Messrs MUSKZAR KNITWEARS (PVT.) LTD VS FEDERATION OF PAKISTAN, MINISTRY OF FINANCE, 2004 PTD-LAHORE-HIGH-COURT-LAHORE 714 (2003)

(a) Sales Tax Act (VII of 1990)‑‑‑

‑‑‑‑Ss. 22, 25 & 45‑A‑‑‑Sales Tax General Order No. 1/1999, dated 7‑1‑1999‑‑‑Sales Tax General Order No.9/1999, dated 22‑9‑1999‑‑ Constitution of Pakistan (1973), Art. 199‑‑‑Constitutional petition‑‑‑Re -audit of registered person approved without notice by Central Board of Revenue few days after completion of third audit‑‑‑Validity‑‑‑Amount found due by last audit team as additional tax and penalty against the petitioner had been deposited‑‑‑Neither any reason nor, existence of exceptional circumstances had been stated for impugned approval of fresh audit‑‑‑Proposed action was unjustified as report did not show as to why a number of firms had been found suspected‑‑‑Powers vested in Board of Revenue under S.45‑A of Sales Tax Act, 1990 could not be exercised in such a manner=‑‑Board of Revenue could not ,recall order of subordinate Authority‑‑‑Record did not show that Board of Revenue had invoked its jurisdiction after calling for record of Deputy Collector (Refund)‑‑‑No action had been taken against the officer, whose order allowing revising of stock statements, if found to be illegal‑‑ Revenue could use last audit report in adjudication proceedings‑‑ Initiation of proposed action would not permit Revenue to block refund claim of petitioner till such time the Adjudicating Officer reaches a conclusion against petitioner and directs action against suppliers/ purchasers‑‑‑High Court allowed Constitutional petition and declared the impugned approval for fresh audit to be without lawful authority.

Shaukat Ali and other v: Government of Pakistan through Chairman, Ministry of Railways arid others PLD 1997 SC 342; Muhammad Latif & Co. v. Chief Settlement and Rehabilitation Commissioner and others PLD 1974 SC 130; Mrs. Shahida Zahir Abbasi and 4 others v. President of 'Pakistan PLD 1996 SC ' 632; Abdul Hafeez Abbasi and others v. Managing Director, Pakistan International Airlines Corporation Karachi and others 2002 SCMR 1034; Mian Iqbal Mahmood Banday v. Muhammad Sadiq PLD 1995 SC 251; Messrs Airport Support Services v. The Airport Manager, Quaid‑e‑Azam International Airport, Karachi and others 1999, SCMR 2268; Zain Yar Khan v. . Chief Engineer, C.B:R.C., WAPDA, D.A. Khan and another 1998 SCMR 2419; Messrs Faisal Enterprises v. Federation of Pakistan 2003 PTD 899 and Messrs Punjab Beverage Company (Pvt.) Limited v. Central Board of Revenue and 4 others 2001 PTD 3929 ref.

(b) Sales Tax Act (VII of 1990)‑‑‑

‑‑‑‑Ss. 22, 25 & 45‑A‑‑‑Sales Tax General Order No.1 of 1999, dated 7‑1‑1999‑‑‑Sales Tax General Order No.9'of 1999, dated 22‑9‑1999‑‑ Re‑audit of registered person‑‑‑Scope‑‑‑Re‑audit in routine would be conducted once during financial year‑‑‑Another audit could be conducted in exceptional circumstances.

(c) Sales Tax Act (VII of 1990)‑‑‑

‑‑‑‑Ss. 25, 36 & 45‑‑‑Amount found erroneously refunded to registered person in approved audit‑‑‑Recovery of such amount after service or show‑cause notice under S.36 of Sales Tax Act, 1990‑‑‑Validity‑‑ Adoption of such course, per se would be violative of adjudication proceeding contemplated under S.45 of Act, 1990.

(d) Taxation‑‑‑

‑‑‑‑ Person can adopt all legal modes to avoid taxation.

(e) Sales tax‑‑‑

‑‑‑‑ Audit report and material collected during course of, audit‑‑ Evidentiary value‑‑‑Principles explained.

Sales Tax Department takes the report of an audit as a gospel truth, which is against law and facts both. Most of the auditors are departmental officials with half‑cooked knowledge of accounting and trans‑national business transactions. Legally speaking, an audit report is at best an opinion of the auditor and a material, in support of the departmental version. It is nothing more than part of a charge‑sheet, which needs to be established through the process of adjudication. A material collected during the course of audit is only an evidence to support the case of the department in adjudication proceedings.

Syed Mansoor Ali Shah for Petitioner.

Ahmad Bilal Soofi for the Revenue.

ORDER

In this Constitutional petition the approval by the Central Board of Revenue to conduct yet another audit of the petitioner and its suppliers and purchasers conveyed to Collector of Sales Tax Lahore on 28‑9‑2002.'

2. The operative part of the letter reads as under:-----

"I am directed to refer to your' letter C. No.IV‑ST(12) Muskzar/Misc/1‑2‑724, dated 2‑9‑2002 on the above subject and convey the approval of the Board to conduct the audit of Messrs Muskzar Knitwear (Pvt.) Limited and its suppliers and purchasers for the last three years as desired. Board has also been pleased to recall the orders of Collector Sales Tax and Central Excise, Lahore of allowing the registered person to revise the records and monthly return on payment of penalty of Rs.25,000 per inventory being illegal and improper."

3. The petitioner is a private limited Company and is engaged in manufacture and export of knitwear garments. It is registered with the Sales Tax Department since 1996 and is receiving sales tax refunds by making zero rated exports since 1997. Also it is making local sales and supplies.

4. It is alleged that an audit of the petitioner‑Company from January, 2001 to August, 2001 was conducted and completed on 24‑11‑2001. That audit resulted into creation of a demand against the petitioner of a sum of Rs.36,381. That payment was settled through adjustment in the refund claimed by the petitioner. Another audit is claimed to have been conducted and completed 'on 12‑4‑2002 which did not result in any significant objection though a sum of Rs.1,66,587 was deducted as additional tax and penalty from the refund sanction against revised stocks. According to the petitioner in December, 2001 it was realized that the stocks inventories given in the statement of stocks for the period February, 2001 to December, 2001 were incorrectly recorded through an inadvertence on, the part of the Accountant. Therefore, a request was made to the concerned Deputy Collector for' permission to revise the statements which was allowed subject to payment of Rs.25,000 per inventory. The said payment of Rs.1;66,587 included a sum of Rs.1,50,000 as penalty for regularization of revised statements.

5. Lastly, on 31‑8‑2002 a 'joint audit team completed the audit of the petitioner which was headed by Secretary/Cost Accountant Central 'Board of Revenue Mr. Aftab Ahmad Razzaqui who was assisted by two senior auditors of the Collectorate of Sales Tax, Lahore. It appears that the Collectorate of Lahore on 2‑9‑2002 made a request to Member Sales Tax, Board of Revenue to direct the on‑going special audit of the petitioner to proceed on certain lines. The letter of the Collector, dated 2‑9‑2002 was obviously issued on the understanding that the audit was still in progress though it already stood completed on 31‑8‑2002.

6. In the backdrop of the above facts it is the case of the petitioner that the Central Board of Revenue was not justified in making a direction for another audit only days after completion of an audit supervised by the said officer who conveyed the approval of the Board by way of the impugned letter reproduced above. Second, that the alleged recalling of the order of Collector Sales Tax (factually it was Deputy Collector Refund) allowing the petitioner to revise record and monthly returns on payment of fine is totally bad in law for two reasons. In. the first place the provisions of section 45‑A of the Sales Tax, 1990 do not provide for "recalling" of an order recorded by a subordinate authority of the Board, particularly when it has already been implemented. Also no notice was given to the petitioner to plead his case. Lastly, that the report by the special audit team having already been completed only days earlier Mr. Aftab Ahmad Razzaqui, the head of the audit team could not issue the impugned letter to convey the approval of the Board for yet another audit in respect of the petitioner.

7.The respondent/Revenue on the other hand supports the case for an audit by the local Collectorate for the various reasons and objections which were earlier pointed out in the letter of Collectorate, dated 2‑9‑2002.

8. Heard the learned counsel for the parties. Learned counsel for the petitioner Syed Mansoor Ali Shah, in support of his submissions as earlier made in the Constitutional petition relies upon re. Shaukat Ali and others v. Government of Pakistan through Chairman, Ministry of Railways and others (PLD 1997 SC 342), re. Muhammad Latif and Co. v. The Chief Settlement and Rehabilitation Commissioner and others , (PLD 1974 SC 130) and re. Mrs. Shahida‑Zahir Abbasi and 4 others v. President of Pakistan PLD 1996 SC 632 to contend that the impugned approval by the Board is mala fide inasmuch as it is designed not only to lower the petitioner in the eye of its suppliers and purchasers but also to throw him out of the market by making an excuse of the audit to refuse the pending refunds of millions of rupees. Also on the basis of the ratio settled in re. Abdul Hafeez Abbasi and others v. Managing Director, Pakistan International Airlines Corporation Karachi and others (2002 SCMR 1034) the unilateral recalling of the permission to revise the records and monthly returns on payment of fine is stated to be against the basic concept of justice and equity. It is further stated that the respondents public functionaries were requited to act fairly and in accordance with law while they had done the very opposite as they disbelieved at least three audits conducted since 24‑11‑2001. In support of submissions made in this regard learned counsel relies upon re. Mian Iqbal Mahmood Banday v. Muhammad Sadiq, (PLD 1995 SC 251). The impugned approval, dated 28-9‑2002 is also stated to be violative of the provisions of section 24‑A of the General Clauses Act. Reliance in that regard is placed upon re. Messrs Airport Support of Services v. The Airport Manager, Qauid‑e‑Azam International Airport, Karachi and others, (1998 SCMR 2268) and re: Zain Yar Khan v. The Chief Engineer, C.R.C.B. Wapda D.A. Khan and another (1998 SCMR 2419). Lastly relies upon a recent judgment of this Court in, re: Messrs Faisal Enterprises v. Federation of Pakistan (2003 PTD 899) wherein a learned Single Bench of this Court inert alia concluded that before a direction for re‑audit the Revenue should provide the taxpayer all information available with it as also the reasons or the basis on which the re‑audit was being directed to take place.

9. Learned counsel for the respondent/Revenue Mr. Ahmad Bilal Soofi, Advocate besides the aforesaid factual objections also relies upon a judgment of the Hon'ble Supreme Court of Pakistan in re. Messrs Punjab Beverage Company (Pvt.) Limited v. Central Board of Revenue and 4 others (2001 PTD 3929) to support his legal objection against the maintainability of the petition. It is asserted that this Court cannot probe or hold an in‑depth investigation into the disputed questions of fact which obviously need recording of evidence.

10. However, I will not agree. There is no fact which can possibly be said to be disputed in this case. All documents referred to, assailed or called into question are either those of the Revenue itself or were otherwise filed with it. There is thus no question of any probe or inquiry to grant the prayer made in this Constitutional petition which reads as under:‑‑

(a) "That the respondents be graciously directed to process and allow the refund for the months of February, June, July, August, September, October, November and December, 2001 in accordance with the Sales Tax Refund Rules, 2000.

(b) That the impugned order, dated 28‑9‑2002 imposing fourth audit no the petitioner‑Company may graciously be set aside as being tainted with mala fide.

(c) That the impugned order, dated 28‑9‑2002 to the extent of recall of the order of the Deputy Collector may also be graciously set aside being in violation of section 45‑A of the Sales Tax Act, 1990.

(d) Any other relief this Hon'ble Court may deem fair, just and appropriate may also he granted to the petitioner.

11. As far the merits are concerned, the petitioner certainly appears to have bee$ treated unfairly by the department. Even if the first two audits are ignored the third audit of the petitioner for the year, 2001 was conducted on 12‑4‑2002. That audit was conducted on a reference by Addl. Collector‑II with the following observations of the Refund Division‑II.

(a) The registered person is doing the negative value addition during the local and export supplies and this element is more in the local supplies.

(b) The revised inventories were submitted after a lapse of 11 months and only after the discrepancies were brought to the notice of the registered person. ,

(c) The mistake n1ade by the registered person is not procedural. An inventory statement in addition to showing the purchasers, consumption, exports etc. also shows the 'closing balance available with the registered person at ‑the end of each month. How is it possible that the registered person did not know what stocks were available with the registered person at the end of each month and suddenly in December, 2001, the registered person was able to account for larger/greater amount of stocks available in say February, March, May, etc.

(d) The most important point which needs to be noted is that the registered person cannot show more stocks and lesser percentage of consumption in a revised inventory because refund has already been sanctioned to him on the percentage of consumption and stocks which he has utilized in consumption of good/local supplies in each particular month.

12. The auditors duly took note of the revised inventory statements and after analyzing the same concluded that less input tax was claimed which resulted in more closing stocks. It was also noted that the revised inventory statement was accepted by the then Deputy Collector (Refunds)‑. Before proceeding to calculate the difference of the stock deferred as per old and new inventory and proposing additional tax and penalty at Rs.1,66,587 the audit teams;

"This audit division could not find any provision in the Sales Tax Act, 1990 about the accepting or rejecting of revised inventory, therefore, the matter was referred to the worthy Additional Collector and Collector Sales Tax and Central Excise for the decision. It has been decided by above said authorities that as the revised inventory has already been accepted by the refund division and none of the refund orders, has been re‑opened, therefore, only additional tax and penalty can be imposed on the refunds sanctioned against excess stocks to the registered person. The representative of the registered person is agreed to deposit the additional tax and penalty."

13. The petitioner claims to have already paid the said amount found due against it by the audit team as additional tax and penalty.

14. As noted earlier the last audit was carried out by Mr. Aftab Ahmad Razzaqui, Cost Accountant/C.B.R. with two senior auditors of the local Directorate. The period involved being September, 2001 to June, 2002. That audit was finalized on 31‑8‑2002 wherein the auditors made a number of recommendations and finally summarized not only the detections but also the proposed actions in the following B words.

Summary of Detections

Summary of actions

14‑A. The Sales Tax general Order No.1 of 1999, dated 7‑1‑1999 and. No.9 of 1999, dated 22‑9‑1999 envisage the procedure to be followed in case of audit of registered persons. In the later STGO it is directed that audit of a registered person/united in routine will be conducted once during the financial year. However, the possibility of conducting another audit is not ruled out where exceptional circumstances exist. In the impugned letter as reproduced above no reason whatsoever has been stated for approval of afresh audit muchless to say of the existence of exceptional circumstances.

15. In their reply on merits to paras. 5 and 6 the Revenue has claimed that "strong suspicion" existed that no refund was due and, therefore, it was being withheld subject to the outcome of audit being carried out under the impugned instructions of the C.B.R. Also the Revenue appears to be dissatisfied with the earlier audits conducted which obviously includes the one dated 31‑8‑2002 conducted jointly by the Central Board of Revenue as well as the Collector. The Revenue in their reply has also attempted to hold out that after completion of the approved audit the petitioner will be served with a show‑cause notice under section 36. That means that the Revenue will proceed to recover refund already received without undergoing the process of adjudication proceedings. The adoption of such course per se is violative of adjudication proceedings contemplated under section 45 of the Act.

16. It needs to be noted that even in the last audit report, dated 31‑8‑2002 nothing objectionable was pointed out as regards‑the claim of the petitioner of his having made zero rated exports. The objection that local sales were designed to cover up zero rated supplies and consequently to make wrong claim of refund may be correct but to a limited extent only. For example purchases from suspected registered persons were shown at a sum of Rs.11,17,500 while at least 11 suppliers of the petitioner were recommended for audit. The only reason for such recommendation being that "most of these suppliers splitting the invoices in such a way that the total of each invoice comes by Rs.10 to Rs.100 less than Rs.50,000 to avoid compliance of section 73 of the Sales Tax Act, 1990". That justification alone is against one of the basic principles of taxing statutes that a person can adopt all legal modes to avoid taxation. The auditors perhaps are not aware of the difference between evasion and avoidance. The proposed action in this case is all the more unjustified when the petitioner is proposed to burden with the total sum of Rs.11,17,500 as sales having been made from suspected person. In the report there is also no mention of the fact as to why a number of these firms were found suspected.

17. The impugned letter conveying the approval for holding of fresh audit does not assign any reason nor shows any exceptional circumstances in respect of the petitioner or its suppliers /purchasers. In a number of similar cases it has been observed that the Sales Tax Department takes the report of an audit as gospal truth which is against law and fact, both. Most of the auditors are departmental officials with half‑cooked knowledge of accounting and transnational business transactions. Legally speaking an audit report is at best an opinion of the auditor and a material in support of the departmental version. It is nothing more than part of a charge‑sheet which needs to be established through the process of adjudication. A material collected during the course of audit is only an evidence to support the case of the Department in adjudication proceedings.

18. The petitioner is also correct in pointing out that the powers vested in C.B.R. under section 45‑A of the Sales Tax Act, 1990 could not be exercised in the manner it has been done in this case. In fact there; is no concept of recalling of an order by Central Board of Revenue of a; subordinate authority. Learned counsel for the petitioner is also correct in pointing out that nothing appears from the record to suggest that the Board ever called for the record of the Deputy Collector (Refund) and thereafter invoked the jurisdiction. If that order was illegal then why not action has so far been taken against the officer who allowed revising of stock statements. Admittedly no action, not even a show‑cause notice lot explanation has, been issued to him.

19. In view of the above facts, the case‑law relied upon .by the' learned counsel for the petitioner is relevant and supports the contention ‑made at the bar. The impugned letter conveying approval of the Central Board of Revenue for a fresh audit and exercise of revisional jurisdiction under section 45/A by the Board without notice to the petitioner is declared to be without lawful authority.

20. This order will not debar the Revenue from using the audit report, dated 31‑8‑2002 in adjudication proceedings. However, mere initiation of these proceedings will not permit the Revenue to either block the refund claim of the petitioner if it is otherwise established according to law nor initiation of proceedings against the suppliers, purchasers of the petitioner till such time the Adjudicating Officer reaches a conclusion against the petitioner and directs action against the suppliers/purchasers.

21. Petition allowed in the above terms.

S.A.K./M‑2473/L Petition allowed.