BABAR YOUNUS VS State, 2006 PTD-KARACHI-HIGH-COURT-SINDH 2190 (2006)

(a) Sales Tax Act (VII of 1990)---

----Ss. 33 & 37-A---Offence of tax fraud---Arrest and prosecution of accused in every case not mandatory, but within discretion of authority to be exercised judiciously---Arrest could not be made merely on basis of reasonable suspicion, which could not be equated with "belief"---Condition precedent for arrest was availability of material evidence sufficient to believe commission of tax fraud by the person to be arrested---Principles.

(b) Criminal trial---

----"Reasonable suspicion" cannot be equated to "belief".

(c) Criminal Procedure Code (V of 1898)---

----S. 497---Sales Tax Act (VII of 1990), Ss. 33, 37-A, 46 & 66---Sales Tax Refund Rules, 2002, R. 8(1)---Bail, grant of---Refund claim, pendency of---Tax fraud case, registration of---Investigating Officer had inferred commission of tax fraud by assessee due to non-availability of supplier and assessee at given addresses---Investigating Officer had not made any effort to collect evidence to show that supplier had not deposited or accounted for tax covered by invoices---No equity has been started against supplier---Export of goods and receipt of value of goods in foreign exchange by assessee had not been denied by prosecution---Refund claim of assessee was still pending and no show-cause notice for its rejection or prosecution had been served on him---Purchases made on credit by assessee for not being prohibited could not be treated as confession of tax fraud---Assessee was in custody for more than 1-1/2 months---Completion of investigation would take a long time---Offence was compoundable and punishable with imprisonment for five years or fine or both---State had not suffered any loss of revenue---Assessee was granted bail in circumstances.

M. Ilyas Khan for Applicant.

Mahmood Alam Rizvi, Standing Counsel for the State.

Date of hearing: 31st May, 2006.

JUDGMENT

ALI SAIN DINO METLO, J.---After having failed to get bail before arrest from this Court and bail after arrest from the trial Court (Special Judge,. Customs and Taxation, Karachi) the applicant has approached this Court. Bail before arrest was declined on the ground that the applicant had failed to establish the conditions precedent for its grant i.e. existence of mala fides or enmity on the part of prosecution. The Special Judge has refused bail after arrest on the ground that the refund claim filed by the applicant was for a big amount of over Rs.30 million.

2. Briefly, the facts are that the applicant, owner of Myco Industries, Karachi, registered as manufacturer-cum-exporter, filed three refund claims pertaining to the months of January, February and March, 2005, total amounting to Rs.30,70,004. The claims were pending before the Sales Tax Collectorate, Karachi, when on 24-3-2006 the Directorate of Intelligence (Customs, Federal Excise and Sales Tax) Karachi registered as case of tax fraud bearing No.292-DFCl/FEST/FIR/7006 mainly on the ground that the suppliers, who had issued the sales tax invoices, were not available at their addresses. Their premises were found locked and from this it was inferred that the invoices were false.

3. The learned Standing Counsel on enquiry stated that the suppliers were registered persons and their registration had not been cancelled or suspended. They were not even black listed. However, he informed that the authorities were contemplating to take some action against them. He further informed that the claim of the applicant were pending and even show-cause notice for their rejection was not issued. However, he contended that the claims were liable to be rejected.

4. Prosecution and arrest for the commission of offences under the Sales Tax Act, 1990, are not mandatory. It is not necessary that each and every person committing offence under the Sales Tax Act must be prosecuted. The phrases `he shall further be liable upon conviction by a Special Judge to imprisonment for a term which may extend to imprisonment for a term---' used in section 33 ibid and `may cause arrest of such person' used in section 37(1) ibid clearly indicate that prosecution and arrest even in the cases of tax fraud were not mandatory but within the discretion of the authorities to be exercised judiciously, in the light of facts and circumstances of each case. The object seems to be to provide maximum possible freedom of trade and business and to maintain tax-friendly relations with the business community. One of the conditions precedent prescribed under section 37-A ibid, for the exercise of such discretion is the availability of material evidence sufficient to believe that the person to be arrested has committed a tax fraud. Unlike offences under general penal laws, he cannot be arrested merely on the basis of `reasonable suspicion'. `Reasonable suspicion' cannot be equated to `belief'.

5. The matters relating to the pending refund claims have been treated still differently. Besides the above condition of the availability of material evidence, a further condition of serving a show-cause notice has been provided under Rule 8(1) of the Sales Tax Refund Rules, 2002, which reads:

"Action on inadmissible refunds.---(l) In case any refund claim or part thereof is found not genuine and not admissible under the law, a notice shall be served on the claimant requiring him to show cause in writing, within fourteen days, as to why the claim or as the case may be part thereof should not be rejected and as to why the claimant should not be proceeded against under the relevant provisions of law."

The show-cause notice is to be given not only for the rejection of claim but also for prosecution. The phrase `and as to why the claimant should not be proceeded against under the relevant provisions of law clearly refers to prosecution, as in such matters no recovery of tax additional tax/default-surcharge and penalty is involved. In any case it does not exclude prosecution. Similar provision in the shape of rule 36 has been made in the Sales Tax Rules, 2005. In the present case the claim of the applicant was and is still pending and admittedly no show-cause notice for its rejection or taking any other action has been served upon him.

6. Except for his visit to the official addresses of the suppliers, and the applicant, the Investigating Officer is, not shown to have made any effort to collect evidence in the case. Simply on finding them to have closed their business at the, given addresses, he inferred that the applicant had committed tax fraud. It is not the case of the prosecution that the suppliers had not issued the invoices. The learned Standing Counsel admitted that the investigation agency had not been able to collect any evidence to show that the suppliers had not deposited or accounted for the tax covered by the invoices. According to him, enquiry against the suppliers had not yet been started, as such permission was awaited. It is also not the case of the prosecution that the applicant had not exported the goods or that the value of the goods was not, received in foreign exchange. According to the learned counsel, the goods were purchased from unregistered persons and invoices were obtained from registered persons. Except for the bare assertion of the prosecution, there is no evidence to support the contention.

7. Faced with the above situation, the learned Standing Counsel contended that the applicant has himself claimed that he had purchased the goods on credit and on finding the suspicious/abnormal profile of the suppliers he stopped their payment and did not press or pursue the refund claims. In this regard, suffice to say that purchases on credit are not prohibited and such contention of the applicant cannot be treated as confession of tax fraud.

8. The learned Standing Counsel contended that the investigation agency was trying to find out and collect further evidence in this case. The applicant is in custody for the last more than one and half months. It is not known when the investigation will be finalized and final challan will be filed. Apparently, in view of the complicated nature of the case, it will take a long time. The offence is punishable with imprisonment which may extend to five years or fine or both and is also compoundable. The State has not suffered any loss of revenue.

9. In view of the above mentioned facts and circumstances of the case I am of the considered opinion that the case is fit for the grant of bail. Accordingly, the bail application is allowed and the applicant is directed to be released on bail on furnishing one surety in the sum of Rs. three million and personal recognizance in the like amount to the satisfaction of the trial Court.

S.A.K./B-12/K??????????????????????????????????????????????????????????????????????????????????????????????? Bail granted.