Messrs A.N. TRADERS (PVT.) LTD. VS SECRETARY, REVENUE DIVISION, ISLAMABAD, 2007 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 1274 (2004)

Sales Tax Act (VII of 1990)---

----Ss.48 & 36---Establishment of Office of. Federal Tax Ombudsman Ordinance (XXXV of 2000), S.2(3)---Recovery of arrears of tax---Sanctioned refund was adjusted against amounts pointed out by the audit as recoverable without issuance of proper show-cause notice and proper adjudication order on the ground that complainant had agreed to the audit finding and given in writing to adjust the outstanding claim---Validity--Amount of tax pointed out by the audit as recoverable should first have been determined through process of show-cause notice and adjudication under the appropriate provisions of law before taking steps for adjusting the amounts for recovery in terms of the provisions of S.48 of the Sales Tax Act, 1990---Refund amount in question could not be adjusted/ rejected merely on the basis of findings/recommendations of the Audit---No doubt complainant had given in writing that since he could not deposit GST worked out on wastage, shortage of stock and' inadmissible bills during detailed audit in cash due to financial problems and had requested for adjustment/withholding the said amount of GST from the outstanding claims lying with the Department and to pay the balance amount, such an undertaking even if voluntary could not stand in the face of provisions of the statute requiring issuance of show-cause notice and proper adjudication---Mere intimation of audit observation did not constitute a show-cause notice nor could it take the form of an adjudication order---Act of adjustment of the sanctioned claims against a liability of the complainant and the rejection of the pending claim, were arbitrary, unfair, unjust and contrary to law---Maladministration was manifest inasmuch as the complainant's refunds were arbitrarily, unjustly and unlawfully adjusted/rejected for recovery against undetermined liability---Such acts of omission and commission fall within the definition of maladministration---Orders for adjustment/rejection of amounts of refunds for making a so-called recovery without adjudicating upon issues or liabilities pointed out by the audit were ab initio void---Federal Tax Ombudsman recommended Central Board of Revenue to vacate the orders under which the complainant's sanctioned/pending refunds were adjusted against so-called liability to confront the complainant with charges/contraventions intended to be framed against it through a proper show-cause notice, invoking appropriate provisions of law, and decide the case on its merit through a formal Order-in-Original after providing the complainant the opportunity of defence/hearing and amount already recovered by way of adjustment of refund claims against liability created in audit report be adjusted or refunded, as the case may be, in consequence of Order-in-Original.

Messrs United Export Company v. Pakistan and 3 others 2000 PTD 1798 and Complaint No.1344 of 2002, dated 21-3-2003 ref.

Muhammad Ashraf Hashmi for the Complainant.

Jawwad Zafar Malik, A.C., Sales Tax, Gujranwala for Respondents.

DECISION/FINDINGS

JUSTICE (RETD.) SALEEM AKHTAR (FEDERAL TAX OMBUDSMAN).---This complaint alleges maladministration on the part of Revenue for making illegal, unjust and unauthorized adjustment of complainant's sanctioned refunds against undetermined tax liability worked out on the basis of mere audit observations without adopting due process of law and without passing a formal adjudication order.

2. Brief facts of the complaint, as explained by the complainant, are that the complainant was sanctioned refund for a sum of Rs.1,468,754. Subsequent to sanctioning of refund action for any recovery, could only be taken under section 36 of the Sales Tax Act, 1990 by Collectorate of Adjudication after issuance of proper show-cause notice. Intimation of audit observation does not constitute a show-cause notice as held by the Honourable Sindh High Court in the case of Messrs United Export Company v. Pakistan and 3 others 2000 PTD 1798. While the refund amounts already sanctioned were unauthorizedly adjusted against a so-called recoverable amount, the balance refund claim was also rejected by the auditor. The D.C. (Audit) has no jurisdiction to reject the claim. It too could be rejected only by passing an order under appropriate section of the Sales Tax Act, 1990 by a competent Authority which has not been done. If there was any allegation of erroneous refund the Collectorate was under an obligation to make out a case for adjudication by the Collectorate. The acts of omission and commission amount to `maladministration'. The adjustment made on the basis of mere audit observation may be declared illegal and the Collectorate may be directed to issue refunds of the sanctioned amounts.

3. In reply, the respondents have submitted that detailed audit of the complainant was completed vide audit/contravention report, dated 14-2-2002. Audit revealed that while the complainant had claimed and received refund amounting to Rs.1,065,867 on suspected/fake sales tax invoices another amount of Rs.480,000 was pending sanction. Audit team sorted out fake/flying invoices from the list, dated 7-12-2001 prepared by the Collectorate of Sales Tax, Faisalabad. Audit observations were discussed with the complainant in the presence of D.C. (Audit). The complainant agreed with all the observations and requested, with free consent, to adjust the detected amount of Rs.1,468,754 from its sanctioned/pending refund claims. Had the complainant's representative disagreed with audit observations that audit team would have forwarded the case to the adjudication Collectorate for decision. The unit furnished letter for adjustment of its outstanding refund claims on 10-2-2002 and filed this complaint on 1-12-2003. The complaint may be rejected.

4. During the hearing the AR submitted that recovery under section 48 of the Sales Tax Act, 1990 has to be preceded by issuance of a proper show-cause notice and followed by a decision in the form of proper adjudication order. Citing a Court case reported as 2000 PTD 1798 the AR submitted that it was ruled therein that the provisions of section 48 of the Act being penal in nature could not be enforced without serving a proper show-cause notice on the affected party. Mere audit observation is not substitute of a show-cause notice. It was pointed in the auditor's report that the unit had claimed input tax on the basis of fake/flying invoices and declared that the amounts, of refund already sanctioned were recoverable and the pending refund claim of Rs.480,000 not yet sanctioned be also rejected and must not be sanctioned to the party. The complainant was threatened with dire consequences if he did not submit the undertaking. No demand could be created unless the audit observations were strengthened by issuance of proper show-cause notice and adjudication order. The audit was conducted in February, 2002 but the complainant was never issued a show-cause notice to determine whether or not they had claimed input tax on the basis of invoices issued by suspect units. The AR further added that in the so-called undertaking referred to by the respondents the complainant did not agree to have indulged in any fake transactions. The respondents also did not pay the balance amount as was sought in the undertaking. Since the so-called undertaking is not an agreement, it is not binding. The AR also added that section 48 of the Sales Tax Act, 1990 is to be read with section 36 of the Act, which lays down the serving of a show-cause notice. The AR referred to FTO's decision on Complaint No.1344 of 2002, dated 21-3-2003 which cancelled the show-cause notice issued in that case on the ground that a belief formed on flimsy grounds that the goods against the aforesaid invoices were not received by the complainant was not sustainable. The respondents may be directed to issue complainant's refund unlawfully adjusted by them for making alleged recovery.

5. The DR submitted that on completion of audit the findings thereof were discussed with the complainant. Agreeing with the findings of the audit the complainant gave the Authorities a letter showing consent for adjustment of the recoverable amounts. Had it not agreed to audit findings a show-cause notice would have been issued. The DR was asked to indicate the provisions of law or procedure prescribed for adopting the course of action to which the respondents resorted to make recovery in the manner in which they did. He just submitted that since the complainant had agreed to the audit findings and given in writing to adjust the outstanding claims the amounts of refund already sanctioned or pending sanction was adjusted against amounts pointed out by the audit as recoverable.

6. The arguments of the parties and the record of the case have been considered and examined. In their comments the respondents have stated that it was observed during the course of audit that the complainant had claimed and received refund amounting to Rs.1,065,867 on the basis of suspect/fake sale tax invoices and another claim for refund for an amount of Rs.480,000 was pending sanction. The amounts were adjusted for recovery when the complainant agreed with the audit findings and submitted a letter for adjusting the same. The complainant has challenged the act of adjustment of refund claims already sanctioned and the one pending on the grounds that it was done arbitrarily without issuance of show-cause notice or passing an adjudication order. The complainant's submissions carry weight because the acts of adjustment of complainant's sanctioned refunds and rejection of one claim which was pending sanction: was neither preceded by a show-cause notice based on the findings of the audit nor was followed by any adjudication order determining the recoverable liability against the complainant. According to the provisions of section 36 of the Sales Tax Act for recovery of tax not levied or short-levied or erroneously refunded as a result of some collusion or deliberate act or due to inadvertence, error or misconstruction a show-cause notice is required to be issued within the period as stipulated in subsections (1) and (2) of section 36. of the Act, as the case may be, before deciding the issue on merit after considering the objections of the person served with the notice to show cause. Thus the amounts of tax pointed by the audit as recoverable should first have been determined through process of show-cause notice and adjudication under the appropriate provisions of law before taking steps for adjusting the amounts for recovery in terms of the provisions of section 48 of the Sales Tax Act, 1990. The refund amounts in question could not be c adjusted/rejected merely on the basis of findings/recommendations of the Audit. No doubt the complainant had given to the respondents in writing that since he could not deposit GST worked out on wastage, shortage of stock and inadmissible bills during detailed audit from 7/99 to 12/01 in cash due to financial problems and had requested for adjustment/ withholding the said amount of GST from the outstanding claims lying with the ,Department and to pay the balance amount, such an undertaking even if voluntary cannot stand in the face of provisions of the statute requiring issuance of show-cause notice and proper adjudication. Mere intimation of audit observations, therefore, does not constitute a show-cause notice nor can it take the form of an adjudication order. The acts of adjustment of the sanctioned claims against a so-called liability of the complainant and the rejection of the pending claim, are, therefore, arbitrary, unfair, unjust and contrary to law. In this case, therefore, `maladministration' is manifest inasmuch as the complainant's refunds were arbitrarily, unjustly and unlawfully adjusted/rejected for recovery against so-called undetermined liability. The respondents' acts of omission and commission fall within `maladministration' as defined under section 2(3)(i)(a) & (b) and 2(3)(v) & (vi) of the Establishment of Office of Federal Tax Ombudsman Ordinance, 2000. The orders for adjustment/rejection of amounts of refunds for making a so-called recovery without adjudicating upon issues or liabilities pointed out by the audit are ab inito void. Accordingly it is recommended that the C.B.R.

(i) Vacate the orders under which the complainant's sanctioned/ pending refunds were adjusted against so-called liability.

(ii) Confront the complainant with charges/contraventions intended to be framed against it through a proper show-cause notice, invoking appropriate provisions of law, and decide the case on its merit through a formal Order-in-Original after providing the complainant the opportunity of defence/hearing.

(iii) The amount already recovered by way of adjustment of refund claims against liability created in audit report may be adjusted or refunded, as the case may be, in consequence of Order-in-Original as indicated in (ii) above.

(iv) Compliance be reported within 30 days.

C.M.A./221/FTOOrder accordingly.