INAM PACKAGES, LAHORE VS APPELLATE TRIBUNAL CUSTOMS, C.E., AND SALES CUSTOM HOUSE, LAHORE, 2007 PTD-LAHORE-HIGH-COURT-LAHORE 2265 (2007)

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

----Ss.36 & 47---Appeal---Maintainability---Recovery of tax---Show- cause notice---Failure to specify reasons causing tax evasion---Assessee claimed input tax adjustment for raw materials shown in the returns for July 1997, September 1997, January, 1998 and March, 1998 to May, 1998---Authorities, after serving show-cause notice, directed the assessee to deposit evaded tax---Plea raised by assessee was that show-cause notice was time-barred and against the provisions of law---Validity---Show-cause notice .generally alleged contravention of .numerous provisions but. neither specific provision of contravened law nor manner of its contravention was specified by authorities---Motives or reasons causing/occasioning alleged evasion were also not stated under S.36 of Sales Tax Act, 1990 by the notifying authority---Show-cause notice was vague, unspecific and too general to enable a reader or notified person to make out or clearly identify particular clause/subsection or reason or period of limitation applicable in terms of 5.36 of Sales Tax Act, 1990---Validity---Show-cause notice alleged input tax adjustment but patently omitted to specify or allege reason causing purported evasion---Assumption of jurisdiction by Adjudicating Authority was an act contrary to the law---Show-cause notice served upon assessee by Notifying Authority was patently illegal, without lawful authority- and all orders based thereupon were liable to be set aside---Validity of show-cause notice was fundamental to assumption of jurisdiction by Revenue Authorities to pass orders---Show-cause notice issued and orders passed against assessee were devoid of jurisdiction and lawful authority---Assessee could legitimately agitate basic fundamental question even in further appeal under S.46 of Sales Tax Act, 1990---Orders passed against assessee by the Authorities were set aside---Appeal was allowed in circumstances.

Ibrahim Textile Mills Ltd. v. Federation of Pakistan and others PLD 1989 Lah. 47; Haji Abdullah Khan and others v. Nisar Muhammad Khan and .others PLD 1965 SC 690; Gatron (Industries) Limited v. Government of Pakistan and others 1999 SCMR 1072; "Commissioner of Income Tax v. Abdul Majeed 2000 PTD 359 and Province of Sindh through Secretary, Public Works. Department, Government of Sindh, Karachi and 6 others v. Messrs Royal Contractors 1996 CLC 1205 rel.

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

----S.36---Recovery of tax---Show-cause notice---Preconditions---Limitation---Determining factors.

Show-cause notice can only be served under section 36 of Sales Tax Act, 1990, if:---

(a) any tax or charge has not been levied or has been short-levied or has been erroneously refunded;

(b) such non-levy, short levy or erroneous refund has been caused by the reason of "some collusion or a deliberate act" under S.36(1) of Sales Tax Act, 1990, or owing to inadvertence or error of misconstruction per S.36(2) of Sales Tax Act, 1990; and

(c) within the period of five years under subsection (1) and three years under subsection (2) of section 36 of Sales Tax Act, 1990.

Mere non-levy, short levy or erroneous refund of tax or charge cannot be the basis for show-cause notice. Notice has to be founded upon non-levy, short levy or erroneous refund caused by any of the above reasons which being the dominant factor also determines the period of limitation thereto. In absence of any of the three conditions or jurisdictional facts, he taxing authorities have no power or jurisdiction to serve show-cause notice under S.36 of Sales Tax Act, 1990.

Assistant Collector Customs and others v. Messrs Khyber Electric Lamp and others 2001 SCMR 838 rel.

Habeeb Ullah Khan for Appellant.

Sh. Izhar-ul-Haq for Respondent.

Date of hearing: 11th April, 2007.

JUDGMENT

MUHAMMAD SAIR ALI, J.---The appellant claimed input tax adjustment of Rs.48,335 for the raw material in the returns for July 1997, September, 1997, January, 1998 and March, 1998 to May, 1998. On the audit objection, the appellant was served with a show-cause notice dated 8-6-2001 by the Additional Collector (Adjudication) alleging contravention of sections 3, 4, 6, 7(2) (i), 22, 23 'and 26 of Sales Tax Act, 1990. The appellant reply was found unsatisfactory. The Additional Collector (Adjudication) vide order in original dated 11-7-2001 holding the appellant to have evaded the sales tax as above, ordered payment of Rs.48,335. Additional tax and personal penalty of Rs.10,000. The appeal thereagainst was dismissed on 17-2-2004 by the Customs, Excise and Sales Tax Appellate Tribunal, Lahore. Hence this further appeal.

2. Following questions have. been raised seeking this Court's opinion:---

(1) Whether the learned Tribunal has erred when it, though admitted verified statement about the input tax adjustment an essential piece of evidence, yet ignored the same in its judgment dated 17-2-2004. Therefore giving rise to the new "Concept of double Taxation"?

(2) Whether the learned Tribunal has not misread the wordings of subsection 2(1) of section 7 of the Sales Tax Act, 1990, particularly when it was proved to the hilt in the verified statement as mentioned in Para supra (1), that input tax was deducted proportionately according to the consumption of raw material in making the targeted quantity number of finished goods for the tax period ending that particular month and that whether this unfinished invoice in terms of raw material does not hold good for the next tax period? Will the taxpayer suffer for no fault of his making? Will he suffer because he has acted in good faith and kept the records correctly?

(3) Whether the judgment dated 17-2-2004 is sustainable in the eyes of law when in the case of Messrs National Battery Industries the same Tribunal held that proportional consumption of raw material was a legal necessity in making required quantity/ number of finished goods under section 7 of the Sales Tax Act, 1990, are not the two judgments two opposite poles, though the wording of section 7 remains particularly the same?

(4) Is the show-cause notice time barred`? The date of SCN is 8-6-2001 which is beyond section 36(2) of the Sales Tax Act, 1990; while the audit observation related to the period 7/97 to 5/98.

(5) Can the learned Tribunal go back on its words i.e. from the declared position to the effect that when the tax has been paid, then why to tax again? This happened on the last date of hearing 5-11-2003.when the D.R himself affirmed our position. And the last not the least.

(6) Can the provisions of section 36 still be invoked when there is neither short payment nor non-payment of tax and the input tax adjustment was found in order?"

3. Heard.

4. The audit report alleged inadmissible adjustment of input tax during July, 1997, September, 1997, January, 1998, and March, 1998 to May, 1998. The appellant was served with a show-cause notice dated 8-6-2001 under section 36 of the Sales Tax Act, 1990. By serving this show-cause notice, jurisdiction was assumed by the Collector (Adjudication) by alleging that:---

".... The claimed input tax adjustment of Rs.48,335 during July 1997, September 1997, January 1998, and March 1998 to May 1998 was not admissible wherefor the evaded sales tax amounting to Rs.48,335 was recoverable along with additional tax."

The appellant Messrs Inam Packages, 14-Ravi Road Lahore wad thus charged wits the contravention of various provisions of law.

5. Reply to the above show-cause notice was rejected. The order-in original dated 30-7-2001 was passed against the appellant by the Additional. Collector (Adjudication) holding the charges to have been established. The appellant was directed to pay back the adjusted amount of Rs.48,335 along with additional tax. A personal penalty of Rs.10,000 was also imposed.

6. Appeal filed by the appellant there against before the learned Customs Excise &Sales Tax Appellate Tribunal was also dismissed through the impugned order dated 10-11-1998. So this further appeal.

7. A fundamental legal question germane to the jurisdiction of the sales tax authorities has been raised in this appeal by the appellant that the show-cause notice dated 8-6-2001 was beyond the period of limitation prescribed under section 36(2) ibid and was even otherwise beyond the scope of section 36 of the Sales Tax Act, 1990. Section 36 read as under:-

"36. Recovery of tax not levied or short-levied or erroneously refunded.---(1) Where by reason of some collusion or a deliberate act any tax or charge has not been levied or made or has been short-levied or has been erroneously refunded, the person liable to pay any amount of tax or charge or the amount of refund erroneously made shall be served with a notice, within five years of the relevant date, requiring him to show cause for payment of the amount specified in the notice:

(2) Where, by reason of any inadvertence, error or misconstruction, any tax or charge has not been levied or made or has been short-levied or has been erroneously refunded, the person liable to pay the amount of tax or charge or the amount of refund erroneously made shall be served with a notice within three years of relevant date, requiring him to show cause for payment of the amount specified in the notice:

Provided that, where a tax or charge has not been levied under this subsection, the amount of tax shall be recovered as tax fraction of the value of supply.

(3) The offer of Sales Tax empowered in this behalf shall, after considering the objection of the person served with a notice to show cause under subsection (1) or subsection (2), determine the amount of tax or charge payable by him and such person shall pay the amount so determined:

Provided that order under this section shall be made within ninety days of issuance of show-cause notice or within such extended period as the Collector may, for reasons to he recovered in writing, fix, provided that such extended period shall in no case exceed ninety days:

(4) For the purpose of this section, the expression "relevant date" means:--

(a) The time of payment of tax or charge as provided under section 6; and

(b) In a case where tax or charge has been erroneously refunded, the date of its refund. "

8. The show-cause notice though charged the appellant with the evasion of sales tax of Rs. 48,335 and generally alleged contravention of numerous provisions, yet neither the specific provision of the contravened law nor the manner of its contravention was specified by the respondents. Further the motives) or the reasons) causing/occasioning the alleged evasion were also not stated under section 36 of the Sales Tax Act by the notifying authority The show-cause notice was vague, unspecific and too general to enable the reader or the notified person to make out or clearly identify the particular clause/subsection or the reason or the period of limitation applicable to the case of the appellant in terms of section 36 ibid.

9. For proceeding against a person under the provision of section 36 ibid, the show-cause notice has to mandatorily specify the reasons) for the alleged non-levy, short levy or erroneous refund of the sales tax or charge. And the notice has to be served within the period of limitation prescribed in the applicable subsection in reference to the reasons) prescribed in each part of section 36. Under subsection (1) thereof, a show-cause notice can be served "within five years of relevant date," if non-levy, short-levy or erroneous refund of sales tax or charge is the result of the reasons of "some collusion or a deliberate .act". Subsection (2) of section 36 is invokable when "inadvertence, error or misconstruction," cause such non-levy, short levy, or erroneous refund and the show-cause notice there under is served "within three years of the relevant date".

10. To put it succinctly show-cause notice can only be served under section 36 ibid, if:---

(a) Any tax or charge has not been levied or has been short-levied or has been erroneously refunded;

(b) Such non-levy, short-levy or erroneous refund has been caused by the reasons) of "some collusion or a deliberate act" under subsection (1) of section 36 of the Sales Tax Act or owing to inadvertence or error or misconstruction per subsection (2) thereof; and

(c) Within the period of five years under subsection (1) and three years under subsection (2) of section 36.

The unarguable conclusion thereto is that mere non-levy, short-levy or erroneous refund of tax or charge cannot be the basis for a show-cause notice. It has to be founded upon non-levy, short-levy or erroneous refund caused by any of the above reasons which being the dominant factor also determine the period of limitation thereto. In the absence of any of the three conditions or the jurisdictional facts, the taxing authorities shall have no power or jurisdiction to serve a show-cause notice under section 36 ibid.

11. The honourable Supreme Court of Pakistan in the case of "Assistant Collector Customs and others v. Messrs Khyber Electric Lamp and others" (2001 SCMR 838), was pleased to settle the similar provision of law i.e. section 32 of the Customs Act (IV of 1969), by holding that:---

"Show-cause notice under subsections (2) and (3) of section 32 of the Act are two distinct and separate types of notices and different grounds and different period for service of notice in each subsection has been prescribed. Under subsection (2) for non-levy, short-levy or erroneous refund, specific allegations of any collusion between the assessee and the Customs Staff has to be levelled with proper particular in the show-cause notice which has to be served within three years of the. relevant date whereas under subsection (3) if non-levy, short-levy or erroneous refund is done due to inadvertence, errors or misconstruction then show-cause notice to the importer has to be served within six months of the non snort levy. If such specific particulars are not stated in the notice, the notice would be vague and would not be in consonance with the requirement of subsections (2) and (3) of sections 32 of the Act".

Further that:-

.... It is necessary under subsection (1) of section 32 of the Act to show that the declarant had the knowledge or had the reason to believe that declaration or statement .made by him was untrue/false and in the absence of such allegation notice would be vague and would not be in accordance with the law. Similarly, notice under subsection (2) of section 32 of the Act must contain the allegation of collusiveness and notice under subsection (3) of section 32 of the Act should speak of inadvertence, error or misconstruction and without such allegation the notices would be defective and against the law."

12. In the case of "Ibrahim Textile Mills Ltd. v. Federation of Pakistan and others (PLD 1989 Lah. 47) notice issued to the exporters by the Customs Authorities under section 32(1) and (2) of Customs Act (IV of 1969) for short-levied and short paid customs duties were struck down non-allegations of collusion, false declaration or inadvertence etc.' Following observations of the Court in this judgment being relevant are reproduced hereunder:-

"The said orders do not touch the conditions precedent required for the exercise of the powers vesting in the Assistant Collector under subsection (2) of section 32 of the Customs Act, 1969, namely, (a) whether the petitioners had made or caused to be made or delivered or caused to be delivered any declarations or statements knowing or having reason to believe that such documents or statements were false in any material particulars or (b) whether the petitioners by reason of some collusion had connived at any duty or charge being short-levied... The impugned orders having been passed on no material and on erroneous construction of the law, required to be set aside ...The orders have been passed on the material which do not make out the conditions precedent on the basis of which they could have been passed. "

13. In the present case, the show-cause notice alleged against the appellant illegal input tax adjustment but patently omitted to specify or allege the reason causing the purported evasion. The assumption of jurisdiction by the Adjudicating Authority was also an act contrary to the law.

14. It is therefore held that the show-cause notice served upon the appellant by the Notifying. Authority was patently illegal and without lawful authority. As such, all orders based thereupon are liable to be set C aside.

15. Validity of the show-cause notice was fundamental to the assumption of jurisdiction by the Revenue Authorities to pass the impugned orders. And that the show-cause notice and the impugned orders have herein been held to be patently devoid of jurisdiction and the lawful authority. The appellant therefore, in our opinion, could legitimately agitate the basic jurisdictional questions) even in this further appeal. The rule has so been laid in the cases of "Haji Abdullah Khan and others v. Nisar Muhammad Khan and others." (PLD 1965 SC 690), "Gatrori (Industries) Limited v. Government of Pakistan and others" (1999 SCMR 1072), "Commissioner of Income Tax v. Abdul Majeed (2000 PTD 359), "Province of Sindh through Secretary, Public Works Department, Government of Sindh, Karachi and 6 others v. Messrs Royal Contractors" (1996 CLC 1205).

16. As the show-cause notice and all proceedings and orders based thereupon have been held to be without jurisdiction, other question do not need to be dealt with as per the principles laid down in the case of "Assistant Collector Customs and others v. Messrs Khyber Electric Lamps and others" (2001 SCMR 838).

17. In view of the foregoing observations, we accept this appeal in terms of the .opinion above recorded. There shall be no order as to the costs in view of leave to the appellant to raise the question of the validity of show-cause notice in this further appeal.

M.H./I-40/LAppeal allowed.