TOPS FOOD & BEVERAGES, HATTAR VS SECRETARY, REVENUE DIVISION, ISLAMABAD, 2008 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 1032 (2003)

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

----S. 36---Provisions of Ss.36(1) & 36(2) of Sales Tax Act, 1990---Distinction and applicability---Section 36(1) of Act, 1990 deals with collusive or deliberate act of non-levy or non-payment-.--Section 36(2) of the Sales Tax Act, 1990 speaks of non-payment due to inadvertence, error or misconstruction.

Subsection (1) and subsection (2) of S.36 of Sales Tax Act, 1990 provide for different contingencies based on different facts and circumstances. Subsection (1) can be applied, where by reason of some collusion or a ,deliberate act any tax or charge has not been levied or made, whereas subsection (2) applies to cases, where by reason of any inadvertence, error or misconstruction, any tax or charge has not been levied. In subsection (1), there are two ingredients viz. (1) collusion or (2) a deliberate act for non-levy or non-payment. Whereas subsection (2) Speaks for non-payment due to inadvertence, error or misconstruction.

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

----S. 36(1)---Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), Ss.9 & 11---Non-payment of sales tax---Issuance of notice under S.36(1) of Sales Tax Act, 1990 without specifying that such non-payment was due to collusion and a deliberate act of complainant or due to inadvertence, error or misconstruction--Validity---In. absence of such particular allegation, complainant would not be able to defend itself properly---Such notice was, held to be defective, vague, illegal, having no legal effect.

Assistant Collector and others v. Messrs Khyber Electrics Lamps 2001 SCMR 838 fol.

M. Zafar Iqbal for the Complainant.

Yousaf Haider Orakzai, Deputy Collector (Adjudication).

FINDINGS/DECISION

JUSTICE (RETD.) SALEEM AKHTAR (FEDERAL TAX OMBUDSMAN).---The Deputy Collector Central Excise and Sales Tax issued show-cause notice dated 1-4-2003 to the complainant which was served on 4-4-2003. It was stated that during the course of audit it was noted that the complainant availed area exemption under S.R.O. 561(I)/94 dated 9-6-1994. The complainant was thus liable to pay sales tax from 22-6-1999 but they started paying it from 26-9-1999. Admittedly there was a default for payment of sales tax for 7 days amounting to Rs.547,254 which was paid. The Deputy Collector issued a show-cause notice dated 1-4-2003 which reads as follows:

GOVERNMENT OF PAKISTAN

COLLECTORATE OF CUSTOMS, CENTRAL EXCISE

& SALES TAX (ADJUDICATION) CUSTOMS HOUSE,

JAMRUD ROAD, PESHAWAR

C. No. ST-DC(Adj)82/2003/904.Dated: 1-4-2003.

SHOW-CAUSE NOTICE

Whereas it has been reported to the undersigned by the Collectorate of Sales Tax & Central Excise, Peshawar vide contravention Report No. ST(Contra) .../02 dated / /02 that during the course of audit of Messrs. Tops Food and Beverage Ind. Hattar, the audit team noted that the registered person availed area exemption under S.R.O. 561(I)/94 dated 9-6-1994. The registered person started its trial production on 22-6-1994 according to their RG-1 Register.

2. After availing five years exemption the registered person was liable to pay sale tax from 22-6-1999, but they started paying sales tax from 29-6-1999. Thus the registered person claimed invalid exemption for seven days. It is liable to pay sales tax for this period amounting to Rs.547,254 as principal amount under section 36(1) and Rs.690,612 as add tax (updated at the time of payment) under section 34 of the Sales Tax Act, 1990.

Contravention case framed against the unit under sections 3, 33(2cc), 34 and 36(I) of the Sales Tax Act, 1990 and submitted for adjudication.

3. Now, therefore, the said Messrs Tops Food and Beverage Plot No.1411, Phase-III I.E. Hattar are hereby called upon to show cause within 15 days of the issuance of this notice as to why the amount stated in above para may not be recovered from them along with additional tax and penalties and why penal action should not be taken against them for violation of law mentioned above. They would produce all evidence documentary or otherwise in support of their defence within the period specified above failing which the case shall be decided on the basis of evidence placed on record.

4. They should also state in their written statement whether they would like to be heard in person or through their duly authorized representative or counsel, and if so, they or their duly authorized representative or counsel should appear before the undersigned for hearing on 16-4-2003 at 11-00 a.m.

(Sd.)

DEPUTY COLLECTOR (ADJ)

REGISTERED:

Messrs Tops Food and Beverages Plot No.1411, Phase-III I.E. Hattar

Copy to:

1. The Collector (Adjudication) Customs, Central Excise and Sales Tax, Peshawar.

2. The Assistant Collector, (Audit-II) Sales Tax & C. Excise, Peshawar with the request to direct Mr. Fawad Saeed, Sr. Auditor to attend the hearing on the time, date and venue as specified above.

DEPUTY COLLECTOR (ADJ)

The complainant submitted his reply dated 27-5-2003 in which facts do not seem to have been disputed. It was, however, submitted that the department should have noted the default and could have recovered within 3 years. The complainant has objected to show-cause notice on the ground that in the facts and circumstances of the cause notice should have been served within 3 years and not 5 years purported to be under section 36(1) of the Sales Tax Act. The complainant has challenged the legality of the notice demanding tax and additional tax as well.

2. In reply the department submitted that reference to section 36(2) is incorrect because the unit wilfully and not by mistake avoided payment of Government tax for one week. The contravention was framed against the unit under section 36(1) and not under section 36(2) of the Sales Tax Act, 1990 and thus the show-cause notice is within time. It was the duty of the unit to inform the Assistant Collector at least the 15 days before the set up of the unit and it was duty to be aware on which date the exemption expired. The department has justified the action taken against the complainant.

3. Mr. M. Zafar Iqbal representative for the complainant's has contended that notice served on the complainant is illegal and no action can be taken on this basis. His main objection is that the notice could not be issued under subsection (1) of section 36. According to him notice issued under subsection (1) of section 36 is not time-barred. The department has reiterated its stand as stated above. The main question for consideration is whether the notice issued by the department is contrary to law and illegal. To appreciate the contention of the parties section 36 its subsection (1) and subsection (2) which are relevant to the controversy is reproduced is under:

"36 Recovery of tax not levied or short-levied or erroneously refunded.---(1) Where by reason of some collusion or a delibrate 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 the 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."

It can be observed that subsection (1) and subsection (2) provide for different contingencies based on different facts and circumstances. Subsection (1) can be applied where by reason of some collusion or a deliberate act any tax or charge has not been levied or made whereas subsection (2) applies to cases where by reason of any inadvertence, error or misconstruction, any tax or charge has not been levied. In subsection (1) there are two ingredients viz. (1) collusion or (2) a deliberate act, for non-levy or not making payment. Whereas sub-section (2) speaks of non-payment due to inadvertence, error or misconstruction. The departmental case is that the complainant's case falls under subsection (1) section 36 and not under subsection (2). Section 32 of the Customs Act is identical to the provision of section 36. It came for consideration before the Supreme Court of Pakistan in case of Assistant Collector and others v. Messrs Khyber Electrics Lamps 2001 SCMR 838. It was observed that where the unit is charged for any act as specified in subsection (1) or (2) the same should be specifically mentioned. In subsection (1) there are two situations as specified above and unless it is clearly specified in a notices that the non-payment was due to collusion or due to deliberate act of the defaulter it will not be possible for the unit to defend itself properly. This defect in the notice was specifically discussed and pointed out by the Supreme Court where with reference to the section 32 of the Customs Act; it was observed as follows:-

"It has not been alleged in the show-cause notices that the respondents knowingly or having reason to believe that documents which were false in any material particular, were filed. 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 absence of such allegation notice would be vague and would not be in accordance with 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 allegations the notices would be defective and against law."

Applying the principle laid down by the Supreme Court it is obvious that notice under section 36(1) of the Sales Tax Act, 1990 is defective, vague and not according to law. The notice being illegal, as held by the Supreme Court the same has no legal effect. It is therefore recommended that:

(i) The show cause notice being illegal, the entire proceeding is c without jurisdiction and of no legal effect.

(ii) The Collector passed the order to cancel the impugned notices, proceeding taken and order if any passed in pursuance of impugned notice.

(iii) Compliance to be reported within 30 days.

S.A.K./186/F.T.O.Order accordingly.