M.I. TEXTILE MILLS LTD. VS SECRETARY REVENUE DIVISION, ISLAMABAD, 2008 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 1744 (2006)

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

----Ss.36(3), 34, 33(2)(cc), 3 & 2(33)---Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.2(3)---Recovery of tax not levied or short levied or erroneously refunded---Non-invoking of specific section/subsections of the applicable law in the show-cause notice---Limitation for passing of order-in-original after issuance of show-cause notice---Show-cause notice was issued alleging that stock had been supplied without payment of sales tax---Complainant along with explanation of stock contended that show-cause notice was issued on 22-3-2003 and order-in-original was passed on 5-9-2005 after two years and seven months whereas the order was required to be passed within 45 days of the issuance of show-cause notice, extendable by another 90 days if extension was allowed of which there was no evidence---Case had to be decided within 135 days (subject to extension) which was not done---On pointing out that adjudicating officer had not invoked Ss.36 and 34 of the Sales Tax Act, 1990 in the show-cause notice, the complainant submitted that, in that case the show-cause notice was defective and so were the subsequent proceedings---Show-cause notice that failed to invoke the specific sections/subsections of the applicable law for determination/recovery of dues was illegal as were all the subsequent proceedings---Validity---Adjudicating authority failed to invoke in show-cause notice the applicable provisions of law i.e. specific subsections of Ss.36 and 34 of the Sales Tax Act, 1990 for determination/recovery of tax and additional tax and specific clause/ clauses of subsection (2) of S.33 for imposition of penalty as provided in law---Vague show-cause notice issued was legally defective, invalid and ab initio void---Order-in-Original passed, was not sustainable---Maladministration was established as the order was passed on the basis of legally flawed, defective and vague show-cause notice---Order was passed beyond the scope of show-cause notice and was illegal, unjust, arbitrary and out of jurisdiction---Federal Tax Ombudsman recommended that the Central Board of Revenue should direct the competent authority to cancel the impugned Order-in-Original.

Complaint No.805 of 2003 and Complaint No.1028-L of 2005 rel.

2001 SCMR 838 ref.

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

----S.36(3)---Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.2(3)---Recovery of tax not levied or short levied or erroneously refunded---Limitation---Extension by Central Board of Revenue after initial period---Validity---Department although obtained extension from Central Board of Revenue in the period for deciding the case up to 31-10-2005 but even then the Order-in-Original dated 5-9-2005 was barred by time because the extension was sought and given much after the expiry of initial period of 45 days as prescribed in S.36(3) of the Sales Tax Act, 1990.

Complaint No.805 of 2003 and Complaint No.1028-L of 2005 rel.

Muhammad Akbar (Advisor) Dealing Officer.

Abdul Qaddus Mughal for the Complainant.

Syed Mahmood Hassan D.C., Sales Tax, Lahore for Respondents.

DECISION/FINDINGS

JUSTICE (RETD.) MUNIR A. SHEIKH, (FEDERAL TAX OMBUDSMAN).---Facts of the complaint are that the complainant was issued a show-cause notice dated 22-3-2003 alleging that it had supplied a stock of Rs.2464189 to Messrs M.I. Concern without payment of sales tax. The complainant contested the allegation by explaining that it had not sold out stocks as contended but had, in fact, leased out the factory premises along with stocks to Messrs M.I. Concern. There was neither sale nor transfer of ownership. The agreement between the complainant and the lessee was only for use of assets and the lessee was bound to return the stocks along with the factory. Thus on the expiry of lease agreement, the factory and the entire stocks were handed back to the complainant. Hence the complainant had not violated the provisions of law. Furthermore, the complainant had legally adjusted sales tax liability on account of electricity bills and rightly claimed the input tax. No penalty could be imposed because the chargeability of sales tax and additional tax was illegal. Similarly, the complainant was entitled to adjustment of sales tax amounting to Rs.23792 on account of electricity bills paid against the office of the registered person. The respondents could not disallow it. The DC (Adjudication) decided the case vide order dated 5-9-2005 unlawfully. He had no justification to decide the case after a lapse of 135 days from the date of issue of show-cause notice dated 22-3-2003, as mandated under the provisions of section 36(3) of the Sales Tax Act, 1990. The respondents' act, being illegal and without lawful authority, amounted to `maladministration'. The order dated 5-9-2005 may be declared null and void, illegal and without lawful authority.

2. In reply, the Collector of Sales Tax, Lahore has submitted that at the time of audit the complainant had failed to produce the lease agreement with Messrs M.I. Concern regarding lease of stocks. Furthermore, the definition of supply in section 2(33) of the Sales Tax Act, 1990, included sale, lease or other disposition of goods in the course of furtherance of business carried out for consideration. As was evident from complainant's letter dated 21-12-2001, it had deposited sales tax amount of Rs.100,000 requesting that the remaining amount be allowed to be deposited in instalments. The complainant had, therefore, admitted its liability even before issuance of show-cause notice dated 22-3-2003. As to the charges referred to by the complainant at para 2(i) and (iii) of the complainant the same had been decided in favour of the complainant. The D. C. had passed a speaking order on merit. The allegations were baseless. The complainant caused delay in deciding the case as the counsel of the complainant requested for adjournments on one pretext or other. It submitted its reply to the show-cause notice on 8-1-2005. However, requisite extension in time limit-was given by the CBR under section 45 of the Sales Ta,: Act, 1990 vide its letter, dated 7-9-2005. As the issue at hand involved interpretation of law as to whether supply was taxable and whether the time limit as mentioned in section 36 of the Act was mandatory or directory, FTO's jurisdiction did not extend in the case in terms of the provisions of section 9(2)(b) of the FTO Ordinance, 2000. The complainant may be dismissed as lacking merit.

3. During the hearing, the AR, while confirming that the complainant had not filed any appeal against impugned Order-in-Original No. 16 of 2005 dated 5-9-2005 emphasized that the aforesaid order-in- original was passed much beyond the time limit prescribed for deciding the case in section 36(3) of the Sales Tax Act, 1990. It was, he contended, hit by time limitation as provided in law. He explained that the show-cause notice was issued on 22-3-2003, order-in-original was passed on 5-9-2005 after two years and seven months whereas the order was required to be passed within 45 days of the issuance of show-cause notice, extendable by another 90 days if extension was allowed of which there was no evidence. The case had to be decided within 135 days (subject to extension) which was not done. When pointed out that the adjudication authority had not invoked sections 36 and 34 of the Act in the show-cause notice dated 22-3-2003, the AR submitted that in that case the show-cause notice was defective and so were the subsequent proceedings. He added that a show-cause notice that failed to invoke the specific sections/subsections of the applicable law for determination/recovery of dues was illegal as would be all subsequent proceedings. He promised to submit various Courts' judgments in support of his aforesaid contention and had since placed them on record. In support of his contention that the order-in-original was barred by time in terms of the provisions of section 36(3) of the Sales Tax Act, he cited FTO's findings in Complainant No.805 of 2003 which was upheld by the President of Pakistan vide Presidential order dated 7-5-2005 as well as FTO's findings in complaint No.1028-L of 2005.

4. The DR submitted that in so far as the question of time-bar was concerned, the Collector had sought extension from the CBR vide his letter dated 30-8-2005 and the CBR had extended the time limit for deciding the case upto 31-10-2005 vide its letter dated 7-9-2005.Asked to check from record whether the adjudication authority had invoked the provisions of sections 36 and 34 of the Act for determination/recovery of sales tax and additional tax, the DR submitted that these sections had not been invoked in the show-cause notice. He also stated that FTO's jurisdiction did not extend in the case in terms of the provisions of section 9(2)(b) of the FTO Ordinance as the impugned order was appealable. He added that it was evident from the complainant's letter dated 31-12-2001 that it had paid Rs.300,000 out of a total liability of Rs.733000.The adjudication officer had reduced the liability by dropping two charges. The AR submitted that even the so-called extension was sought by the Collector vide his letter dated 30-8-2005 long after the expiry of the prescribed period within which the case had to be decided and, therefore, the extension allowed by the CBR was legally untenable. He further stated that the show-cause notice had described the tax liability at Rs.552267. The DR submitted that the aforesaid amount represented only the principal amount, without additional tax.

5. The arguments of the two sides and records of the case have been considered and examined. The show-cause notice dated 22-3-2003 (on record) reveals that the DC (Adjudication) had asked the complainant to show cause why the evaded sales tax amounting to Rs.552257 be not recovered from it along with additional tax in contravention of the various provisions of the Sales Tax Act, 1990 besides penal action under section 33 of the Sales Tax Act, 1990. While some of the charges were dropped, others were upheld vide Order-in-Original No.16 of 2005 dated 5-9-2005. It is observed that the show-cause notice merely says why tax and additional tax be not recovered and penalty imposed without invoking the specific applicable provisions of law i.e. subsection (1) or (2) of section 36 and section 34 of the Act for determination of tax/additional tax liability. No doubt, section 33 of the Act was invoked in the show-cause notice for imposition of penalty on account of evasion of sales tax but .the show-cause notice did not specify the specific clause/clauses of subsection (2) of section 33 of the Act under which the penalty was intended to be imposed. Considering that there are sub-Clauses (a) to (d) of subsection (2) of section 33 of the Act attracting a penalty of Rs.5000 or 3% of the amount of tax involved, whichever is higher, the specific sub-clause of the breach of which the penalty was intended to be imposed should have been invoked and the complainant confronted with it, which was not done. Yet the impugned order directs the recovery of sales tax, additional tax without invoking the applicable provisions of law. It also imposes penalty in respect of one charge at the rate of 3% of the principal recoverable amount of tax involved and in respect of the another Rs.5000 under section 33(2)(cc) of the Act without invoking in the show-cause notice the specific sub-clause (cc) of subsection (2) of section 33 of the Act. "It is well-settled position of law that a thing required by law to be done in certain manner must be done in the same manner as prescribed by law or not at all" as held vide 2001 SCMR 838. Thus the show-cause notice to the extent that it failed to invoke the applicable provisions of law is faulty, flawed and legally invalid. Consequently the impugned order also becomes invalid because the complainant was not confronted with the specific provisions of law under which tax liability was determined and penalty was imposed. The impugned order based on a vague, defective and faulty show-cause notice is, therefore, void and legally untenable.

6. In reply to the complainant's argument that the impugned order -in-original was time-barred because it was passed beyond the time prescribed under section 36(3) of the Sales Tax Act, 1990, the respondents have submitted that it was not barred by time because the Collector had sought extension from the CBR vide letter dated 30-8-2005 and the CBR had extended the period for deciding the case upto 31-10-2005 vide its letter dated 7-9-2005.The complainant's AR has correctly argued that if the respondents claimed that the order was passed under section 36(1) of the Act and they had obtained an extension from the CBR in the period for deciding the case upto 31-10-2005 even then the order-in-original dated 5-9-2005 was barred by time because the extension was sought and given much after the expiry of initial period of 45 days as prescribed in section 36(3) of the Sales Tax Act. In support of his contention, the AR cited FTO's decision in Complaint No.805 of 2003, which was upheld by the President of Pakistan vide Presidential Order dated 7-5-2005 and FTO's findings in Complaint No.1028-L of 2005. AR's contention is correct as it has already been held by the FTO vide findings in Complaint No.805 of 2003 that the order passed beyond the period prescribed in law was not sustainable. The aforesaid decision of the FTO was upheld by the President of Pakistan vide Presidential Order dated 7-5-2005. In the instant case, the Collector of Sales Tax sought extension in the time for deciding the complainant's case, along with other cases, vide letter dated 30-8-2005 on the ground that "in all these cases extension is required as the adjudication Collectorate was not able to decide the cases within stipulated period". The CBR allowed extension vide its letter dated 7-9-2005 upto 31-10-2005. The failure of the Adjudication Collectorate to decide the cases within the prescribed period cannot be termed as constituting `exceptional circumstances', which the CBR had to determine before allowing extension under the provisions of section 45 of the Sale Tax Act. The period of 45 days within which the case had to be decided in terms of the provisions of section 36(3) of the Act had expired on 7-5-2003, more than two years before the abolition of the Collectorate of Adjudication. The so-called extension was sought by the Collector and allowed by the CBR long after the expiry of the prescribed time limit of 45 days when the case was already a closed transaction. In view of the foregoing position the AR's contention that the impugned order was time-barred is correct. Respondent's contention that the complainant's counsel was responsible for causing delay in deciding the case is not convincing. It was within the power of the adjudication authority to decline counsel's requests for adjournment and to adhere to the time-frame provided, in the law for deciding the case. As to the respondents' argument that the complainant had admitted liability even before issue of show-cause notice, it is observed that the complainant had contested the charges as well as the liabilities framed in the show-cause notice. The impugned order .determined the liabilities and imposed penalty by issuing a show-cause notice which did not invoke the applicable provisions of law, as discussed above; hence the show-cause notice as well as the impugned order based on that show-cause notice were illegal and ab initio void.

7. However, it is observe that in the present case the adjudication authority failed to invoke in the show-cause notice the applicable provisions of law i.e. specific subsections of sections 36 and 34 of the Act for determination/recovery of tax and additional tax and specific clause/clauses of subsection (2) of section 33 for imposition of penalty as provided in law. The vague show-cause notice issued in the case is legally flawed, invalid and ab intio void. The order-in-original passed in the case, therefore, not sustainable.

8. The respondents' objection to the jurisdiction of the F.T.O in terms of the provisions of section 9(2) of FTO Ordinance, 2000 is misplaced because the complainant had not filed any appeal before the competent appellate authority nor was the case sub-judice on the day that the complaint was filed in the FTO Secretariat. The issue whether the time limit as prescribed in section 36(3) of the Act was mandatory or directory already stands decided at the level of the President of Pakistan vide order dated 7-5-2005. The FTO can investigate complaints involving `maladministration'. Clearly, 'mal administration' is established. The impugned order was passed on the basis of a legally flawed, defective and vague show-cause notice, as discussed above. The order was, therefore, passed beyond the scope of show-cause notice and is legal, unjust, arbitrary and out of jurisdiction. Accordingly, it is recommended that the CBR direct the competent authority to:

(i) Cancel the impugned Order-in-Original No.16 of 2005, dated 5-9-2005.

(ii) Compliance be reported within 30 days of the receipt of this order.

C.M.A./19/FTOOrder accordingly.