ABDUL JALIL AND BROTHERS, LAHORE VS SECRETARY, REVENUE DIVISION, ISLAMABAD, 2008 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 416 (2005)

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

----Ss. 21(4), 25(3) & 38---Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.2(3)---De-registration, blacklisting and suspension of registration---Complainant was registered person with the sales tax department as a commercial exporter and wholesaler and paying sales tax on imports and on more than 10% value addition---Name of the complainant was included in the list of suspect units without issuing a show-cause notice or the blacklisting order debarring the complainant to claim input tax on invoices issued by it---Validity---Registered person was blacklisted on the basis of non-existence of declared address/premises and involvement in issuance of fake/flying invoices, which were later reported in audit observations---Complainant's name in the list of suspect units at a time when there was no provision in the Sales Tax Act, 1990 to blacklist the registered person---Proviso to S.21(4) of the Sales Tax Act, 1990 under which the Collector was authorized to blacklist the units or suspend their registration, subject to adherence to the procedure as laid down for the purpose, was added to the Sales Tax Act, 1990 w.e.f. 1-7-2003---Department's action to include complainant's name in the list of suspect units prior to that amendment was without jurisdiction---Collector's letter addressed to Central Board of Revenue for inclusion of complainant's name in the suspect list did not disclose any reason for which inclusion was to be made nor did the department disclose whether any formal order blacklisting the complainant was communicated to it to enable it to react and explain its position---Inclusion of complainant's name in the list of suspect units was without jurisdiction and not sustainable---Complainant's name should be excluded from the list of suspicious units---Federal Tax Ombudsman recommended that Revenue Division direct the competent authority to exclude complainant's name from the list of suspect units as the same was included in the list at a time when there did not exist any provision in the statute empowering the revenue to place complainant's name in the suspect list, the department will, however, be at liberty to include the name of the complainant in the list of suspect units, provided it has sufficient and demonstrable evidence to do so subject also to the condition that the law, provides for such blacklisting and the department follows the procedure Paid down for the purpose; that Central Board of Revenue to decide complainant's pending application, dated 4-6-2005 complaining that it was subjected to audit despite suspension of audit by the Central Board of Revenue so as to rule whether or not respondents' action to conduct audit was legitimate or whether it militated against Central Board of Revenue's own instructions to suspend audit and communicate its considered decision to the complainant with reference to its pending application as well as to the Collectorate.

Complaint No.295-K of 2004 ref.

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

----S. 21(4)---Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.2(3)---De-registration, blacklisting and suspension of registration---Compensation for loss of business due to blacklisting and suspension of registration---Validity---Not possible for Federal Tax Ombudsman to award compensation on account of loss of business---Sales Tax Act, 1990 did not provide for payment of any such compensation---Department will be at liberty to blacklist the complainant, provided it had sufficient and demonstrable evidence to do so subject to the condition that the law provides such blacklisting and the department follows the procedure laid down for the purpose, giving the complainant the opportunity to clarify its position.

Muhammad Akbar, Advisor, Dealing Officer.

Saleem Iqbal Rathore, for the Complainant.

Muhammad Saeed Wattoo, D.C. Sales Tax, Lahore for Respondents.

DECISION/FINDINGS

JUSTICE (RETD.) MUNIR A. SHAIKH, (FEDERAL TAX OMBUDSMAN).---Facts of the complaint are that the complainant who is registered with the sales tax department as a commercial exporter and wholesaler of chemicals had been paying sales tax on imports and on more than 10% value addition. In April 2004, it learned that the Lahore Collectorate had included its name in the list of suspect units without issuing a show cause notice or the blacklisting order debarring the complainant to claim input tax on invoices issued by it. On approaching the department for exclusion of its name from list of suspicious unit it was informed that it would not be possible unless audit of complainant's unit was conducted. As the complainant's business was practically closed and its reputation was damaged it moved an application on 10-4-2004 to the department for audit, as advised by the officials. Auditors were appointed. Audit notice was issued on 29-5-2004. The complainant supplied copies of relevant records to the auditors and answered their queries. While they did not raise any objection they kept on delaying the matter till the C.B.R. vide its order dated 8-11-2004 suspended sales tax audit. Complainant was not issued any audit report. Again approached for exclusion of its name from the blacklist the department informed the complainant that nothing could be done during suspension of audit by the C.B.R. The respondents acted unlawfully and against C.B.R's. directive suspending the audit. After about eight months the complainant received a show cause notice from Additional Collector (Adjudication), which was duly replied, supported by documentary evidence. Another auditor was appointed. He neither turned up for hearings before the adjudicating officer nor did he file counter comments on complainant's reply to the show cause notice. The Additional Collector (Adjudication) refused to proceed ex parte. The complainant requested the Collector and Additional Collector to exclude its name from the backlist conditionally pending auditor's report but to no avail.. Another auditor was appointed who asked the complainant to submit records for the last five years despite the fact that the complainant has undergone audit for the period in question. The complainant informed the auditor that since the complainant was paying tax on more than 10% value-addition it was exempt from audit from 11-7-2004 onwards as per the provisions of S.R.O.592(I)/04 dated 8-7-2004 read with clause 14 of Special Procedure for Payment of Sales Tax by Commercial Importers on value-addition. The auditor ignored it all and resumed on 18-5-2005 entire records upto May, 2005. During proceedings before Additional Collector (Adjudication) the complainant contested the charges and pleaded for exclusion of its name from the list of suspicious units but to no avail. The complainant also lodged a complaint with Chairman C.B.R. on 4-6-2005 but did not get any relief. It is pleaded that (i) action may be taken against officials responsible for taking unlawful actions and showing indifferent attitude that amounted to `maladministration', (ii) complainant's name may be excluded from the blacklist, (iii) respondents be directed to return whole record resumed by them for audit, (iv) fix responsibility for loss of business for the last 16 months and allow damages and (v) declare re-audit proceedings, being unlawful, as null and void.

2. In reply, the respondents have submitted that the, complainant was issued preliminary audit observations on 19-7-2005 under sub-section (3) of section 25 of the Sales Tax Act, 1990 requiring it to submit reply to the observations. Instead of making any response under section 25(3) of the Act it had filed a complaint before the F.T.O. so as to obstruct and delay the action initiated against it. Complainant's case of blacklisting was subjudice. The current audit was undertaken as consequence of adjudications proceedings when, on the question of deletion of complainant's name from the blacklist, the adjudicating authority ordered complainant's audit so as to consider its request for deletion of its name from the blacklist. Complainant's records had been returned. No audit prior to the current audit had been conducted. The value-addition of 10.04% quoted by the complainant for the whole period was misleading as the actual value-addition for the period from 13-6-1997 to 28-2-2003 was 10.47%. (negative). The overall value-addition since registration upto 30-4-2005 was also 6.33% (negative) as per its sales tax profile. The complainant was blacklisted for non-existence of declared address/premises and for issuing fake/flying invoices, which were subsequently reported in audit observations dated 19-7-2005. A list of blacklisted units was published and posted on C.B.R's. website for information of general public. The complainant should clarify its position regarding fake invoices with reference to audit observations already communicated. Complainant's request for audit was promptly attended. A notice for audit was issued. C.B.R. suspended audit of registered persons vide order dated 8-11-2004. Complainant's audit was initiated on the instructions of the adjudicating authority. This audit was different from routine audit. Subsequently, sales tax audit of the complainant was initiated with Collector's approval under the provisions of section 38 of the Sales Tax Act, 1990 in accordance with Board's directive dated 8-11-2004. The complainant was not providing full records. It is for the adjudication authority to decide the allegations contained in the show cause notice. Majority of complainant's buyers had disowned conducting any business with the complainant. Instead of replying to the audit observations the complainant was trying to sabotage the proceedings. It may be asked to respond to audit observations dated 19-7-2005 and not create hurdles in a matter, which was subjudice.

3. At the first hearing, the A.R. submitted that the complainant was blacklisted without issuance of show cause notice and without passing a formal order. Complainant's requests for execution of its name from the blacklist were ignored. The D.C. undertook first audit on 28-5-2004. The complainant had submitted all relevant records. It was not sure whether that audit had been completed. When, in November, 2004, the C.B.R. suspended all audits the complainant contacted the respondents to clear its name from the blacklist but to no avail. Subsequently, a show-cause notice dated 16-3-2005 was issued framing contravention of section 36(3) of the Sales Tax Act against the complainant with the intention to create sales tax liability along with additional tax and penalty. Although the complainant had replied to the show cause on 9-4-2005, denying all allegations, yet the case had not been decide. Even, its complaint to the C.B.R. remained unanswered.

4. The D.R. submitted that the audit initiated on 29-5-2004 was not completed. The second audit was ordered on 21-4-2005 by the adjudicating authority. Audit findings had since been conveyed to the complainant vide letter dated 19-7-2005. The complainant had submitted its reply vide letter dated 23-8-2005. The task of reconciliation of figures regarding value-addition as well as the task of verification of whether or not the complainant had adhered to the provisions of section 73 of the Sales Tax Act, 1990 was underway with the help of the complainant and the bank concerned. No "maladministration" was committed. The D.R. could not produce a copy of order blacklisting the complainant. He was asked to produce a copy of both the first audit report as well as the blacklisting order so as to appreciate the facts of the case. He promised to do so. He, however, submitted that complainant's name was included in the list of suspect units because it was not traceable .on the declared premises. The A.R., on the other hand, argued that the respondents did not make any effort to trace out the complainant. They could have done that because they had the address of complainant's house, his I.D. Card and were also aware of its NTN number. They could have verified the particulars from tax authorities. The A.R. cited F.T.O's. judgment in complaint No.295-K/2004 wherein in an identical case the complainant was allowed relief by way of exclusion of its name from the list of suspect units. The D.R. was asked to intimate as to, whether the procedure as laid down in the Sales Tax Act, 1990 or Rules made thereunder was followed for blacklisting the complainant. He could not give a satisfactory reply. Asked as to when the case of adjudication was likely to be decided the submitted that it was for the adjudication authority to indicate. He added that complainant's premises, were visited and two notices dated 5-11-2003 and 9-12-2003 were dispatched to its declared address but the postal envelopes came back undelivered giving rise to suspicion. He submitted that complainant's request for blacklisting could be examined only in the light of audit report and after verification of payment of tax through banking channels.

5. At a subsequent hearing, the D.R. produced the order dated 22-2-2003 under which, he submitted, that complainant's name was included in the list if suspect units and placed a copy on record. The A.R. reiterated the arguments earlier advanced in the complaint and during the first hearing. The D.R. submitted that the procedure, as laid down in section 21(4) of the Sales Tax Act, 1990; requiring issuance of show cause notice before blacklisting, was inserted on 16-6-2003. He submitted that before introduction of provisions to section 21(4) of, the Act the Collectorate used to include the names of suspect units in a list, which was provided to the C.B.R. The D.R. submitted that the complainant had changed its address without notifying the department. The D.R. submitted that at one stage complainant's premises were not traceable leading to inclusion of complainant's name in the list of suspect units but since the complainant had now surfaced, though at a different address, the department would be prepared to review the blacklisting ordered dated 22-2-2003 in the light of the audit. The A.R. did not agree with this course of action. He submitted that the respondents should have confronted the complainant with facts before blacklisting it. The D.R. submitted that the findings of audit would be finalized and separate proceedings would be initiated by issuing a show cause notice to the complainant to enable it to defend itself. The A.R. submitted that the respondents had issued a fresh notice for audit after suspension of audit by the C.B.R., which was unlawful.

6. The A.R. explained that Provisos 1 and 2 of section 21(4) of the Act were introduced vide Finance Act, 2003 in July, 2003. Complainant's name was included in the blacklist earlier to that when there was no provision in the section 21 for blacklisting. In July, 2003 the Finance Ordinance provided for both deregistration and blacklisting subject to adherence to the procedure laid down in law. They neither issued any show cause notice nor conducted any inquiry before blacklisting it. The D.R. submitted that the complainant had itself suggested that its audit be conducted vide letter dated 9-4-2005. That is why the adjudicating authority agreed to it. Asked as to why the audit was conducted when the C.B.R. had suspended sales tax audit, the D.R. clarified that the C.B.R. had vide letter dated 27-12-2004 clarified that only audit falling under section 25 was suspended. Since audit under section 25 of the Act was suspended by the C.B.R., the D.C. took permission from the Collector to conduct audit under section 38 of the Act on 15-6-2005. Notices under the aforesaid section were issued to the buyers of the complainant. Since no body received the notices audit was finalized on the basis of available record on 19-7-2005. The adjudication case had since been decided against the complainant.

7. The arguments of the two sides and. records of the case have been considered and examined. The complainant pleads that its name may be excluded from the blacklist and it be paid compensation for loss of business, its records resumed by the department for audit be returned and re-audit proceedings, being unlawful, be declared illegal.

8. During the hearing, the D.R. was asked to identify the law under which complainant's name was included in the list of suspicious units. He submitted that the practice at the time when complainant's name was sent (on 22-2-2093) to the C.B.R. for inclusion in the list of suspect units was that the Collectorate would communicate the names of suspect units to the C.B.R. and the C.B.R. maintained a list of such units. He also submitted that proviso to section 21(4) of the Act providing for blacklisting and suspension of registered units was introduced later vide Finance Act, 2003. The department, he argued, was prepared to review the complainant's case for exclusion of its name from the list of suspect units after determining the correct picture in the light of audit report.

9. It is observed that the Collectorate vide its letter dated 22-2-2003 communicated complainant's name to the C.B.R. for inclusion in the list of suspect units. The department, vide Para 2 of its comments, reports that the registered person was declared blacklisted on the basis of non-existence of declared address/premises and involvement in issuance of fake/flying invoices, which were later reported in audit observations dated 19-7-2005. It is observed that the department placed complainant's name in the list of suspect units at a time when there was no provision in the Sales Tax Act to blacklist the registered persons. Proviso to sub-section (4) of section 21 of the Act under which the Collector was authorized to blacklist the units or suspend their registration, subject to adherence to the procedure as laid down for the purpose, was added to the Sales Tax Act, 1990 w.e.f. 1-7-2003. Therefore, department's action to include complainant's name in the list of suspect units prior to that amendment was without jurisdiction. Furthermore, Collector's letter addressed to the C.B.R. for inclusion of complainant's name in the suspect list does not disclose any reasons for which inclusion was to be made nor did the D.R. disclose whether any formal order blacklisting the complainant was communicated to it to enable it to react and explain its position. As such the inclusion of complainant's name .in the list of suspect units was without jurisdiction and, therefore, not sustainable. The complainant's name should, therefore, be excluded from the list of suspicious units. It is not possible for this forum to award compensation on account of loss of business. The Sales Tax Act, 1990 does not provide for payment of any such compensation. The department will; however, be at liberty to blacklist the complainant, provided it has sufficient and demonstrable evidence to do so subject also to the condition that the law provides for such blacklisting and the department follows the procedure laid down for the purpose, giving the complainant the opportunity to clarify its position.

10. As for the issues relating to complainant's re-audit, the record revealed that the first audit was started on 28-5-2004 but as the C.B.R. had suspended the ongoing sales tax .audits vide its order dated 8-11-2004, the audit was reportedly closed on 19-7-2004. However, the Additional Collector (Adjudication) who had issued the complainant a show cause notice dated 16-3-2005 directed the Audit Wing to conduct audit of the complainant vide letter dated 21-4-2005. The re-audit was completed on 19-7-2005 and its findings were communicated to the complainant on the same date. In the letter dated 8-11-2004 the C.B.R. had ruled that audit already started should be stopped forthwith, in case of audit already completed required process i.e. feeding of computer, preparation of audit observation, contravention of audit report and its communication to the Board should be followed. The question arises as to how is it that while the C.B.R. had suspended all ongoing audit and had disallowed fresh allocation of audit vide its order dated 8-11-2004 the adjudicating authority directed audit of the complainant on 21-4-2005? Subsequently, the C.B.R. had also clarified in its order dated 27-12-2004 that the orders regarding suspension of sales tax of internal audit issued vide Board's letter dated 8-11-2004 were restricted to field audit under section 25 of the Sales Tax Act, 1990. The record, however, shows that complainant's own re-audit, which was initiated on 21-4-2005, was completed for the period July 2000 to April 2005 on 19-7-2005 under section 25 of the Act. Why the Board's instructions were not followed by the field formations? The Additional Collector (Adjudication) had directed re-audit with reference to the show cause notice dated 16-3-2005, which was pending decision. The case had since been decided vide Additional Collector (Adjudication)'s order dated 14-9-2005. The adjudicating authority has vacated the show-cause notice. While vacating it, the Additional Collector has observed that the subject show cause notice dated 16-3-2005 was issued to the respondents without completing the required formalities under section 25 of the Act and that the department was at liberty to complete the requisite course of action under section 25 of the Sales Tax Act, 1990---which was in progress---and issue a fresh show-cause notice, if desired under section 25(5) of the Sales Tax Act. The entire situation raises a number of questions: how was an ongoing audit not suspended in the wake of C.B.R's. order to suspended sales tax audit? Was this action legitimate? The Additional Collector (Adjudication) directed re-audit on 21-4-2005 after the C.B.R. had suspended ongoing audit and disallowed fresh allocation of audit. Was this order compatible with Board's instructions dated 8-11-2004? Is Additional Collector (Adjudication)'s observation in the O-I-O dated 14-9-2005, already passed, that the department should go ahead with action under section 25 of the Act for issuance of a fresh show-cause notice compatible with C.B.R's. policy to stop audits under section 25 of the Act? Whether the complainant was really discriminated against? The C.B.R. had as a matter of policy issued general instructions regarding audit, which, it appears, were not strictly followed in this case. It is, therefore, for the C.B.R. to find answers to the questions raised above. Recently the complainant had also filed a complaint dated 4-6-2005 in the C.B.R., which was still pending decision. In the aforesaid complaint the complainant had, among other things, agitated that "although audit has been suspended in all cases but in our case the auditors have intentionally created a situation that we forced to undergo audit or otherwise remain blacklisted and face closure of business, which we are facing till date". As to respondents' contention that the complainant, had itself asked for audit, the complainant contends that it was forced to do so.

11. Clearly, `maladministration' is established inasmuch as complainant's name was included in the list of suspect units without jurisdiction and illegally as indicated above without even so much as informing the complainant to enable it to clarify its position. `Maladministration' also appears to have been committed in the way the complainant's own audit had been conducted under section 25 despite C.B.R's. clear instructions on the whole issue. In view of the foregoing position, it is felt that the C.B.R. should decide complainant's pending application, especially with reference to 're-audit' to determine the legitimacy of the audit conducted by the field formations and the way in which it was conducted. Since the C.B.R. had issued instructions to stop audit, disallowed fresh allocation of audit and given clarifications .regarding audit under section 25, it is advisable that decision in regard to issues relating to audit may be left to the C.B.R's. fair judgment in the light of its own directives and policy behind suspending tax audits.

12. While the show cause notice framing charges against the complainant had been dropped' by Additional Collector (Adjudication) and records resumed by the department have been returned to the complainant, it is recommended that the Revenue Division direct the competent authority to: ---

(i) exclude complainant's name from the list of suspect units as the same was included in the list at a time when there did not exist any provision in the statute empowering the revenue to place complainant's name in the suspect list. The department will, however, be at liberty to include the name of the complainant in the list of suspect units, provided it has sufficient and demonstrable evidence to do so subject also to the condition that the law provides for such blacklisting and the department follows the procedure laid down for the purpose.

(ii) The C.B.R. to decide complainant's pending application dated 4-6-2005 complaining that it was subjected to audit despite suspension of audit by the C.B.R. so as to rule whether or not respondents' action to conduct audit was legitimate or whether it militated against C.B.R's. own instructions to suspend audit and communicate its considered decision to the complainant with reference to its pending application as well as to the Collectorate.

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

C.M.A./538/F.T.O.Order accordingly.