SLECTO FABRICS TRADING CO., KARACHI VS SECRETARY, REVENUE DIVISION, ISLAMABAD, 2008 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 515 (2004)

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

----S.21(4), first proviso---Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.2 (3)---De-registration--Registration was suspended in terms of S.21 (4) of the Sales Tax Act, 1990 by the Assistant Collector on account of tax fraud/evasion---Complainant contended that Assistant Collector did not have the power to suspend the registration---Department contended that order of suspension of registration was passed by the Collector on the relevant file and the Assistant Collector had issued the order on behalf of the Collector---Validity---Power under first proviso of subsection (4) of S.21 of the Sales Tax Act, 1990 had been exclusively given to the Collector who could pass suspension order after satisfying himself that registered person was found to have issued fake invoice, evaded tax or had committed tax fraud---Such exercise had to be carried out by the Collector personally and not through any other authority, subordinate or agent---Satisfaction of the Collector could be made basis for passing such order---Collector had not made any inquiry for reaching the satisfaction that the complainant was found to have issued fake invoices, evaded tax or had committed tax fraud---Nothing was on record to show that the Collector had made any investigation or applied his mind independently to the facts of the case---Collector only endorsed the opinion of the Assistant Collector and approved the same---Mechanical process was adopted by the Collector without applying his mind and satisfying himself as required by law---Order of suspension was not passed as required by law and suffered from illegality and was of no legal effect---Contention that Assistant Collector had merely communicated the order of suspension was not correct---In fact order was passed by the Assistant Collector which was merely approved and no order was passed by the Collector as required by law---Order of suspension was arbitrary, contrary to law and against established practice without any valid reason and bona fides---Process of decision making adopted by the Collector was in violation of mandatory provisions of law- s Maladministration was established---Federal Tax Ombudsman recommended that Central Board of Revenue may set aside the order dated 28-7-2003 passed by the Assistant Collector (Registration) within fifteen days, direct the Collector to carry out a thorough inquiry in the working of the complainants and pass speaking order after affording the complainant opportunity of being heard and issue instructions to the Collectors of Sales Tax to pass order under first proviso to subsection (4) of S.21 of the Sales Tax Act, 1990 after affording an opportunity of being heard to the party.

(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---Where registered person fails to file return under S.26 of the Sales Tax Act, 1990 for six consecutive months officers of not below the rank of Assistant Collector may, after issuing a notice and giving an opportunity of being heard to such person, cancel the registration after satisfying himself that no tax liability was outstanding against such person--Assistant Collector is empowered to cancel the registration if a registered person fails to file sales tax return under S.26 of the Sales Tax Act, 1990 for six consecutive months but before passing this order he has to issue notice to the party and after giving an opportunity of being heard pass the order.

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

----S.21(4), first proviso---Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.2(3)---De-registration---Opportunity of being heard---First proviso to subsection (4) of S.21 of the. Sales Tax Act, 1990 required the Collector to satisfy himself about the illegalities calling for suspension of registration but no provisions had been made to afford an opportunity of being heard to the complainant before passing the order---Any adverse order passed against a party without affording it an opportunity to defend itself is against the principles of natural justice---Although subsection (4) of S.21 of the Sales Tax Act, 1990 did not provide for hearing of a party, the principles of natural justice are so embedded in jurisprudence that the superior courts taking into consideration the fundamental rights conferred by the Constitution have consistently held that even if no provision is made for affording an opportunity of being heard before any order is passed it is incumbent on every authority and court to issue notice and opportunity of hearing be afforded to him before passing any order against him.

M. Mubeen Ahsan, Advisor (Dealing Officer).

Tahir Razzaq Khan, F.C.A., Authorized Representative Zahid Habib.

Farrukh Sajjad, Deputy Collector (Adjudication).

FINDINGS/DECISION

JUSTICE (RETD.) SALEEM AKHTAR, FEDERAL OMBUDSMAN.---The complaint has been filed against the alleged illegal suspension of the sales tax registration of Messrs Slecto Fabrics Trading Company, Karachi. The Complainant has alleged that it had purchased tax-paid goods from registered persons and sold the same to other registered persons who were neither black-listed nor in the defaulters list at the time the transactions were executed. The sales and purchases were reflected in the monthly sales tax returns.

2. It has been pleaded that the Complainants had hired the services of Messrs Al-Habib Trading Company for proper maintenance of sales tax record and it core record was forcibly seized during the raid on the premises of Mts. Diamond Textile Traders. The Collectorate had asked it for copies of the sales register, the purchase register, the bills of entry, the bank statements, the list of suppliers and the list of buyers through various letters. It had replied that the record was already in the custody of the Department and the information could be obtained from the seized record or allow it a reasonable time to inspect the seized record which was not allowed. The Assistant Collector issued an order dated 27-8-2003 that as there existed a prima facie case of tax fraud/evasion of tax against the Complainant, its registration was suspended in terms of section 21(4) of the Sales Tax Act.

3. It has been stated that the order suspending the registration was without any proof of even a single wrongful gain and the Department was maligning it of tax fraud by invoking the provision of section 2(37) of the Act. The Collectorate had failed to substantiate the allegations. It has been further pleaded that its transactions were genuine and bona fide, the input tax claim was in accordance with the law and sales had been made to the parties who were genuine and bona fide exporters. It alleged that the staff of the Department was acting vindictively and a fair and impartial treatment was not expected from them. It has been requested that the order for suspension of the registration be withdrawn, special auditors under section 32A of the Sales Tax Act be appointed, and necessary disciplinary action be taken against the officials responsible for committing the illegality.

4. The Deputy Collector of Sales Tax replied to the complaint that on receipt of a credible information the officials of the Collectorate visited the premises of Messrs Diamond Textile Traders on 10-6-2003 under section 38 of the Act. Mr. Zahid Habib met the visiting team and introduced himself as a partner. Since he refused to cooperate, a search of the premises was made under section 40-A of the Act and it was found that besides the documents of Messrs Al-Habib and Messrs Diamond Textile Traders, the documents of Messrs Radiant Trading Company, Messrs Supertex, Messrs Green Land Business Trader etc. and the units registered in other Collectorates were lying in the same premises. Since Mr. Zahid Habib failed to provide any satisfactory reply and the activities taking place in the premises appeared to be suspicious, it was decided to resume all records which were connected with the inquiry against Messrs Diamond Textile Trading. Mr. Zahid Habib was defrauding the public exchequer by preparing fake invoices in the premises owned jointly with Messrs Diamond Trading Company and claiming refund in connivance with several other units. He stated that refund of Rs.77.202 million had been claimed for the exports made by seven companies and refund of Rs.325.02 million was pending in the Collectorate. The companies were run in the name of the relations of Mr. Zahid Habib or his agents.

5. It was pleaded that the exporters namely Messrs Radiant, Messrs Supertex Entrepreneurs, Messrs GL Business Traders, Messrs Zam Zam Traders, Messrs S.F. Traders, Messrs World Business Traders and wholesalers namely Messrs Slecto, Messrs Optimum and Messrs Karachi Top Fabrics were summoned under section 37 of the Act to produce their record on 25-6-2003 but they failed to comply. It was denied that the Complainant had adjusted input tax correctly. Fake invoices were prepared and fraudulent refunds obtained. The Complainant had neither paid the tax to the government nor any physical transactions had taken place.

6. The Department further pleaded that the Complainant and other wholesalers were asked to produce their records so that their actual sales tax liabilities be determined but they did not comply. Only partial records were resumed from Mr. Zahid Habib which were based on fake invoices. The Complainant had in fact not purchased any goods. When other Collectorates were requested to investigate the related units, they replied that these units did not exist on their declared addresses or were avoiding inquiries. He stated that an amount of Rs.2,021,086 had already been paid as refund to the exporters of the racket and the Complainant had paid nominal tax by claiming inadmissible input tax based on the " invoices of black-listed companies.

7. The Department justified the action of the Collectorate as in accordance with law, the Complainant was involved in an organized tax fraud, conniving with the members of the racket, the transactions were fake, and the input tax had been claimed on the invoices of the suspected persons. It was alleged that Mr. Zahid Habib had made sales mostly to unscrupulous exporters and refunds claimed on these invoices were inadmissible. It was requested that the complaint be dismissed as the Complainant had not come with clean hands and was involved in tax fraud.

8. The Complainant submitted a rejoinder to the Department's reply alleging that tnc Assistant Collector did not have the power to suspend the registration under section 21(4) of the Act. The Deputy Collector contended that the order of suspension of registration was passed by the Collector in the relevant file and the Assistant Collector had issued the order on behalf of the Collector.

9. For examining the validity of the order of suspension dated 27-8-2003 it is necessary to ascertain the correct factual position. The Department has supplied photocopy of the record entitled "Investigative Audit Against 4 Units" which inter alia include the Complainant. The report regarding the Complainant states the facts and also concludes that the action of the unit clearly come under the purview of tax fraud as defined under section 2(37) (ii) read with section 21(4) of the Sales Tax Act 1990, It recommended that the matter may be forwarded to the competent authority for suspension of the license under section 21(4).

This report is signed by two auditors namely Syed Umair Raza and Mr. Rehan Qamar dated 19-08-2003. The report was submitted to Assistant -Assistant Collector (AC) who made the following remarks:---

6. "Please refer to paras. 2 to 5. In view of the investigation made by Mr. Rehan Qamar (Auditor) and Mr. Umair Raza undersigned is satisfied that registration of units under investigation namely Messrs Diamond Textile Traders, Messrs Optimum Fabrics, Messrs Karachi Top Fabrics and Messrs Slecto Fabric be suspended under provisions of section 21(4)",

(Sd.) Assistant Collector

19-8-2003

10. The Assistant Collector submitted his report to Additional Collector-I who made the following remarks:---

7. "For approval of action proposed at para 6/N, for the reasons detailed in respect of each units in preceding paras".

(Sd.) Additional Collector-I"

19-8-2003

11. The Additional Collector-I forwarded the case for approval of the proposed action to the Collector who made the following order---

8. "Approved"

(Sd.) Collector

19-8-2003

12. It seems that in pursuance of this approval the Assistant Collector passed the following order:---

GOVERNMENT OF PAKISTAN COLLECTORATE OF SALES TAX & CENTRAL EXCISE (EAST) SALES TAX HOUSE, PP-1, MAIN UNIVERSITY ROAD, KARACHI

Order

As there exists a prima facie case of tax fraud/evasion of tax against Messrs Slecto Fabrics Trading Co, Sales Tax Registration No.12-00-5209-477-46, the registration of the said units is, therefore suspended in terms of Section 21(4) of the Sales Tax Act, 1990, with immediate effect, until further orders.

(JAMSHED ALI TALPUR)

ASSISTANT COLLECTOR

REGISTRATION

Messrs Slecto Fabrics Trading Co.,

213, 2nd Floor, Seema Centre,

Magezine Line, Preedy,

Karachi

C. No.11(767)Reg/E/Hq/2003/4737dated 27-8-2003

13. A close scrutiny of the entire proceedings makes it clear that on submission of the report by the auditors dated 19-8-2003, the Assistant Collector made his observation and expressed the opinion that "the undersigned is satisfied that the registration of the Complainant may be suspended under provision of section 21(4) this dated is 19-8-2003". The Additional Collector forwarded to the Collector for approval of suspension of registration for the reasons stated by the Assistant Collector. The Collector on the same date i.e. 19-8-2003 approved and signed it. The question is whether the order of suspension communicated to the Complainant can be said to be an order passed by the Collector under section 21(4) of the Sales Tax Act which is reproduced as follows---

Section 21. De-registration:-7-

(i) -------------------

(ii) -------------------

(iii) ------------------

(4) "if a registered person fails to file tax return under section 26 Air six consecutive months, the officer of sales tax, not below the rank of an Assistant Collector, may, without prejudice to any action that may be taken under any other provision of this Act, after issuing a notice in writing and after giving an opportunity of being heard to such person, cancel the registration after satisfying himself that no tax liability is outstanding against such person:

Provided that in cases where the Collector is satisfied that a registered person is found to have issued fake invoices, evaded tax or has committed tax fraud, he may blacklist such person or suspend his registration or as the case may be enrolment pending further inquiry:

Provided further that order suspending registration, enrolment or blacklisting such registered or enrolled person, shall be in writing and copy thereof shall be communicated to the registered enrolled person, as the case may be, and show cause notice for recovery of evaded amount of tax and de-registration or de-enrolment may be issued within ninety days of completion of inquiry".

14. A scrutiny of subsection (4) of section 21 makes it clear that in cases where the registered person fails to file return under section 26 for six consecutive months officers of not below the rank of Assistant C Collector may after issuing a notice and giving an opportunity of being heard to such person cancel the registration after satisfying himself that no tax liability is outstanding against the such person. However, the first proviso of subsection (4) of section 21 provides for blacklisting, suspension of registration or enrolment pending inquiry. This power has been exclusively given to the Collector who may pass suspension order after satisfying himself that a registered person is found to have issued fake invoice,, evaded tax or has committed tax fraud. This exercise has to be carried out by the Collector personally and not through any other authority, subordinate or agent. It is the satisfaction of the Collector which can be made basis for passing such order. In the present case the Collector has not made any inquiry for reaching the satisfaction that the Complainant was found to have issued fake invoices, evaded tax or has committed tax fraud. There is nothing on record to show that the Collector had made any investigation or applied his mind independently to the facts of the case. The Collector only endorsed the opinion of the Assistant Collector and approved it. A mechanical process was adopted by the Collector without applying his mind and satisfying himself as required by law. In these circumstances the order of suspension was not passed as required by law and therefore suffers from illegality and is of no legal effect. The contention of the Department is not correct that the Assistant Collector had merely communicated the order of suspension. In fact the order was passed by the Assistant Collector which was merely approved and no order was passed by the Collector as required by law.

15. It may also be pointed out that under subsection (4) the Assistant Collector is empowered to cancel the registration if a registered person fails to file sales tax return under section 26 for six consecutive months but before passing this order he has to issue notice to the party and after giving an opportunity of being heard pass the order. The first proviso of subsection (4) requires the Collector to satisfy of the illegalities calling for suspension of registration but no provisions has been made to afford an opportunity of being heard to the Complainant before passing the order. It is against the principles of natural justice that any adverse order may be passed against a party without affording an opportunity to defend itself. Although sub-section (4) does not provide for hearing a party, the principles of natural justice are so embedded in our jurisprudence that the superior courts taking into consideration the fundamental rights conferred by the Constitution have consistently held 'that even if no provision is made for affording an opportunity of being heard before any order is passed it is incumbent on every authority and court to issue notice and opportunity of hearing be afforded before passing any order against him. The order of suspension is arbitrary, contrary to law and against established practice without any valid reason and bona fides. The process of decision making adopted by the Collector is in violation of mandatory provisions of law. Maladministration is established.

16. It is recommended that C.B.R.---

(i) set aside the order dated 28-7-2003 passed by the Assistant Collector (Registration) within fifteen days.

(ii) direct the Collector to carry out a thorough inquiry in the C' working of the Complainants and pass a speaking order after affording the Complainant opportunity of being heard.

(iii) to issue instructions to the Collectors of Sales Tax to pass order under first proviso to subsection (4) of section 21 of the Sales Tax Act after affording an opportunity of being heard to the party.

(iv) Compliance be reported within forty-five days.

C. M. A./336/FTOOrder accordingly.