KAMALIA SUGAR MILLS LTD. VS FEDERATION OF PAKISTAN through Ministry of Finance, 2015 PTD-LAHORE-HIGH-COURT-LAHORE 221 (2014)

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

----S. 40B---Federal Excise Act (VIII of 2005) S. 45(2)---Constitution of Pakistan, Art. 199---Constitutional petition---Posting of Officers of Inland Revenue/Federal Board of Revenue ("FBR") at manufacturing premises of taxpayer/petitioner---Exercise of powers under S. 40B of the Sales Tax Act, 1990 and S. 45(2) of the Federal Excise Act, 2005; interpretation and scope---Show-cause notice not required before exercising of powers under S. 40B of the Sales Tax Act, 1990 and S.45(2) of the Federal Excise Act, 2005---Taxpayers had impugned orders of Chief Commissioner Inland Revenue/FBR under S.40B of the Sales Tax Act, 1990 and 45(2) of the Federal Excise Act, 2005 whereby officers of Inland Revenue were posted at the manufacturing premises of the taxpayers---Contention of taxpayers was that such powers had been exercised without issuance of a show-cause notice to the taxpayers; therefore due process was not followed and principles of natural justice were violated---Held, that word "monitor" meant observe and check over a period of time and the FBR understood monitor to mean that team posted at manufacturing premises physically watched the production, sales and stock positions and collected data maintained by taxpayers---Respondent FBR needed to ascertain whether collected tax had been duly deposited and therefore power to monitor under the Federal Excise Act, 2005 and the Sales Tax Act, 1990 was to watch and observe and to take information maintained by the taxpayer with respect to its daily production, sales and stock position---At such stage, there was no investigation or inquiry but a simple desire to ascertain whether volume of business was duly reflected in tax returns of the taxpayers---For purposes of the FBR/Inland Revenue, no restriction had been placed by the Sales Tax Act, 1990 and Federal Excise Act, 2005 on power of monitoring; however said statutes required the Commissioner to have material evidence and pass a speaking order under S. 45(2) of the Federal Excise Act, 2005 and S.40B of the Sales Tax Act, 1990---Said sections envisioned a specific distinction in the manner in which powers were to be excised by the FBR, Chief Commissioner and Commissioner---Section 4(1)(o) of the Federal Board of Revenue Act, 2007 gave powers to make regulations, policies, programs and strategies in order to carry out purposes of said Act---In the present case, it was explained by the Chief Commissioner Inland Revenue that the entire sugar industry was under review for not paying required tax and previous data provided by taxpayers showed discrepancies when compared with present data therefore it was decided that the taxpayer's mill was to be monitored---Decision of the FBR or Chief Commissioner did not require material evidence but could be a decision based on broader principles---While at present there was no specific allegation raised against the taxpayers for evasion of tax and the taxpayers were given due notice under S. 40B of the Sales Tax Act, 1990 and S. 45(2) of the Federal Excise Act, 2005 and were given sufficient reasons for invoking of said sections---Show-cause notice, was therefore, not required and similarly a hearing was also not required because an order under S. 40B of the Sales Tax Act, 1990 and S.45(2) of the Federal Excise Act, 2005 was not an adverse order against the taxpayers---High Court also observed that the taxpayers in the present case had not challenged the vires of said sections but only impugned the orders for monitoring-----High Court further observed that in order to prevent arbitrary exercise of powers , that when such an order was passed such order must provide a reasonable timeframe within which monitor would take place and be completed and in the event that the required data and information was not obtained within the contemplated time, the FBR, Chief Commissioner or Commissioner were always free to extend the time by informing the taxpayer---Appeals and Constitutional petition of the taxpayers were dismissed, in circumstances.

Concise Oxford English Dictionary rel.

(b) Words and Phrases----

----"Monitor", meaning of---Word "monitor" means to observe and check over a period of time.

Concise Oxford English Dictionary rel.

Ali Sibtain Fazli for Appellant (in I.C.A. No.124 of 2014).

Shehzad A. Elahi for Appellant (in I.C.A. No.129 of 2014).

Ali Sibtain Fazli for Petitioner (in Writ Petition No.5072 of 2014).

Nadeem Mahmood Mian, Muhammad Ilyas Khan, Sarfraz Ahmad Cheema, Muhammad Asif Hashmi and Rana Muhammad Luqman, Commissioner, Inland Revenue, Faisalabad for Respondents.

Date of hearing: 15th April, 2014.

JUDGMENT

AYESHA A. MALIK, J.---Through this single judgment, we have decided upon the common issues arising in I.C.As. Nos.124, 129 of 2014 and Writ Petition No.5072/2014 with respect to the exercise of powers by the respondents under section 40B of the Sales Tax Act, 1990 (Act of 1990) and section 45(2) of the Federal Excise Act, 2005 (Act of 2005).

2.The appellants are both sugar mills and the petitioner is a textile mill. I.C.As. Nos.124 and 129 of 2014 have been filed against judgment dated 3-2-2014 passed in Writ Petition No.33429/2013 and Writ Petition No.1824/2014 and Writ Petition No.5072/2014 has been filed against the impugned order dated 21-2-2014 passed by respondents Nos.3 and 5 (Chief Commissioner and the Commissioner Inland Revenue) wherein they have issued an order under section 40B of the Act of 1990 and section 45(2) of the Act of 2005 to post officers of the Inland Revenue at the manufacturing premises of the petitioner.

3.The case of the appellants (in I.C.As. Nos.124 and 129/2014) is that vide an order dated 13-12-2013 issued by the respondent No.3 powers under section 40B of the Act of 1990 and 45(2) of the Act of 2005 have been invoked to post officers, at the business premises of the appellants, with immediate effect, in order to monitor production, sales of taxable goods and their stock position. The appellants received letter dated 19-12-2013 in which the respondent No.3 in pursuance of the earlier letter dated 13-12-2013 of the respondent No.3 posted officers at the business premises of the appellants with immediate effect.

4.The grievance of the appellants is that the powers under section 40B of the Act of 1990 and section 45(2) of the Act of 2005 have been exercised without any show-cause notice to the appellants. It is their case that the principles of natural justice were violated as the respondents levied allegations of under declaration and tax evasion against the appellants, on the basis of which they decided to monitor production, sales of taxable goods and stock position of the appellants, by posting officers within their business premises. Learned counsel argued that no reason or justification has been given for exercising powers under section 40B of the Act of 1990 and section 45(2) of the Act of 2005. They argued that this is contrary to the mandate of the law as provided under section 24A of the General Clauses Act, 1897 which requires public functionaries to give reasons while exercising powers under any statute. It was also argued that where any action adversely affects the vested rights of a party, show-cause notice or a preliminary hearing must be given before passing any order. It has also been argued that the concerned person must be aware of the reasons considered by the respondents before invoking section 40B of the Act of 1990 and section 45(2) of the Act of 2005.

5.The learned counsel stated that the impugned judgment dated 3-2-2014 passed by the learned Single Judge in Chamber holds that the show-cause notice was not required because no adverse action was contemplated in the order dated 19-12-2013 and the appellants have not been prevented from doing their lawful business. The impugned judgment also finds that since the officers were posted simply to monitor production, sales of taxable goods and stock position, therefore, no right of the appellants was prejudiced and the principles of natural justice are not violated. Learned counsel argued that in terms of the impugned judgment, the learned Single Judge in Chamber held that the respondents can post officers to the premises of a registered person to monitor production, sales of taxable goods and stock position. The learned Counsel argued that this is not the spirit of the law as the monitoring team sits and monitors the business of the appellants within their business premises which act is intrusive and infringes upon their fundamental right to do lawful trade, business or profession. They argued that it also means that the respondents are collecting data, which they will use against the appellants in the case of tax evasion which the respondents are building against the appellants. This seriously prejudices the rights of the appellants to defend themselves in any proceedings initiated by the respondents. Learned counsel further argued that any action under section 40B of the Act of 1990 and section 45(2) of the Act of 2005 can only be initiated if there is material evidence showing involvement of the taxpayer in evasion of sales tax or federal excise duty or fraud. Learned counsel argued that in the instant cases no material evidence was presented before the court nor was there any material evidence available on the basis of which the order dated 13-12-2013 was issued by the Chief (Automation & ST).

6.Learned counsel also objected to the competence of the Chief (Automation & ST) to direct the Chief Commissioner to invoke section 40B of the Act of 1990 and section 45(2) of the Act of 2005 against the appellants. They argued that letter dated 13-12-2013 was issued by the Chief (Automation & ST) to all Chief Commissioners Inland Revenue and that he was not the competent authority to pass any order with respect to section 40B of the Act of 1990 and section 45(2) of the Act of 2005. They further argued that the Chief Commissioner cannot act on the directions of the Chief (Automation & ST) as was directed in the letter of 19-12-2013. Learned counsel argued that the subsequent letter issued by the Chief Commissioner dated 19-12-2013 was on the direction of the Chief (Automation & ST) who is not the competent authority to pass any such order. Learned counsel argued that this factor was not considered by the learned Single Judge in Chamber who has upheld the posting of officers under section 40B of the Act of 1990 and section 45(2) of the Act of 2005.

7.Report and para wise comments have been filed by the respondents. Learned counsel on behalf of the respondents argued that the respondents have acted totally in accordance with law, hence the impugned order issued on 19-12-2013 was upheld by the learned Single Judge in Chamber. Learned counsel argued that the appellants are involved in under declaration of production and sales, they are not paying due tax and do not provide correct data. Hence it was decided that the provisions of section 40B of the Act of 1990 and section 45(2) of the Act of 2005 should be invoked and officers be posted at the premises of the appellants to monitor their production, sales of taxable goods and stock position. Learned counsel argued that this order was passed in compliance with the directions issued by the Federal Board of Revenue (FBR) on 13-12-2013. Learned counsel argued that the proceedings are meant simply to monitor the production, sales of taxable goods and stock position and do not in any way interfere in the normal business operations of the appellants. Learned counsel further argued that the objective is to collect data from the business premises. They argued that the respondents are not conducting any inquiry or investigation within the business premises but simply monitoring the process and collecting data as compiled by the appellants on their production, sales and stock position. On the basis of the data so collected the respondents are then able to ascertain whether the appellants are making a full and proper declaration and paying the required tax and federal excise duty. Learned counsel argued that no adverse action is taken against the appellants and no fundamental right of the appellants has been violated by the respondents.

8.In Writ Petition No.5072/2014 the petitioner has called into question order dated 21-2-2014 passed by the respondents Nos.3 and 5 under section 40B of the Act of 1990 and section 45(2) of the Act of 2005. Hence the same issues and questions arise in the Writ Petition as in the two I.C.As. before us.

9.We have heard the learned counsel for the parties and have gone through the record available on the file.

10.The appellants and the petitioner have questioned the invoking of section 40B of the Act of 1990 and section 45(2) of the Act of 2005 by the order issued on 19-12-2013 by the respondents Nos.3 and 4. They have challenged the exercise of power by the Chief (Automation & ST) as well as the fact that due process was not followed and the principles of natural justice were violated. The impugned judgment upheld the powers exercised under section 40B of the Act of 1990 and section 45(2) of the Act of 2005 on the ground that show-cause notice was not required, no adverse order or action was being taken against the appellants and that it was issued by the competent authority. The impugned judgment finds that section 40B of the Act of 1990 and section 45(2) of the Act of 2005 simply post officers to monitor production, sales and stock position which does not render the appellants as tax evaders nor does it find them guilty of tax evasion.

11.Section 40B of the Act of 1990 and section 45(2) of the Act of 2005 are reproduced below for ease of reference:--

40B Posting of Inland Revenue Officer.---Subject to such conditions and restrictions, as deemed fit to impose, the Board or Chief Commissioner may post Officer of Inland Revenue to the premises of a registered person or class of such persons to monitor production, sale of taxable goods and the stock position:

Provided that if a Commissioner on the basis of material evidence has reason to believe that a registered person is involved in evasion of sales tax or tax fraud, he may, by recording the reason in writing, post an Officer of Inland Revenue to the premises of such registered person to monitor production or sale of taxable goods and the stock position.

45 Access to records and posting of excise staff, etc.

(1)

(2)Subject to such conditions and restrictions, as deemed fit to specify, the Board or Chief Commissioner may, post an officer of Inland Revenue' to the premises of registered person or class of such persons to monitor production, removal or sale of goods and the stock position or the maintenance of records:

Provided that if a Commissioner on the basis of material evidence has reason to believe that a registered person is involved in evasion of duty, he may, by recording the reason in writing, post an officer of Inland Revenue to the premises of such registered person to monitor production, removal or sale of goods and the stock position or maintenance of records.

In terms of section 40H of the Act of 1990 and section 45(2) of the Act of 2005 the Board or the Chief Commissioner may post an officer to the premises of a registered person or class of persons to monitor production, sale of taxable goods and stock position. The impugned orders dated 19-12-2013 have been issued by the Chief Commissioner, Faisalabad. The orders provide that the appellants are involved in under declaration of production/supplies and are not paying due amount of tax in the national exchequer with respect to the volume of business. Hence it is believed that they may be involved in the evasion of tax and duties. In terms of the orders, ten officers were placed with immediate effect at the business premises of the appellants. The officers included two Auditors, four Inspectors, two Havaldars/Constables and two Notice Servers/Naib Qasids. The first grievance of the appellants is that this notice dated 19-12-2013 was issued on the directions of the Chief (Automation & ST) who was not the competent authority to pass any such order. The direction of the Chief (Automation & ST) dated 13-12-2013 is based on a decision of the FBR to post Inland Revenue Officers to the premises of all sugar mills to monitor their production, sale and stock position. The basic challenge of the appellants is that the Chief (Automation & ST) cannot issue any direction to the Chief Commissioner and that the Chief Commissioner must pass its own independent order. In both the I.C.A. No.124/2014 the order of the Chief Commissioner is dated 19-12-2013 and the order of Chief (Automation & ST) is dated 13-12-2013. In Writ Petition No.5072/2014 the order of the Chief Commissioner is dated 21-2-2014 and available on the record.

12.The Chief Commissioner, Faisalabad appeared before us on 9-4-2014 on which date he explained the reasons and basic rationale for invoking section 40B of the Act of 1990 and section 45(2) of the Act of 2005. He stated that soft data was reviewed and it was found that production for the current year was less than the preceding year notwithstanding the fact that the circumstances were the same. He explained that after analysis of the data it was recommended that section 40-B of the Act of 1990 be imposed. He explained that the modalities for monitoring the process under section 40B of the Act of 1990 and Section 45(2) of the Act of 2005 is simply to check the production, stock and sale position. He further explained that the data collected is countersigned by the Management and generally there is no dispute in relation to the data that is collected. Further stated that in the event of any dispute it can always be brought to the notice of the Assistant Commissioner or any senior member of the Monitoring Team. He explained that each case was reviewed and the overall sector was also considered. He stated that it was found that certain sectors such as the sugar mills were not paying the required tax and duty. Hence an effort was being made by the respondents to collect data from such mills or industries so as to determine whether they are paying the required tax and duty. He stated that the process of monitoring enabled the respondents to determine whether the information provided by the taxpayer was correct and reflective of the industry and its income. He further explained that the respondents did not have any other means to check the data and information provided to them because the appellants and the petitioner are assessed to tax under the Self Assessment Scheme. They are required to furnish their details online and the system determines the tax that is due. The respondents while comparing this years data with the previous years and with other information found that the appellants and the petitioner are paying less tax than the previous years for no apparent or justifiable reasons. Hence he stated that the law specifically caters to such a situation and allows the respondents to monitor the sale, purchase and stock positions maintained by the registered person.

13.We have gone through the contents of the notices dated 19-12-2013 and 21-2-2014. The first objection to these notices is that they have been issued at the instance of the Chief (Automation & ST) dated 13-12-2013. We are of the opinion that the notices dated 19-12-2013 and 21-2-2014 sufficiently explain the reasons for its issuance. We also find that the letter of 13-12-2013 issued by the Chief (Automation & ST) can at best be called a guideline, however in each case before us the respondent No.3 has thought through the issues before invoking section 40B of the Act of 1990 and section 45(2) of the Act of 2005. Furthermore the Chief Commissioner is not required under the stated sections to give detailed reasons for invoking section 40B of the Act of 1990 and section 45(2) of the Act of 2005. Therefore with respect to the basic objection on the competence of the order issued on 19-12-2013 we find that in terms of section 40B of the Act of 1990 and section 45(2) of the Act of 2005, the Chief Commissioner was competent to issue the orders of 19-12-2013 and 21-2-2014 and that he is not required to provide material evidence before invoking section 40B of the Act of 1990 and section 45(2) of the Act of 2005. We also find that the letter of 13-12-2013 issued by the Chief (Automation & ST) is at best a guideline issued on the direction of the FBR. Therefore there is no merit in this objection.

14.The second set of objections pertains to due process and the violation of the principles of natural justice. Section 40B of the Act of 1990 is divided into two parts. The first part empowers the Chief Commissioner or the Board to post officers for the purposes of monitoring production, sale of taxable goods and the stock position. The proviso states that the Commissioner can also pass an order for posting of Inland Revenue Officers only if there is material evidence before him and he has reason to believe that the registered person is involved in evasion of sales tax or tax fraud. In such a situation the Commissioner has to record his reasons in writing, before passing such an order. The argument made before us essentially was that no show-cause notice was issued, no hearing was given and that the fundamental rights of the appellants and the petitioner to do their business have been violated. We have considered the meaning and the scope of the power to "monitor" under section 40B of the Act of 1990 and 45(2) of the Act of 2005. The word 'monitor' has not been, defined anywhere in the stated Acts. In the Concise Oxford English Dictionary, eleventh edition, the word 'monitor' means observe and check over a period of time. The respondents understand monitoring to mean that the team posted at the manufacturing premises physically watches the production, sales and stock positions and collects the data maintained by the appellants and the petitioner. They are observing and recording the data as maintained by the appellants and the petitioner. The voluminous data produced before us by the respondents also shows that the respondents are collecting data made by the appellants and the petitioner related to production, sale and stock positions. They watch over the process and collect the relevant information as maintained and documented by the appellants and the petitioner on a daily basis. This enables the respondents to collect data for a given period of time and consequently ascertain whether due tax is being paid. The reasons explained by the Chief Commissioner was that in these cases the taxpayer did not provide the correct information with respect to the volume of their business and the stocks maintained. The appellants and the petitioner file their returns under the Self Assessment Scheme which means that they provide the total income for the relevant period, which is then assessed to tax. The respondents state that the appellants and the petitioner do not reflect the correct position in their returns and the respondents cannot determine the factual position for the purposes of levy of tax. Furthermore the appellants and the petitioner collect the sales tax from the end consumer and deposit it with the national exchequer. Hence the respondents need to ascertain whether the collected tax has been duly deposited. Therefore we understand that the power to monitor is to watch and observe and to take the information maintained by the taxpayer with respect to its daily production, sales and stock position. At this stage there is no investigation or inquiry but simply a desire to ascertain whether in fact the volume of business in the form of purchase, sale and stock positions is duly reflected in the tax returns.

15.The basic function of the FBR is to declare a tax system and collect tax as per the Act. Section 40B of the Act of 1990 and 45(2) of the Act of 2005 gives the FBR or the Chief Commissioner the authority to post an officer to monitor production, sales of taxable goods and stock positions. For the purposes of the FBR or the Chief Commissioner no restriction has been placed by the Act of 1990 or Act of 2005 on the power of monitoring. However the said sections require the Commissioner to have material evidence and pass a speaking order under the said sections. We are of the opinion that 40B of the Act of 1990 and 45(2) of the Act of 2005 envisions a specific distinction in the manner in which the power under Section 40B of the Act of 1990 and section 45(2) of the Act of 2005 is to be exercised by the FBR, Chief Commissioner and the Commissioner. The Federal Board of Revenue Act, 2007 (Act of 2007) provides for the establishment of the FBR and its powers and functions. Section 4 of the Act of 2007 provides for the powers and functions of the FBR such that 4(1)(c) provides that the FBR may adopt modern effective tax administration methods, information technology system and policies in order to consolidate assessments, improve processes and widen the tax base. Section 4(1)(b) provides that the FBR should promote voluntary tax compliance and to implement comprehensive policies and programs to ensure efficient collection of tax. Section 4(1)(o) of the Act of 2007 gives the powers to make regulations, policies, programs, strategies in order to carry out the purposes of the Act of 2007. The provision of monitoring under section 40B of the Act of 1990 and section 45(2) of the Act of 2005 essentially means that the respondents need to watch over the production, sales and stocking of taxable goods in order to ascertain whether the returns being filed and the information provided is reflective of the actual production, sales and stocks maintained by the taxpayer. In the instant cases, as explained by the Chief Commissioner, the entire sugar industry was under review and it was opined that the sugar industry was not paying the required tax. Furthermore previous data was compared with present data and the respondents could not reconcile the discrepancies. Hence it was decided that the petitioner's mill be monitored. The decision of the FBR or the Chief Commissioner does not require material evidence but can be a decision based on broader principles. At this point, there is no specific allegation raised against the appellants or the petitioner for evasion of tax. The appellants and the petitioner were given due notice under 40B of the Act of 1990 and 45(2) of the Act of 2005 and were given sufficient reasons for invoking these sections. Hence a show cause notice is not required and a hearing is not required because an order under sections 40B of the Act of 1990 and 45(2) of the Act of 2005 is not an adverse order against the appellants or the petitioner for which a show-cause notice or hearing is required. In this regard we note that the appellants and the petitioner have not challenged the vires of the sections but have only challenged the impugned orders dated 19-12-2013 and 21-2-2014.

16.We have also taken notice of the arguments raised by the appellants and the petitioner that the respondents can utilize sections 40B of the Act of 1990 and 45(2) of the Act of 2005 to enter and sit within their business premises for an unlimited period of time and disturb their ability to do business. The orders dated 19-12-2013 and 21-2-2014 issued by the Chief Commissioner do not provide any timeframe within which the process of monitoring should be completed by the officers. However the section also does not stipulate any time frame. In order to prevent arbitrary exercise of powers under sections 40B of the Act of 1990 and 45(2) of the Act of 2005, we are of the opinion that when such an order is passed by the FBR or the Chief Commissioner or Commissioner, the order must provide a reasonable timeframe within which the monitoring will take place and be completed. In the event that the required data and information is not obtained within the contemplated time, the FBR, the Chief Commissioner or Commissioner are always free to extend the time by informing the taxpayer.

17.Therefore in view of the aforesaid, we find no merit in these appeals and the petition which are dismissed.

KMZ/K-46/LAppeals dismissed.