M/S. Seri Sugar Mills Limited Versus Collector Of Customs, Sales Tax & Federal

Sales Tax Appeal No.H-188 of 2006, decided on 31st March, 2008.

Result: Order accordingly.

Summary

This matter concerns an appeal against a tax demand imposed following a special audit conducted under the Sales Tax Act, 1990. The appellant challenged the validity of the audit, contending that it was not performed by the appointed Chartered Accountants but by unauthorized staff, and that the resulting audit report was concealed and factually incorrect. Furthermore, the appellant questioned the jurisdiction of the issuing officer and the vagueness of the show cause notice issued under Section 36 of the Sales Tax Act, 1990. The Tribunal held that the audit was fundamentally flawed as it was not conducted by the mandated professionals, rendering the findings unreliable. Additionally, the Tribunal found that the show cause notice lacked the necessary legal specificity and that the jurisdictional authority of the subordinate officers was improperly exercised in violation of established Central Board of Revenue directives. Consequently, the Tribunal set aside the impugned orders, declaring the proceedings coram non judice, while granting the respondent liberty to initiate fresh proceedings in accordance with the law and evidence.

Questions settled in this judgment

Whether an audit report prepared by unauthorized staff instead of the appointed Chartered Accountants is legally valid?
Does a show cause notice that fails to identify the specific statutory power exercised and lacks factual specificity constitute a valid notice?
Can tax proceedings be set aside if the jurisdictional authority of the issuing officer is not established in accordance with Central Board of Revenue directives?

Laws & provisions referred

special auditsales tax demandshow cause noticejurisdictional authoritycoram non judicetax adjudicationaudit report

ORDER

MR. ZAFAR IQBAL, MEMBER (TECHNICAL).--(1). The controversy leading to the present case started with the issuance of a letter to the appellant by Assistant Collector, Sales Tax, Hyderabad on 07- 06-2005. The said letter stated that under section 32A of the Sales Tax Act, 1990, the Central Board of Revenue had appointed M/s. Riaz Ahmed & Co., Chartered Accountants to conduct special audit under section 25 and 38 of the Sales Tax Act, 1990 for the period commencing-,October, 2003 and ending March, 2005.

2.As a consequence of audit a number of charges were framed against the appellant and accordingly a demand of tax alongwith additional tax and penalty was imposed by the respondent. The vires of the said order was challenged by means of an appeal before the Collector (Appeals) who vide his order dated 04-10-2006 rejected the appeal and upheld the order passed by the Additional Collector. The present appeal challenges the validity of the said order.

3.It has now been contended that the audit in the present case was admittedly not performed by the firm of Chartered Accountants who were appointed by the CBR, the report seems to have been submitted by a firm which is different from the firm appointed, the audit report was not produced before the lower forums, the audit was not performed by the Chartered Accountants or their partners of the firm, rather the work was done but by the clerks and assistants since none of the partners of the firm ever visited and examined the accounts of the appellant, the audit was not performed according to the mandate of the CBR, since deviations and differences were to be supported by acceptable evidence and the report was to be submitted by 31-08-2005 whereas as per report itself it was submitted after Nov. 24, 2005, the findings in the audit report were never furnished to the appellant by the auditors, the audit report stands contradicted by detailed Audit performed by the Appellant's own Auditors and the findings given by the Board's appointed auditors are totally false] and concocted.

4.It has further been contended that the show cause notice issued u/s 36 is invalid as:-

(i)the show cause notice is vague since the Audit Report was not identified therein and the source of allegations as per appellant's accounts was not identified. It did not state that the issuing author was exercising any power u/s 36(1), 36(2) or 36(3). It was only a notice for collection of a demand which did not exist. Justification in terms of section 36(1) apropos allegations of a "deliberate act" and "collusion" are missing from the show cause notice. The learned Additional Collector before issuing the show cause notice has not examined the truth and reliability of the audit report and the books of'-' accounts of the registered person were neither called for nor the truth of Audit Report ascertained. Reliance is placed on:~ Asstt: Collector vs. Khyber Elec. Lamps PTCL 2002 CL. 1 D. G. Khan Cement v. Collector of Customs PTCL 2003 CL. 362 Caltex vs. Collector PTCL 2004 CL. 494 Atlas Tyres v. Addl. Collector PTCL 2003 CL. 728 State Cement v. Collector 2002 MLD 180 Kashmir Sugar v. Collector PTCL 2001 CL. 558 Federation of Pakistan v. Ibrahim Textile PTCL 1993 CL. 532 Rose Color v. Chairman CBR 2003 PTD 1047 (ii) It is submitted that the jurisdiction to recommend the case to Adjudication Authorities vested in a Collector and not in a Deputy Collector/Assistant Collector. Accordingly Press Report dated y 31-10-2001 appeared in Business Recorder has been produced. These are only specific jurisdictional orders passed by CBR in terms of section 31 of the Sales Tax Act and were binding on all officers. These were also binding in terms of section 72 of the Sales Tax Act. The CBR is the apex authority to delegate jurisdictional powers or to withdraw such powers u/s. 32 of the Sales Tax Act. Further these orders were passed by the CBR to eradicate and meet the public complaints on a large scale. The subordinate officers were not entitled to disobey them.

(iii)The orders of CBR only demonstrate that this function even if earlier assigned to the Assistant Collectors had been withdrawn from them since Oct., 2001 and there was no order thereafter further amending these orders. At least no such distribution, contrary to the above was shown. This related to a plenary power and these were directions of the CBR and it cannot possibly be suspected that these instructions related to the Audit Teams of Auditor General of Pakistan on which CBR of-course admittedly held no jurisdiction to issue instructions, hi result the show cause notice and ONO and the Order in First Appeal are liable to cancellation as without jurisdiction. Reliance is placed on:-

(i)PLD 1964 SC (ii)PTCL 2002 CL 80 (iv) The whole exercise of audit is false, concocted and incorrect. The audit report was kept concealed in violation of section 25(4) of Sales Tax Act, 1990:

(i)by the so-called auditors; (ii) by the Dy. Collector;

(i.e) by the Addl. Collector also.

(v)The audit report has not been served on the appellant until today. The department is precluded from submission before the Appellate Forum and even before the Tribunal it has not been brought on record rather suppressed:-

1987 CLC 1246 (Lahore)

1988 CLC 22 (Peshawar)

1988 SCMR 1563

(vi)The show cause notice is not served, other notices not served in accordance with the Sales Tax Act. The ONO is liable to annul. The recovery of tax is from the Company and from principal officer. Board of Directors but notices has not been served on them. Notice has to be served upon the person from whom it is intended or his agent i.e. The principal officer of the company. In terms of section 27 of General Clauses Act. Notice sent to the factory is invalid exercise. On whom it is served is not known. The objection has been taken since the beginning of proceedings but sendee was not proved. M/O Law's orders are violated. Reliance is placed on:-

1959ITR 388 (SC OF INDIA)

(1967) 15 TAXATION 103 S. C. OF PAK 1978 PTD 8 S.C. OF INDIA

(1979) 120 ITR 576 (1988) 67 TAXATION 56 (TRIB.) 1988 PTE(Trib.) 117

1990 PTD (TRIB) 705

1995 PTD (Trib) 1100

1988 PTD 135 (HC Lahore)

ITA Nos. 2376, 2377 & 2378/KB of1984-85, Dated 25.5.1989 ITA No. 1058/KB OF 1994-95 and ITA No. 434/KB of1995-96, dated 19.1.1996.

2002 PTD 102 (.Karachi HC)

(vii)There is no justification for proposing additional tax and penalty since there was no default of appellants and At least the alleged default is not willful and deliberate and the matter was being agitated in the appeals:-

2004 SGMR 456

PTCL 2001 CL. 621 2005 PTD 1984

5.On the basis of said averments, the appellant seeks set- asiding of the impugned order.

6.The D. R. Maintains that the reply already furnished before Collector (Appeals) are sufficient to be considered and supported the impugned order for the reasons given therein. The learned departmental representative relied upon the replies already furnished before the Collector (Appeals).

7.Rival parties have been heard. After giving serious consideration to the facts and arguments addressed by both the sides we are of the opinion that since a copy of the order passed by the CBR U/S 32A of the Sales Tax Act had not been furnished by the CBR itself and a justification towards the selection of the case had not been furnished, and that the order of special Audit had been passed at the back of the appellant, and it is observed that the jurisdiction has been incorrectly, unlawfully exercised in violation of section 24A of General Clauses Act. This view is supported from dictums of the Supreme Court of Pakistan reported as 1998 SCMR 2268, 1998 SCMR 2419 and 1999 SCMR 1071.

8.It is evident from records that the audit had not been performed by the Chartered Accountants, it was done by their clerks. There was nothing wanting so far as the appellant's company was concerned. It appears that none of the Chartered Accountants ever visited the appellant's company or examined and considered any books of accounts, the audit report was not submitted in accordance with the directives of the CBR. Proper evidence which was desired to be furnished does not appear to have been furnished. The show cause notice by itself is vague and lacks legal requirements.

9.The jurisdiction exercised by the Additional Collector (Adjudication) the same has not been correctly and properly exercised in view of the instructions of CBR. The basic action of assigning jurisdiction to issue notice u/s 36 and pass an order therefore lacks in jurisdiction and proceedings are rendered as coram non judice since:-

(i)the proceedings in this case have been undertaken without seeking recourse to the Qanoon-e- Shahadat, 1984;

(ii)there are more than three affidavits two before Collector (Appeals) and two before us which have not been repudiated through counter affidavits. The statements of the Appellant therefore are not open to question;

(iii)there is no justification for proposing additional tax and penalty since there is no default what to say of willful and contumacious default whatsoever.

10.On the basis of said legal objections the impugned orders are set-aside. However, the respondent will be at liberty to proceed against the appellant in accordance with law and on the basis of evidence, if they are so advised.

Judges on this bench

Zafar Iqbal41 judgments