FIRDOUS CLOTH MILLS (PVT.) LTD. VS FEDERATION OF PAKISTAN through Ministry of Finance, 2016 PTD-LAHORE-HIGH-COURT-LAHORE 257 (2015)

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

----Ss. 38 & 40-B---Constitution of Pakistan, Art. 199---Constitutional petition---Entry into premises of taxpayer---Authorized officer, jurisdiction of---Petitioner was a company registered with Sales Tax Authorities and was aggrieved of entry of authorities into its premises without issuing any prior notice to it---Validity---Objective of Ss. 38 & 40-B of Sales Tax Act,1990, was to give authorized officer access to premises as well as record and documents of registered person---While S. 38 of Sales Tax Act,1990, contemplated a visit to premises, S. 40-B of Sales Tax Act,1990, allowed authorized officers to stay at the premises for a given period of time to monitor the premises, sale and stock position of registered person---Primary requirement of both the sections was a notice to taxpayer---Authorities, in the present case, issued a notice stating material evidence on the basis of which monitoring was necessary to investigate into allegations of tax fraud and evasion of tax---High Court declined to interfere in the matter---Petition was dismissed in circumstances.

Messrs Food Consults (Pvt.) Ltd., Lahore and others v. Collector (Central Excise and Sales Tax), Lahore and 2 others 2004 PTD 1731; Collector of Sales Tax and others v. Messrs Food Consults (Pvt.) Ltd. and another 2007 PTD 2356; Taj International (Pvt.) Ltd. and others v. Federation of Pakistan and others 2014 PTD 1807; Chairman, Central Board of Revenue and others v. Messrs Haq Cotton Mills (Pvt.) Ltd., Burewala 2007 PTD 1351; Dr. Ghulam Mustafa v. The State and others 2008 SCMR 76; Rana Shahid Ahmad Khan v. Tanveer Ahmad and others 2011 SCMR 1937; Kamalia Sugar Mills Ltd. v. Federation of Pakistan and others 2015 PTD 221; West Pakistan Tanks Terminal (Pvt.) Ltd. v. Collector (Appraisement) 2007 SCMR 1318 and Muhammad Asif and another v. Director Public Instruction, Punjab and another 2005 PLC (C.S.) 1434 ref.

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

----Ss. 40 & 40-B---Entry into premises---Search warrant, requirement of---Principle---When an authorized officer enters the premises under S. 40-B of Sales Tax Act,1990, a warrant is not required under S. 40 of Sales Tax Act,1990---Need for a warrant arises when any officer of Inland Revenue has reason to believe that any document or record of a registered person may be useful or relevant to investigation and that document or record is not at the business or manufacturing premises of registered person but at some other place, then the officer may, after obtaining a warrant from Magistrate, enter that place and cause a search to be made at any time.

Collector of Sales Tax and Central Excise (Enforcement) and another v. Messrs Mega Tech (Pvt.) Ltd. 2005 PTD 1933 rel.

Arslan Akhtar for Petitioner (in W.Ps. Nos.6363 and 6903 of 2015).

Ali Sibtain Fazli for Petitioner (in W.Ps. Nos.12324 and 8211 of 2015).

Muhammad Zikria Sheikh, DAG, Sarfraz Ahmad Cheema, Dr. Ishtiaq Ahmad Khan, Additional Commissioner, LTU, Lahore, Malik Afzal, ACIR, Muhammad Sohail, ACIR and Muhammad Rashid Naseem, Auditor for Respondents.

Date of hearing: 9th June, 2015.

JUDGMENT

AYESHA A. MALIK, J.---This common judgment decides upon the issues raised in Writ Petitions Nos.6363, 6903, 8211 and 12324 of 2015, as all the petitions raise common questions of law and facts.

2. The Petitioners in W.Ps. Nos.8211 and 6903 of 2015 have impugned notices dated 22.1.2015, 20.3.2015 and 9.3.2015 issued under Section 40B along with Section 38 of the Sales Tax Act, 1990 ("The Act"). Their basic grievance is that while exercising powers under Section 40B of the Act powers under Section 38 of the Act cannot be invoked.

3. The instant petition is filed by the Petitioner Firdous Cloth Mills (Pvt.) Limited against a similar notice dated 5.3.2015 issued under Section 40B read with Section 38 of the Act. However, in the case of Firdous Cloth Mills subsequent to the notice dated 5.3.2015, FIR No.8/2015 was registered on 22.4.2015. Thereafter Firdous Cloth Mills along with its five directors and company secretary filed W.P. No.12324/2015 praying for quashment of FIR No.8/2015.

4. The Petitioners are aggrieved by the notice issued by Respondent No.3 invoking Section 40B of the Act to monitor production and sale of taxable goods along with the stock position and through the same notice he has authorized the named officers to exercise all powers under Section 38 of the Act. The grievance of the Petitioners is that the Respondent No.3 cannot invoke Section 38 of the Act along with Section 40B of the Act. Learned counsel for the Petitioners argued that Section 40B of the Act authorizes the Commissioner to post an officer of Inland Revenue at the premises of a taxpayer to monitor production, sale and the stock position of taxable goods provided that he has material evidence that the taxpayer is involved in evasion of sales tax or tax fraud. Learned counsel for the Petitioners stated that under the garb of Section 40B of the Act, the Respondents cannot invoke Section 38 of the Act which is a separate and independent provision for which an investigation or inquiry on allegations of tax fraud is necessary. In this case, he argued that no investigation or inquiry is pending against the Petitioner and no notice with reference to the business records and documents maintained at the factory premises has been issued by the Respondents under Section 38 of the Act. Learned counsel argued that in order to invoke Section 38 of the Act, a notice stating reasons should have been issued by the Respondents and thereafter, if required, a search warrant under Section 40 of the Act, on the basis of which they could enter the premises and confiscate documents or the business record of the Petitioners. In this regard he has placed reliance on the cases titled Messrs Food Consults (Pvt.) Ltd., Lahore and others v. Collector (Central Excise and Sales Tax), Lahore and 2 others (2004 PTD 1731) and Collector of Sales Tax and others v. Messrs Food Consults (Pvt.) Ltd. and another (2007 PTD 2356).

5. In W.P. No.12324/2015, the case of the Petitioners is that since the record was seized unlawfully under Section 38 of the Act, therefore, the FIR in pursuance thereof is also illegal and should be quashed. The Petitioners also pray that all record and accounts that have been seized should not be used against the Petitioners. Writ Petition No.16359/2015 has been filed by the same Petitioners, Firdous Cloth Mills (Pvt.) Ltd. through its Company Secretary and its directors who pray that a civil suit for declaration and permanent injunction against FIR No.8/2015 be decided first and in the meanwhile they should not be arrested pursuant to FIR No.8/2015. The merits of that case have been dealt with separately.

6. Learned counsel argued that FIR No.8/2015 has been lodged against the Petitioners in W.P. No.12324/2015 on the basis of information collected through the illegal act of seizure under Section 38 of the Act. Learned counsel for the Petitioner argued that search and seizure by the Respondents is in absolute violation of Section 38 of the Act and the FIR on the basis thereof, is also illegal. Learned counsel argued that the FIR has been lodged without determining the tax liability of Petitioner No.1 in accordance with Section 11 of the Act. He has placed reliance on the case titled Taj International (Pvt.) Ltd. and others v. Federation of Pakistan and others (2014 PTD 1807). Also placed reliance on the cases cited as 2004 PTD 1731 (supra) and Chairman, Central Board of Revenue and others v. Messrs Haq Cotton Mills (Pvt.) Ltd., Burewala (2007 PTD 1351) to urge the point that Section 38 of the Act is dependent upon the issuance of a warrant under Section 40 of the Act in order to carry out any search under Section 38 of the Act. Therefore, the Respondents were obligated to obtain a warrant from a Magistrate as stipulated in Section 40 of the Act. Learned counsel further argued that the Respondents are committing contempt of the orders of this Court because the impugned notice was suspended on 10.3.2015, such that the Respondents were restrained from entering the premises of the Petitioner. Thereafter by order dated 1.4.2015 the Respondents were allowed to continue with the monitoring process under Section 40B of the Act but they could not invoke the provisions of Section 38 of the Act. Notwithstanding the same, the Respondents exercised their powers under Section 38 confiscated the business record and documents of the Petitioners and proceeded with the registration of FIR. Therefore, they are in violation of the orders of this Court 1.4.2015 for which Crl. Org. No.1114-W/2015 is also pending.

7. Learned counsel for the Respondents at the very outset raised the objection that notices under Section 40B of the Act have been issued by the Commissioner Inland Revenue and they are appealable orders under Section 46 of the Act. In this regard, he stated that the Petitioner in the instant petition has filed its appeal which is pending. Learned counsel further stated given that a statutory remedy is available, the petitions are not maintainable. In response to this preliminary objection, learned counsel for the Petitioners admitted that an appeal is pending, however, he stated that the instant petitions are confined to the legal question as to whether the Respondents while invoking Section 40B can authorize the same officers to exercise all powers under Section 38 of the Act. He stated that he does not question the grounds raised in the notice for invoking Section 40B of the Act.

8. On merits, learned counsel for the Respondents stated that with respect to W.Ps. Nos. 6363, 6903 and 8211 of 2015 only a notice has been issued and as to the Petitioner Firdous Textile Mills, no search and seizure of the premises or record was carried out. The Respondents were given access to the premises under Section 40B and the officers appointed for the purposes of this provision were authorized to exercise powers under Section 38 of the Act. The officers asked for documents and record which were necessary in the investigation regarding evasion of sales tax and tax fraud. The stated Petitioner provided all documents with its consent. He argued that the Respondents did not raid the premises of the Petitioner nor did they seize any record. Learned counsel further argued that the FIR was registered on the ground that a case of tax fraud is made out against the Petitioner and if the Petitioner is of the opinion that no case is made out, it is required as per the law to participate in the proceedings and raise all objections in those proceedings. He further argued that the Petitioner is not entitled to the prayer for quashment of FIR in view of the pronouncement of the august Supreme Court of Pakistan in the cases titled Dr. Ghulam Mustafa v. The State and others (2008 SCMR 76) and Rana Shahid Ahmad Khan v. Tanveer Ahmad and others (2011 SCMR 1937). Learned counsel also stated that the Petitioners in W.P. No.12324/2015 filed another petition wherein they have sought the same relief and without disclosing W.P. No.12324/2015 they obtained order dated 29.5.2015 in W.P. No.16359/2015 preventing their arrest from another Court. Therefore, the learned counsel stressed that the conduct of the Petitioners in W.P. No. 12324/2015 does not entitle them to equitable relief from this Court.

9. Arguments heard and record perused.

10. The basic issue pertains to the issuance of a notice under Section 40B of the Act along with all powers under Section 38 of the Act. Section 40B of the Act provides for the posting of Officers of Inland Revenue within the premises of a registered person to monitor production or sale of taxable goods and the stock position. The Commissioner Inland Revenue issued the notices under Section 40B of the Act as he had reason to believe that the Petitioners are involved in evasion of sales tax or tax fraud. It has been held in the case titled Kamalia Sugar Mills Ltd. v. Federation of Pakistan etc. (2015 PTD 221) by a Division Bench of this Court that the provisions of Section 40B do not prejudice the rights of a registered person as the section is invoked for the purposes of watching and observing the production or sale of taxable goods and the stock position. Hence there is no adverse order against the registered person and the Respondents can monitor purchase, sale and stock positions if they have material evidence of tax fraud or evasion of sales tax. Relevant part is reproduced for convenience:--

"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 this Court essentially was that the fundamental rights of the Petitioners to do their business have been violated. I have considered the meaning and the scope of the power to "monitor" under Section 40B of the Act of 1990. 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 Petitioners. They are observing and recording the data as maintained by the Petitioners. The Respondents are collecting data made by the Petitioners related to production, sale and stock positions. They watch over the process and collect the relevant information as maintained and documented by the Petitioners 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 Respondents state that the Petitioners 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 Petitioners 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 I am of the view 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. A distinction was made on the basis of the powers under Section 40B invoked by the Board and that invoked by the Commissioner Inland Revenue. In that case, an order was issued by the Board wherein in terms of the Section itself, no specific allegation of evasion of sales tax or tax fraud is required. However, under the same Section, the Commissioner Inland Revenue issues an order which invokes Section 40B on the basis of material evidence before him with reference to the allegation of evasion of sales tax or tax fraud, therefore the objective of Section 40B remains the same. Where the order is issued by the Commissioner, the objective of the Respondent Department is to watch and observe with reference to the allegations of evasion of sales tax or tax fraud. The provision of 'monitoring' under Section 40B of the Act essentially means that the Respondents need to monitor production or sale of taxable goods and the stock position in order to ascertain whether the information provided in the returns filed is reflective of the actual record maintained by the taxpayer. With reference to an order by the Commissioner, it means that the taxpayer is put to notice that the Respondents believe that the taxpayer is involved in evasion of sales tax or tax fraud, hence on the basis of material evidence, the Commissioner invokes the provisions of Section 40B of the Act."

11. The question that arises is that when Section 40B is invoked, can the Commissioner authorize the same officers to exercise powers under Section 38 of the Act. Sections 38 and 40B of the Act are reproduced below for ease of reference:--

38. Authorized officers to have access to premises, stocks, accounts and records. (1) Any officer authorized in this behalf by the Board [or the Commissioner], shall have free access to business or manufacturing premises, registered office or any other place where any stocks, business records or documents required under this Act are kept or maintained belonging to any registered person or a person liable for registration or whose business activities are covered under this Act or who may be required for any inquiry or investigation in any tax fraud committed by him or his agent or any other person; and such officer may, at any time, inspect the goods, stocks, records, data, documents, correspondence, accounts and statements, utility bills, bank statements, information regarding nature and sources of funds or assets with which his business is financed, and any other records or documents, including those which are required under any of the Federal, Provincial or local laws maintained in any form or mode and may take into his custody such records, statements, diskettes, documents or any part thereof, in original or copies thereof in such form as the authorized officer may deem fit against a signed receipt.

(2) The registered person, his agent or any other person specified in subsection (1) shall be bound to answer any question or furnish such information or explanation as may be asked by the authorised officer.

(3) The department of direct and indirect taxes or any other Government department, local bodies, autonomous bodies, corporations or such other institutions shall supply requisite information and render necessary assistance to the authorised officer in the course of inquiry or investigation under this section.

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 registered person or class of such persons to monitor production, sales of taxable goods and 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.

12. Section 38 authorizes an officer to have free access to premises, stocks, accounts and records of the taxpayer. In terms of the pronouncement of the august Supreme Court of Pakistan in the case titled Collector of Sales Tax and Central Excise (Enforcement) and another v. Messrs Mega Tech (Pvt.) Ltd. (2005 PTD 1933) the provisions of Section 38 of the Act expect that the registered person will keep the relevant record in an open and transparent manner at their declared premises and the use of the word 'free access' means that the authorized officers have free access to the business premises of a registered person at any time and the registered person shall be bound to answer questions or explanation required. The objective of Section 38 of the Act is to inspect the business or manufacturing premises and to be able to inspect the business record of the registered person. The Petitioners have relied upon the case cited at 2004 PTD 1731(supra) to urge the point that a warrant under Section 40 of the Act was necessary before entering and seizing the record under Section 38 of the Act. However, in that case the question of issuance of a warrant arose because the respondents raided the premises. Hence the question before the court was whether the respondents could have raided the premises of the taxpayer and seize its business record and documents without obtaining a warrant under Section 40 of the Act. In the instant case, the Respondents did not raid the premises of the Petitioner but entered the premises by invoking Section 40B of the Act and the record was handed over voluntarily. Therefore, reliance on the case cited at 2004 PTD 1731(supra) is misplaced and not applicable to this case.

13. To settle the controversy, the relevant question which needs to be decided is whether the Respondents can enter the premises of a taxpayer under Section 40B of the Act and at the same time exercise its power under Section 38 of the Act. The argument raised by the Respondents is that both the provisions of Section 40B and Section 38 of the Act are independent provisions having separate and independent procedures which must be followed. Section 40B of the Act is invoked by the Commissioner Inland Revenue on the basis of material evidence that a case of evasion of sales tax or tax fraud is made out. A notice under Section 40B of the Act must stipulate the material evidence on the basis of which the Commissioner Inland Revenue feels the need to monitor the production, sale of taxable goods and the stock position of the registered person. On the other hand, Section 38 of the Act gives an authorized officer free access to the business or the manufacturing premises or the registered office or any other place of a taxpayer where the stocks, business records, documents are maintained and kept. Section 38 allows the authorized officer free access to the premises and the business records and documents where an inquiry or investigation in tax fraud is underway. The authorized officer can inspect the goods, stocks, records, data, documents, correspondence, accounts and statements, utility bills, bank statements, information regarding nature and source of funds or assets with which the business is financed and any other record or document which are required for the purposes of the investigation. The authorized officer can also take into custody such records, statements, diskettes, documents or any part thereof in original or copies thereof in such form as the authorized officer may deem fit against a signed receipt. Furthermore under Section 38 of the Act, the taxpayer is bound to answer any question or furnish such information or explanation as may be required by the authorized officer. The principles of due process mandate that the registered person is put to notice under Section 38 of the visit and inspection. Section 38 allows the visit and inspection so that the authorized officer can satisfy himself that the registered person is in compliance with the Act when manufacturing the record. It also allows a visit and inspection where there is an inquiry or investigation in tax fraud against the registered person or any other person connected in the investigation of tax fraud.

14. From the aforementioned it is evident that the objective of both the sections is to give the authorized officer access to the premises as well as the record and documents of the registered person. While Section 38 of the Act contemplates a visit to the premises, Section 40B allows the authorized officers to stay at the premises for a given period of time to monitor the purchase, sale and stock position of the registered person. The primary requirement of both sections is a notice to the taxpayer. In this case, a notice was issued stating the material evidence on the basis of which monitoring is necessary to investigate into allegations of tax fraud and evasion of tax. The Petitioners have argued that separate notices should have been issued under Section 38 of the Act for the purposes of entry in the premises of the Petitioners and for the purposes of seizure of the record a warrant under Section 40 was necessary. Having gone through these provisions of the Act it is clear that both Sections 38 and 40B of the Act are independent provisions which can be used independent of each other however they can also be used simultaneously. There is no restriction on the authorized officers who enters the premises of a registered person for the purposes of monitoring to also exercise powers under Section 38 of the Act as both Sections are in aid of an investigation into allegations of tax fraud and sales tax evasion. In both the cases, the Commissioner Inland Revenue has jurisdiction. He can invoke Section 40B of the Act on the basis of material evidence and he can authorize the same officers under Section 38 on the basis of the same material evidence to inspect the premises or record of the registered person with reference to the allegations of evasion of sales tax or tax fraud. Both the Sections require that the Respondents have reasonable cause to believe that a visit to the premises of the registered person where the record and the stocks are maintained will facilitate the investigation. Both Sections 38 and 40B of the Act give the Respondents free access to the premises of the registered person, subject to notice and material evidence pertaining to the allegations of evasion of sales tax or tax fraud. Therefore when an authorized officer enters under Section 40B of the Act, a warrant is not required under Section 40 of the Act. The need for a warrant arises when any officer of Inland Revenue has reason to believe that any document or record of a registered person may be useful or relevant to the investigation, and that document or record is not at the business or manufacturing premises of the registered person but at some other place, then he may, after obtaining a warrant from the magistrate, enter that place and cause a search to be made at any time. Reliance is placed on the case cited at 2005 PTD 1933 (supra). A warrant may also be necessary where the record is not produced voluntarily by the registered person but in the instant case, a warrant was not required as the authorized officers entered the business/ manufacturing place of the Petitioner, Firdous Textile Mills (Pvt.) Limited from whom the documents were handed over as per request, without any resistance.

15. The record shows that the Petitioners in these cases are under investigation with reference to allegations of tax fraud and evasion of tax. The purpose of both the Sections is to enable the Respondents to carry out the investigation and inquiry and obtain necessary information. The Act contemplates an inquiry/investigation process in which 'monitoring' and 'free access' is necessary. To say that while invoking Section 40B of the Act, the Respondents cannot use their power under Section 38 of the Act would therefore go against the mandate of the law. Both sections facilitate the inquiry process and since the Petitioners have been put to notice under Section 40B read with Section 38 of the Act no illegality is made out.

16. The other question argued by the learned counsel in W.P. No.12324/2015 is that a liability had to be determined in the first instance before lodging the FIR in this case. The Petitioners have relied upon 2014 PTD 1807 (supra) to urge the point that an assessment under Section 11 of the Act must be done first before initiation of criminal proceedings by registration of FIR No.8/2015. The operation of the judgment relied upon has been suspended by the august Supreme Court of Pakistan through its order dated 10.12.2014 passed in Civil Petitions Nos.1798 to 2024, 1721-1724 L, 1762-1770 L, 1773-1779 L, 1785-1787 L, 204-208 K and 212 K of 2014 (S.C Order) and the matter is still pending before the august Supreme Court of Pakistan, therefore, reliance on the said judgment is not applicable to the controversy at hand. It has been held in the case cited at 2008 SCMR 76 (supra) that this Court had no jurisdiction to quash an FIR as the same amounts to taking the role of the investigating agency while exercising constitutional jurisdiction. Quashing an FIR can only be done in exceptional circumstances, which do not exist in this case because the Petitioners have challenged the FIR on the ground that the record was illegally seized under Section 38 which could not be invoked when monitoring under Section 40B of the Act. Even otherwise, given the conduct of the Petitioners before this Court with reference to W.P. No.16359/2015, which has been dealt with by a separate order, the Petitioners in W.P. No.12324/2015 have approached this Court with unclean hands and are not entitled to any equitable relief from this Court. Reliance is placed on the cases titled West Pakistan Tanks Terminal (Pvt.) Ltd. v. Collector (Appraisement) (2007 SCMR 1318) and Muhammad Asif and another v. Director Public Instruction, Punjab and another (2005 PLC (C.S) 1434).

17. Under the circumstances, all W.Ps. Nos. 6363, 6903, 8211 and 12324 of 2015 are dismissed.

MH/F-29/LPetitions dismissed.