ISLAMABAD: The Supreme Court held that without investigative audit or issuance of show cause notice or providing opportunity to explain the matters, under Section 37A of the Sales Tax Act, 1990, registration of FIR, initiation of criminal proceeding and arrest of registered person is without jurisdiction and lawful authority.
The 61-page judgment, authored by Justice Aqeel Ahmed Abbasi, further held that criminal prosecution follows adjudication and assessment of tax under Section 11 of the Act; therefore, pre-trial steps including arrest and detention cannot be given effect to unless the tax liability of the taxpayer is determined in accordance with law.
A three-judge bench, headed by Justice Shahid Waheed and comprising Justice Irfan Saadat Khan, and Justice Aqeel upheld the Lahore High Court (LHC) verdict dated 19.09.2013, and through consolidated judgment uploaded on the Supreme Court’s website decided all the listed matters as they involve common questions of law.
The criminal prosecution was initiated under Sections 37A and 37B of the Sales Tax Act, 1990 for the alleged offence of tax fraud, issuance of fake sales tax invoices to claim inadmissible input adjustment/ refund of sales tax.
The SC judgment said perusal of the provisions of Section 33 of the Act reveals that criminal penalties are linked with the “tax loss” or “amount of tax involved and tax due”. Therefore, instead of providing for imprisonment or fine (ordinarily a certain sum of money) or both as punishment, the “fine” under the Act requires the taxpayer to pay the “tax loss” or “amount of tax involved and tax due,” thereby indirectly criminalising, the recovery of “tax due.”
Careful review of the penalties as provided, clearly shows that the measure of sentence is linked with the “amount or loss of tax involved and tax due”, and prima facie, cannot be imposed unless there is some determination or duly assessed tax liability of sales tax due through the processes of assessment for adjudication as per law.
In fact, the linkage uses the tool of imposition of penalty as a mode of recovery of tax. Hence, criminalisation under the Act goes beyond the pale of retribution and deterrence and appears to be principally focused on recovery of tax. The said linkage between “fine” and the “amount of tax due” is missing.
If we may examine the criminal provisions under the other tax laws; i.e., Income Tax Ordinance, 2001, in Part XI of Chapter X of the said Ordinance, it provides for criminal prosecution under Sections 191 to 200, which simply provide for imposition of “fine” but does not link it with the “tax loss or amount of tax” (except for compounding the offence under Section 202). In the case of Federal Excise Act, 2005, such a linkage is visible; however, it has been pointed out that no criminal proceedings can be initiated under the said law without prior assessment of tax.
It reflects upon the clear intent of the legislature that primarily tax liability is a civil liability to be determined through process of assessment or adjudication as per law, whereas, in case of wilful default, miscalculation, concealment or fraud penal provisions can be invoked to ensure tax compliance, recovery of tax and payment of additional amount of tax and/ or penalty.
It; therefore, appears that criminalisation under the Act while invoking the provisions of Section 37A, without recourse to the assessment proceedings, is being treated differently as compared with other tax laws, which is not only against the scope and application of taxing provisions of the Act but also, violates the settled principles of fairness and fair trial as guaranteed under Article 10-A of the Constitution of Islamic Republic of Pakistan, 1973.
“Imposition of additional tax, default surcharge, penalty or fine; etc., depends upon peculiar facts of each case whereas, such penal provisions are only attracted once the Revenue Authorities can establish that the default in payment of tax was wilful and there was element of mens-rea on the part of tax payer, while not making payment of such amount of tax due.”
The judgment noted, in all the cases, the criminal proceedings and registration of FIRs are mainly based on the allegations of tax fraud by the registered persons while preparing fake sales tax invoices to claim false input adjustment/ refund of the amount of sales tax.
“Even if we assume that the Special Judge convicts the taxpayer, he cannot award the sentence, as “fine” is dependent on the “amount or loss of tax involved” and it is not within the competence or jurisdiction of the Special Judge to assess tax or determine the “amount or loss of tax involved” which is not part of the offence but of the sentence. Further, the facility of compoundability under Section 37 (A) (4) is not available to the taxpayer, unless the amount of tax due and penalties as determined under the Act.”
The judgment said if the provisions of Section 37A are allowed to be invoked independently without any reference to the other relevant provisions of Sales Tax Act, 1990 including Section 2 (37) “tax fraud”, Section 3 “Scope of Tax”, Section 11 “Assessment of tax” and Section 33 “Offences and Penalties”, the same will be in violation of the substantial provisions relating to Charge of Sales tax and Assessment of Sales Tax, as it will give unbridled powers to officials of sales tax to initiate criminal prosecution against a registered person or any person within the supply chain, including registration of FIR and arrest, even without creating a lawful demand under the law. If such an interpretation is made in respect of provisions of Section 37A the same will make the provisions of the Act as redundant, whereas, redundancy cannot be attributed to legislation.
It noted that under the Sales Tax Act there is no provision of law which authorises the tax officials to presume any tax liability in the absence of assessment proceedings, and to proceed against a registered person or any person within the supply chain.
The judgment also stated that the perusal of the provisions of Section 37A of the Act shows that unless these provisions are read in harmony with other corresponding provisions of the Act, and invoked as per scheme of the law after assessment/ adjudication of the amount of sales tax due, it can be abused by initiating criminal proceedings, including arrest of a registered person, on the mere allegation of tax fraud and default in payment of presumed tax liability which is yet to be determined through process of assessment or adjudication. Such interpretation of the provisions of Section 37A would bring uncertainty of taxation, which is against the very spirit and purpose of imposition of any tax.
However, before invoking such provisions or adopting coercive measures for the recovery of the amount of tax due, the determination of tax liability through process of assessment or adjudication has to precede before initiating criminal proceedings, which otherwise depend upon wilful default, mens-rea and commission of an offence of tax fraud with an intent to cause loss of tax involved or due.
The judgment observed; “Admittedly in all the cases, without determination of sales tax liability and the amount of tax allegedly evaded or short paid, through process of assessment/ adjudication, recourse to initiation of criminal proceedings on the allegation of tax fraud, including registration of FIR and arrest of a registered person or any person within the supply chain, amounts to, pre-empting the assessment of tax liability, whereas, in the absence of lawful demand of Sales tax pursuant to assessment of tax due, the penal provisions including Section 33 read with Sections 37A and 37B cannot be invoked.
Therefore, the penal provisions including registration of FIR and arrest of any person on the above allegations is without jurisdiction and lawful authority. It is settled principle of interpretation of taxing statute that any provision of statute cannot be read in isolation, particularly, when it is dependent upon or complimentary to other provision of the law. In case of any ambiguity or overlapping of the provisions of law, harmonious construction is to be made, so that such provision of law may not render the other provisions as redundant or nugatory.
Copyright Business Recorder, 2025