SC says show-cause notice issued to taxpayer must contain all necessary facts

ISLAMABAD: The Supreme Court declared that a show cause notice issued to a taxpayer must contain all the necessary facts and must specify the alleged actions or inaction by the taxpayer that violated the law, allowing for a meaningful response from the taxpayer.

The judgment authored by Justice Syed Mansoor Ali Shah said it is imperative that the taxpayer is confronted with specific allegations, along with the grounds upon which such allegations are based, in order to properly respond to the same and to place relevant material on record that would be necessary for any defence put forth and for any adjudication by the assessing officer in relation thereto.

The Commissioner Inland Revenue, Lahore, (petitioner) had issued a show cause notice to M/s RYK Mills (respondent), wherein, it alleged that the respondent company had to charge federal excise duty (FED) at the rate of eight percent on local supplies of white crystalline sugar but instead, it charged 0.5 per cent and as a consequence, FED was short levied.

The respondent company in its reply controverted the allegations. However, the department through an order-in-original on 27.3.2014 decided against the respondent company and held that the short levied FED along with surcharge is to be recovered from the respondent along with penalty (five per cent of the amount involved). The respondent then filed an appeal before the Commissioner Inland Revenue, Appeal-V, Lahore, which was dismissed on 23.11.2020 as barred by time. The respondent company then filed a rectification application against the said order, which was also dismissed on 24.12.2020.

SC says 50pc of deemed IT to be paid till adjudication of pending appeal

The respondent then assailed the orders through appeals before the Appellate Tribunal Inland Revenue, Lahore, which on 28.1.2021, decided against the Commissioner Inland Revenue. Against the said order, the petitioner preferred two ETRs before the Lahore High Court under Section 34A of the Federal Excise Act, 2005. The LHC upholding the Tribunal verdict decided ETRs against the petitioner department. Thereafter, the department approached the Supreme Court.

The judgment noted that the show cause notice issued to the respondent had no such grounds or allegations regarding the applicability of the SRO or fulfilment of the conditions therein. Even when the respondent asserted in its reply that it had paid the FED by availing the benefit under the SRO, no fresh or supplementary show cause notice was issued to the respondent after inquiry by the department as to whether the conditions of the SRO had been fulfilled by the respondent.

It further observed that the assessing officer, without confronting the respondent as to the non-fulfilment of the conditions of the SRO, without providing the respondent with the opportunity to respond to the same and place relevant material on the record, and hence, without having any material to adjudicate upon this aspect, proceeded to determine that the respondent had not complied with the conditions of the SRO while adjudicating upon the same show cause notice already issued to the respondent. Therefore, the order-in-original passed on the matter, being extraneous to the show cause notice, was wholly without jurisdiction and could not have been sustained.

Justice Mansoor wrote that unless the taxpayer is confronted with the allegations through a show cause notice, no determination can be made by the assessing officer with regards to the said allegations as it is beyond the competence of the department to make out a case which the department had never canvassed and the taxpayer had never been afforded the opportunity to meet.

It said; hence, unless the allegations, and the grounds on which the said allegations are based, are not specifically alleged in the show cause notice issued to the taxpayer, the whole exercise becomes redundant and unsustainable in law. Therefore, where in response to a show cause notice, the taxpayer, in defence, raises substantial grounds or puts forth substantial factual aspects that are not covered in the initial show cause notice and, therefore, require further inquiry or verification by the department, then, after conducting such further inquiry or verification, a fresh or supplementary show cause notice should be issued to the taxpayer, if it is then so required.

“No determination can be made with regards to the same unless the taxpayer is afforded the opportunity to respond to any deficiencies or misrepresentations found in relation thereto by specifically alleging the same in a fresh or supplementary show cause notice,” the judgment noted.

It said instead of proceeding under the same show cause notice, it is necessary that a fresh or supplementary show cause notice is issued to the taxpayer in light of the defence so taken. Failure to do so would not only denote that in light of the grounds or facts raised in the defence put forth by taxpayer in response to the show cause notice, which were not in the knowledge of the tax authorities and therefore, were not part of the show cause notice, no further action is required under the said show cause notice, any adjudication in relation to the same would also be against the law, rendering the whole exercise redundant.

The judgment said as a policy, such practice must be adopted by the tax authorities in order to prevent wastage of time and effort, and to curb unnecessary litigation. Not only would this allow a taxpayer to meaningfully respond to the specific allegations asserted against the taxpayer upon which the subsequent original adjudication, if any, will be based, as required under the law, it would also allow many cases to be resolved at the initial stages without the need to proceed any further and needlessly burden the public exchequer.

Copyright Business Recorder, 2023