ISLAMABAD: Over 150 operative First Information Reports (FIRs) registered by the Federal Board of Revenue (FBR) against arrested persons on accusation of tax evasion/tax fraud would be quashed/withdrawn after a recent order of apex court of Pakistan.
A tax expert told Business Recorder that the Supreme Court of Pakistan has rejected more than 300 Civil Appeals of the Department filed against the judgment of Lahore High Court wherein it was held that prior to assessment of sales tax under section 11 no FIRs/criminal proceedings are justified.
Resultantly, the right of the tax department to lodge FIRs remain intact after assessment of tax under section 11 of the Sales Tax Act, which was sought to be evaded.
When contacted, the FBR sources confirmed that the SC order would be applicable to presently operative hundreds of FIRs lodged subsequent to the orders of the High Court.
The background facts are that the Directorate of Intelligence & Investigation, Lahore in 2012–13 registered hundreds of FIRs against the taxpayers for prosecution by the Special Judge in respect of evasion of sales tax alleged against the taxpayers in the FIR. On that, writ petitions were filed before Lahore High Court and a Division Bench of the Lahore High Court through its order dated 19.09.2013 in the lead case of Taj International quashed all the FIRs being unconstitutional, violative of fundamental rights, ultra vires of the Sales Tax Act and hence illegal and without lawful authority. The line of argument which prevailed before the Lahore High Court was that until and unless first adjudication proceedings are finalized under section 11 of the Sales Tax Act the evasion of sales tax cannot be alleged for registering FIR and initiating criminal proceedings. The relevant extract from the order of the Lahore High Court are as under:
“24. Inability of the Special Judge to compound or award a sentence including a fine unless the loss of tax or amount of tax is first assessed, freezes the initiation of criminal proceedings till such time that the tax is duly assessed under the Act. Fair Trial under Article 10A of the constitution encompasses the whole trial including all the pre-trial steps like arrest, compoundability, etc. If at any stage of the trial, the taxpayer is deprived of the facility of settlement (compoundability) or there is a clog on the powers of the Special Judge in the matter of sentencing (choice of punishing with fine only) continuance of any such trial will offend article 10A of the Constitution. Where the civil adjudication system under the Act declares that there is no loss of tax caused by the taxpayer or no amount of tax is due from the taxpayers, initiation of criminal prosecution in such a case may offend Article 10A of the Constitution.
As a conclusion, we once again reiterate that civil and criminal proceedings can run independently and simultaneously or otherwise. The purpose and objective of criminalizing tax fraud and tax evasion is retribution and deterrence which is achieved through punishment or fine or both. If the law, however, goes further and criminalises recovery of tax in addition to retribution and deterrence, then tax assessment has to take place first under the provisions of the Act. In this background the term “shall be further liable” re-appearing several times in section 33 of the Act holds a chronological significance i.e., that criminal prosecution follows adjudication and assessment of tax under section 11 of the Act.
Even if the criminal prosecution under the present scheme of the Act is initiated after assessment of tax under section 11 as discussed above, the constitutionality of hurriedly invoking section 37A on the basis of material evidence requires consideration. Material evidence must be credible and definite if it is to deprive a citizen of his constitutional protection and safeguards under Articles 4 (due process), 9 (human liberty), 10A (fair trial) and 14 (human dignity). Setting in motion of the criminal prosecution cannot be left in the hands of any officer of the Inland Revenue, especially when the said Officers are under an obligation to recover the tax and meet tax targets before the close of the financial year set by the FBR. The process of initiation of criminal prosecution must comply with the requirement of due process and fair trial. The material evidence collected under section 37A needs to be credible and can best pass the test of fair trial and due process if it is an outcome of an inquiry or investigation envisaged under the proviso to section 25(2) of the Act. The outcome of any such inquiry and investigation must be placed before an independent forum like the Directorate General (Intelligence and Investigation), Inland Revenue established under section 30A of the Act to first review the inquiry and investigation and the material evidence and then proceed under the law. Anything short of this process will not only lead to persecution of the tax payers, it will also make a mockery of the fundamental right of fair trial.
The other issue is the choice of opting for criminal proceedings against a particular taxpayer and letting go of the other. This poses a problem and amounts to vesting unstructured and unregulated power in the hands of the department, once again threatening the sanctity of fair trial. Any such unguided and uncontrolled exercise of power will not withstand the constitutional test of fairness and equality under Article 25 of the Constitution. A more wholesome, transparent and standardized system needs to be evolved by the FBR to avoid this unconstitutionality.
In view of the above, we hold that the pre-trial steps including arrest and detention cannot be given effect to unless the tax liability of the taxpayer is determined in accordance with section 11 of the Act. In this background, criminal proceeding initiated against the petitioners, and documented as the First Information Report in this case and cases mentioned in Schedule-A is quashed as being unconstitutional, violative of fundamental rights, ultra vires the Act and hence illegal and without lawful authority. For the above reasons all these petitions are allowed. In the light of the above discussion, we see no need to answer the question regarding the jurisdiction or competence of the officer who initiated the criminal proceedings in these cases”, Lahore High Court order added.
When contacted, Shahid Jami, a Lahore-based Tax Consultant observed that the Supreme Court has decided the case after more than eleven years of decision of the Lahore High Court.
In the meanwhile, taxpayers across the country have faced lot of hardship including arrest as tax department was not obeying the order of the Division Bench of the Lahore High Court on the pretext that appeal of the Department is pending before Supreme Court.
Jami observed that it should be good grace of the Department in the context of rule of law that all presently operative FIRs are withdrawn and the taxpayers facing trial before the Special Judge are released. He observed that right of the Department to lodge FIRs remain intact after assessment of tax under section 11 which was sought to be evaded, Jami added.
Copyright Business Recorder, 2024
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