The Lahore High Court (LHC) has set aside SRO 116 of the Federal Board of Revenue (FBR) relating to the powers and functions of Directorate General Intelligence and Investigation, Inland Revenue under Sales Tax Act 1990 and declared the SRO 116 as illegal.
According to a judgement of LHC in writ petition No. 37358 of 2016, SRO 116 is hereby set aside as being ultra vires the powers of the FBR and is declared without lawful authority and is of no legal effect. The FIRs registered and the criminal prosecution set in motion in pursuance of SRO 116 are also set aside and quashed.
The LHC judgment added that the federal government is directed to frame rules with regard to the transfer and postings under the Federal Board of Revenue Act, 2007 (Act, 2007) of officers and employees of the FBR. The FBR is directed to frame rules with regard to the Directorates and their functioning. In particular, the FBR will enact rules for structuring the powers given in section 37A which is couched in a broad language and confers wide powers on officers of Inland Revenue.
The FBR and its officers are directed to comply with the judgment in Taj International until it is set aside by the Supreme Court of Pakistan, the LHC judgment added. Under SRO 116, the Federal Board of Revenue has appointed the officers of the Directorate General Intelligence and Investigation, Inland Revenue, to be the officers of Inland Revenue and exercise such powers and perform functions of officers of Inland Revenue as mentioned in Sales Tax Act.
In its judgment, LHC said that the judgment shall also decide connected constitutional petitions No. 29474 of 2015, WP No. 28698 of 2015, WP No. 16866 of 2015, WP No. 30331 of 2017 and WP No. 21988 of 2017. These petitions are woven into a unified fabric by the challenge in these petitions to SRO 116(I)/2015 issued by the Federal Board of Revenue (FBR) on 9.2.2015 (SRO 116) in exercise of the powers conferred by sections 30, 30A and 30E of the Sales Tax Act, 1990 ("the Act, 1990"). It is the case of the counsels for the petitioners that SRO 116 is out with the authority of FBR and must be struck down. As a consequence, the prayer is for the proceedings set in motion on the basis of SRO 116 to be quashed as being without lawful authority and of no legal effect.
The challenge to SRO 116 has its genesis in two separate but related arguments:
Firstly, whether the provisions of section 30 read with section 30A of the Sales Tax Act, 1990 (Act, 1990) require the setting up and formation of a Directorate General (Intelligence & Investigation) [Inland Revenue] (DG I&I)IR prior to the declaration of those officers as officers of Inland Revenue and the conferment of powers under the Act, 1990 in terms of section 30E. Secondly, whether the powers conferred on the officers of DG I&I under SRO 116 can validly be conferred as such powers are beyond the remit of the authority of officers appointed to D.G (I&I) IR?
To sum up, the Board has sufficient powers under the Act, 2007 to appoint, by posting or transfer, officers of DG (I&I) and upon such appointment these officers shall perform functions which are peculiar to that Directorate. The powers and functions shall be specified by the Board through a notification issued under Section 30E of the Act, 1990 and those powers and functions will have a close nexus with the purpose which DG (I&I) is designed to achieve. By appointment, once again, as officers of Inland Revenue (as has been done through SRO 116), the officers so appointed shall be deemed to have been transferred and thereby ceases to function as officers of DG (I&I). Appointment made under Section 30 is independent of an appointment made under Section 30A and must remain so. But the fundamental principle is that officers should be posted to the Directorates independently with separate and distinct functions. The SRO 116 fails to meet these foundational requirements and is thus held to be without lawful authority and of no legal effect.
In WP No. 21988 of 2017, WP No. 30331 of 2017, WP No. 29474 of 2015, WP No. 28698 of 2015 and WP No. 37358 of 2016, the registration of the first information report (FIR) has also been challenged. The primary reliance of the challenge to the registration of an FIR and the initiation of criminal prosecution under the provisions of the Act, 1990 is on the basis of a judgment of a division bench of this court. In a nub, the division bench held that the registration of a criminal case was to be preceded by the determination of the tax liability as a civil liability and the amount of tax due ought to be fixed against a person so as to grant jurisdiction in the hands of the officer of Inland Revenue or any other officer authorized by law to set in motion proceedings of a criminal nature.
It has been vehemently stated at the bar, by almost all the petitioners that the department forcibly hauls up taxpayers under the threat of arrest and criminal prosecution and releases them after extraction of money (shown as the amount of tax due under section 37A). In the absence of tax assessment under section 11 of the Act and without knowing the "amount or loss of tax involved," neither compoundability is possible nor the award of sentence against the tax payer. Hence the process of hauling up taxpayers and effecting recovery of self-determined amount of sales tax by the officer of the Inland Revenue is brutally unconstitutional".
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, ie, 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 LHC held that 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.