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Petitioner: A&Z Agro Industries (Pvt.) Ltd VS Respondent: Federation of Pakistan & others
Court Name: Sindh High Court Judge(s): Adnan Iqbal Chaudhry Title: A&Z Agro Industries (Pvt.) Ltd vs Federation of Pakistan & others Case No.:Suit No. 2019/2015, Suit No. 2218/2015, Suit No. 09/2016, Suit No. 2180/2015,
JUDGMENT
Reported As: 2021 SHC 1062 Result: Accordingly disposed off Judgment JUDGMENT Adnan Iqbal Chaudhry J. - The Plaintif fs in all these suits are registered persons under the Sales Tax Act, 1990, and taxpayers under the Income Tax Ordinance, 2001. All of them have primarily challenged a surprise search of their respective business premises, authorized and conducted in the majority of the suits by officers of the Directorate General (Intelligence & Investigation) Inland Revenue, purportedly in exercise of powers under section 38 of the Sales Tax Act, 1990 and/or section 175 of the Income Tax Ordinance, 2001, during which the said officers took into custody certain books, files, record, documents and computer hardware belonging to the Plaintif fs. Since the cause of action of all these suits and the relief sought therein was similar , and all of them raised common questions of law , all suits were heard together , and I proceed to decide them by this common judgment. The Sales Tax Act, 1990 is hereinafter referred to as the 'STA'; the Income Tax Ordinance, 2001 as the 'ITO'; the Directorate General (Intelligence & Investigation) Inland Revenue as 'DG I&I'; and the Commissioner Inland Revenue as the ' Commissioner '. A reference to the Director DG I&I includes the Additional Director DG I&I. 2. In the suits where search of the Plaintif fs? premises under section 38 STA and/or section 175 ITO was authorized by the Director DG I&I, the Authorization Letters, also impugned, were issued in exercise of powers under SRO 116(I)/2015 (or the superseding SRO 1301(I)/2018) and SRO 115(I)/2015, which SROs were issued by the FBR under section 30A STA and section 230 IT O respectively . In the suits listed as Set-I, the Authorizat ion Letters were issued only under section 38 STA. In the suits listed as Set-II, the Authorization Letters were issued only under section 175 ITO, except Suit No. 1229/2016 where the Authorization Letter was simultaneously issued also under Rule 62 of the Federal Excise Rules, 2006. In the suits listed as Set-III, separate Authorization Letters were issued simultaneously under section 38 STA and section 175
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ITO, but the search was a common one. In Suit No. 1741/2016, the Authorization Letter was also titled under section 45 of the Federal Excise Act, 2005. Samples of the Authorization Letters issued by the Director DG I&I are as follows: "AUTHORIZA TION U/S 38 OF THE SALES TAX ACT, 1990 In exercise of the powers conferred upon the undersigned vide Board' s Notification bearing No. 116(1)/2015 dated 09-02-2015, the following officers of this Directorate having jurisdiction, are hereby authorized under Section 38 of the Sales Tax Act, 1990, to have access to the premises, stock, accounts, documents or computer or information from hard disk or inventory of any article found at the business place of JADE E-SER VICES P AKIST AN (PRIV ATE) LIMITED, having STRN: 170040121 1818, and other business concerns, located at 6th AND 12th FLOORS, DOLMEN EXECUTIVE TOWER, BLOCK-4, CLIFT ON, KARACHI, maintained by it and / or by any other persons in his behalf.
2. It is further informed that director or any other responsible person of your busine ss concern / company should be present in the abovementioned business premises to extend full cooperation and assistance in providing the details / documents requisitioned by the team members and to facilitate the officers in discharge of their official responsibilities. 3. The report of the official activity must be communicated to the undersigned on the very next working day . (- sd - ) DIRECT OR" "AUTHORIZA TION OF OFFICERS TO HAVE ACCESS UNDER SECTION 175 OF THE INCOME TAX ORDINANCE, 2001 In exercise of the powers conferred upon the undersigned vide Board' s Notification bearing No. 115(1)/2015 dated 09-02-2015, the following officers of this Directorate having jurisdiction, are hereby authorized under Section 175 of the Income Tax Ordinance, 2001 to have access to the premises, accounts, documents or computer and to impound or to take extracts or copy of such material and / or examine and prepare notes, details of inventory and its valuation, or computer disk or information from hard disk or inventory of any article found at the business place of JADE E-SER VICES PAKIST AN (PRIV ATE) LIMITED, having NTN: 40121 18-6, and other business concerns, located at D-67/1, BLOCK-4, CLIFT ON, KARACHI, maintained by it and / or by any other persons in his behalf. S.NO Name of Officer Designation .. .......... ............ .. .......... ............
The officers authorized shall handover a copy of inventory of goods and material to the person(s) available on premises and/or put / affix conspicuous place in case of refusal of such person(s) to receive or accept. In the later situation, may also send such copy through registered / courier service as early as possible. The officers may keep in mind the enquiry / investigation relating to tax issues only . (- sd -) DIRECT OR" 3. The Plaintif fs allege that their premises were in fact raided? by tax officers who came there in a hostile manner , in some cases with armed police personnel, and resorted to harassment and intimidation to gain access to the files, books, record and computers of the Plaintif fs, and proceeded to seize the same. Except Suit No. 2180/2015, all Plaintif fs have filed a copy of the resumption memo or receipt issued for the record seized during the search, albeit some of the Plaintif fs allege that the resumption memo/receipt does not list the entire record seized. 4. In their pleadings, the Plaintif fs have averred that the search of their premises was malafide , arbitrary and a fishing inquiry; that it was without assigning any reasons, without attributing any illegality to the Plaintif fs and without having any definite information against the Plaintif fs; that the search under section 38 STA was unlawful also for want of a warrant mandated by section 40 STA; that the Director DG I&I had no authority to authorize a search, which power vested in the FBR or the Commissioner under section 30A STA, and in the Commissioner under section 175 ITO; and therefore, the SROs issued by the FBR to confer powe rs of search on the DG I&I were
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ultra vires the provisions of the STA and ITO respectively . The prayers common to all these suits are: for a declaration that the Authorization Letter issued for the search, and the record taken into custody during such search, are unlawful; for an injunction directing the Defendant tax authorities to return the record; and for restraining the Defendant tax authorities from taking any action against the Plaintif fs on the basis of the record so seized. In addition, some of the Plaintif fs have also prayed that SRO 116(I)/2015 and/or SRO 115(I)/2015 issued by the FBR to confer powers of search on the DG I&I, be declared ultra vires the provisions of the STA and ITO; and for damages. 5. The written statements of the tax department plead that the jurisdiction of this Court to decide these suits is ousted by the provisions of section 51 STA, section 227 ITO and section 9 CPC; that by virtue of section 30A STA and section 230 ITO, the FBR was empowered to confer upon the DG I&I the power of search under section 38 STA and section 175 ITO, and hence SROs for the same were issued with lawful authority; that the search of the Plaintif fs? premises was not arbitrary , rather the Plaintif fs were selected for search on a scrutiny of their tax returns or on the basis of intelligence gathered and/or received which showed that the Plaintif fs were involved in tax evasion by suppressing receipts/sales, taxable activities and taxable income. In some of the suits the tax department has also pleaded that the scrutiny of the record taken into custody during the search has revealed that the Plaintif fs have been concealing taxable activity , taxable income and are involved in tax evasion and tax fraud. 6. At the hearing for settlement of issues on 16-02-2021, all learned counsel representing the Plaintif fs gave up any issue of fact and requested that the suits may be finally determined on issues of law only which do not require evidence. Therefore, with the consent of learned counsel on both sides, and in view of Order XV Rule 3 CPC, these suits were heard for final judgment. 7. The issues of law on which learned counsel were heard are recorded in the order dated 01-03-2021. However , while examining these suits in Chamber s, it transpired that in Suit No. 2031/2016 and Suit No. 213/2019, the impugned search had been authorized not by the Director DG I&I but by the Commissioner . Further , in Suit No. 1229/2016 and Suit No. 1741/2016, the impugned Authorization Letters had also cited Rule 62 of the Federal Excise Rules, 2005 and section 45 of the Federal Excise Act, 2005 for authorizing the search. These variations in said suits had not been highlighted by learned counsel during arguments. To cater to said variations, the issues require an amendment and an addition. It will emerge infra that the answer to the issues originally settled applies equally to the issues as amended and added to, and no prejudice is caused to either side by the amendment and addition. Therefore, in exercise of power s under Order XIV Rule 5 CPC, Issue No.(ii) is amended to the include the Commissioner?, and an issue is added to address the common search under the Federal Excise Act, 2005. The issues now read as follows, the amendment/addition being highlighted in italics: (i) Whether the suits are barred by reaso n of the special provisions of the Sales Tax Act, 1990 and/or the Income Tax Ordinance, 2001 ? (ii) Whether the raid and/or search and seizure by the Directorate General (Intelligence & Investigation) Inland Revenue or by the Commissioner at the premises of the Plaintif fs under section 38 of the Sales Tax Act, 1990 was unlawful ? If so, to what ef fect ? (iii) Whether the entry , search and seizure of record by the Directorate General (Intelligence & Investigation) Inland Revenue under section 175 of the Income Tax Ordinance, 2001 at the offices of the Plaintif fs was unlawful ? If so, to what ef fect ? (iv) Whether the search of the Plaintiffs' premises and seizure of their record under the Federal Excise Act, 2005 or the Federal Excise Rules, 2005 was unlawful ? If so, to what effect ? (v) What should the decree be ? The second part of Issues (ii) and (iii), i.e. "If so, to what effect ?", was settled to cater to the prayer of the Plaintif fs that in the event this Court comes to the conclusion that the impugned searches were unlawful, then the Defendants should be directed to return the record seized and restrained from taking any action against the Plaintif fs on the basis of such record. 8. Mr. Owais Ali Shah, learned counsel for the Plaintif fs in Suit No. 2297/2018, Suit No. 2298/2018 and Suit No. 625/2016, submitted that since the conditions to a search under section 38 STA and section 175 ITO, and the
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consequence of not fulfilling those conditions were matters already decided by case-law , he will confine himself to that and to the relief sought to that end, and therefore he did not press the other prayers of his suits, including the prayers against SRO 116(I)/2015 and SRO 115(I)/2015 whereby the power of search was conferred on the DG I&I. Learned counsel submitted that even assuming that the Director DG I&I was competent to authorize the search, the search conducted under section 38 STA without the warrant mandated by section 40 STA was completely unlawful; that sections 38 and 40 STA have to be read together and the requirement of obtaining a search warrant could not be by-passed; that as per section 40 STA, the search is in relation to "proceedings under this Act", and therefore until the Commissioner requires the assistance of the DG I&I in relation to a pending proceeding, the Director DG I&I had basis to authorize a search on his own. Learned counse l submitted that the "inquiry or investigation in any tax fraud" contemplat ed in section 38 STA can only be authorized by the Commissioner acting under the proviso to section 25(2) STA; that the impugned Authorization Letters issued under section 38 STA do not allege any tax fraud by the Plaintif fs, nor could the Director DG I&I undertake any inquiry on his own. Learned counsel submitted that the consequence of such unlawful search was that the record taken into custody during such search had to be returned, and no action could be taken by tax authorities against the Plaintif fs on the basis of such record. To support of his submis sions, learned counsel cited the cases of Collector of Sales Tax and Central Excise (Enforcement) v. Mega Tech (Pvt.) Ltd. (2005 SCMR 1166); Collector of Sales Tax v. Food Consults (Pvt.) Ltd. (2007 PTD 2356 ); Federation of Pakistan v. Master Enterprises (Pvt.) Ltd. (2003 PTD 1034 ); Agha Steel Industries Ltd. v. Directorate of Intelligence and Investigation (2019 PTD 2119); and N.P. Water Proof T extile Mills (Pvt.) Ltd. v . Federation of Pakistan ( PTCL 2005 CL. 32 ). 9. As regards the impugned search under section 175 ITO, Mr. Owais Ali Shah Advocate submitted that the provision itself stipulates that the search thereunder is "in order to enforce a provision of this Ordinance"; therefore section 175 ITO can only be invoked where the taxpayer is not in compliance of some other provision of the ITO; and again, until the Commissioner requires the enforcement of that other provisi on, the Director DG I&I had no basis to authorize a search on his own; and that the impugned Authorization Letters do not give any reasons for authorizing the search. To support his submissions, learned counsel cited the cases of Agha Steel Industries Ltd. v. Directorate of Intelligence and Investigation (2019 PTD 2119); K.K. Oil and Ghee Mills (Pvt.) v. Federal Board of Revenue (2016 PTD 2601 ); Khurram Shahzad v. Federation of Pakistan (2019 PTD 1124); and Tri- Star Industries (Pvt.) Ltd. v . C.I.T . (1998 PTD 3923 ). 10. Mr. Hyder Ali Khan, learned counsel for the Plaintif f in Suit No. 2121/2018 also confined himself and the suit to the points raised by Mr. Owais Ali Shah. To bolster those points he cited the case of Ihsan Yousuf Textile Mills (Pvt.) Ltd. v. Federation of Pakistan (2003 PTD 2037 ) to add that section 38 STA was not an independent provision for search but only an enabling provision, whereas the search itself had to be carried out in accordance with section 40 STA. To further the submission that the record taken into custody during the unlawful search has to be returned and no action can be taken thereon, learned counsel relied on the cases of S.M. Yousuf v. Collector of Customs (PLD 1968 Kar 599) and Muhammad Yousuf v. The Collector of Sea Customs, Karachi (PLD 1969 SC 153). As to the question to the maintainabili ty of the suits, learned counsel relied on the case of K.G. Traders v. Deputy Collector of Customs (PLD 1997 Kar 541) to submit that when the impugned searches were not in accordance with the law that conferred such power , the suits were very much maintainable. Learned counsel for the other Plaintif fs took the same course as Mr. Owais Ali Shah and Mr. Hyder Ali Khan to confine their suits as aforesaid and adopted the same arguments. 11. In Suit No. 1176/2018, the impugned search under section 38 STA was authori zed by the Commissioner Zone- V, RTO-III, not the DG I&I, during which certain record was also taken into custody . Subsequently , the said Commissioner proceeded to suspend the sales tax registration of the Plaintif f under Rule 12(a)(i)(B) of the Sales Tax Rules, 2006 for failing to give access to the entire record during the search. However , that order was suspended by this Court by an interim order that continues. Apart from impugning the search, the Plaintif f has also challenged the order of suspension of his sales tax registration. Ms. Fauzia Rasheed, learned counsel for the Plaintif f submitted that while the allegation of not providing the entire record was false, nonetheless under section 21(2) STA, sales tax registration can only be suspended for issuing fakes invoices or committing tax fraud, and
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after giving a prior show-cause notice as held by a learned Division Bench of this Court in the cases of Saleem Ahmed v. Federation of Pakistan (C.P. No. D-8101/2017) & others . Learned counsel further submitted that the Commissioner Zone-V had no territorial jurisdiction in the matter , as the same was with the Commissioner Zone-IV pursuant to FBR?s jurisdiction notification dated 18-09-2017. 12. Mr. Aqeel Qureshi, learned counsel for the tax department submitted that the impugned search was made to check the veracity of the tax returns filed by the Plaintif fs, and the record taken into custody by the DG I&I during the search was passed on to the Commi ssioner for appropriate action. He submitted that the Director DG I&I can authorize a search not only on a request for assistance received from the Commissioner , but he can also act on his own on the basis of intelligence gathered by the of ficers of the DG I&I. Mr. Ameer Bakhsh Metlo, learned counsel for the tax department relied on the case of Vincraft (Pvt.) Ltd. v. Federal Board of Revenue (2017 PTD 2114) to submit that no exception can be taken to the power to search a premises under section 175 ITO; that section 38 STA is not dependent on section 40 STA; that in Iqbal and Sons v. Federation of Pakistan (2017 PTD 590), the Lahore High Court had rejected the argument that section 38 STA exists only to cater to an audit under section 25 ST A. Mr. Mohsin Imam, learned counsel for the tax department submitted that these suits in tax matters could not proceed further until the Plaintif fs deposit 50% of the tax calculated by the departm ent as so required by the case of Searle IV Solution v. Federation of Pakistan (2018 SCMR 1444 ). However , that argument did not notice that after that condition was imposed by the Honourable Supreme Court, these suits were examined for said purpose, and the Court came to the conclusion that since these suits did not impugn any demand of tax, the said condition of deposit was not attracted. None of those orders were ever assailed by the tax department. Issue (i): Whether the suits are barred by reason of the special provisions of the Sales Tax Act, 1990 and/or Income T ax Ordinance, 2001 ? 13. Though written statements of the tax department had pleaded that the jurisdiction of this Court was ousted respectively by the provisions of section 51 STA and section 227 ITO, however , those grounds were not urged at the time of arguments, presumably becau se it has since been held by the Supreme Court in Searle IV Solution v. Federation of Pakistan (2018 SCMR 1444 ) that the words civil court? in such ouster clauses does not include the High Court of Sindh at Karachi exercising jurisdiction in civil suits. Nonetheless, there is the question of an implied bar? to the jurisdiction of this Court within the meaning of section 9 CPC, arising as a consequence of special law which provides for a special mechanism to address matters arising thereunder . Thus, the objection urged against the maintainability of these suits was essentially that the suits are impliedly barred by reason of the special mechanism of the STA and the ITO and the Plaintif fs should resort to remedies provided thereunder as and when an appelable order is passed against them on the basis of the record seized during the search. 14. The contours of a statutory provision that expressly or impliedly bars the jurisd iction of civil courts, are by now well defined. To quote from Abbasia Cooperative Bank v . Hakeem Hafiz Muhammad Ghaus ( PLD 1997 SC 3 ): "It is a well-settled principle of interpretation that the provision contained in a statute ousting the jurisdiction of Courts of general jurisdiction is to be construed very strictly and unless the case falls within the letter and spirit of the barring provision, it should not be given effect to. It is also well-settled law that where the jurisdiction of the civil court to examine the validity of an action or an order of executive authority or a special tribunal is challenged on the ground of ouster of jurisdiction of the civil court, it must be shown (a) that the authority or the tribunal was validly constituted under the Act; (b) that the order passed or the action taken by the authority or tribunal was not mala fide; (c) that the order passed or action taken was such which could be passed or taken under the law which conferred exclusive jurisdiction on the authority or tribunal; and (d) that in passing the order or taking the action, the principles of natural justice were not violated. Unless all the conditions mentioned above are satisfied, the order or action of the authority or the tribunal would not be immune from being challenged before a civil court. As a necessary corollary , it follows that wher e the authority or the tribunal acts in violation of the provisions of the statutes which conferred jurisdiction on it or the action or order is in excess or lack of jurisdiction or mala fide or passed in violation of the principles of natural justice, such an order could be challenged before the civil court in spite of a provision in the statute barring the jurisdiction of civil court."
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Therefore, the implied bar to the jurisdiction of this Court to entertain these suits can be circumvented if the Plaintif fs demonstrate that the suits attrac t one or more of the exceptions to the ouster of jurisdiction laid down in Abbasia Cooperative Bank. Having said that, all of these suits have been pitched on the recognized exception that the impugned action, i.e. the search of the Plaintif fs? premises, was initiated in violation of the provisions which authorized such search. That issue is being examined infra. If the answer to that issue is in the negative, then the suits are not maintainable, and the Plaintif fs will have to go through the mechanism provided in the STA and/or the ITO. However , if the answer to that issue is in the affirmative, then the suits are maintainable, for then the Plaintif fs succeed in circumventing the implied bar to jurisdiction. Issue No.(i) is answered accordingly . Issue (ii): Whether the raid and/or search and seizure by the Directo rate General (Intelligence & Investigation) Inland Revenue or by the Commissioner at the premises of the Plaintif fs under section 38 of the Sales T ax Act, 1990 was unlawful ? If so, to what ef fect ? 15. Though section 38 STA does not use the word search?, the words "shall have free access" with the power to "take into his custody such records" manifest that it is a provision for search. While section 38 STA empowers the FBR or the Commissioner to authorize a search, the search in most of these suits was authorized by the Director DG (I&I) in exercise of powers under SRO 116(I)/2015 (or the superseding SRO 1301(I)/2018), issued under sections 30A and 30E STA which empowered the FBR to specify the functions, jurisdiction and powers of the DG I&I. Since the vires of sections 30A and 30E STA were not called in question in these suits, and the prayer for declaring SRO 116(I)/2015 as ultra vires the STA was not pressed during arguments, the authority of the Director DG I&I to authorize the impugned searches need not be discussed herein. To answer Issue No.(ii) it is to be examined foremost whether a search under section 38 STA is independent of the provisions of section 40 STA which requires not only the obtaining of a warrant from the Magistrate before making a search, but also circumscribes the search to circumstances "where any officer of Inland Revenue has reason to believe that any documents or things which in his opinion, may be useful for, or relevant to, any proceedings under this Act are kept in any place". 16. At the time relevant to these suits, sections 38 and 40 ST A read as under: "38. Authorised officers to have access to premises, stocks, accounts and records - (1) Any officer authorised 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,…
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