Al Wakeelo
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Petitioner: Rana MUHAMMAD HAYAT KHAN VS Respondent: Rana IMTIAZ AHMAD KHAN
Court Name: Supreme Court of Pakistan Judge(s): Iftikhar Muhammad Chaudhry, Shakirullah Jan, Sayed Saeed Ashhad Title: Rana MUHAMMAD HAYAT KHAN vs Rana IMTIAZ AHMAD KHAN Case No.: Civil Petitions No,2035-L and 2198 of 2005 Date of Judgment:2007-10-08 Reported As: PLD 2008 Supreme Court 85 Result: Order accordingly
Judgment ORDER ' IFTIKHAR MUHAMMAD CHAUDHRY, C J.---These petitions for leave to appeal have been filed by Rana Muhammad Hayat Khan and Rana Imtiaz Ahmed Khan against the order of the Lahore High Court, Lahore dated 5th October, 2005 therefore, we propose to dispose of both these petitions by means of instant common judgment. 2. As per the facts, available in the pleadings of the parties, petitioner Rana Muhammad Hayat Khan filed his nomination papers to contest elections for the office of District Nazim, Kasur. The nomination papers so filed by him were objected to by the petitioner Rana Imtiaz Ahmed Khan before the Returning Officer, District Kasur, alleging that he being owner of M/s. Faisal Enterprises, having its Registered No,03-97-999-590-55, engaged in the business of import and export, dishonestly and fraudulently obtained refund of Rs,1,55,15,523 from the Sales Tax Authorities as per Audit Report dated 24th March, 2003. It was further pointed out that as per the Audit Report, the registered person i,e, M/s. Faisal Enterprises is also liable for criminal proceedings under sections 37-A and 37-C of the Sales Tax Act, 1990. Accordingly, the Member, Sales Tax recommended lodging of an F.I.R. Against the firm owned by him. On this Rana Muhammad Hayat Khan filed a Writ Petition No,9640 of 2003 before the Lahore High Court, Lahore, challenging criminal proceedings but later on the same was disposed of as withdrawn, therefore, he being wilful defaulter of tax, owe to the Federal Government, by virtue of section 152(1)(j) of the Punjab Local Government Ordinance, 2001 is disqualified to contest the election of any office of the Local Government. The Returning Officer vide order dated 16th May, 2005 rejected his nomination papers. In the meantime, the Additional Collector (Adjudication), vide order dated 14th June, 2005 called upon petitioner Rana Muhammad Hayat Khan to deposit the amount of Rs,1,55,15,523 and imposed the penalty under
---
## Page 2
section 33(4)(a)(f) of the Sales Tax Act, 1990, equal to one hundred per cent. Of the tax involved, as well. This order was challenged by the petitioner Rana Muhammad Hayat Khan in Writ Petition No,16131 of 2005 before the Lahore High Court, which was allowed and the order of the Additional Collector (Adjudication) was set aside vide order dated 20th September, 2005. In pursuance of this order, petitioner Rana Muhammad Hayat Khan was allowed to contest the elections conditionally and consequently he was declared successful, as such was notified to be District Nazim of Kasur, resulting in filing of Election Petition under Rule 65 of the Punjab Local Government Election Rules, 2005, which is pending adjudication. It is pertinent to mention here that above noted Writ Petition No,16131 of 2005 was withdrawn by the petitioner Rana Muhammad Hayat Khan on 21st October, 2005. For the sake of convenience said order is reproduced herein below:- "Learned counsel for the petitioner states that due to formal defects in the instant petition, he seeks its withdrawal with the permission to file a fresh one. 2. Dismissed as withdrawn." ' However, against the rejection of his nomination papers, petitioner Rana Muhammad Hayat Khan filed an appeal against the order of Returning Officer dated 16th May, 2005 before the District Returning Officer, wherein the order of Returning Officer was set aside mainly for the reason that learned Lahore High Court, Lahore in Writ Petition No,16131 of 2005 vide order of even date i,e, 20th September, 2005 had suspended the operation of the order of the Additional Collector (Adjudication) dated 14th June, 2005 in the matter of M/s. Faisal Enterprises, with clear observation that the same is without jurisdiction, ex parte and passed after the lapse of the statutory period of three years. Against this order, petitioner Rana Imtiaz Ahmed Khan filed Writ Petition No,16605 of 2005 before the Lahore High Court, Lahore, inter alia, on the ground that the Returning Officer/District Judge, Kasur misconstrued and misinterpreted the order of the High Court dated 20th September, 2005, as it is settled proposition of law that the order suspending the order of recovery of Government duty, only stops the process of recovery but does not cancel the order itself which continues to hold the field and the defaulter shall continue to be defaulter, as such the petitioner Rana Muhammad Hayat Khan being defaulter disqualified from contesting elections or being elected to a local body under the Local Government Laws. It seems that petitioner Rana Imtiaz Ahmed Khan also sought indulgence of the Court for making directions to the Appellate Tribunal, Customs, Excise and Sales Tax, Lahore to decide the appeal filed by M/s. Faisal Enterprises within 60 days. As such learned High Court, vide impugned judgment dated 5th October, 2005, disposed of the Writ Petition in the following terms:- "10. The Appellate Tribunal, Customs, Excise and Sales Tax, 2nd Floor, Customs House, Lahore is directed to decide the appeal filed by M/s. Faisal Enterprises against order dated 14-6-2005 passed by Mr. Ghulam Sarwar Qaisarani, Additional Collector (Adjudication) by or before 19-12- 2005. In case the Appellate Tribunal held the respondents to be liable for the amount due and the liability is not discharged by them, in accordance with law, they shall be treated as 'wilful defaulter' and petitioners or, for that matter any other voter from the area, can challenge the elections of respondents, in case they are elected, before any appropriate forum." ' Against the above order, both the petitioners i,e, Rana Muhammad Hayat Khan and Rana Imtiaz Ahmed Khan had filed instant petitions. 3. Before dilating upon the respective contentions of the parties' counsel, it is necessary to note few important facts, being relevant for discussion at a later stage:-- (a) The Additional Collector (Adjudication) passed an Order-inOriginal No,56/2005 dated 14th June, 2005 against M/s. Faisal Enterprises in the following terms:- "7. On the basis of aforesaid facts a show-cause notice was issued to the respondent on 13-5-2005 and first date of hearing was fixed on 21-5-2005. On that date of hearing neither any reply to the show-cause notice was received nor anybody appeared for personal hearing. Another date of
---
## Page 3
hearing was fixed on 30-5-2005 and 13-6-2005. Even on that dates nobody appeared for personal hearing nor any reply to the show-cause notice was received within the stipulated period. Rather the show cause notice and hearing notices issued to them were received back to this office with the remarks of the postal authorities that the respondent is not available at the given address. This fact also confirms the position of the prosecution that the respondents have not been involved in any physical business. 8. In view of above, the case is decided ex parte on the basis of available record. The charges stand established against the respondent as have not been contested by the respondent. I, therefore, order to recover the evaded amount of sales tax amounting to Rs,1,55,15,523 additional tax at the rate of one percent of the tax due per month or any part thereof is ordered to be recovered under section 34 of the Sales Tax Act, 1990 at the time of deposit of the principal amount. Penalty equal to one hundred percent of the amount of tax involved is imposed under section 33(4)(a)(0 of the Sales Tax Act, 1990." (b) Against the above order Appeal No,45/ST/2006 was filed by M/s. Faisal Enterprises through their counsel before the Collector, Customs, Sales Tax and Federal Excise (Appeals), Lahore but it was dismissed on 17th February, 2005. (c) Second Appeal being Sales Tax Appeal No,194/LB/2006 was filed by M/s. Faisal Enterprises through its counsel before the Customs, Excise and Sales Tax Appellate Tribunal, Lahore, but without any success as the same has also been dismissed on 13th May, 2006. (d) Against the order dated 13th May, 2006, a Reference under section 47 of the Sales Tax Act, 1990, being STR No,15/2006 was filed by M/s. Faisal Enterprises before the High Court which is pending adjudication. During pendency of the same, on CMA No,630/2006 filed in STR No,15 of 2006, order dated 21st December, 2006 was passed to the effect that applicant has already discharged his liability to the extent of 20% of the principal amount, therefore, the request that respondent No,1 be restrained from adopting any coercive measures till the decision of this STR is allowed. Resultantly, matter was ordered to be fixed in the 3rd week of January, 2007. (e) Consequently, functionaries under the Sales Tax Act issued notices dated 8th May, 2006 and 18th May, 2006 for effecting the recovery. 4. Learned counsel contended that petitioner Rana Muhammad Hayat Khan and Mr. Muhammad Mumtaz Khalid were partners of M/s. Faisal Enterprises, which was dissolved on 5th February, 2002, therefore, legally he was not bound to discharge the liability of the registered firm and the order of the Collector dated 4th June, 2005, demanding an amount of Rs,1,55,15,523 with penalty under section 33(4)(a)(f) of the Sales Tax Act, 1990, equal to one hundred per cent. Of the tax involved, was not recoverable from him. 5. Learned counsel appearing for petitioner Rana Imtiaz Ahmed Khan argued that liability of outstanding amount, which the petitioner Rana Muhammad Hayat Khan has deceitfully and fraudulently received from the Sales Tax Department, pertains to the period commencing from September, 2000 to April, 2001 and according to sections 25 and 58 of the Partnership Act, 1932 the partners of the firm are bound to clear the liability, notwithstanding the fact that partnership has been dissolved. He further stated that the plea of dissolution of partnership has been raised by the petitioner Rana Muhammad Hayat Khan as a device to absolve himself from the liability. He explained that in pursuance of a resolution dated 19th October, 2005, passed by the partners of M/s. Faisal Enterprises namely Rana Muhammad Hayat Khan and Mr. Muhammad Mumtaz Khalid he is very much partner of the firm. Therefore, the argument raised by him is not acceptable. It was further argued that petitioner Rana Muhammad Hayat Khan not only owe the civil but also owe criminal liability for which an action was proposed against him, as a result whereof he filed application i,e, C.M. No,630/2006 before the High Court and succeeded in obtaining restraint order in his favour.
---
## Page 4
' Therefore, according to him, these facts are sufficient to conclude that petitioner Rana Muhammad Hayat Khan is the partner of M/s, Faisal Enterprises under section 152(1)(j) of the Punjab Local Government Ordinance and he is wilful defaulter of Rs,1,55,15,523 along with penalty under section 33(4)(a)(f) of the Sales Tax Act, 1990, equal to one hundred percent of the tax involved, which comes to total amount of Rs,3 crore. As such his nomination papers were rightly dismissed by the Returning Officer. 6. We have heard the learned counsel for both the sides and have also gone through the relevant provisions of law. On factual premise of the case, it is to be resolved that liability of about Rs,3 crore against M/s. Faisal Enterprises admittedly pertains to the period between September, 2000 and April, 2001, during which the partners of the firm allegedly in deceitful and fraudulent manner committed fraud with the Government of Pakistan, claiming refund against the fake invoices. As per record, the firm M/s Faisal Enterprises (a registered person) was issued an intimation letter on 23rd January, 2002 for audit and it was called upon to produce record and details which was mentioned in the letter but instead of complying with the order a writ petition was filed on its behalf in the Lahore High Court, Lahore claiming that its audit had already been conducted and department had initiated re-audit of its record without any lawfully authority. The writ petition was disposed of by the learned High Court with direction to the department to furnish to A M/s. Faisal Enterprises the information available with it, regarding special circumstances on the basis of which re-audit of the record of the firm has been initiated. Learned High Court also directed for providing personal hearing to the registered person so that special circumstances may be explained to it. Accordingly, the firm was furnished with the details of circumstances which warranted re-audit of its record. Admittedly opportunity of personal hearing was afforded to registered person during which Mr. Nisar Ahmad Advocate appeared on its behalf and was explained special circumstances giving rise to special audit of the registered person. Not only this but after providing personal hearing, further notice C-No,66, dated 1st January, 2002 was issued to the registered person for production of record for audit but M/s. Faisal Enterprises did not produce the record. Thus under these circumstances re-audit was completed on the basis of refund claim submitted by the M/s. Faisal Enterprises. On completion of audit, M/s Faisal Enterprises was called to show cause as to why evaded sales tax amounting to Rs,1,55,15,523 should not be recovered from them along with additional tax besides the penal action under the law. Despite of issuance of show-cause notice by the Collector (Adjudication), subsequent their to repeatedly show-cause notices were issued on the address provided on its registered head office i,e, 147 Grand Battery, Multan Road, Lahore and ultimately on 14th June, 2005 the Additional Collector (Adjudication) found them guilty and concluded that the charges stand established against the respondent which had not been contested by them, therefore, in order to recover the evaded amount of sales tax amounting to Rs,1,55,15,523 along with additional tax @ 1% of the tax due per month or any part thereof was ordered to be recovered under section 34 of the Sales Tax Act, 1990. It was further observed that at the time of deposit of the principal amount penalty equal to 100% of the amount of tax is also imposed under section 33(4)(a)(t) of the Sales Tax Act, 1990. Against this order an appeal was filed and now STR is pending adjudication before the High Court. 7. Simultaneously criminal proceedings were also initiated which were challenged by M/s Faisal Enterprises before the High Court by filing Writ Petition No,9640 of 2003 and restrained order dated 9th July, 2003 was obtained which reads as under:- "2. Learned counsel inter alia contends that an audit report on the basis of which department intends to initiate criminal proceedings is not a material evidence contemplated in section 37-A of the Sales Tax Act, 1990 to provide for a reason to believe that a registered person committed a tax fraud in respect of supply or supplies made by him. The contention needs consideration. 3. Admit Notice.
---
## Page 5
' C.M. No,2/2003. 4. In the meanwhile, subject to notice, no process for personal direct or detention of the petitioner shall be issued by the respondent revenue, however, this order will not restrain them from initiating adjudication proceedings ' to bring home contravention of any provisions of law by the petitioner as registered person. ' The above petition was withdrawn vide order dated 7th June, 2005, which read as under:- "Learned counsel for the petitioner seeks not to press this petition. However, wishes to reserve his right to again approach this Court if the issue becomes alive. Allowed. 2. Disposed of as withdrawn." ' The perusal of above two orders indicates that the partners of M/s. Faisal Enterprises were apprehending their prosecution therefore, they rushed to the Court for restrained order. 8. Learned counsel appearing for Rana Muhammad Hayat Khan emphasized that on dissolution of the partnership, a fresh registration was issued in favour of new partners of the firm excluding the name of Rana Muhammad Hayat Khan as back as in the month of September, 2000, therefore, according to him after dissolution of the partnership, Rana Muhammad Hayat Khan being form partner is not liable in any manner. 9. The argument so raised by the learned counsel seems to be without any force. To attend the same reference is required to be made to section 25 of the Partnership Act, 1932 according to which "every partner is liable jointly with all the other partners and also severally, for all acts of the firm done while he is a partner". This section had been well taken care by the superior Courts. Reference may be made to Harchandrai v. The Popular Metal Works PLD 1971 Karachi 925 wherein it has been held that "it is well settled that liability of one partner is the liability of the other partners jointly and severally".This fact has also been reiterated by the Indian Supreme Court in State of Kerala and others v. Saroja and others AIR 1987 Kerala 239. Likewise in Third Income-Tax Officer v. Arunagri Chettiar 1997 PTD 544 it has been observed that:- ' The firm is treated as an entity only for certain purposes. It is not a separate juristic entity distinct from its partners. A firm cannot be equated to a corporate body. Section 25 of the Partnership Act, 1932, expressly states that every partner is liable, jointly with all the other partners, and also severally, for all acts of the firm done while he is a partner. Section 25 does not make a distinction between a continuing partner and an erstwhile partner. Its principle is clear and specific,vii.,(sic) that every partner is liable for all the acts of the firm done while he is a partner jointly along with other partners and also severally. If a continuing partner is liable to pay the tax due from the firm relating to the period when he was a partner of the firm there is no reason in principle to hold that the said liability ceases merely because a partner has ceased to be a partner subsequent to the said period. The absence of a provision corresponding to the proviso to section 46(2) of the Indian Income Tax Act, 1922, in the Income Tax Act, 1961, prior to the introduction of section 188-A in the 1961 Act with effect from April, 1, 1989, does not make any difference to the position, since the liability of the partners to pay the dues of the firm does not arise by virtue of Order XXI, rule 50 of the Code of Civil Procedure, which is attracted by virtue of the said proviso, but on account of the basic nature and character of a partnership firm. Order XXI, rule 50, merely reiterates the said basic premise; it does not create a new liability. Section 188-A of the 1961 Act explicitly provides what was implicit hitherto. ' The respondent-assesse, a partner of a firm, retired from the firm on April, 19, 1963, and for the accounting years relevant to the assessment years 1962-1963 and 1963-1964, the accounts were duly made up by the partners and the share of profits due to the respondent paid to him before his retirement. The firm continued with new partners until 1972 when it was dissolved. ' To further strengthened the above proposition reference may also be made to Dena Bank v. Bhikhabhai Prabhudas Parekh and Co. 2001 PTD 2349 wherein it has been observed as under:-
---
## Page 6
' The principle that where a firm is deemed to be a person and hence a legal entity for a certain purpose, the liability incurred by the firm in that capacity cannot be enforced against the partners, will have no applicability if there is a statutory provision to the contrary. Though the Karnataka Sales Tax Act gives the firm a legal status by treating it as a dealer and hence as a person for the limited purpose of assessing under that Act, there is a provision, viz., section 15(2A), in that Act specifically providing that the firm and each of the partners of the firm shall be jointly and severally liable for the payment of any tax, penalty or nay amount under the Act. Therefore, the partners cannot rely on that principle and take shelter behind the status of the firm, where the State proceeds to recover arrears of sales tax, penalty or other amount due from the firm." 10. It is equally important to note that the Sales Tax Department is authorized to initiate criminal proceedings under section 37-A of the Sales Tax Act, 1990 to arrest and prosecute a person who has committed a tax fraud in respect of supply or supplies made by him. On the basis of audit report the Sales Tax Department initiated criminal proceedings as well, against petitioner Rana Muhammad Hayat Khan as partner, which D prompted to take refuge under the legal provisions as he filed a writ petition No,9640 of 2003 which was withdrawn subsequently as it his been noted herein above. This aspect of the case itself is sufficient to draw inference that petitioner Rana Muhammad Hayat Khan was apprehending his arrest being a partner of M/s. Faisal Enterprises. 11. Above all the documents, which have been relied upon on his behalf to argue that he has retired from the partnership, have not furnished authenticated evidence. Contrary to it he Rana Muhammad. Hayat Khan instituted a Petition No,16131 of 2005 but subsequently a resolution dated 19th October, 2005 was passed to resolve that said writ petition will be withdrawn. The contents of the resolution are reproduced here in below:-- "Extraordinary meeting of the partners of M/s. Faisal Enterprises 147-Grand Battery, Multan Road Lahore was held which was attended by Mr. Muhammad Mumtaz Khalid and Rana Muhammad Hayat, partners on 19-10-2005 and it was resolved that Writ Petition No,16131/05 instituted through Mr. Muhammad Atif Habib, Manager, be withdrawn from the Honourable Lahore High Court, Lahore with permission to file again a fresh writ petition challenging the entire action of the sales tax authorities including order dated 14-6-2005 be instituted and for that purpose Mr. Muhammad Mumtaz Khalid partner was authorized to sign the said petition and all other relevant documents, file written statement etc. And also to engage counsel for filing said petition in the Honourable Lahore High Court, Lahore." 12. It is to be noted that the above resolution was filed along with No,1382-L/2006, notices of which were duly served upon the petitioners through registered post but no reply of the same has been filed, therefore, on the basis of this document as well it can safely be concluded that petitioner Rana Muhammad Hayat Khan was fully aware about civil and criminal liabilities towards the Sales Tax Department. 13. For the better understanding of the proposition, guidelines can be sought from the following passage from the case of Pakistan International Airlines Corporation v. Khalid Waheed and others 1981 SCMR 573 which is reproduced herein below:-- "Now, the question of the liability of the directors of a company for a criminal breach of trust or indeed for any offence by the company is a question of law, therefore, we venture to think that it would have been better if the learned Judge had given reasons for the sweeping conclusion reached by him. Be that as it may, although company is a distinct legal entity which is quite different from its members, including its directors as held in Saloman v. Saloman 1897 AC 22 this does not alter the fact that a company can only act through its director and officers, therefore, an allegation of a criminal offence against a company can only mean that the company's directors and/or officers have committed the alleged offence and in order to decide, who has committed that offence, the Court has always to pierce the veil of incorporation, as held by Hamoodur
---
## Page 7
Rehman, CI., in President v. Shaukat Ali PLD 1971 SC 585. We are aware that .This decision is an order by the Supreme Judicial Council and not by this Court, therefore, we would clarify that -we respectfully approve of the observations of the learned Chief Justice in this case on the necessity of piercing the veil of incorporation. Therefore, merely because a company is a distinct legal entity from its directors, it does not mean,, as held by the learned Judge, that the commission of a criminal offence by a company is inconsistent with mensrea on the part of its directors." 14. Now turning towards the next contention of the learned counsel that petitioner Rana Muhammad Hayat Khan has been proceeded against ex parte during the process of audit, therefore, any finding recorded by the Collector (Adjudication) based on such proceedings has got no legal sanctity. 15. The argument so raised by the learned counsel seems to be without force in view of the facts narrated hereinabove, according to which the notice of intimation was…
Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.