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Petitioner: Nestle Pakistan Ltd. & another VS Respondent: Federation of Pakistan & others
Court Name: Lahore High Court Judge(s): Shahid Karim Title: Nestle Pakistan Ltd. & another vs Federation of Pakistan & others Case No.: W.P No.4361 of 2017 Date of Judgment:2020-12-29 Reported As: 2021 PTD 521, 2020 LHC 3369 Result: Petition allowed
JUDGMENT
JUDGMENT Shahid Karim, J. This judgment will also decide connected petitions W.P No.17982 of 2015, W.P No.21339 of 2016, W.P No.81 19 of 2016, W.P No.81 15 of 2016, W.P No.29142 of 2016, W.P No.27152 of 2016, W.P No.61835 of 2017, W.P No.101788 of 2017, W.P No.59935 of 2017, W.P No.126012 of 2017, W.P No.177571 of 2018, W.P No.215284 of 2018, W.P No.156477 of 2018, W.P No.22498 of 2019, W.P No.21542 of 2019 and W.P No.76744 of 2019. Although separate notices have been issued to the petitioner in these constitutional petitions, yet there is a commonality of challenge to SRO 115(I)/2015 ("SRO 115") issued by the FBR on 09.02.2015. By the notification certain powers and functions have been conferred on the officers of Directorate General (Intelligence & Investigation Inland Revenue) [D.G (I&I)] by section 230 of the Income Tax Ordinance, 2001 (Ordinance, 2001) . The recital of the impugned notification provides that: "S.R.O 115(I)/2015.- In exercise of the powers conferred by section 230 of the Income Tax Ordinance, 2001 (XLIX of 2001), read with section 208 and sub-section (I) of section 209 the Federal Board of Revenue is pleased to confer upon the officers of the Directorate General (Intelligence and Investigatio n), Inland Revenue specified in column (2) of the Table below , the powers of the authorities specified in column (3) of the said Table, to exercise powers and perform functions under the provisions of the said Ordinance as specified in column (4) thereof, and having jurisdiction as specified in column (5) of that T able." 2. The petitioners' challenge is primarily founded on the holding of this Court in F.M. Textile Mils and others v. Federal Board of Revenue and others (2017 PTD 1875 ). Under similar circumstances, SRO 116(I)/2015 (SRO 116) issued on the same date (in respect of conferment of powers under Sales Tax Act, 1990) was struck down by this Court on various grounds. According to Barrister Muhammad Umer Riaz, learn ed counsel for the D.G (I&I) (in some of the petitions), there is a clear distinction between the two, in that, the tenor of the two notifications is distinct from each other . He contends that SRO 116 was struck down on the ground that reappointment of the
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officers as officers of Inland Revenue could not be made through the impugned notification which was not the case in SRO 115. However , this argument cannot prosper since this was one of the aspects dealt with by this Court in dealing with SRO 116 whereas the other more pertinent grounds on which SRO 116 was struck down related to the functions of D.G (I&I) and the effect of SRO 116 in setting up a parallel agency to undertake the exercise of powers which were already conferred on Officers of Inland Revenue ("OIR") and which had an unsavory effect of exercise of powers by different agencies without creating a proper structure under which the D.G (I&I) was to function. In this respect, the following observations in the precedent would suffice to bring home the similarity in the two challenges: "23. What is the purpose of Section 30E and the power that comes to reside in the hands of FBR? That purpose can only be gleaned by the use of purposive interpretation which is sometimes referred as the antonym of textualism. According to Aharon Barak, Justices of the United States Supreme Court are divided on the task of constitutional interpretation, and it is his view "that purposive interpretation provides a proper solution to this interpretative dilemma". (See his Foreword to Harvard Law Review 2002). According to Aharon Barak, "one should not give the constitution a meaning that its express or implied language cannot sustain...A constitution is a unique legal document. It enshrines a special kind of norm and stands at the top of the normative pyramid......The key question is what is the proper system of interpretation in the context of a particula r system of government, in the context of a particular society"? In his view, "purposive interpretation is that proper system. Purposive interpretation is based, of course, on the concept of purpose. Purpose is a normative concept that the law constructs". 24. As was said by Lord Griffith in the famous case of Pepper v Hart, (1993) 1 A11 ER 42, 50, (quoted in Gadoon Textile Mills v W APDA 1997 SCMR 641 , 829): "The days have long passed when the courts adopted a strict constructionist view of interpretation which required them to adopt the literal meaning of the language. The courts now adopt a purposi ve approach to give effect to the true purpose of legislation". 25. Statutes should, said Lord Roskill in Anderson v Ryan, (1985) 2 A11 ER 355, 359, "be given what has become known as a purposive construction, that is to say, the courts should when possible identify the mischief which existed before the passing of the statute and then if more than one construction is possible favour that which will eliminate the mischief so identified". 29. In order to lend actuality to the analysis, it would be interesting to refer to some of the powers and functions conferred by SRO 116 and by way of illustration and exposition of the nature of those powers and the contradictions inherent therein, a reference to the powers conferred on Director General I & I (Inland Revenue) listed at serial No.1 of SRO 116 may be alluded to. By column 3, the powers of Chief Commissioner (Inland Revenue) have been conferred to be exercised by the Director General I & I (Inland Revenue). Column 4 in the Table given in SRO 116 delineates the powers and functions so conferred. The first power is that under section 21(4) which, for facility , is reproduced as follows:- "(4) Notwithstanding anything contained in this Act, where the Board, the concerned Commissioner or any officer authorized by the Board in this behalf has reasons to believe that a registered person is engaged in issuing fake or flying invoices, claiming fraudulent input tax or refunds, does not physically exist or conduct actual business, or is committing any other fraudulent activity , the Board, concerned Commissioner or such Officer may after recording reasons in writing, block the refunds or input tax adjustments of such person and direct the concerned Commissioner having jurisdiction for further investigation and appropriate legal action." 30. The entire section 21 relates to de-registration, blacklisting and suspension of registration of a registered person or such class of registered persons not required to be registered under the Act. The procedure for blacklisting such persons or suspension of the registration has to be in accordance with the procedure prescribed by the FBR. The enormous power given in sub-section (4) is conferred on the Board, the concerned Commissioner or any officer authorized by the Board in this behalf who may, in case there are reasons to believe that a registered persons is engaged in issuing fake or flying invoices, claiming fraudulent input tax or refunds etc., the Board, the concerned Commissioner or such officer may after recording reasons in writing, block the refunds or input tax adjustment of such person and direct the concerned Commissioner having jurisdiction for further investigation and
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appropriate legal action. Therefore, primarily the jurisdiction for blocking the refunds or input tax adjustment is conferred on the Board, the concerned Commissioner or such officer as authorized by the Board. It can be argued that the Director General I & I is included in the category of an officer authorized by the Board and SRO 116, in fact, does confer such a power . However , it is anomalous indeed that that officer should direct the concerned Commissioner for further investigation and appropriate legal action. The jurisdiction has been vested in the Commissioner having jurisdiction for further investigation and appropriate legal action by the legislature and the same powers cannot be conferred by the FBR through a notification and particularly when, as held above, that officer is an officer below the rank of a Commissioner Inland Revenue and cannot, therefore, direct the concerned Commissioner for further investigation and appropriate legal action. It is otiose to confer such a power in the first place as the power has validly been conferred on the concerned Commissioner and upon further investigation, the concerned Commissioner can very well refer the matter to the D.G (I & I) for proceeding under the relevant provision in case a tax fraud has been committed or the registered person is committing a fraudulent activity . Such a power cannot be conferred through SRO 116 on an officer of D.G (I & I). Also for the additional reason that the power under Section 21(4) is to be exercised by either the Board, the concerned Commissioner or any officer authorized by the Board and is not a power peculiar to be exercised by the Chief Commissioner (Inland Revenue) and thus for this reason also such a power cannot be conferred on an officer of D.G (I & I). Yet the conundrum gets more complicated if we were to consider the precise nature of the powers conferred under Section 21(4). For, the said provision deals with a panoply of powers. The first of these is conferred on the Board, the concerned Commissioner or an officer authorized by the Board, "to block the refunds or input tax adjustments of such person" . The second power is exercised by the "concerned Commissioner having jurisdiction" for further investigation and appropriate legal action. These are distinct powers invested in distinct officers and SRO 116 fails to clarify which of the powers mentioned in section 21(4) have been prescribed to be conferred by it. The lack of specify will be a recipe for abuse of discretion. 32. The provision relates to access to record and documents and obliges a perso n who is required to maintain a document under the Act as and when required by the Commissioner to produce that record or documents which are in his possession or control. By sub-s ection (2), the officer of Inland Revenue authorized by the Commissioner on the basis of the record obtained under sub-section (1) may, once in a year, conduct audit. Thus at first blush, the power conferred by section 25 is, in essence, the power to conduct audit. It is a specialized and skilled assignment which cannot be undertaken by the Director General I & I or any other officer of D.G (I & I). Be that as it may, the provisions of sub-sections (1) and (2) read cumulatively merely confer a power to conduct audit and no more. The entire reliance of the learned counsel for the respondents as also the Deputy Attorney General was on the proviso to sub-section (2) which deals with the matters of tax fraud. The proviso comes into play when the Commissioner has information or sufficient evidence showing that such registered person is involved in tax fraud or evasion of tax, the Commissioner may authorize an officer of Inland Revenue to conduct an inquiry or investigation under Section 38. This is the scheme of the law when a tax fraud is detected. The learned counsel for the respondents as also the learned D.A.G invited this Court to read the proviso independently without reference to sub-sections (1) and (2). This contention should receive a short shrift as the proviso on the basis of establis hed rule is merely an exception to the main provision of which it is a part and has to be read in conjunction with the part of the Act to which the proviso has been made. However , I have no doubt that the proviso will be triggere d only upon the conduct of audit by the officer of Inland Revenue authorized by the Commissioner and cannot be set in motion without such audit having been conducted and to precede any action under the proviso. It is the information or sufficient evidence based on the audit which could form the basis of an action in terms of the proviso and on the basis of which the Commissioner can conclude that a tax fraud has, in fact, been committed and so an inquiry or investigation under Section 38 is in order . This was the finding rendered by this Court in W.P No.24062 of 2016 and the following observations are relevant for our purposes:- "13. The category of persons who may be required for any inquiry or investigation in a tax fraud committed by him as mentioned in section 38 is a category which is not free from doubt. The case of this category of persons is relatable to the provisions of section 25 of the Act, 1990. As adumbrated, the Commissioner may direct an
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investigation or inquiry to be held upon sufficient evidence showing that a registered person is involved in tax fraud or evasion of tax. This is the only provision perhaps in the Act, 1990 which relates to the involvement of a registered person in a tax fraud or evasion of tax. Such an opinion can be formed by the Commissioner upon the coming in his hands of any record or documents maintained by a registered person . Upon the formation of such an opinion the Commissioner may direct an inquiry or investigation under section 38 to be held. This is precisely the inquiry and investigation contemplated by section 38 while referring to it as one of the categories of persons in respect of whom a notice under section 38 may be served. Therefore, this is the only instance where the provisions of section 38 have a close nexus with the provisions of section 25 and both these provisions are to be read inextricably . In all other cases of categories of persons, section 38 is an independent self-executing provision and can be set in motion without recourse to section 25 of the Act, 1990. By way of elaboration, it may be stated that in case there are allegations of tax fraud or evasion of tax, the provisions of section 38 cannot be invoked unless an opinion has been formed under section 25 by the Commissioner concerned." 33. Thus, the argument of the learned counsel for the respondents is indefensible that, in fact, SRO 116 confers the powers of the proviso to sub-section (2) of section 25 relating to tax fraud. In any case, SRO 116 confers the powers both under sub-sections (1) and (2) of section 25 and this fact alone should be sufficient to put paid to those arguments. Under no circumstances can the FBR by the terms of SRO 116 confer powers of audit on the officers of D.G (I & I) in complete disregard of the specialized nature of the job of conducting an audit. It is also not the case of FBR that the officers who have been conferred these powers are skille d in the functions of carrying an audit. It can be seen that the legislature was careful in providing that the Commissioner can only require a person to produce record or documents which are in his possession or control and the conduct of audit will be done by an officer of Inland Revenue who is authorized by the Commissioner and this presupposes that that officer of Inland Revenue will be a skilled officer having the expertise and academic qualifications to carry out audit of records and documents. It could be reasonable to presume that such a power may be conferred on an officer of directorate general Internal Audit but by no stretch of imagination can the D.G (I & I) be given that power in complete oblivion of the specialized nature of these directorates. Thus, it clearly follows that the conferment of powers under Section 25 on the Director General I & I (Inland Revenue) is incompetent and without any rational basis. 40. The remainder of the powers and functions conferred through SRO 116 seem to have a relation to the nature of the D.G (I & I) and does not require any discussion other than to bring home the proposition that indeed only those powers can be conferred on the officers of D.G (I & I) which have a close nexus to the nature and character of the said Directorate General and it is improper and irrational to confer powers which have no connection with the working and functionality of the D.G (I & I). SRO 116 to the extent of conferring of those powers and functions is ultra vires and without lawful authority . 3. It is apparent from the above that the same vices afflict SRO 115 as well, in that, by the said notification various officers of D.G (I&I) have been conferred powers of the Chief Commissioners and Commissioners which they are equipped to undertake and which are within their expertise. There is no reasonable and rational basis for the said powers and functions to be conferred on these officers. The entire basis of FM Textiles is applicable on all fours to the circumstances in the instant cases. There is no reason to hold otherwise and to take a different view from the one taken in FM T extiles by this Court. 4. The learned counsel for the respondents relied upon the validation clause inserted by section 241 of the Ordinance, 2001 by the Finance Act, 2018 which provides that: "241 (2) Notwithstanding any omission, irregularity or deficiency in the establishment or conferment of powers and functions, of the Directorate-General (Intelligence and Investigation), Inland Revenue and authorities specified in section 230, all orders passed, notices issued and actions taken in exercise or purported exercise of the powers and functions of the Commissioner under this Ordinance by the Directorate-General (Intelligence and Investigation), Inland Revenue or the authorities specified in section 230 shall be deemed to have been validity passed, issued and taken under this Ordinance." 5. On the basis of sub-section (2) added in section 241 of the Ordinance, 2001 it was argued by the learned counsel for the respondents that the acts taken by the respondents in respect of the petitioners stand validated with
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the insertion of sub-section (2) Finance Act, 2018 and have been saved from any challenge whatsoever . However , the validation will not impact any determination made by this Court on the basis of the challenge raised by the petitioners to SRO 115. According to the learned counsel for the respondents, even if SRO 115 was struck down by this Court being ultra vires and non est, the proceedings taken and the notices issued can still be pursued by the officers of D.G (I&I). This argument is a contradiction in terms as the striking down of SRO 115 by this Court will necessarily entail the consequent striking down of the notices issued to the petitioners and no amount of validation could confer validity to these notices on a standing basis. Be that as it may, the validation does not have the effect of giving legal cover to the actions of D.G (I&I) as the validation clause mere ly validates any irregularity or deficiency in the establishment or confer ment of powers and functions by D.G (I&I). On the contrary , this Court does not merely render a finding with regard to the irregularity in the establishment of D.G (I&I). That is one aspect of the matter . SRO 115 has been found deficient on a number of interwoven principles ranging from constitutional (due powers of law) to rule of law sources. It is also contradictory on the part of the learned counsel for the respondents to argue that the striking down of SRO 115 will result in compelling the Federal Board of Revenue (FBR) to issue a new notification as fresh action could not be initiated in a vacuum. The validation clause merely saves the pending action but in case SRO 115 is struck down there will have to be conferred anew a legally valid set of powers (emanating from a lawful source) to enable the Officers of D.G (I&I) to continue to exercise their powers. 6. Barrister Muhammad Umer Riaz has placed on record a notification SRO 1301(I)/2018 (SRO 1301) issued by FBR to specify the functions, powers and jurisdiction of D.G (I&I) and its officers under the Sales Tax Act, 1990. This has been done perhaps to give effect to the judgment in FM Textiles, for SRO 1301 supersedes SRO 116, too. This was preceded by the substitution of section 30A by the Finance Act, 2018. After substitution, section 30A provides that: "30A. Directorate General (Intelligence and Investigation), Inland Revenue.-- (1) The Directorate General (Intelligence and Investigation) Inland Revenue shall consist of a Director General and as many Directors, Additional Directors, Deputy Directors and Assistant Directors and such other officers as the Board may, by notification in the official Gazette, appoint. (2) The Board may , by notification in the official Gazette,-- (a) specify the functions and jurisdiction of the Directorate General and its officers; and (b) confer the powers of authorities specified in section 30 upon the Directorate General and its officers." Whereas the original section 30A read as under: ""30A. Directorate General (Intelligence and Investigation), Inland Revenue.-- The Directorate General (Intelligence and Investigation) Inland Revenue shall consist of a Director General and as many Directors, Additional Directors, Deputy Directors and Assistant Directors and such other officers as the Board may, by notification in the official Gazette, appoint." 7. Section 30A (as substituted) is in pari materia with section 230 of the Ordinance, 2001 and by its sub-section (2) requires FBR to perform two distinct functions while issuing a notification. One, to specify the functions and jurisdiction of the D.G and its Officers and second, to confer powers of authorities specified in section 30 upon Officers of D.G (I&I). (Section 230 of the Ordinance is similarly worded and the significance of these distinct roles shall be adverted to in the later part of this judgment). A similar notification has not been issued under the provisions of Ordinance, 2001. However , essence of the matter is that the periphery of powers of D.G (I&I) has not been defined in either the law itself or in any statutory rules framed under the Ordinance, 2001. It has left the Officers of D.G (I&I) to be completely adrift without defining their powers and setting out the limits within which the Directorate may operate. This raises a seminal question regarding jurisdiction of the Directorate to proceed in cases coming up before it. For, there is no doubt that the officers of Inland Reven ue have discretionary powers in all matters envisaged by law itself and a clear purpose must be spelt out in setting up of a Directorate General of Investigation & Intelligence with regard to the overlapping field of activity within which the Directorate and its officers will operate. Certainly , it does not make sense to confer the powers of Commissioners and Chief Commissioners and other officers of Inland Revenue on the officers of Directorate as that would be tantamount to
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setting up a parallel hierarchy of officers to exercise the same powers already conferred upon a regular cadre of officers of Inland Revenue. Moreover , the learned counsel for the respondents could not rebut the proposition that the officers of D.G (I&I) cannot proceed further after a certain stage. For example, notice has been issued to one of the petitioners under Section 177 which relates to audit proceedings. After a certain stage in the proceedings, it is inconceivable as to how the officer of D.G (I&I) who has issued the notice will proceed further for, there are consequential steps to be taken pursuant to the issuance of the notice and which must then be concluded by taking further logical steps. But the underlying concern is that no rules have been enact ed to regulate and structure the powers of officers of D.G (I&I) to disting uish them from the other officers of Inland Revenue. This makes their powers unregulated and is a reasonable ground for holding that any powers exercised by the officers of D.G (I&I) are based on whims and unstructured discretion which cannot be countenanced and is an af front to the rule of law . Rule of Law: 8. Concentrated, unguided power runs counter to the concept of democracy , constitution and rule of law. Conferring broad-based and unstructured power on officers of an agency is anathema to the quality requirement of rule of law. There has to be a remit and periphery within which these officers are to function. The precise scope and the nature of their powers has to be delineated so that they do not run amok and threaten the very fiber of commerce and trade which in turn, impacts the dynamics of the national economy . The officers seem to have been conferred absolute power to initiate action at their whims and to choose to exercise powers at their discretion without the corresponding essential prerequisites set out by statutory rules. This means that the officers may simply lurk around covertly and suddenly strike one day. For, in the absence of rules to specify the circumstances…
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