Commissioner Inland Revenue v. Messrs RYK Mills
Present: Umar Ata Bandial, C.J., Syed Mansoor Ali Shah, Athar Minallah and Syed Hasan Azhar Rizvi, JJ.
Commissioner Inland Revenue — Petitioner
Versus
Messrs RYK Mills — Respondent
Civil Petitions Nos. 1842-L and 1843-L of 2022
Decided on: 11th September, 2022
Against the order of the Lahore High Court, Lahore, dated 31.03.2022, passed in ETRs Nos. 32241 and 32246 of 2021.
Show Cause Notice — Significance and Purpose
A show cause notice is a formal communication from an authority informing the recipient of an alleged violation or non-compliance with a law and providing an opportunity to respond to the allegations.
It embodies the principle of natural justice, which requires that parties to a dispute be given a fair hearing before any decision is made that may affect their rights or interests.
The principles of due process and fairness require that the recipient of a show cause notice be given adequate time to respond and present their case, access to relevant evidence and information, and an opportunity to be heard before any action is taken against them.
A show cause notice is therefore an important tool for enforcing the law and ensuring that the recipient is given a fair and transparent opportunity to present their case before any adverse order affecting their rights and interests is passed.
Constitutional Protection and Due Process
Articles 4 and 10A of the Constitution provide for protection of law, fair trial and due process.
Article 4 provides citizens with the right to enjoy the protection of law and to be treated in accordance with law. It further provides that no action detrimental to the life, liberty, body, reputation or property of any person shall be taken except in accordance with law.
Article 10A provides for the fundamental right to fair trial and due process.
The issuance of a show cause notice is an essential element in ensuring these rights because it provides individuals and organizations with an opportunity to explain their actions and respond to allegations of violation or non-compliance before any adverse action is taken.
Where a specific allegation is not put to the recipient and the recipient is therefore not given an opportunity to respond to it, any adjudication on that allegation would be contrary to the requirements of due process and fair trial and, consequently, in contravention of Articles 4 and 10A of the Constitution.
Show Cause Notice as Pre-Litigation Resolution
A show cause notice may also be viewed as being akin to alternative dispute resolution (“ADR”) because it provides a pre-litigation opportunity for the recipient to present their position and show cause.
The matter may thereby be resolved before it escalates and requires formal adjudication. This saves time and resources and encourages the efficient resolution of disputes outside the traditional legal framework.
Thus, apart from ensuring due process and fair trial, the issuance of a show cause notice may also assist in resolving an issue at the pre-litigation stage.
Fresh or Supplementary Show Cause Notice
In certain circumstances, and in order to uphold the principles and rights protected under Articles 4 and 10A of the Constitution, it may become necessary to issue a supplementary or fresh show cause notice after the issuance of the initial notice.
This may arise where there has been a significant change in circumstances or where new evidence has come to light.
A fresh show cause notice may also be required where the recipient has provided a response to the initial notice but new information has subsequently surfaced suggesting that an alleged violation or non-compliance occurred.
Similarly, where the original notice is defective or incomplete, or does not fully address all the issues or violations requiring consideration, a fresh or supplementary notice may be necessary.
The decision to issue a fresh show cause notice must ultimately be based upon a careful evaluation of the facts and circumstances of each case so that the principles of due process and fair trial are upheld.
Contents and Scope of a Show Cause Notice
A show cause notice issued to a taxpayer must contain all necessary facts and must specify the alleged actions or inaction by the taxpayer that violated the law, thereby allowing the taxpayer to provide a meaningful response.
The taxpayer must be confronted with specific allegations and the grounds upon which those allegations are based so that the taxpayer may properly respond and place relevant material on record for their defence and for adjudication by the assessing officer.
Once a show cause notice has been issued, the original adjudication can only be based upon the grounds and allegations contained in that notice.
Unless the taxpayer has been confronted with the allegations through a show cause notice, no determination can be made by the assessing officer regarding those allegations, as it would be beyond the competence of the department to make out a case that it had never raised and which the taxpayer had never been afforded an opportunity to meet.
Accordingly, where the allegations and the grounds upon which they are based have not been specifically stated in the show cause notice, the entire exercise becomes redundant and unsustainable in law.
Fresh Show Cause Notice After New Grounds Are Raised
Where, in response to a show cause notice, the taxpayer raises substantial grounds or puts forward substantial factual aspects that were not covered in the initial notice and which require further inquiry or verification by the department, a fresh or supplementary show cause notice should be issued if required after conducting such inquiry or verification.
No determination can be made regarding such matters unless the taxpayer is afforded an opportunity to respond to any deficiencies or misrepresentations found in relation thereto and such matters are specifically alleged in a fresh or supplementary show cause notice.
Proceeding under the original show cause notice in such circumstances would be contrary to law and could render the entire exercise redundant.
The adoption of such a practice by tax authorities also serves to prevent wastage of time and effort, curb unnecessary litigation, and allow taxpayers to meaningfully respond to the specific allegations upon which any subsequent adjudication may be based.
Factual Determination in Tax Matters
The highest authority for factual determination in tax matters is the Tribunal.
The Supreme Court referred to Commissioner Inland Revenue v. Sargodha Spinning Mills (2022 SCMR 1082) and Commissioner Inland Revenue v. MCB Bank Limited (2021 PTD 1367) in this regard.
Counsel
Saba Saeed, Advocate Supreme Court appeared for the Petitioners through video-link from Lahore.
Shehbaz Butt, Advocate Supreme Court appeared for the Respondent through video-link from Lahore.
Assisted by: Muhammad Hassan Ali, Law Clerk, Supreme Court of Pakistan.
Date of Hearing: 11th November, 2022.
Judgment
Background of the Case
The petitioner sought leave to appeal against the order dated 31.03.2022 whereby the Excise Tax References (“ETRs”) filed by the petitioner department were dismissed by the High Court.
The petitioner department had issued a show cause notice dated 02.01.2014 to the respondent company alleging that the respondent was required to charge Federal Excise Duty (“FED”) at the rate of 8% on local supplies of white crystalline sugar but had instead charged 0.5%, resulting in short levy of FED.
The respondent company filed a written reply dated 11.01.2014 controverting the allegation. However, through the Order-in-Original dated 27.03.2014, the matter was decided against the respondent company and the short-levied FED, along with surcharge and penalty, was ordered to be recovered.
The respondent filed an appeal before the Commissioner Inland Revenue, Appeal-V, Lahore, which was dismissed as barred by time. A subsequent rectification application was also dismissed.
The respondent thereafter filed appeals before the Appellate Tribunal Inland Revenue, Lahore (“Tribunal”). The Tribunal allowed the appeal against the order of the Commissioner Inland Revenue, and the other appeal was consequently deemed infructuous.
The petitioner department then filed two ETRs before the Lahore High Court. The High Court decided the ETRs against the petitioner department and upheld the decision of the Tribunal.
The Original Show Cause Notice
The Supreme Court observed that the show cause notice dated 02.01.2014 issued by the petitioner department alleged that the respondent company had charged 0.5% FED on the value of local supplies whereas it should have charged 8%.
However, the show cause notice made no mention of SRO No. 77(I)/2013 or any alleged non-compliance with the conditions of that SRO.
In its response, the respondent company explained that it had charged 0.5% FED on the basis of the SRO and therefore was not liable to pay 8% FED on local supplies.
Despite the respondent raising this new factual ground, no fresh or supplementary show cause notice was issued seeking clarification regarding the applicability of the SRO or the respondent’s entitlement to its benefit.
Instead, the adjudicating authority proceeded under the original show cause notice and considered whether the conditions of the SRO had been fulfilled.
Significance of the Show Cause Notice
The Supreme Court emphasized that a show cause notice is a formal communication informing a person of an alleged violation or non-compliance with law and providing an opportunity to respond.
It is an important component of natural justice because a person must be given a fair opportunity to present their case before a decision affecting their rights or interests is made.
The recipient must have adequate time to respond, access to relevant information and evidence, and an opportunity to be heard.
The decision-maker must also remain impartial and provide reasons for the decision.
Articles 4 and 10A of the Constitution
The Supreme Court reiterated that Articles 4 and 10A of the Constitution protect the principles of lawful treatment, fair trial and due process.
Where a specific allegation is not communicated to the recipient, the recipient is denied an opportunity to respond to that allegation.
Consequently, any adjudication upon an allegation that was not included in the show cause notice would be contrary to the principles of due process and fair trial.
Necessity of a Fresh or Supplementary Notice
The Court held that a fresh or supplementary show cause notice may become necessary where new evidence or circumstances arise, where the original notice is defective or incomplete, or where additional issues or violations need to be addressed.
Such a notice ensures that the recipient is given an opportunity to respond to the new allegations before any determination is made against them.
Application to the Present Case
The Supreme Court held that the non-compliance with the conditions of the SRO constituted a distinct and separate allegation which was required to be properly stated in a show cause notice and put to the respondent company.
The show cause notice was required to contain the necessary facts and specify the alleged actions or omissions that constituted a violation of law.
Since the respondent had not been confronted with the allegations regarding non-compliance with the SRO, the assessing officer could not properly determine those matters under the original show cause notice.
Defence Raised by the Taxpayer
Where a taxpayer raises substantial grounds or factual matters in response to a show cause notice which were not covered in the original notice and which require further inquiry or verification, the tax authorities must, where necessary, issue a fresh or supplementary show cause notice.
The taxpayer must be given an opportunity to respond to any deficiencies or misrepresentations discovered during the further inquiry.
The Supreme Court observed that following this approach would prevent unnecessary litigation, avoid wastage of time and resources, and allow matters to be resolved at an early stage.
Order-in-Original Without Jurisdiction
In the present case, the original show cause notice contained no allegation regarding the applicability of the SRO or fulfilment of its conditions.
Even after the respondent stated in its reply that it had paid FED by availing the benefit of the SRO, no fresh or supplementary show cause notice was issued after inquiry by the department.
The assessing officer proceeded to determine that the respondent had failed to comply with the conditions of the SRO without confronting the respondent with those allegations or providing an opportunity to respond.
The Supreme Court therefore held that the Order-in-Original, being based on matters extraneous to the show cause notice, was wholly without jurisdiction and could not be sustained.
Findings of the Tribunal
The Supreme Court also considered the applicability of the SRO because the forums below had discussed the issue.
The Court observed that the Tribunal is the highest authority for factual determination in tax matters.
The Tribunal had found that the exports were duly made by the respondent company under the SRO and that the relevant conditions, including provision of proof of exports and restrictions regarding exports through land routes to Afghanistan and the Central Asian Republics, had been complied with.
The department had not produced evidence before the Tribunal sufficient to dislodge those factual findings.
The Supreme Court therefore found no reason to interfere with the factual determination of the Tribunal, which had also been upheld by the High Court.
Question of Limitation
The Supreme Court also considered the contention of the petitioner department that the appeal filed by the respondent taxpayer was barred by limitation.
The issue had been considered by the Tribunal and decided in favour of the respondent. Although the question of limitation had subsequently been raised in the ETRs, it was not pressed before the High Court at the time of hearing.
The Supreme Court therefore declined to examine the issue further. In any event, the Court held that the Order-in-Original against which the appeal had been filed was not sustainable in law.
Final Decision
In view of the above, the Supreme Court found no reason to interfere with the impugned judgment of the Lahore High Court.
Leave was refused and Civil Petitions Nos. 1842-L and 1843-L of 2022 were dismissed.
Petitions dismissed.