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by Ikramul Haq

Ikramul Haq is a leading International Tax Counsel specializing in tax, corporate and constitutional law. Mr. Haq is the Chief Partner of Lahore Law Associates; fax: +92 42 636-3499, e-mail: irm@brain.net.pk. He is also a member of the Visiting Faculty of the Institute of Direct Taxes in Lahore. He served for 12 years as the Deputy Commissioner of Income Tax. He graduated from the Government College, Lahore and he earned a Master’s degree in English and an L.L.B. from the University of Punjab. He has written many books on various aspects of Pakistani law, some of which were co-authored with his wife, Ms Huzaima Bukhari, the Additional Commissioner of Income Tax.

It is well-established principle that statutory authorities, while exercising statutory powers vested in them, have to observe the principles of natural justice. This is more than necessary especially where their actions are going to have adverse repercussions for the affected parties. One of the requirements of natural justice is that if a decision already taken and communicated to an interested party is to be changed subsequently, such a change should not be effected without the affected party being given an opportunity of being heard. In tax proceedings, which are quasi-judicial in nature, the authorities are increasingly becoming indifferent to the established principles of natural justice. Perhaps, in the frenzy of collecting revenues to achieve their pre-fixed targets, they have completely ignored, the fact that even a very good order otherwise justifying the quantum of tax etc. can be held as void by courts if proper opportunity of being heard is not extended to the taxpayer. In this article, this point of law has been highlighted with the help of the recent judgement of the Sindh High Court in the case of Siemens Pakistan Engineering Ltd. v. Federation of Pakistan & Others (1999 PTD 1358)

Tax authorities under respective statutes are vested with wide powers that have substantial repercussions. These powers are being abused every day by passing orders, which are arbitrary, illegal and determining tax demands in a highly discretionary manner. The world ‘discretion’ in itself implies vigilant circumspection and care. It was, therefore, laid down in Ibrahim v. Emperor AIR 1933 Sind 49 that wherever the Legislature concedes wide discretion, it also imposes a heavy responsibility. The use of discretion cannot be arbitrary. It cannot be vague and fanciful but has to be legal and regular – Gordan Das Baldev Das v. Governor General in Council AIR 1952 Punj. 103,10. It is natural to assume that when a statute confers a discretionary power, the authority will use it properly and not arbitrarily or capriciously.

The honourable Apex Court in CIT Pakistan v. Fazlur Rehman & Sayeedur Rehman (1964) 10 Tax 49 (S.C. Pak)  = 1964 SCC 176 held that the maxim “no man should be condemned unheard” is not confined to courts but extend to all proceedings, by whomsoever held which may effect the person or property or other rights of the parties concerned in the dispute, and the maxim will apply with no less force to proceedings which affect liability to pay a tax.

The honourable Sindh High Court in a recent case, Siemens Pakistan Engineering Co. Ltd. v. Federation of Pakistan & Others (1999 PTD 1358), made the following remarks:

            “Audi alterem partem i.e. no-one shall be condemned unheard is a universally established principle of law. This rule is applicable to both judicial and non-judicial proceedings (1994 SCMR 2232). The legislature being cognizant of this principle of natural justice has incorporated the same in the Sales Tax Act, 1990 in the various provisions of the Sales Tax Act relating to adjudication of cases.

The relevant sections of the Sales Tax Act, 1990 referred to in above judgement read as under:

            “44.      Issue of show cause notice before confiscation of goods or imposition of penalty.- No order under this Act shall be passed for the confiscation of any goods or for imposition of any penalty unless the owner of the goods, if any, or the concerned person:-

                 (a)   is served a notice in writing (unless the owner or the person concerned accepts the notice orally) of the grounds on which it is proposed to confiscate the goods or to impose the penalty;

                 (b)   is given an opportunity of making a representation against such confiscation or imposition of penalty in writing (unless the owner or person concerned indicates in writing his preference to present an oral representation) within such reasonable time as the officer of Sales Tax may specify; and

                 (c)   is given a reasonable opportunity of being heard in person or through a counsel or duly authorised agent.”

[underlined for emphasis]

Section 45(2) relating to appeals provides as follows:‑

                “(2)   The Collector of Sales Tax (Appeals) may, after making such further inquiry as may be necessary and after giving both parties to the appeal an opportunity of being heard, pass such order as he thinks fit, confirming, varying, altering, setting aside or annulling the decision or order appealed against:”

[underlined for emphasis]

Section 46(4) of the Act relating to Appeals to Appellate Tribunals postulates that:‑

                “(4)   The Appellate Tribunal, after giving the parties to the appeal, an opportunity of being heard may pass such orders in relation to the matter before it as it thinks fit.”

[underlined for emphasis]

The expression “opportunity of being heard” also appears in the following sections of Income Tax Ordinance, 1979.

             “13(2)   Where the value of any investment or article referred to in clause (aa), (b), (c) or (d), or the amount of expenditure referred to in clause (e) of sub-section (1) is, in the opinion of the Deputy Commissioner, too low, the Deputy Commissioner may determine, after giving a reasonable opportunity to the assessee of being heard, a reasonable value or the amount thereof, as the case may be, and all the provisions of sub-section (1) shall have effect accordingly.”

             “39(4)   No order under sub-section (3) shall be made without giving the assessee a reasonable opportunity of being heard.”

             “66A.   Powers of Inspecting Additional Commissioner to revise Deputy Commissioner’s order.-(1) The Inspecting Additional Commissioner may call for and examine the record of any proceedings under this Ordinance, and if he considers that any order passed therein by the Deputy Commissioner is erroneous in so far as it is prejudicial to the interests of revenue, he may, after giving the assessee an opportunity of being heard and after making, or causing to be made, such enquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment to be made.

             “68(5)   If, at any time after a firm has been registered or treated as a registered firm under sub-section (4) for any income year, the Deputy Commissioner has reason to believe that-

                          (a)   there was no genuine firm in existence in such income year constituted as shown in the instrument of partnership; or

                          (b)   the requirements of sub-sections (2) and (3) had not been fulfilled in respect of the said income year,

                        he may cancel the registration after giving a reasonable opportunity to the firm of being heard.”

[underlined for emphasis]

The Honourable Sindh High Court in the above mentioned judgement made the following elaborate observations in respect of the import and meaning of the expression “opportunity of being heard”:

            “It will be observed that in all the aforesaid three sections, the law requires that no order affecting the rights of a person shall be passed without providing him an opportunity of being heard. The word “hear” according The Chambers Dictionary (1994 Edition) means “to perceive by the ear, to have or exercise the sense of hearing, to listen, or be spoken of”. The past participle “heard” means “actin of perceiving sound” and the noun “hearing” means “power or act of perceiving sound; an opportunity to be heard; judicial investigation and listening to evidence and arguments”. The Standard International Dictionary (1973 Edition), Part I, defines “hear” to means “to listen, to perceive by means of the ear, to listen t officially, judicially”. The phrase “opportunity of being heard” would, therefore, mean that the party concerned should be allowed to present his point of view, explanation, clarification and arguments by spoken words which should be heard by the officer passing the order. An explanation given in writing should be is perceived by the sense seated in the eye has generally not been considered sufficient. Experience has shown that many doubts, complaints and misunderstandings between parties are cleared, resolved and removed when they meet face to face and communicate by word of mouth. Appearance in person and explanation by word of mouth, therefore, is placed on a higher footing both in daily life and in judicial and administrative proceedings where rights of parties are involved. Therefore, it is not the written explanation or the answer submitted to the show-cause notice but the expression of spoken words of the person concerned which have been emphasized by the Legislature in the relevant provisions relating to Appeals in the Sales Tax Act. Consequently, an officer before passing an order which would aversely affect the rights of a party should hear that person’s explanation, clarification and argument in his defence submitted by him personally or through his counsel or his duly authorised agent. If such a hearing is not given to the person concerned, the order would be in violation of not only the principles of natural justice but also of the statutory requirements and consequently would be invalid.

[underlined for emphasis]

The above directions/observations of the Honourable Sindh High Court are an eye-opener for the tax authorities. They do not bother to consider the written arguments/replies of the taxpayers what to talk of giving them “personal hearing” and recording of their spoken arguments. Applying the principle laid down by the honourable Sindh High Court one will find that hardly a few orders by the tax authorities, both adjudicating and appellate, will stand the test of natural justice. It is tragic that Stale tax machinery (responsibility squarely lies with CBR and the ministry of law) in its statutory functions is blatantly violating the principle of natural justice. The higher courts, including the Income Tax Appellate Tribunal, has time and again passed even strictures against tax authorities for such lapses, but the concerned authorities in CBR and the Ministries of Finance and Law did not even bother to initiate any departmental proceedings against these officers. This shows how much respect they have for higher courts (their claim to this effect in daily Press reports are mere lip-service).

The Honourable Supreme Court of Pakistan, in the case of Anisa Rehman v. PIAC, 1994 SCMR 2232, set aside the order of reversion of the employee on the ground that she had not been heard before the impugned order reverting her to a lower grade was passed with the observation that it would be open to the employer to take fresh action after hearing the appellant in accordance with law.

The important questions relating to statutory requirements of “hearing” in person have been answered by the honourable high court as under:

            The next question which arises for consideration is whether the requirement of personal hearing would be fulfilled if the hearing is given by one officer and the order is passed later on by another officer who has not heard the explanation, clarification and the arguments of the party concerned. The answer is simple. If the Legislature did not want to provide an opportunity to the person concerned to present his case by spoken words before the Sales Tax Authority it would not have included the phrase “giving an opportunity of being heard” in sections 44, 45 and 46 of the Sales Tax Act. The wordings of section 44(c) of the Act are very significant in this respect because it clearly requires that the person concerned should be given a reasonable opportunity of being heard in person. If the officer has not heard the person concerned he would not have knowledge of the explanation given and the arguments advanced by the latter and consequently would not be qualified to pass an order because the hearing by a predecessor does not mean or amount to a hearing by the officer passing the order. Such an officer would be ignorant of the explanation, clarification and arguments advanced by the party concerned and would pass the order on the basis of his own perception and understanding of the issues in question. In this respect it would be advantageous to reproduce here a short paragraph from “Judicial Review of Administrative Action” by S.A. de Smith, (1973 Edition), page 193, which reads as follows:‑

            “Must he who decides also hear? In general the answer is in the affirmative. It is a breath of natural justice for a member of a judicial tribunal or an arbitrator to participate in a decision if he has not heard all the oral evidence and the submissions. The same principle has been applied to members of administrative bodies who have taken part in decisions affecting individual rights made after oral hearings before those bodies at which they have not been present; for bias and ignorance alike preclude fair judgment upon the merits of a case.”

            A similar view was expressed more than 75 years ago, in the case of Mahmood Khan and others v. Ghazanfar Ali and others, AIR 1920 Lahore 247, by Abdul Raoof, J. of the Lahore High Court, who accepted the contention of the appellant that the fact that the arguments had been heard by another officer made it absolutely necessary for the learned Munsif who was going to deliver the judgment to have allowed the parties to put their case before him and consequently remanded the case to the trial Court for disposal according to law.

            In the present case also, it is an admitted position that the Additional Collector-I (respondent No. 4) who passed the impugned order, dated 12-6-1998 was not the officer who had heard the petitioner’s counsel on various dates and especially on the last date of hearing on 25-10-1997. The said officer (respondent No. 4) thus passed the impugned order without giving a personal hearing to the petitioner which is not only a violation of the principles of natural justice but also of the statutory requirement of section 44 of the Sales Tax Act.”

The above remarks/observations of the Honourable Sindh High Court make it abundantly clear that the scope of the word “opportunity of being heard” requires adequate and personal hearing and not mere formality of issuing notice or discussing the some aspects of reply of the party in a casual manner. This principle is applicable in all kinds of tax proceedings where the statute specifically requires personal hearing or even if there is no such command in law but the order/action of the authority can increase tax burden of the taxpayer or where past and closed transactions are to be reopened. It is customary these days that the tax authorities just shrug away the written replies or verbal arguments of the taxpayers dubbing the same as “irrelevant” without refuting the same with plausible arguments. This practice is against the established principles of natural justice.

In conclusion, it can be said that as rightly held by the Honourable Sindh High Court that any order which resulted in civil consequences is a quasi-judicial order and in all such orders principles of natural justice must be followed. The tax authorities must observe principles of natural justice in passing orders against any assessee/taxpayer. The principles of natural justice must always be kept in view and fulfilled while taking action, initiating proceeding and passing orders under the fiscal laws. Any order which violates the principles of natural justice is a void order as held by Honourable Supreme Court in 1959 PLD 45 (SC) and (1964) 70 Tax 49 (S.C. Pak) and now reaffirmed by the Honourable Sindh High Court in the above case.

From: Bharat’s Central Sales Tax Act

The complexity of sales tax laws can be well judged by the large number of cases decided recently by the High Courts and Supreme Court.

Sales Tax is becoming the main revenue on which major part of budget of Government depends for the expenditure of the Provincial Governments and Federal Government, major portion of which consists of salary of the state employees. The increase in expenditure of the State Government is balanced by increasing the levy of sales tax on consumers. This necessitates rapid amendments in the sales tax laws by the federal government not only by Finance Acts but by notifications, circular letters, general orders and even by President and ordinances throughout the year.

Sales Tax has its origin in very old times in different countries of the world. It was imposed in a recognizable form in Spain in 1342 and was known as sakabala. In France it was imposed in fourteenth century but was soon given up. The modern sales tax was the result of first world war. Germany imposed in 1916 a turnover tax called “die umasatzsleur” and that is the form the tax is collected there. France followed a year later but with a transaction tax which was known as “L’impot sur le chiffred’ affairs”. It is claimed by the economists that in ancient times sales tax was levied in India. In modern form it ws imposed by the Legislature of the Central Province and Berar by passing an Act entitled “the Central Provinces and Berar Sale of Motor Spirit and Lubricant Taxation Act, 1938”, during the period of Second World War to meet the expenses of the war. Soon-after other States followed being as productive as customs duty and income-tax. Now the wars have gone but sales tax is very much there as main source of revenue of the States.

Pre-constitution provisions.-Section 100(1) of the Government of India Act, 1935, provided that the Federal Legislature had, notwithstanding anything in sub-sections (2) and (3) of the said section, and a provincial Legislature had not, power to make laws, with respect to any of the matters enumerated in the Federal Legislative List. Section 100(3) provided that subject to two preceding sub-sections Provincial Legislature had, and the Federal Legislature had not, powr to make laws for a province or any part thereof with respect to any of the matter enumerated in the Provincial Legislative List. Entry 48 of the List was as follows: “Taxes on the sale of goods and on advertisements.” Even though the entry mentioned taxes on sales of goods that head was construed to mean in reality a power to tax the transaction and the power to tax the transaction carried with it the power to tax either party thereto. The expression “tax on sale” was therefore construed to include also a tax on purchases of goods, as the transaction resulted in change of ownership from one person to another and was from its very nature a bilateral transaction with a seller on the one hand and the purchaser on the other.

From: CCL Publications Manual of Sales Tax Laws In Pakistan

Refund of—Claim for assessee collected sales tax from customers which was in excess of tax payable or not realizable—Held: Assessee as an agent of department is bound to deposit all taxes collected and cannot claim any right over same as any principle. [(Muhammad Afzal Zullah, J.), Commissioner of Sales Tax v. M/s. Zalin, 1984 PSC, SC (Pak) (b) 1014].

Ss. 3(4) & (6)(d)—Sales Tax, levy of—Manufacturer using any such material/ ingredient for his products which is independently marketable, held, would be liable to pay sales tax on that material/ingredient. 1989 PTD 42 1988 PLD 233 ref: 1990 PTD 569.

From: Tariq Najib’s Sales Tax Act, 1990

Sales Tax is a tax on the supply of goods. It has been levied in Pakistan since 1948. The mechanism of sales tax credit is like the Value Added Tax in many countries of the world, e.g., UK, France, Malaysia, Bangladesh, etc. The distinctive feature of this mechanism is that it avoids tax on tax or cascading.

From: Taxation House’s The Law of Sales Tax In Pakistan

Sales Tax was the provincial subject according to the government of India Act, 1935 as was adapted for Pakistan, after Independence. In 1948 the Federal Government took over the sales tax and there came the Pakistan Genral Sales-tax Act of 1948. Every dealer, under the said Act, making annually a turnover of Rs. 5,000 was assessable. There were, however, certain exemptions under the said Act. Every dealer yielding a turnover of more than Rs. 5,000 was to obtain the dealer’s licence from the competent Sales-tax Officer and on the strength of it he was entitled to collect the sales tax from the customers. As against the present Act, which levies sales-tax only at one stage, the old Act levied sales-tax at multiple stages.

The standard rate, under the old Act, was six pies per rupee leviable at every stage whenever the sale was effected. There were goods liable to sales-tax at the higher rates too. Strong representations were made by the small dealers, both against the low turnover liable to sales-tax and also against levy of the said tax at multiple stages. A Sales-tax Committee was appointed for the purpose and on the recommendations thereof the present enactment came into operation. The sales-tax became leviable at one stage only. The sales-tax becomes assessable in the hands of the (i) manufacturers, (ii) producers, (iii) importer and (iv) exporter. The standard rate of levy of sales-tax, in the beginning was fixed at 10 per cent but later increased to 12 ½ per cent from 1st July, 1961, and further raised to 15 per cent from 1st July, 1964. In order to meet defence requirements, a surcharge of 25% of the sales-tax was levied on the sales of taxable manufactured goods by the Finance (Supplementary) Act, 1965. Defence surcharge and Rehabilitation tax were abolished by the Finance Ordinance, 1972. At present standard rate of sales-tax is 20%.

Sales-tax on importation and exportation.‑ Sales-tax, under the Act as it stood before its amendment made in 1960, could not be charged on importation and exportation of goods but on consumption. The lacuna, if it could be said so,w as, however, removed by the Ordinance [Taxation of Goods (Sales and Purchases) Order 1960,] dated 30th June, 1960, by virtue of which the power to impose taxes on the sale, purchase, consumption, importation, exportation, manufacture and production of goods, was conferred since 31st March, 1948. The enactment was made retrospective ever since the sales-tax became a Central subject. The preamble of the Act was amended accordingly.

The Sales-tax Act is an Act of 1951 and was passed on the 20th April, 1951 by the Central Legislature. The contention on behalf of the appellants before the High Court was that the Central Legislature had power to enact laws with respect to sales-tax only for a period of two years, that is, till the 31st March, 1952, and that after that date Sales-tax Act lapsed and was of no effect. We see no reason for accepting the proposition that the time for which a legislature has been granted powr to enact laws on a subject necessarily nvolved to enact laws only for that period. As long as the power to enact laws remains in force it is a power to make laws at all times past as well as future, that is, with prospective as well as retrospective operation, unless of course there be some further limitations of the powers of the legislature. Even if the power to legislate existed for a day, the legislature could have made laws for all times. The limitation was as to the time during which the powers of making law could be exercised and not to the extent of their operation when they were enacted. The argument can be explained with respect to the provision in the Government of India Act which bestowed power on the legislature to make laws. Under section 100 of the Government of India Act the Central Legislature had the power to make laws with respect to items on the Federal List. As long as that list included a particular item there would be full power in the Central legislature to make laws with respect to that subject, because the provision in Section 100, that the Central Legislature has “power to make laws,” implied a power to make law for all times and without any limitation. That admittedly is the mean of the words used in section 100 for it is from these words alone that the Central Legislature derived its power to make laws. [Noorani Cotton Corporation and others v. S.T.O. (1965) 11 Tax 184 (S.C.).

In cases reported as C.S.T. v. Pakistan Builders Co. (Sheikh Gulzar Ali and Others) and C.I.T. v. Ghulam Rasool A. Baluch [(1967) 15 Tax 27, 369] the point arose whether the provisions of Section 3(6)(d) of the Sales-tax Act were ultra vires of the Federal Legislature, it was held by Their Lordship of Karachi High Court following the case of Noorani Cotton Corporation v. S.T.O. [(1965) 11 Tax 184 (S.C.)] that in view of the law laid down by Their Lordships of the Supreme Court of Pakistan in the case of M/s. Noorani Cotton Corporation v. The Sales-tax Officer and also the retrospective legislation of the Taxation of Goods (Sales and Purchases) Order, 1960, there cannot be any doubt as to the competency of the Federal Legislature to enact the Sales-tax Act, 1951.

To the same effect are the judgements of the Karachi High Court in Sharif Cotton Factory v. Sales-tax Officer [(1963) 7 Tax 180] and the Lahore High Court in S. Haji Muhammad Saeed & Co. v. Sales-tax Officer [(1963) 7 Tax 213]

Charge of sales-tax.‑ This charging section is a pivotal section on which the whole of the machinery of sales-tax revolves. Ever since the abolition of the Sales-tax Act of 1948 and introduction of the present Act, all goods are subjected to a single point tax.

The section creates liability on different persons, determines the rate at which sales-tax shall be payable by such persons on transaction of goods, lays down methods to determine value of the goods for computing tax thereon, and fixes point of time when liability to tax accrues in different types of transactions.

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