Pre-trial steps illegal san determination of tax liability of taxpayer; LHC grants 341 petitions

KARACHI: The Lahore High Court has ruled that the pre-trial steps including arrest and detention cannot be given effect to unless the tax liability of the taxpayer is determined and quashed criminal proceedings as documented in FIRs against 341 accused parties.
The Court made its ruling in a petition filed by Taj International (Pvt.) Ltd and applied to 340 writ petitions as all these cases raise common question of law and facts.
According to the details of the case, criminal prosecution under sections 37A and 37B of the Act for the offence of tax fraud was initiated, against 134 persons along with “other beneficiary being sales tax registered persons of the tax fraud” and “other persons due to whose criminal negligence/connivance, the tax fraud was committed.” Additional Director, Intelligence & Investigation, FBR, Regional Office, Lahore being the complainant documented this in the shape of First Information Report (FIR 4/2011) dated 26-3-2011. The said document reveals that on receipt of credible information that a cartel of fraudsters was involved in the issuance of fake sales tax invoices for the purposes of generating illegal/inadmissible input tax adjustments criminal prosecution was initiated against some persons, which further led to unearthing of a mega scam of sales tax evasion of Rs 7.5 billion involving 144 dummy suppliers who issued fake sales tax invoices. This gang of fraudsters issued fake invoices to various registered persons who claimed input tax on the basis of the same causing a huge loss to the exchequer. It has, therefore, been alleged that petitioners have committed the offence of tax fraud and are liable to arrest and criminal prosecution. Similar allegations have been leveled in other FIRs in the connected matters.
Counsel for the petitioners argued that the criminal prosecution under Section 37A of the Act can only be initiated after the tax liability of the taxpayer has been duly assessed under the Act, as provided under Section 11 of the Act. While referring to the list of offences under Section 33 of the Act, learned counsel for the petitioners have laid emphasis on the term “shall be further liable” appearing in the column of penalties to underline its chronological significance. They submitted that only after the determination of the tax liability (i.e., civil liability) can the criminal prosecution be initiated.
They further argued that under Section 37A (4), the Commissioner at any stage can compound the offence if the taxpayer pays the amount of tax due along with default surcharge and penalty as is determined under the provisions of this Act, hence the facility of compounding the offence is available only after the assessment of tax under the Act.
The Court held that the pre-trial steps including arrest and detention cannot be given effect to unless the tax liability of the taxpayer is determined in accordance with section 11 of the Act. In this background, criminal proceeding initiated against the petitioners, and documented as the First Information Report in these cases are quashed as being unconstitutional, violation of fundamental rights, ultra vires the Act and hence illegal and without lawful authority.

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