Tax Notice issued without Jurisdiction and based on Assumptions rather than Legal Grounds --- Islamabad High Court (IHC) set aside Tax Notice

Islamabad 14-02-2025: In a significant ruling, the Islamabad High Court (IHC) has set aside a tax notice issued to Fauji Fertilizer Company Limited by the Federal Board of Revenue (FBR), declaring it to be without lawful authority. The judgment, delivered by Mr. Chief Justice Aamer Farooq, highlights critical issues of jurisdictional overreach, mala fide exercise of power, and arbitrary taxation.  

The case arose when the FBR issued a notice dated 20.04.2016 to Fauji Fertilizer under Rule 9 of the Sales Tax Rules, 2006, alleging that the company had illegally moved finished goods to unauthorized warehouses, potentially making it liable for sales tax on such movement. The company challenged this notice, arguing that:  

1. It had already notified the tax department about its warehouses on 19.02.2016.  
2. Rule 9 of the Sales Tax Rules, 2006 did not empower the department to issue such a notice.  
3. No actual sale or taxable supply had taken place, making the department’s assumption baseless and illegal.  

The Petitioner sought relief under Article 199 of the Constitution, arguing that the notice was without jurisdiction and based on mala fide intent.  

During proceedings, the FBR’s legal counsel struggled to justify how the mere movement of goods constituted a taxable sale under the Sales Tax Act, 1990. The Court observed that:  

1. Rule 9 of the Sales Tax Rules, 2006 pertains to registration and change in particulars of registration and does not authorize the issuance of tax notices for alleged sales.  
2. The FBR failed to prove any statutory provision supporting the claim that shifting goods within a company’s own premises is a taxable event.  
3. A mala fide act is inherently void, as ruled in Abdul Rauf Vs. Abdul Hamid Khan (PLD 1965 SC 671), and the issuance of the notice without jurisdiction amounted to misuse of power.  

The Court further cited key precedents to reinforce its judgment:  

1. Edulji Dinshaw Ltd. Vs. Income Tax Officer (PLD 1990 SC 399): Confirming that a wrongful tax notice can be challenged through writ jurisdiction.  
2. Pak Telecom Mobile Ltd. Vs. Federation of Pakistan (2017 PTD 2296): Defining sale and taxable supply under the Sales Tax Act, 1990.  
3. Telenor Pakistan Vs. Federation of Pakistan (ICA No. 301/2019 etc.): Holding that tax cannot be levied on assumptions and must be based on clear statutory provisions.  

The Court ruled that the FBR’s actions were ultra vires (beyond legal authority) and that the impugned tax notice was legally unsustainable. The judgment underscores several critical legal principles:  

1. Tax departments must act within the framework of the Sales Tax Act, 1990.  
2. Orders issued without jurisdiction violate constitutional protections.  
3. Courts can intervene when tax notices are issued without legal basis.  
4. The FBR failed to substantiate its claims, making the notice unenforceable.  

Declaring the FBR notice as null and void, the Islamabad High Court (IHC) allowed the petition, setting a precedent for businesses facing arbitrary tax claims. The ruling reiterates that tax authorities cannot exceed their legal mandate, and assumptions cannot form the basis of taxation.

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