Tax Searches without two Independent Witnesses as required under Sections 102 & 103 of Cr.P.C. are Unlawful --- Lahore High Court, Lahore dismissed FBR Appeal

Islamabad 06-03-2025: In a significant ruling, the Lahore High Court (LHC) has declared that tax authorities must strictly comply with legal safeguards during searches and seizures, failing which the proceedings would be deemed unlawful. The judgment, delivered in [STR No. 256 of 2015] by Mr. Justice Muhammad Sajid Mehmood Sethi and Mr. Justice Shahid Karim, reinforced procedural requirements under the Sales Tax Act, 1990 and the Criminal Procedure Code, 1898 (Cr.P.C.).

The case stemmed from a show cause notice issued on May 7, 2014, to M/s Sika Paint Industries (Pvt.) Ltd. for alleged willful evasion of sales tax from 2007-08 to 2013-14. The tax department initiated proceedings based on a contravention report, which culminated in an adverse assessment order on September 17, 2014.

The Commissioner Inland Revenue upheld the order but provided partial relief on the ground of limitation [CIR (Appeals) Order dated January 15, 2015]. However, the Appellate Tribunal Inland Revenue (ATIR) later overturned the decision entirely, leading the Federal Board of Revenue (FBR) to file a reference before the Lahore High Court under Section 47 of the Sales Tax Act, 1990.

The primary question before the Court was whether the absence of two independent witnesses during a tax search, as required under Sections 102 & 103 of Cr.P.C., was a mere procedural irregularity or a fundamental violation of law.

The FBR argued that the omission was a minor technicality, relying on the precedent set in “Messrs Medora of London Ltd.” (2005 PTD 2234, 94 TAX 101). However, the taxpayer contended that failure to follow statutory safeguards invalidated the entire search process.

The Court, after examining the Sales Tax Act, 1990 and the Cr.P.C., ruled that:

1. Tax searches must adhere to Sections 102 & 103 of Cr.P.C., requiring the presence of two independent witnesses.
2. The department failed to present any evidence showing compliance with these requirements.
3. The absence of witnesses was not a minor defect but a substantive illegality that vitiated the entire search and seizure process.

Citing precedent, the Lahore High Court noted that procedural non-compliance in tax searches had previously led to nullification of similar recovery actions in:

• Federation of Pakistan Vs. Messrs Master Enterprises (2003 PTD 1034)
• A.R.K. Textiles Vs. Federation of Pakistan (2006 PTD 494)
• Shafqat Hameed Vs. Federation of Pakistan (2006 P.C.T.L.R. 834)

Referring to Chairman, Central Board of Revenue Vs. Messrs Haq Cotton Mills (2007 SCMR 1039), the Court reiterated that even in cases of tax evasion, authorities cannot bypass procedural safeguards.

The Lahore High Court dismissed the reference application, ruling in favor of the taxpayer. The question of law was answered against the department, confirming that:

Tax authorities must operate within legal constraints and cannot bypass statutory safeguards.

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