The Discrepancies between Income Tax and Sales Tax Returns alone cannot form the Sole Basis for Tax Imposition without Substantiating Evidence --- Lahore High Court, Lahore
Islamabad 23-12-2024: In a landmark judgment issued on December 11, 2024, the Lahore High Court ruled in favor of Sabir Press Calendar, setting aside an order by the Appellate Tribunal Inland Revenue, Faisalabad. The Court found that the Tribunal’s decision was legally unsustainable due to its failure to adhere to principles of natural Justice and procedural fairness.
The taxpayer argued that the tax authorities imposed liabilities for matters beyond the allegations raised in the show cause notice. The Court affirmed that exceeding the scope of the notice is a violation of established legal principles and renders such actions void.
The Court highlighted that the Tribunal failed to provide adequate reasoning for its decision, violating Section 24-A of the General Clauses Act, 1897. Speaking orders, the Court noted, are essential for ensuring transparency and fairness in adjudicatory proceedings.
Discrepancies between income tax and sales tax returns alone were deemed insufficient to impose tax. The Court emphasized that tax authorities bear the burden of proof to establish taxable supplies under the Sales Tax Act, 1990.
Mr. Justice Muhammad Sajid Mehmood Sethi noted that the taxpayer was not afforded a fair opportunity to respond to new allegations that arose during adjudication. The Court stressed that the issuance of a fresh or supplementary show cause notice is mandatory when new grounds are raised.
The Court also underscored the importance of respecting the principles of audi alteram partem (the right to be heard), stating that failure to do so violates fundamental tenets of natural Justice.
The judgment relied on several landmark decisions to reinforce its reasoning, including:
- Messrs Fateh Yarn (2021 PTD 1392): Emphasized that adjudication must remain within the bounds of the show cause notice.
- Commissioner Inland Revenue Vs. Messrs RYK Mills (2023 SCMR 1856): Required fresh notices for new grounds raised during adjudication.
- Pakistan Water and Power Development Authority Vs. Commissioner Inland Revenue (2022 SCMR 824): Reiterated the necessity of speaking orders.
The Court held that the Tribunal’s non-speaking order violated statutory requirements and could not be sustained. The tax authorities exceeded their mandate by imposing liabilities on grounds not specified in the show cause notice. Discrepancies in fiscal records cannot form the sole basis for tax imposition without substantiating evidence. Consequently, the Court set aside the impugned order and directed the matter to be reconsidered in light of its findings.
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