Writ Petition No.5047 of 2012, decided on 19th September, 2013.
(a) Taxation—
—-Tax law—Purpose—Civil and criminal—Collection of tax—Punishment/deterrence—Tax was a fiscal tool to regulate the monetary policy of the State, hence, the primary focus of a tax law was the levy and collection of tax, however, as a white collar crime, tax evasion, etc had also been criminalized with the collateral effect of retribution and deterrence, in addition to achieving the fiscal incentives of the State—While assessment of tax liability was characteristically a civil proceeding, tax evasion or tax fraud, etc. could also be a tax crime and attracted both civil, as well as, criminal penalties—Under civil proceedings the tax was assessed and recovered as a compensation along with monetary penalties, while under criminal prosecution, tax evader was punished with imprisonment of fine or both.
(b) Administration of justice—
—-Concurrent civil and criminal proceedings—Stay of criminal proceedings—Scope—Criminal and civil proceedings could co-exist and proceed side by side, in cases where the subject matter of both the proceedings was so closely interrelated, so that the outcome of the civil proceedings could have a material bearing on the criminal proceedings—Safer course, however in such a situation was to stay the criminal proceedings till the finalisation of the civil matter.
Akhlaq Hussain Kayani v. Zafar Iqbal Kiyani and others 2010 SCMR 1835 and Muhammad Akbar v. The State and others PLD 1968 SC 281 rel.
(c) Sales Tax Act (VII of 1990)—
—-Ss. 11, 37A & 72B—Self-assessed taxpayer—Tax evasion—Selection for criminal prosecution—Scope—Section 37A of the Sales Tax Act, 1990 could be employed to select or pick a taxpayer out of the pool of self-assessed taxpayers to undergo criminal prosecution without first carrying out an objective selection process of audit followed by assessment of tax under S. 11 of the Sales Tax Act, 1990—Criminal prosecution, generally, had no nexus with assessment of tax liability and could not be equated with cases selected for audit—While self-assessment scheme guarded the sanctity of self-assessed sales tax returns it afforded no protection to a criminal act committed by the tax payer—Audit was a tool that was primarily geared to decipher tax evasion from amongst the pool of taxpayers; it was a departmental surveillance tool for sniffing out tax that had gone unpaid—Criminality behind any such tax evasion was a separate matter.
(d) Sales Tax Act (VII of 1990)—
—-Ss. 33 & 37A(4)—Tax evasion—Criminal prosecution under S. 33 of Sales Tax Act, 1990—Principal purpose—Recovery of tax—Penalties provided under S. 33 of Sales Tax Act, 1990, clearly showed that the measure of sentence was linked with the “amount or loss of tax involved.”—Said linkage, used the tool of penalty as a mode of recovery of tax—If the purpose (of criminalization) was simple retribution and deterrence, there was no need to load/link the fine with the amount or loss of tax involved—Hence, criminalization under the Sales Tax Act, 1990, went beyond the pale of retribution and deterrence and appeared to be principally focused on recovery of tax—Criminalization of recovery of tax was also evident from S. 37A(4) of the Sales Tax Act, 1990—Said provision permitted compoundability of the offence if the amount of tax due and penalties as determined under the Sales Tax Act, 1990 were paid at any stage of the criminal proceedings—Tax assessment became doubly necessary, when recovery (of tax) stood criminalized and entailed criminal consequences.
(e) Sales Tax Act (VII of 1990)—
—-Ss. 11, 25(5), 33, 37A & 37B—Constitution of Pakistan, Arts. 4, 10A & 199—Constitutional petition—Tax fraud—Criminal prosecution under the Sales Tax Act, 1990—Pre-condition—Tax assessment under S. 11 of Sales Tax Act, 1990 mandatory before initiation of criminal prosecution—Petitioners in the present case, were accused of tax fraud and criminal proceedings were initiated against them by registration of F.I.Rs.—Validity—Sales Tax Act, 1990 criminalised recovery of tax in addition to retribution and deterrence, thus tax assessment had to take place first under the provisions of the said Act—Criminal prosecution followed adjudication and assessment of tax under S. 11 of the Sales Tax Act, 1990—Pre-trial steps including arrest and detention could not be given effect to unless the tax liability of the taxpayer was determined (first) in accordance with S. 11 of the Sales Tax Act, 1990—Under S.33 of the Sales Tax Act, 1990, the fine under criminal prosecution was linked/loaded with the amount or loss of tax, thus such a criminal construct must (first) be prefaced with the mandatory requirement of assessment of tax through civil adjudication provided under S. 11 of the Sales Tax Act, 1990—Such precondition of assessment of tax was the minimum constitutional requirement to ensure fair trial and due process under Arts. 4 & 10A of the Constitution—Special Judge could not compound or award a sentence including a fine unless the loss of tax or amount of tax was first assessed—In the absence of tax assessment under S. 11 of the Sales Tax Act, 1990 and without knowing the “amount or loss of tax involved,” neither compoundability was possible nor the award of sentence against the tax payer—Criminal proceeding initiated against the petitioners in the present case, and documented as F.I.Rs. were quashed as being unconstitutional, violative of fundamental rights, ultra vires the Sales Tax Act, 1990 and hence illegal and without lawful authority—Constitutional petition was allowed accordingly.
(f) Constitution of Pakistan—
—-Art. 10A—Right to fair trial—Scope—Pre-trial steps—Right to fair trial under Art. 10A of the Constitution encompassed the whole trial including all the pre-trial steps like arrest, compoundability, etc.
(g) Sales Tax Act (VII of 1990)—
—-Ss. 30A, 33 & 37A—Constitution of Pakistan, Arts. 4 & 10A—Tax fraud—Criminal prosecution under the Sales Tax Act, 1990 on basis of “material evidence”—“Material evidence”—Scope—“Material evidence” must be credible and definite—“Material evidence” collected under S. 37A of the Sales Tax Act, 1990, needed to be credible and could best pass the test of fair trial and due process if it was an outcome of an inquiry or investigation envisaged under the proviso to S. 25(2) of the Sales Tax Act, 1990—Outcome of any such inquiry and investigation must be placed before an independent forum like the Directorate General (Intelligence and Investigation), Inland Revenue established under S. 30A of the Sales Tax Act, 1990 to first review the inquiry and investigation and the material evidence and then proceed under the law—Anything short of such process would not only lead to persecution of the tax payers, it would also make a mockery of the Fundamental Right of fair trial.
Imtiaz Rashid Siddiqui, Shehryar Kasuri, Ali Sibtain Fazli, Mirza Nasar Ahmad, Mian Abdul Ghaffar, Muhammad Akram Nizami, Muhammad Mansha Sukhera, M. M. Akram, Mian Masood Ahmed, Ch. Anwaar-ul-Haq, Muhammad Ajmal Khan, Sheikh Muhammad Farooq, Amir Umer Khan, Ch. Ishtiaq Ahmad Khan, Rana Muhammad Afzal, Khurram Shahbaz Butt, Muhammad Mohsin Virk, Umer Ahmed Khan, Waseem Ahmed Malik, Muhammad Ijaz, Rana Hammad Aslam, Hashim Aslam Butt, Muhammad Ejaz, Shahbaz Siddique, Zahid Ateeq, Asad Ihsan, Shabbir Ali Khokhar vice Mian Sultan Tanvir Ahmad, Mirza Yahya Farid, Ms. Khalida Abid, Khurram Ahmed Saeed, Hasnain Naveed Raja, Atif Muhtashim Khan, Talih Hussain , Syed Ali Zubair, Muhammad Ijaz Ali Bhatti, Naeem Khan, Mazhar Hayat, Sami Ullah Zia, Syed Naeem-ud-Din Shah, Amjad Farouck Bismill Rajpout, Shakeel Ahmad Basra, Muhammad Aamir Qadeer, Zia Shahid Waseer, Rana Munir Hussain, Raja M. Akhtar Zaman Khan, Javaid Anwar Janjua; Hassan Kamran Bashir, Muhammad Ayyaz Butt, Hafiz Saif-ur-Rehman, Ch. Muhammad Ali, Kamran Khalil, S.M. Masud, Ch. Saeed Ashraf, Khawaja Adnan Ahmed, Muhammad Amin Goraya, Shakeel-ur-Rehman Khan, Omer Farooq Khan, Shahid Umar Khan, Shezada Muhammad Zeeshan Mirza, Junaid Qayyum, Umar Ahmed Khan, Muhammad Shahid Baig, Iftikhar Ullah Malik, Mirza Nasir Hussain Shahid Baig, Syed Ali Zafar, Asad Manzoor Butt, Ch. Muhammad Ali, Kashif Khurshid, Muhammad Yousuf Khan, Rai Abid Ali Kharal, Muhammad Aamir Qadir, Qari Habib-ur-Rehman Zubairi, Javed Iqbal Sheikh, Muhammad Saeed Ch., Muhammad Sohail Naeem, Hasnain Naveed Raja, Ikram-ul-Haq Sheikh, Muhammad Saad Khan, Saood Nasrullah Cheema, Iqbal Khursheed Mughal, Saleem Akram Ch. and Muhammad Riaz Anjum for Petitioners.
Messrs Naveed Inayat Malik, Ch. Muhammad Ishaque, Deputy Attorney Generals for Pakistan; Messrs Salman Akram Raja, Malik Ahsan Mehmood, Ch. Zafar Iqbal, Dr. Rana Muhammad Shamim, Mian Qamar-ud-Din Ahmed, Sarfraz Ahmad Cheema, Ch. Imtiaz Elahi, Izhar-ul-Haque, Asjad Saeed, Ch. Faisal Nawaz, Muhammad Yahya Johar, Sultan Mahmood, Muhammad Asif Hashmi, Sajjad H. Rizvi, Muhammad Amir Malik, Ehsan-ur-Rehman, Nadeem Mahmood Mian, Mrs. Kausar Parveen,Tahir Zia Mahar, Nadeem Mahmood Mian, Shahid Masood Manzoor Bhatti, Mian Yusuf Umar, Muhammad Khalid Ch. and Khawar Ikram Bhatti for Respondents.
Messrs Sher Hassan Pervaiz, Nadeem Ahmad Sohail Cheema, Qaisar Abbas and Mohsin Mumtaz, Research Associates, Lahore High Court Research Centre for Research.
Dates of hearing: 9th, 12th, 17th, 18th and 19th September, 2013.
JUDGMENT
SYED MANSOOR ALI SHAH, J.—“If prosecution degenerates into persecution, this Court cannot sit as a helpless spectator”1
Tax crimes are white collar crimes that impose civil, as well as, criminal penalties for evasion of tax, etc. Even though the two sets of penalties are distinct and independent with separate objectives and consequences, yet this distinction is at times forgotten, resulting in over-criminalization2. The constitutionality and legality of such distortion under the unique architecture of Sales Tax Act, 1990 (“Act”) marks the high point of this case.
Facts
2. 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 fraud3” and “other persons due to whose criminal negligence/connivance, the tax fraud occurred /was committed.” Additional Director, Intelligence and 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 invoicies for the purposes of generating illegal/ inadmissible input tax adjustments criminal prosecution was initiatied 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 (including the petitioner) 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 levelled in other F.I.Rs. in the connected matters.
Arguments
3. Learned counsel for the petitioners have mainly 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.
4. Pursuing the same line of reasoning, they submitted that the fines available under section 33 of the Act are dependent on the amount of “tax involved” hence no sentence can be awarded unless the tax is first determined, which is not the prerogative of the Special Judge, especially, when civil adjudication system for tax assessment is specifically provided for under the Act. In the present case and in many other cases it is additionally pointed out that the learned Appellate Tribunal Inland Revenue under the civil adjudicatory system has held that the petitioner has not committed any tax fraud and is not liable for any additional tax liability or penalties, still criminal prosecution has been initiated against the petitioner. Reference is made to Order of the ATIR, Lahore dated 5-6-2012 passed in S.T.A. No. 478/LB/2012. It was also argued that the Additional Director, Intelligence and Investigation, Federal Board of Revenue does not have the jurisdiction to initiate criminal prosecution under the act as the said Directorate exercises no jurisdiction under the Act.
5. Learned counsel for the respondents, on the other hand, have submitted that it is settled principle of law that civil and criminal proceedings are neither interrelated nor mutually exclusive, hence, the department enjoys the choice to opt for either of the two enforcement mechansims. Criminal prosecution can be triggered if material evidence is available and the concerned officer has reason to believe that the taxpayer has committed tax fraud or any offence warranting prosecution. The term “shall be further liable” appearing in the list of penalties under section 33 of the Act does not have a chronological significance but in fact provides for two different sets of penalties; one on the civil side and the other on the criminal side and both of them are independent of each other.
6. Learned counsel for the respondent department frankly volunteered to submit that recourse to recovery of tax under the civil regime of the Act has not proven effective over the years and, therefore, criminal prosecution is the preferred choice of the department in cases where there is material evidence attracting section 37A. He further contends that compoundability of the offence is on the basis of the amount of tax due according to the calculation of the respondent department rather than on the basis of the amount determined through adjudicatory process under the Act. He submitted that tax assessment through civil adjudication under the Act has no bearing on the initiation of criminal proceedings against the petitioner.
Opinion of the Court
7. It is settled law that a singular act can trigger both civil and criminal proceedings simulatenously. Proceedings against a civil wrong or a public wrong (offence) are independent and not mutually exclusive. Both set of proceedings have their own procedures, standards and consequences. The famous eighteenth century English jurist William Blackstone summarizes the distinction between civil and criminal law by observing that “private wrongs are an infringement of the civil rights which belong to individuals public wrongs, or crimes are a breach and violation of the public rights and duties, due to the whole community in its social aggregate capacity.4” “There are a number of wrongs which are both crimes and civil wrongs .The offender may be prosecuted and punished or he may be tried in a civil court and ordered to pay compensation. This overlap of the criminal and civil law means, in effect, that a man may be tried twice for what is substantially the same wrong.5” Blackstone illustrates this difference by pointing out that the society has little interest in whether he sues a neighbour or emerges victorious in a land dispute. On the other hand, society has a substantial investment in the arrest, prosecution, and conviction of indiviuals responsible for espionage, murder or robbery.6
8. The standard of evidence to determine civil liability is preponderance of evidence, while a criminal conviction, as it carries loss of liberty is based on the higher standard of guilt i.e., beyond reasonable doubt. Primarily, civil law protects the interest of the individual while criminal law protects the interest of the society. “The main purposes of criminal law are to redress criminal behaviour and to maintain social order. Each country administers its own types of punishment based on the nature of the crime. The goals of punishment are retribution, deterrence, incapacitation, rehabilitation, and restitiution.”7
9. In 1939 sociologist Edwin H. Sutherland published his pioneering study regarding WHITE COLLAR CRIMES. He defined White Collar Crime to be an offense committed by a person of respectability and high social status in the course of his occupation. The financial cost of white collar crimes is several times greater than the economic consequences of common crimes. Tax is a fiscal tool to regulate the monetary policy of the State, hence, the primary focus of a tax law is the levy and collection of tax. However, as a white collar crime, tax evasion, etc has also been criminalized with the collateral effect of retribution and deterrence, in addition to achieving the fiscal incentives of the State. Under the new regime of white collar crimes or tax crimes, even civil wrongs have been categorised as an offence, attracting both civil and criminal penalties. While assessment of tax liability is characteristically a civil proceeding, tax evasion or tax fraud, etc. can also be a tax crime and attract both civil, as well as, criminal penalties. Under civil proceedings the tax is assessed and recovered as a compensation along with monetary penalties, while under criminal prosecution, tax evader is punished with imprisonment or fine or both. Civil and criminal proceedings have different objectives and achieve different ends.
10. Jurisprudence evolved over the years shows that while criminal and civil proceedings can co-exist and proceed side by side, in cases where the subject matter of both the proceedings is so closely interrelated, so that the outcome of the civil proceedings can have a material bearing on the criminal proceedings, a safer course to adopt is to stay the criminal proceedings till the finalisation of the civil matter. Reliance is placed on Akhlaq Hussain Kayani v. Zafar Iqbal Kiyani and others (2010 SCMR 1835) and Muhammad Akbar v. The State, and others (PLD 1968 SC 281).
11. Tax crimes can lead to criminal prosecution leading to conviction and punishment (i.e., imprisonment or fine or both) and yet simulatenously, for the same tax crime, civil proceedings for assessment of tax and its subsequent recovery can be initiated. The role and character of an adjudicator in assessing the tax liability and of a special judge in convicting the tax evader are distinct and entail different sets of procedures and evidentiary standards (as discussed above). These roles cannot be swaped. Hence, a Special Judge while convicting the taxpayer for an offence cannot assess the amount of tax due and similarly an Officer of Inland Revenue carrying out assessment of tax cannot convict the taxpayer. Civil adjudicatory process for assessment of tax has been laid down in the Act and entrusted to the officers of the Inland Revenue followed by a complete appellate redressal system, in the shape of a departmental appeal followed by an appeal before the Appellate Tribunal Inland Revenue and then a Tax Reference before the High Court. The recovery mechanism under section 48 of the Act comes into operation once tax is assessed and penalties imposed go unpaid. Tax assessment system based on adjudication has a central role in any tax law and precedes collection and recovery of tax.
12. With these juriprudentially delienated contours of civil criminal proceedings, we examine the construct and architecture of criminalization under the Sales Tax Act, 1990. Admittedly, sales tax is a value-added tax, grounded in unsupervised self-assessment scheme. The taxpayer assesses his tax and deposits it along with the sales tax return. The scope of the Act was brought out clearly in the budget speech of the Minister of State for Finance, for the year 1990-1991 when the tax was first introduced:–
75. Under the proposed sales tax system the tax payer will be allowed the facility of deferred payment of sales tax. Instead of paying the tax before the goods are cleared from the factory premises, the tax payer under the proposed system will himself determine his tax liability in respect of sales made during the course of a month and pay the tax due by the 20th of the following month. He has also been allowed the facility to deduct the tax which he has paid on his business purchases from the tax due on his sales and thus the proposed system provides for automatic adjustment of input tax. In short the proposed sales tax system is based on self assessment procedures.8(emphasis supplied)
13. The tax regulators monitor this self-assessment system through neutral and impartial tool of audit under section 72B. There is no other mechanism under the Act to lift the veil of self-assessment, protecting the monthly tax return filed by the tax payer. Once the case of a taxpayer is selected for audit under section 72B, the return is closely scrutinized and on completion of audit if any of the grounds under section 11 are attracted, an assessment order is passed against the tax payer, adjudicating the actual tax liability along with penalties under section 33 and default surcharge under section 34 of the Act. The taxpayer is not a defaulter unless “tax due” is first assessed and determined under the provisions of the Act. Section 25(5) provides that before, during and after the audit proceedings the taxpayer has the option to deposit the tax along with default surcharge and penalties to avoid further proceedings. Recovery and collection of tax, therefore, remains the central focus of the Act.
14. Inquiry or investigation can be initiated on the basis of “information or sufficient material” received by the Commissioner against a taxpayer under proviso to section 25(2) of the Act. It is axiomatic that any such inquiry or investigation must lead to further proceedings against the taxpayer in case of any adverse finding against the taxpayer. The Act is, however, surprisingly silent regarding the nature of further proceedings to be adopted after the said inquiry or investigation is completed. We have tried to rationalize this disconnect later in the judgment.
15. At this juncture, the department was of the view that other than the mechanism of audit under section 72B, the taxpayer can also be selected out of the pool of self-assessed taxpayers and criminally prosecuted under section 37A of the Act, if the officer concerned has reason to believe that there is material evidence that the tax payer has committed the offense of tax fraud or any other offence warranting prosecution under the Act.
16. Can section 37A of the Act be employed to select or pick a taxpayer out of the pool of self-assessed taxpayers to undergo criminal prosecution without first carrying out an objective selection process of audit followed by assessment of tax under section 11 of the Act? The answer to the above question is YES, on the assumption, that criminal prosecution, generally, has no nexus with assessment of tax liability and cannot be equated with cases selected in audit. While self-assessment scheme guards the sanctity of self-assessed sales tax returns it affords no protection to a criminal act committed by the tax payer. Audit is a tool that strategically monitors the regime of sales tax under the Act and is primarily geared to decipher tax evasion from amongst the pool of taxpayers. It is a departmental surveillance tool for sniffing out tax that has gone unpaid. Criminality behind any such tax evasion is a separate matter. In case both the proceedings (civil and criminal) are simultaneously initiated, the jurisprudence discussed above will regulate the criminal proceedings.
17. We now look at the unique construct of punishment (in particular the imposition of fine) under the Act. Perusal of section 33 of the Act reveals that criminal penalties are linked with the “tax loss” or “amount of tax involved.” Therefore, instead of providing for imprisonment or fine (ordinarily a certain sum of money) or both as punishment, the “fine” under the Act requires the taxpayer to pay the “tax loss” or “amount of tax involved,” thereby indirectly criminalizing, the recovery of “tax due.” Is this over-criminalization? Is the criminal prosecution set in motion to punish the taxpayer (retribution) or is it to criminalize recovery of tax (as if in addition to recovery procedure under section 48 of the Act) or both? Perusal of section 33 is important which reads as under:–
Offences Penalties Section of the Act to which offence has reference.
(1) (2) (3)
5. Any person who fails to deposit the amount of tax due or any part thereof in the time or manner laid down under this Act or rules or orders made thereunder. Such person shall pay a penalty of ten thousand rupees or five per cent of the amount of the tax involved, whichever is higher: Provided that, if the amount of tax or any part thereof is paid within fifteen days from the due date, the defaulter shall pay a 3, 6, 7 and 48.
(1) (2) (3)
penalty of five hundred rupees for each day of default: Provided further that no penalty shall be imposed when any miscalculation is made for the first time during a year: Provided further that if the amount of tax due is not paid even after the expiry of a period of sixty days of issuance of the notice for such payments by an officer of Inland Revenue not below the rank of Assistant Commissioner Inland Revenue, the defaul-ter shall, further be liable, upon convic-tion by a Special Judge, to imprison-ment for a term which may extend to three years, or with fine which may extend to amount equal to the amount of tax in-volved, or with both.
7. Any person who is required to apply for registration under this Act fails to make an application for registration before making taxable supplies. Such person shall pay a penalty of ten thousand rupees or five per cent of the amount of tax involved, whichever is higher: Provided that such person who is required to get himself registered under this Act, fails to get registered within sixty days of the commencement of tax-able activity, he shall, further be liable, upon conviction by a Special Judge, to imprisonment for a term which may extend to three years, or with fine which may extend to an amount equal to the amount of tax involved, or with both. 14
11. Any person who,– (a) Submits a false or forged document to any officer of Inland Revenue; or (b) Destroys, alters, mutilates or falsifies the records including a sales tax invoice; or (c) Knowingly or fraudulently makes false statement, false declaration, false representation, false personification, gives any false information or issues or uses a document which is forged or false. Such person shall pay a penalty of twenty five thousand rupees or one hundred per cent of the amount of tax involved, whichever is higher. He shall, further be liable, upon conviction by a Special Judge, to imprisonment for a term which may extend to three years, or with fine which may extend to an amount equal to the amount of tax involved, or with both. 2 (37) and General.
12 Any person who denies or obstructs the access of an authorized officer to the business premises, registered office or to any other place where records are kept, or otherwise refuses access to the stocks, accounts or records or fails to present the same when required under sections 25, 38, 38A or 40B. Such person shall pay a penalty of twenty five thousand rupees or one hundred per cent of the amount of tax involved, whichever is higher. He shall, further be liable upon conviction by a Special Judge, to imprisonment for a term which may extend to five years, or with fine which may extend to an amount equal to the loss of tax involved, or with both. 25, 38, 38A and 40B
13 Any person who commits, causes to commit or attempts to commit the tax fraud, or abets or connives in commissioning of tax fraud. Such person shall pay a penalty of twenty five thousand rupees or one hundred per cent of the amount of tax involved, whichever is higher. He shall, further be liable, upon conviction by a Special Judge, to imprisonment for a term which may extend to five years, or with fine which may extend to an amount equal to the loss of tax involved, or with both. 2(37)
14 Where any person violates any embargo placed on removal of goods in connection with recovery of tax. Such person shall pay a penalty of twenty five thousand rupees or ten per cent of the amount of the tax involved, whichever is higher. He shall, further be liable, upon conviction by a Special Judge, to imprisonment for a terms which may extend to one year, or with fine which may extend to amount equal to the amount of tax involved, or with both. 48
18 Where any officer of Inland Revenue authorized to act under this Act, acts or omits or attempts to act or omit in a manner causing loss to the sales tax revenue or otherwise abets or connives in any such act. Such officer of Inland Revenue shall be liable, upon conviction by a Special Judge, to imprisonment for a term which may extend to three years, or with fine which may extend to amount equal to the amount of tax involved, or with both. General.
22 Any person who, — (a) Knowingly and without lawful authority gains access to or attempts to gain access to the computerized system; or (b) Unauthorizedly uses or discloses or publishes or other-wise disseminates information obtained from the compute-rized system; or (c) Falsifies any record or infor-mation stored in the computerized system; or (d) Knowingly or dishonestly damages or impairs the computerized system; or (e) Knowingly or dishonestly damages or impairs any duplicate tape or disc or other medium on which any infor-mation obtained from the computerized system is kept or stored; or (f) Unauthorizedly uses unique user identifier of any other registered user to authenticate a transmission of information to the computerized system; or (g) Fails to comply with or contravenes any of the conditions prescribed for security of unique user identifier. Such person shall pay a penalty of twenty-five thousand rupees or one hundred per cent of the amount of tax involved, whichever is higher. He shall, further be liable, upon conviction by the Special Judge, to imprisonment for a term which may extended to one year, or with fine which may extend to an amount equal to the loss of tax involved, or with both. 50A.
18. Review of the penalties above, clearly shows that the measure of sentence is linked with the “amount or loss of tax involved.” Infact, the above linkage, uses the tool of penalty as a mode of recovery of tax. Hence, criminalization under the Act goes beyond the pale of retribution and deterrence and appears to be principally focused on recovery of tax. The said linkage between “fine” and the “amount of tax due” is missing, if we examine the criminal provisions under the Income Tax Ordinance, 2001. Part XI of Chapter X of the said Ordinance provides for criminal prosecution under Sections 191 to 200, which simply provide for imposition of “fine” but does not link it with the “tax loss or amount of tax” (except for compounding the offence under section 202). In the case of Federal Excise Act, 2005, such a linkage is visible, however, it has been pointed out that no criminal proceedings have been initiated under the said law without prior assessment of tax. It, therefore, appears that criminalization under the Act is being treated differently when compared with other tax laws.
19. The background and the departmental justification to this over-criminalization has been frankly pointed out by the learned counsel for the respondent department. He submitted that the civil proceedings leading to assessment of tax and penalties followed by the recovery procedure under section 48 has not proved successful over the years. Hence, to fast track recovery, it had to be criminalized. Without commenting on the legality of this over-criminalization, it is settled law that recovery of tax is possible only after the tax has been duly assessed and the amount of “tax due” determined under the Act. Recovery under civil law is initiated once tax has been assessed through the civil adjudicatory process provided under the Act. Tax assessment becomes doubly necessary, when recovery stands criminalized and entails criminal consequences. Other than the penalties hinged on “amount or loss of tax involved,” criminalization of recovery of tax is also evident from section 37A(4) of the Act. This provision permits compoundability of the offence if the amount of tax due and penalties as determined under the Act are paid at any stage of the criminal proceedings. Criminal mode of recovery, reinforces the requirement of prior assessment of tax liability under the Act.
20. Talking the offence of tax fraud under clause 13 of section 33 (above). Tax fraud has been defined in section 2(37) of the Act as:–
“”tax fraud” means knowingly, dishonestly or fraudulently and without any lawful excuse (burden of proof of which excuse shall be upon the accused)–
(i) doing of any act or causing to do any act; or
(ii) omitting to take any action or causing the omission to take any action, including the making of taxable supplies without getting registration under this Act; or
(iii) falsifying or causing falsification the sales tax invoices in contravention of duties or obligations imposed under this Act or rules or instructions issued thereunder with the intention of understating the tax liability or underpaying the tax liability for two consecutive tax periods or overstating the entitlement to tax credit or tax refund to cause loss of tax.”
In essence tax fraud is falsifying a tax invoice with the intention to understate the tax liability, or to underpay the tax liability or overstate the entitlement to tax credit or tax refund to cause loss of tax. Even if we assume that the Special Judge convicts the taxpayer, he cannot award the sentence, as “fine” is dependent on the “amount or loss of tax involved” and it is not within the competence or jurisdiction of the Special Judge to assess tax or determine the “amount or loss of tax involved” which is not part of the offence but of the sentence. Further, the facility of compoundability under section 37(A)(4) is not available to the taxpayer, unless the amount of tax due and penalties as determined under the Act.
21. Learned counsel for the department took pains to argue that the amount determined under section 37A (4) of the Act is the amount calculated by the department and is not the tax assessed under section 11 post adjudication. This argument is seriously misconcieved. It is settled proposition of law that “tax due” means amount duly determined under the law through an independent process of adjudication. Further, language of section 37A (4) is unambiguous and is directly supportive in this regard. Reliance is placed on Agricultural Development Bank of Pakistan v. Sanaullah Khan and others (PLD 1988 SC 67) and Abdul Latif v. The Government of West Pakistan and others (PLD 1962 SC 384) and Agricultural Development Bank of Pakistan and another v. Abid Akhtar and others (2003 CLD 1620).
22. Collective reading of sections 11, 25(5), 33, 37A and 72B of the Act indicates that the criminalization under the Act is principally to effectuate recovery or is being largely used to effectuate recovery. Two clear pointers are: dependence of fine on the “amount or loss of tax involved.” and the window of compoundability available to the taxpayer who can pay the “amount of tax due along with such default surcharge and penalty as determined under the provisions of this Act.” If the purpose was simple retribution and deterrence, there was no need to load the fine with the amount or loss of tax involved. However, if the fine under criminal prosecution is to be loaded with the amount or loss of tax, such a criminal construct must be prefaced with the mandatory requirement of assessment of tax through civil adjudication provided under section 11 of the Act. This precondition is the minimum constitutional requirement to ensure fair trial and due process under Articles 4 and 10-A of the Constitution.
23. It has been vehemently stated at the bar, by almost all the petitioners, that the department forcibly hauls up taxpayers under the threat of arrest and criminal prosecution and releases them after extraction of money (shown as the amount of tax due under section 37A). In the absence of tax assessment under section 11 of the Act and without knowing the “amount or loss of tax involved,” neither compoundability is possible nor the award of sentence against the tax payer. Hence the process of hauling up taxpayers and effecting recovery of self-determined amount of sales tax by the officer of the Inland Revenue is brutally unconstitutional.
24. Inability of the Special Judge to compound or award a sentence including a fine unless the loss of tax or amount of tax is first assessed, freezes the initiation of criminal proceedings till such time that the tax is duly assessed under the Act. Fair Trial under Article 10A of the constitution encompasses the whole trial including all the pre-trial steps like arrest, compoundability, etc. If at any stage of the trial, the taxpayer is deprived of the facility of settlement (compoundability) or there is a clog on the powers of the Special Judge in the matter of sentencing (choice of punishing with fine only) continuance of any such trial will offend Article 10A of the Constitution. Where the civil adjudication system under the Act declares that there is no loss of tax caused by the taxpayer or no amount of tax is due from the taxpayers, initiation of criminal prosecution in such a case may offend Article 10A of the Constitution.
25. As a conclusion, we once again reiterate that civil and criminal proceedings can run independently and simultaneously or otherwise. The purpose and objective of criminalizing tax fraud and tax evasion is retribution and deterrence which is achieved through punishment or fine or both. If the law, however, goes further and criminalises recovery of tax in addition to retribution and deterence, then tax assessment has to take place first under the provisions of the Act. In this background the term “shall be further liable” re-appearing several times in section 33 of the Act holds a chronological significance i.e., that criminal prosecution follows adjudication and assessment of tax under section 11 of the Act.
26. Even if the criminal prosecution under the present scheme of the Act is initiated after assessment of tax under section 11 as discussed above, the constitutionality of hurriedly invoking section 37A on the basis of material evidence requires consideration. Material evidence must be credible and definite if it is to deprive a citizen of his constitutional protection and safeguards under Articles 4 (due process), 9 (human liberty), 10A (fair trial) and 14 (human dignity). Setting in motion of the criminal prosecution cannot be left in the hands of any officer of the Inland Revenue, especially when the said Officers are under an obligation to recover the tax and meet tax targets before the close of the financial year set by the FBR. The process of initiation of criminal prosecution must comply with the requirement of due process and fair trial. The material evidence collected under section 37A needs to be credible and can best pass the test of fair trial and due process if it is an outcome of an inquiry or investigation envisaged under the proviso to section 25(2) of the Act. The outcome of any such inquiry and investigation must be placed before an independent forum like the Directorate General (Intelligence and Investigation), Inland Revenue established under section 30A of the Act to first review the inquiry and investigation and the material evidence and then proceed under the law. Anything short of this process will not only lead to persecution of the tax payers, it will also make a mockery of the fundamental right of fair trial.
27. The other issue is the choice of opting for criminal proceedings against a particular taxpayer and letting go of the other. This poses a problem and amounts to vesting unstructured and unregulated power in the hands of the department, once again threatening the sanctity of fair trial. Any such unguided and uncontrolled exercise of power will not withstand the constitutional test of fairness and equality under Article 25 of the Constitution. A more wholesome, transparent and standardized system needs to be evolved by the FBR to avoid this unconstitutionality.
28. In view of the above, we hold 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 proceedings initiated against the petitioners, and documented as the First Information Report in this case and cases mentioned in Schedule-A is quashed as being unconstitutional, violative of fundamental rights, ultra vires the Act and hence illegal and without lawful authority. For the above reasons all these petitions are allowed. In the light of the above discussion, we see no need to answer the question regarding the jurisdiction or competence of the officer who initiated the criminal proceedings in these cases.
29. This judgment will decide the instant petition, as well as, connected writ petitions mentioned in Schedule “A” as all these cases raise common questions of law and facts.
SCHEDULE-A
Sr. No. Case Number Sr. No. Case Number
1 W.P. No.9512/2012 3 W.P. No.7514/2012
2 W.P. No.28231/2012 4 W.P. No.7648/2012
5 W.P. No.7657/2012 32 W.P. No.10246/2012
6 W.P. No.7658/2012 33 W.P. No.10926/2012
7 W.P. No.8191/2012 34 W.P. No.11027/2012
8 W.P. No.8226/2012 35 W.P. No.11268/2012
9 W.P. No.8270/2012 36 W.P. No.11300/2012
10 W.P. No.8271/2012 37 W.P. No.11455/2012
11 W.P. No.8492/2012 38 W.P. No.11744/2012
12 W.P. No.8493/2012 39 W.P. No.12461/2012
13 W.P. No.8494/2012 40 W.P. No.12631/2012
14 W.P. No.8786/2012 41 W.P. No.29471/2012
15 W.P. No.8848/2012 42 W.P. No.29563/2012
16 W.P. No.8994/2012 43 W.P. No.29603/2012
17 W.P. No.9047 /2012 44 W.P. No.29411/2012
18 W.P. No.9049/2012 45 W.P. No.11020/2012
19 W.P. No.9113/2012 46 W.P. No.13426/2012
20 W.P. No.9157/2012 47 W.P. No.13577/2012
21 W.P. No.9500/2012 48 W.P. No.13838/2012
22 W.P. No.9503/2012 49 W.P. No.13991/2012
23 W.P. No.9504/2012 50 W.P. No.14205/2012
24 W.P. No.9505/2012 51 W.P. No.14538/2012
25 W.P. No.9506/2012 52 W.P. No.14784/2012
26 W.P. No.9614/2012 53 W.P. No.14874/2012
27 W.P. No.9615/2012 54 W.P. No.15470/2012
28 W.P. No.9616/2012 55 W.P. No.15471/2012
29 W.P. No.9872/2012 56 W.P. No.15800/2012
30 W.P. No.9876/2012 57 W.P. No.16328/2012
31 W.P. No.9920/2012 58 W.P. No.16329/2012
59 W.P. No.17447/2012 86 W.P. No.5333/2012
60 W.P. No.17589/2012 87 W.P. No.5334/2012
61 W.P. No.17815/2012 88 W.P. No.5381/2012
62 W.P. No.17918/2012 89 W.P. No.5634/2012
63 W.P. No.18758/2012 90 W.P. No.5885/2012
64 W.P. No.22231/2013 91 W.P. No.6001/2012
65 W.P. No.19673/2012 92 W.P. No.6391/2012
66 W.P. No.19674/2012 93 W.P. No.6743/2012
67 W.P. No.20004/2012 94 W.P. No.6794/2012
68 W.P. No.20092/2012 95 W.P. No.6795/2012
69 W.P. No.20657/2012 96 W.P. No.6878/2012
70 W.P. No.20658/2012 97 W.P. No.7188/2012
71 W.P. No.20674/2012 98 W.P. No.7670/2012
72 W.P. No.20922/2012 99 W.P. No.7695/2012
73 W.P. No.21062/2012 100 W.P. No.7877/2012
74 W.P. No.21897/2012 101 W.P. No.7917/2012
75 W.P. No.22571/2012 102 W.P. No.7918/2012
76 W.P. No.22572/2012 103 W.P. No.27578/2012
77 W.P. No.24736/2012 104 W.P. No.27803/2012
78 W.P. No.1686/2012 105 W.P. No.11021/2012
79 W.P. No.417/2012 106 W.P. No.11030/2012
80 W.P. No.418/2012 107 W.P. No.11137/2012
81 W.P. No.1043/2012 108 W.P. No.11138/2012
82 W.P. No.1082/2012 109 W.P. No.11294/2012
83 W.P. No.5048/2012 110 W.P. No.11296/2012
84 W.P. No.5049/2012 111 W.P. No.11297/2012
85 W.P. No.5300/2012 112 W.P. No.11298/2012
113 W.P. No.11519/2012 140 W.P. No.8740/2012
114 W.P. No.11544/2012 141 W.P. No.9045/2012
115 W.P. No.11555/2012 142 W.P. No.9048/2012
116 W.P. No.11561/2012 143 W.P. No.9086/2012
117 W.P. No.11745/2012 144 W.P. No.9087/2012
118 W.P. No.11746/2012 145 W.P. No.9104/2012
119 W.P. No.11921/2012 146 W.P. No.9107/2012
120 W.P. No.11922/2012 147 W.P. No.9158/2012
121 W.P. No.11923/2012 148 W.P. No.9166/2012
122 W.P. No.11972/2012 149 W.P. No.9653/2012
123 W.P. No.12104/2012 150 W.P. No.9654/2012
124 W.P. No.12248/2012 151 W.P. No.9736/2012
125 W.P. No.12384/2012 152 W.P. No.9255/2012
126 W.P. No.12472/2012 153 W.P. No.9324/2012
127 W.P. No.12493/2012 154 W.P. No.9364/2012
128 W.P. No.12670/2012 155 W.P. No.9423/2012
129 W.P. No.12997/2012 156 W.P. No.9486/2012
130 W.P. No.13031/2012 157 W.P. No.9570/2012
131 W.P. No.13805/2012 158 W.P. No.9651/2012
132 W.P. No.13969/2012 159 W.P. No.9652/2012
133 W.P. No.14136/2012 160 W.P. No.9742/2012
134 W.P. No.15179/2012 161 W.P. No.9873/2012
135 W.P. No.15281/2012 162 W.P. No.9936/2012
136 W.P. No.8015/2012 163 W.P. No.10330/2012
137 W.P. No.8190/2012 164 W.P. No.10331/2012
138 W.P. No.8402/2012 165 W.P. No.10341/2012
139 W.P. No.8568/2012 166 W.P. No.10456/2012
167 W.P. No.10498/2012 194 W.P. No.22447/2012
168 W.P. No.10499/2012 195 W.P. No.22594/2012
169 W.P. No.10598/2012 196 W.P. No.22646/2012
170 W.P. No.10688/2012 197 W.P. No.23402/2012
171 W.P. No.10698/2012 198 W.P. No.25801/2012
172 W.P. No.10721/2012 199 W.P. No.26814/2012
173 W.P. No.10838/2012 200 W.P. No.26815/2012
174 W.P. No.10852/2012 201 W.P. No.28142/2012
175 W.P. No.10935/2012 202 W.P. No.26440/2012
176 W.P. No.15660/2012 203 W.P. No.25622/2012
177 W.P. No.15791/2012 204 W.P. No.25623/2012
178 W.P. No.16754/2012 205 W.P. No.22075/2012
179 W.P. No.16810/2012 206 W.P. No.28912/2012
180 W.P. No.16811/2012 207 W.P. No.27352/2012
181 W.P. No.16812/2012 208 W.P. No.8695/2011
182 W.P. No.16813/2012 209 W.P. No.9041/2011
183 W.P. No.16997/2012 210 W.P. No.9019/2011
184 W.P. No.16998/2012 211 W.P. No.9020/2011
185 W.P. No.17106/2012 212 W.P. No.8926/2011
186 W.P. No.17286/2012 213 W.P. No.7802/2011
187 W.P. No.17332/2012 214 W.P. No.8256/2011
188 W.P. No.17743/2012 215 W.P. No.8257/2011
189 W.P. No.18029/2012 216 W.P. No.8647/2011
190 W.P. No.18098/2012 217 W.P. No.6848/2011
191 W.P. No.18221/2012 218 W.P. No.8359/2011
192 W.P. No.20261/2012 219 W.P. No.7406/2011
193 W.P. No.21671/2012 220 W.P. No.7029/2011
221 W.P. No.9118/2011 248 W.P. No.26489/2011
222 W.P. No.9354/2011 249 W.P. No.29582/2011
223 W.P. No.9355/2011 250 W.P. No.29653/2012
224 W.P. No.9219/2011 251 W.P. No.29751/2012
225 W.P. No.9873/2011 252 W.P. No.26857/2011
226 W.P. No.7895/2011 253 W.P. No.23251/2010
227 W.P. No.11343/2011 254 W.P. No.26554/2010
228 W.P. No.13657/2011 255 W.P. No.26555/2010
229 W.P. No.8154/2011 256 W.P. No.26568/2010
230 W.P. No.18058/2011 257 W.P. No.26769/2010
231 W.P. No.19644/2011 258 W.P. No.27266/2011
232 W.P. No.19862/2011 259 W.P. No.27863/2011
233 W.P. No.19107/2011 260 W.P. No.27864/2011
234 W.P. No.20160/2011 261 W.P. No.27865/2011
235 W.P. No.20297/2011 262 W.P. No.27866/2011
236 W.P. No.20298/2011 263 W.P. No.29671/2011
237 W.P. No.12159/2011 264 W.P. No.24686/2011
238 W.P. No.12160/2011 265 W.P. No.4580/2011
239 W.P. No.12153/2011 266 W.P. No.7686/2011
240 W.P. No.26855/2011 267 W.P. No.9655/2011
241 W.P. No.2379/2012 268 W.P. No.9656/2011
242 W.P. No.26856/2011 269 W.P. No.11256/2011
243 W.P. No.12568/2011 270 W.P. No.11359/2011
244 W.P. No.14436/2011 271 W.P. No.11665/2012
245 W.P. No.27422/2011 272 W.P. No.13721/2011
246 W.P. No.1302/2012 273 W.P. No.22737/2011
247 W.P. No.15927/2011 274 W.P. No.22738/2011
275 W.P. No.1985/2012 301 W.P. No.1110/2013
276 W.P. No.2726/2011 302 W.P. No.25182/2011
277 W.P. No.3173/2012 303 W.P. No.711/2013
278 W.P. No.4439/2010 304 W.P. No.2145/2013
279 W.P. No.4478 /2011 305 W.P. No.18521/2011
280 Crl. Org. No.476-W/2010 306 W.P. No.19219/2012
281 Crl. Org. No.458-W/2010 307 W.P. No.19218/2012
282 W.P. No.21725/2011 308 W.P. No.1879/2013
283 W.P. No.11666/2012 309 W.P. No.2526/2013
284 W.P. No.10908/2011 310 W.P. No.5109/2013
285 W.P. No.10674/2011 311 W.P. No.5138/2013
286 W.P. No.4440/2011 312 W.P. No.5139/2013
287 W.P. No.132/2013 313 W.P. No.5450/2013
288 W.P. No.57/2013 314 W.P. No.5246/2013
289 W.P. No.58/2013 315 W.P. No.20452/2013
290 W.P. No.59/2013 316 W.P. No.21502/2013
291 W.P. No.60/2013 317 W.P. No.6547/2013
292 W.P. No.61/2013 318 W.P. No.7056/2013
293 W.P. No.31741/2012 319 W.P. No.29753/2012
294 W.P. No.109/2013 320 W.P. No.27742/2012
295 W.P. No.110/2013 321 W.P. No.6412/2013
296 W.P. No.111/2011 322 W.P. No.7074/2013
297 W.P. No.367/2013 323 W.P. No.6572/2013
298 W.P. No.368/2013 324 W.P. No.21438/2013
299 W.P. No.887/2013 325 W.P. No.21439/2013
300 W.P. No.888/2013 326 W.P. No.21440/2013
327 W.P. No.21441/2013 334 W.P. No.18015/2011
328 W.P. No.21449/2013 335 W.P. No.9017/2011
329 W.P. No.21770/2013 336 W.P. No.9018/2011
330 W.P. No.17671/2013 337 W.P. No.16607/2011
331 W.P. No.21884/2013 338 W.P. No.21611/2012
332 W.P. No.22908/2013 339 W.P. No.21612/2012
333 W.P. No.16622/2011 340 W.P. No.15251/2012
MWA/T-18/L Petition allowed.