Commissioner Inland Revenue Vs Ms Matrix Dairy Farms

Form No.HCJD/C-121

ORDER SHEET

LAHORE HIGH COURT, LAHORE

JUDICIAL DEPARTMENT

S.T.R.No. 59890 of 2024.

Commissioner Inland Revenue vs . M/s Matrix Dairy Farms Sr. No. of Date of order/ Order with Signature of Judge, and that of parties or counsel, where necessary. order/ proceedings proceedings

17.09.2025. Syed Zain-ul-Abidien Bokhri, Advocate for the applicant. Syed Nasir Ali Gillani, Advocate for the respondent. This consolidated judgment shall dispose of instant reference application alongwith following under mentioned connected reference applications:-

1.S.T.R.No. 59893 of 2024.

(Commissioner Inland Revenue vs. M/s Matrix Diary Farms) 2. S.T.R.No. 59895 of 2024.

(Commissioner Inland Revenue vs. M/s Matrix Diary Farms) 3. S.T.R.No. 59898 of 2024.

(Commissioner Inland Revenue vs. M/s Matrix Diary Farms) 4. S.T.R.No. 59903 of 2024.

(Commissioner Inland Revenue vs. M/s Matrix Diary Farms) 5. S.T.R.No. 59912 of 2024.

(Commissioner Inland Revenue vs. M/s Matrix Diary Farms) 6. S.T.R.No. 59916 of 2024.

(Commissioner Inland Revenue vs. M/s Matrix Diary Farms) 7. S.T.R.No. 59922 of 2024.

(Commissioner Inland Revenue vs. M/s Matrix Diary Farms) 8. S.T.R.No. 59923 of 2024.

(Commissioner Inland Revenue vs. M/s Matrix Diary Farms) 9. S.T.R.No. 59926 of 2024.

(Commissioner Inland Revenue vs. M/s Matrix Diary Farms) 10. S.T.R.No. 59928 of 2024.

(Commissioner Inland Revenue vs. M/s Matrix Diary Farms) 11. S.T.R.No. 59932 of 2024.

(Commissioner Inland Revenue vs. M/s Matrix Diary Farms) 12. S.T.R.No. 59934 of 2024.

(Commissioner Inland Revenue vs. M/s Matrix Diary Farms)

S.T.R.No.59890 of 2024.

as common questions of law and facts are involved in all these matters.

2.Through this reference application under Section 47 of the Sales Tax Act, 1990 (“Act”), the following question of law, asserted to have arisen out of the impugned order dated 21.03.2024, passed by the Commissioner Inland Revenue (Appeals), Gujranwala, has been proposed for our opinion:

"(2). Whether, under the facts and circumstances of the case, the learned CIR (Appeals) was justified in allowing refund on the basis of consumption of feed for non-milking cows, heifers, and calves, in violation of Rule 33, Chapter V (Refund) of the Sales Tax Rules, 2006, notified via SRO No.555(I)/2006 dated 05.06.2006, wherein no refund is admissible on such purchases that are not consumed in the manufacture of zero-rated goods?"

3.Briefly, the facts are that the applicant-department rejected the deferred sales tax refund of Rs.786,355/- for the tax period of January 2022, on the grounds that the feed was consumed by non-milking cows, as per Rule 33 of Chapter V (Refund) of the Sales Tax Rules, 2006 (hereinafter referred to as (“Rules”). The applicant contended that the refund is only claimable on feed used for milking cows, and not for non-milking cows, therefore, the deferred refund is not admissible in terms of Sections 4, 7, 8(1), 10(1), 26, and 21 of the Act, read with Rule 33 of Chapter V of the Sales Tax Rules, 2006, notified through SRO No.555(I)/2006 dated 05.06.2006. As a result, adjudication proceedings were initiated and culminated in the passing of Order-in-Original No.06/ST/2024 dated 24.11.2023, whereby the refund of Rs.786,355/- was rejected under Sections 10(1) and 11(2) of the Act, alongwith imposition of penalty under Section 33(19) of the Act.

S.T.R.No.59890 of 2024.

4.Being dissatisfied with the aforesaid order, the respondent preferred an appeal before the Commissioner (Appeals), which, after contest by the applicant, was accepted by way of impugned order dated 21.03.2024.

5.We have heard learned counsel for the applicant- department as well as the learned counsel representing the respondent, and have perused the available record.

6.From bare perusal of the record, it is evident that the respondent-taxpayer, in his written reply submitted before the Inland Revenue Adjudicating Officer (IRAO), categorically asserted that the feed items, on which input tax was claimed as refundable, were exclusively consumed by milking animals. It was clearly stated that these feed items were administered solely to lactating cows for the specific purpose of enhancing milk production, which constitutes a zero-rated supply under the Act.

7.This assertion was duly recorded and reproduced by the IRAO in the Order-in-Original. However, despite the clear explanation and factual context provided, the IRAO proceeded to impose a penalty on the respondent on the alleged ground of non-compliance with Section 26(1) of the Act, and the apportionment rules stipulated in Chapter IV of the Sales Tax Rules, 2006. Notably, this penal action was taken without furnishing any cogent reasoning or lawful basis, and in violation of settled principles of natural justice and due process of law, against the spirit of Article 10A of the Constitution of the Islamic Republic of Pakistan, 1973.

8.It was further clarified by the respondent that non- milking animals, such as heifers and calves, were fed separately with unregistered feed items including corn, wheat, silage, and agricultural residues, which were

S.T.R.No.59890 of 2024.

exempted from sales tax. Accordingly, such exempted items were not required to be declared in the sales tax return, as per prevailing law. This factual assertion was not merely speculative, but was substantiated by a veterinary Doctor report. Additionally, it is pertinent to note that heifers and calves, while not currently producing milk, will in due course contribute to maintain zero-rated supplies. Hence, the use of feed for their development is not extraneous to the business of producing zero-rated goods. Despite this, the IRAO erroneously invoked Section 26(1) and the apportionment rules without confronting the taxpayer with any specific evidence to rebut their documented position. The record further reveals that the respondent had submitted a detailed and verifiable break-up of taxable sales and zero- rated supplies for Tax Year 2022, duly supported by documentary evidence obtained from registered suppliers. Moreover, the refund claim was limited strictly to feed inputs use to enhance energy levels and milk yield in lactating animals consistent with the principles governing zero-rated supplies under the Fifth Schedule to the Act.

9.Moreover, the adjudication proceedings initiated by the Inland Revenue Adjudicating Officer (IRAO) are vitiated by serious procedural and substantive legal infirmities. Chief among these is the manifest misapplication of Rule 33 of the Sales Tax Rules, 2006. Rule 33 governs the determination of refund eligibility based on the actual consumption of inputs in the manufacture or production of zero-rated goods. However, the said Rule does not authorize the adjudicating authority to presume or apply arbitrary apportionment of input tax credits in the absence of verifiable, empirical evidence demonstrating mixed use of inputs for both taxable and exempt supplies.

S.T.R.No.59890 of 2024.

10.In the instant case, the respondent taxpayer had submitted a detailed statement of inventory and stock, reflecting the use of feed items exclusively for milking animals directly engaged in zero-rated milk production. The IRAO, rather than appreciating the inventory as corroborative evidence, erroneously inferred from it a presumed apportionment between milking and non-milking animals. On the basis of this unsubstantiated assumption, Rule 33 was invoked against the respondent, resulting in disallowance of input tax refund claims.

11.To understand Rule 33, which is reproduced as hereunder:-

“33. Refund against goods supplied at zero-rate. Refund in respect of goods supplied at zero-rate shall be paid to the extent of input tax paid on purchases or imports that are actually consumed in such goods as supplied.”

From its bare reading, it is clear that this Rule is applicable in cases, where a registered person supplies goods that are subject to a zero-rate of sales tax under the Act. In such circumstances, the registered person becomes entitled to a refund of input tax, but this entitlement is to the extent of input tax paid on goods or materials that were actually consumed in the production or supply of the zero-rated goods.

12.The phrase “actually consumed” carries legal and factual significance, as it implies that the refund claim must be supported by objective and verifiable evidence of actual usage of the input goods or services in the manufacture or provision of zero-rated output. This factual determination requires a documented evidence of input usage.

13.Rule 33 of the Rule ibid, thus, mandates the existence of a clear, quantifiable, and verifiable nexus between the

S.T.R.No.59890 of 2024.

procured inputs and their consumption in the zero-rated output. Inputs which are not used or cannot be proven to have been used in the production or supply of zero-rated goods, do not qualify for input tax refund under this provision.

14.There is no cavil to the proposition that the burden of proof rests upon the taxpayer to substantiate any claim for a refund by furnishing appropriate and relevant documentation. Such documentation may include, but is not limited to, production records, consumption reports, inventory reconciliation statements, and other materials evidencing the nexus between the input tax paid and the zero-rated supplies made. In the present case, the respondent taxpayer duly submitted documentary evidence in support of the refund claim. However, the Inland Revenue Assessing Officer (IRAO), without conducting any verification or physical inspection of the respondent's premises, proceeded to invoke Rule 33. This action constitutes a departure from the prescribed procedure, and no reasons have been recorded in the original order to justify such deviation.

15.The underlying legislative objective of Rule 33 is to prevent the cascading effect of taxation in respect of zero- rated supplies, while simultaneously ensuring that the refund mechanism is not exploited or misused. The rule serves to strike a balance between allowing legitimate refund claims and protecting public revenue, by ensuring that only inputs genuinely used in zero-rated supplies form the basis of any refund claim. Therefore, the application of Rule 33 is strictly dependent upon the factual consumption of inputs in the course of making zero-rated supplies. This approach aligns with the broader statutory scheme of the Act. The

S.T.R.No.59890 of 2024.

framework thereby promotes fiscal discipline, administrative transparency, and accountability within the tax system.

16.In the present matter, no evidence was produced by the department to establish that the feed in question was used for non-milking animals or for any purpose other than the production of zero-rated milk. The respondent’s explanation, inventory records, and veterinary certification remained uncontroverted. Therefore, the unilateral imposition of apportionment and denial of refund under Rule 33 is devoid of legal merits and is accordingly unsustainable. Such an approach is contrary to established principles of tax jurisprudence, which require that any disallowance of statutory tax benefits such as input tax refund, must be grounded in clear, credible, and affirmative evidence. Mere conjecture or interpretative assumptions, without factual backing, cannot form the basis for adverse fiscal action.

17.Any invocation of apportionment under Rule 33 must be preceded by a clear finding of fact, supported by documentary or inspection based evidence, demonstrating actual common usage of inputs in both taxable and non- taxable activities. In absence of such evidence, reliance on Rule 33 becomes not only arbitrary but violative of the principles of natural justice, due process, and fiscal neutrality. Accordingly, the findings and actions of the IRAO, based on presumed application of Rule 33, are legally flawed and liable to be struck down. Furthermore, the disallowance of input tax claimed on electricity used within the dairy production facility, including areas housing non-milking animals, is legally untenable. The principle of composite manufacturing activity must be applied in such cases. There exists no statutory requirement under the Act or

S.T.R.No.59890 of 2024.

Rules to segregate utilities based on the functional category of animals. Electricity usage in a dairy facility, integral to the overall production of milk, qualifies for input tax adjustment in its entirety, as per prevailing legal standards.

18.In view of the above, it is observed the IRAO has failed to appreciate the respondent’s explanation and supporting documentary evidence in its correct legal context. The penal action taken is devoid of lawful basis, arbitrary in nature, and in violation of fundamental principles of administrative law and tax jurisprudence, the interpretation of Rule 33, as relied upon by the IRAO, is legally flawed and unsupported by the statute. No opportunity of hearing or confrontation after invoking penal provisions was afforded to the taxpayer by the IRAO, hereby violating principles of natural justice and in violation of Article 10A of the Constitution of the Islamic Republic of Pakistan, 1973.

19.It is a settled principle that unless the taxpayer’s records are found to be deficient, non-verifiable, or fraudulent, the benefit of refund under the law cannot be denied on presumptive or hypothetical grounds. The IRAO’s reliance on an assumed proportional consumption lacks any evidentiary backing and is in direct conflict with the settled jurisprudence, particularly the principle enunciated by the Hon’ble Supreme Court of Pakistan in Commissioner Inland Revenue, (Legal), Islamabad vs. Messrs WI-Tribe Pakistan Ltd, Islamabad (2020 SCMR 420), which affirms that it is now well settled that a fiscal provision of a statute has to be construed liberally in favour of the tax payer. Relevant portion is reproduced as under:--

“5...........The respondent cannot be allowed to be deprived of the statutory benefit through

S.T.R.No.59890 of 2024.

misinterpretation and misreading, as attempted by the department. Even in case of any ambiguity regarding any exemption or concession, the same is to be resolved in a manner beneficial to the tax payer and not in the manner that would lead to obliteration of his rights and liabilities. “

20.After careful consideration of the legal and factual matrix, we hold that the rejection of the sales tax refund by the adjudicating authority was based on conjectural and disproportionate calculations, unsupported by any statutory provision or evidentiary material. The Commissioner (Appeals) has rightly exercised appellate jurisdiction and granted relief to the respondent in accordance with the law. The findings are well reasoned, evidence-based, and consistent with judicial precedents.

21.Accordingly, the impugned order dated 21.03.2024, passed by the Commissioner Inland Revenue (Appeals), Gujranwala is upheld. All reference applications filed by the applicant-Department are, therefore, answered in the negative, against the applicant and in favour of the respondent taxpayer.

22.Office is directed to dispatch a certified copy of this order to the Commissioner Inland Revenue (Appeals), Gujranwala, as required under Section 47(5) of the Sales Tax Act, 1990.

(ABID AZIZ SHEIKH) (MALIK JAVID IQBAL WAINS)

JUDGE JUDGE

Approved for reporting.

JUDGE JUDGE

*M.AYYUB*