Ms Riaz Textiles Mills Pvt Ltd Vs Federation of Pakistan etc.

Stereo. H C J D A 38.

Judgment Sheet

IN THE LAHORE HIGH COURT LAHORE

JUDICIAL DEPARTMENT

Case No: W.P. No.84103/2023

M/s Riaz Textile Mills Versus Federation of Pakistan, etc. Pvt. Ltd.

JUDGMENT

Date of hearing 23.09.2026 Petitioner by Mr. Mehmood Ahmad, Advocate.

Respondents by: Mr. Muhammad Humzah Sheikh, Assistant Attorney General for Pakistan.

Rana Muhammad Mehtab, Advocate for respondent-FBR.

Muhammad Ajmal Zahid, J.— Through this constitutional petition under Article 199 of the Constitution of the Islamic Republic of Pakistan, 1973, the petitioner has called in question the recovery notice dated 05.12.2023, whereby a demand of Rs.101,883,037/- has been raised against the petitioner on account of regulatory duty, purportedly on the basis of Audit Observation No.58 dated 24.04.2012 (DP No.331/2012-2013).

2.Briefly stated, the petitioner is a private limited company incorporated under the Companies Act, 2017 and is engaged in the manufacture and export of yarn. It was permitted to import raw material under S.R.O. No.450(I)/2001 dated 18.06.2001 and was subsequently issued an Export Oriented Unit (EOU) Licence under the relevant statutory regime. During the period from 13.05.2010 to 12.07.2010, the petitioner exported yarn under the said S.R.O., claiming exemption from regulatory duty at the rate of 15%. Subsequently, an audit objection was raised by the Directorate of Revenue Audit/DRRA in respect of the alleged short levy/non-

payment of regulatory duty. Pursuant thereto, respondent No.5 issued the impugned recovery letter dated 05.12.2023, which was received by the petitioner on 18.12.2023, demanding an amount of Rs.101,883,037/-. The petitioner submitted a reply to the audit objection, asserting, inter alia, its entitlement to exemption under S.R.O. No.450(I)/2001; however, according to the petitioner, the said objection/reply was not properly considered. Hence, this petition.

3.Learned counsel for the petitioner submits that the impugned recovery has been initiated solely on the basis of an audit objection and without following the procedure prescribed under the Customs Act, 1969. He contends that an audit objection, by itself, cannot constitute a determination of customs duty liability, particularly where the petitioner disputes the very basis of the alleged liability. It is further submitted that no show-cause notice was issued to the petitioner and no adjudication order determining its liability was passed by the competent authority. Learned counsel maintains that the petitioner was entitled to the benefit of S.R.O. No.450(I)/2001 and that, in any event, the question of its liability could only be determined after observance of the procedure prescribed by law and after affording an effective opportunity of hearing.

4.Conversely, learned counsel appearing for the respondents/FBR supports the impugned proceedings. He submits that the demand was raised pursuant to an audit objection concerning short levy/non-payment of regulatory duty and that the petitioner was afforded an opportunity to respond to the objection. According to learned counsel, the reply submitted by the petitioner was duly considered and the respondents acted in discharge of their statutory functions. It is further contended that the petitioner has an adequate alternate remedy under the Customs Act, 1969 and, therefore, the constitutional petition is not maintainable.

5.Learned Law Officer has adopted the submissions advanced by learned counsel for the respondents/FBR.

6.We have heard learned counsel for the parties and have examined the available record.

7.The controversy, at this stage, does not require this Court to determine whether the petitioner is ultimately liable to pay the regulatory duty claimed by the respondents. The principal issue requiring consideration is whether a disputed fiscal liability could lawfully be recovered from the petitioner merely on the basis of an audit objection/recovery letter, without first determining such liability through the statutory mechanism prescribed under the Customs Act, 1969.

8.An audit objection may certainly bring an alleged discrepancy, short levy or non-payment of duty to the notice of the competent authority and may provide the basis for examination of the matter in accordance with law. However, where the person proceeded against disputes the underlying liability, an audit objection cannot, by itself, be treated as a substitute for the statutory process for determination and recovery of such liability. The competent authority is required to examine the objection in the light of the relevant statutory provisions and the record, provide the affected person an effective opportunity of hearing, consider the defence raised and thereafter arrive at an independent determination in accordance with law.

9.In the present case, the petitioner has specifically disputed its liability and has asserted that the relevant exports were covered by S.R.O. No.450(I)/2001 dated 18.06.2001 and were, therefore, entitled to the exemption claimed. The question whether the petitioner was entitled to such exemption, and consequently whether any regulatory duty was recoverable from it, requires examination of the relevant statutory provisions, the terms and conditions of the S.R.O., the petitioner's EOU status, the relevant

import/export documents and the factual circumstances of the transactions. Such a disputed question cannot be finally concluded merely through a recovery letter issued pursuant to an audit observation, without determination by the competent authority in accordance with the statutory scheme.

10.It is a settled principle that where a fiscal statute prescribes a particular procedure for determination of liability, the authority exercising jurisdiction thereunder must act within the four corners of that procedure. The requirement of a fair hearing assumes particular significance where the proposed liability is disputed. The affected person must be apprised of the precise basis of the proposed liability and afforded a meaningful opportunity to controvert the same before an adverse determination is made. The fact that the petitioner was asked to respond to an audit objection does not, in itself, dispense with the statutory process where the substantive liability itself remains in dispute.

11.The record presently available before us does not disclose that the disputed amount of Rs.101,883,037/- was first determined against the petitioner through a duly passed order by the competent authority under the applicable provisions of the Customs Act, 1969. The impugned recovery notice, therefore, cannot, standing alone, sustain recovery of the disputed amount merely because the alleged liability was pointed out in an audit objection.

12.Before proceeding further, it is also necessary to clarify the distinct institutional functions of audit and the authorities exercising powers under fiscal statutes. An audit observation made in the course of audit of the accounts of a governmental department, including the Inland Revenue Department, FBR or any other Federal or Provincial governmental entity, may identify an alleged irregularity or short levy and may call for examination by the authority competent under the relevant fiscal law. However, such observation does not, by its own force, constitute a

determination of a taxpayer's liability under that fiscal statute. The powers and functions of the Auditor General under the constitutional and statutory framework governing audit, on the one hand, and those of the customs/tax authorities under the applicable fiscal legislation, on the other, operate within their respective spheres. An audit observation cannot be employed as a substitute for the exercise of jurisdiction and procedure specifically conferred upon the competent fiscal authority by law.

13.The above distinction also follows from the settled principle that what cannot lawfully be done directly cannot be achieved indirectly. Thus, if determination and recovery of a disputed customs liability are required by law to be undertaken through a specified statutory process, the same requirement cannot be circumvented merely by treating an audit observation as itself constituting a determination of liability.

14.We, however, refrain from expressing any opinion on the merits of the petitioner's claim for exemption under S.R.O. No.450(I)/2001 dated 18.06.2001, or on the question whether any regulatory duty was actually leviable or recoverable from the petitioner. Likewise, we do not express any concluded opinion at this stage on the question of limitation or the effect of the passage of time upon the alleged liability. These matters are to be considered by the competent authority in accordance with the applicable statutory provisions and the factual and documentary record.

15.Consequently, this petition is disposed of with the direction that the competent authority shall reconsider the matter afresh and determine, in accordance with the Customs Act, 1969 and other applicable law, whether any liability on account of regulatory duty is legally recoverable from the petitioner. While doing so, the competent authority shall specifically examine:-

(i)the legal effect and scope of Audit Observation No.58 dated 24.04.2012 (DP No.331/2012-2013);

(ii)whether, having regard to the period to which the alleged liability relates and the date on which recovery proceedings were initiated, any such liability remains legally recoverable, including the question of limitation and any other statutory bar;

(iii)the petitioner's claim for exemption under S.R.O. No.450(I)/2001 dated 18.06.2001, including the terms and conditions thereof and the petitioner's EOU status;

(iv)the relevant import and export documents and all other material relied upon by either side; and

(v)whether any amount is otherwise recoverable from the petitioner under the applicable law.

16.If, upon such examination, the competent authority is of the view that any amount is legally recoverable from the petitioner, appropriate proceedings shall first be initiated and conducted strictly in accordance with the procedure prescribed by law. The petitioner shall be afforded an effective and meaningful opportunity of hearing and of producing all relevant documents and material in support of its claim. Thereafter, a well-reasoned and speaking order shall be passed, dealing with all material contentions raised by the petitioner.

17.It is made clear that the competent authority shall make an independent determination of the matter and shall not treat the audit observation as conclusive of the petitioner's liability. The observations contained in this order are confined to the legality of the procedure adopted for recovery and shall not prejudice either party in the determination of the underlying substantive controversy.

18.Till such determination is made by the competent authority and communicated to the petitioner, no coercive measures shall be taken against the petitioner for recovery of the disputed amount of Rs.101,883,037/-.

19.For expeditious disposal of the matter, the petitioner shall appear before respondent No.2 on 01.10.2026 at 11:00 a.m. Respondent No.2 shall thereafter proceed with the matter without unnecessary adjournment and, within thirty (30) days from the date of appearance, communicate the decision to the petitioner and furnish a copy thereof to the Deputy Registrar (Judicial) of this Court for information and compliance.

20.Disposed of in the above term.

(Hassan Nawaz Makhdoom) (Muhammad Ajmal Zahid) Judge Judge

APPROVED FOR REPORTING.

Judge Judge M. Tahir*