The Commissioner Inland Revenue Zone -II Vs MS Malik Silk Emporium

Stereo.HCJDA 38.

Judgment Sheet

IN THE LAHORE HIGH COURT, LAHORE.

JUDICIAL DEPARTMENT

Sales Tax Reference No.185185 of 2018.

Commissioner Inland Revenue, Zone-II, Regional Tax Office, Gujranwala.

Versus

M/s Malik Silk Emporium, Hajipura Bazar, Gujranwala.

J U D G M E N T.

Date of hearing 23.09.2026.

Applicant by Rana Muhammad Mehtab, Advocate. Respondents by: Mr. Faheem Bhatti, Advocate Muhammad Ajmal Zahid, J.— Through this Reference Application under Section 47 of the Sales Tax Act, 1990 (“the Act”), the applicant-department has called in question the order dated 19.12.2017 passed by the learned Appellate Tribunal Inland Revenue, Lahore Bench, Lahore (“the learned Tribunal”) in S.T.A. No.755/LB/2017, whereby the appeal filed by the respondent-taxpayer was allowed and the orders passed by the Assessing Officer as well as the Commissioner Inland Revenue (Appeals) were set aside. The applicant-department has raised the following questions of law:

1)“Whether, on the facts and in the circumstances of the case, the learned ATIR was justified to cancel the order of CIR (Appeals) on account of bank credit entries without bringing into record any documentary evidence whereas the taxpayer has failed to avail the opportunity provided by the CIR (Appeals) to reconcile its credit entries?”

2)“Whether, on the facts and in the circumstances of the case, the learned ATIR was justified to not provide ample opportunity for submission of documents in support of

conducting of joint business of various persons under one name and style?”

3)“Whether, on the facts and in the circumstances of the case, the order of the learned Appellate Tribunal can be termed as a speaking order in terms of Section 24-A of the General Clauses Act, 1897?”

4)“Whether, on the facts and in the circumstances of the case, the learned ATIR was justified to assume an individual as having no concern with the AOP whereas the same person was operating the business account of the AOP?”

5)“Whether, on the facts and in the circumstances of the case, the learned ATIR was justified to cancel the Order-in-Original and order of CIR (Appeals) whereas the ATIR has failed to appreciate that the subject case is a case of tax fraud and the registered person concealed true particulars in respect of its members of AOP?”

2.The controversy arises out of proceedings initiated against respondent M/s Malik Silk Emporium. According to the applicant- department, credible information was received regarding under- declaration of sales. Consequently, with the approval of the Commissioner Inland Revenue, Zone-II, Regional Tax Office, Gujranwala, the business premises of the respondent were raided on 18.08.2016 at about 01:30 p.m. under Section 175 of the Income Tax Ordinance, 2001 (“the Ordinance”), and certain record was resumed through recovery memo of the same date.

3.The case of the department was that M/s Azhar Javed, Taimoor-ul-Hassan, Farrukh Shehzad, Khalid Javed and Azhar Javed Malik were carrying on business under the name and style of M/s Malik Silk Emporium, while filing their individual income tax returns. Upon examination of the resumed record, the department formed the view that the sales declared by the aforesaid persons in their respective income tax returns were substantially lower than the sales reflected from the record recovered during the proceedings. It was further asserted that, after

obtaining permission under Section 38 of the Act, further proceedings were conducted on the basis of the resumed record.

4.Ultimately, the Deputy Commissioner Inland Revenue/Assessing Officer passed the Order-in-Original dated 21.01.2017. The Assessing Officer rejected the explanation furnished on behalf of the respondent regarding the credit entries appearing in the bank statements and cash credits in the books, observing that the tax liability had been determined on the basis of the original business record, including sales/invoice books and sales register resumed under Section 38 of the Act. The respondent was held liable for carrying on taxable business without fulfilling the statutory requirements relating to registration and for committing “tax fraud” within the meaning of Section 2(37) of the Act.

5.The Assessing Officer further observed that the respondent was carrying on business in the status of an AOP and that its managing partner, Mr. Azhar Javed, had acknowledged liability to the extent of Rs.3,570,950/-, out of which an amount of Rs.3,500,000/- had already been deposited through the specified CPRs. Consequently, the remaining sales tax liability of Rs.19,421,611/- was ordered to be deposited under Section 11(2) of the Act, along with default surcharge under Section 34(1)(c), besides imposition of penalty of Rs.22,921,611/- under Section 33 of the Act.

6.The respondent challenged the aforesaid order before the Commissioner Inland Revenue (Appeals), but remained unsuccessful. Aggrieved, the respondent carried the matter before the learned Tribunal.

7.The learned Tribunal, after examining the controversy, allowed the appeal vide order dated 19.12.2017 and set aside the orders passed by the Assessing Officer and the Commissioner

Inland Revenue (Appeals). Said order which has been called in question through the instant Reference Application.

8.We have heard learned counsel for the parties at considerable length and have examined the available record with their assistance. Before adverting to the individual questions of law formulated by the applicant-department, it is necessary to examine the basis upon which the learned Tribunal interfered with the departmental proceedings, as the same goes to the root of the controversy.

9.The learned Tribunal, while dealing with the challenge before it, specifically adverted to the procedure prescribed under Rule 6 of the Sales Tax Rules, 2006, concerning compulsory registration. The Tribunal observed that, where the Commissioner was satisfied that a person was required to be registered, the prescribed notice was required to be issued to such person, his reply was to be considered and, where the notice was contested, an opportunity of personal hearing was required to be afforded before passing an order regarding compulsory registration. The Tribunal further noticed that the department had issued the sales tax registration order in the status of an AOP on 27.09.2016, whereas the show-cause notice forming the basis of the subsequent proceedings had already been issued on 23.09.2016.

10.The aforesaid chronology is of decisive significance. The show-cause notice dated 23.09.2016 preceded the respondent's compulsory registration dated 27.09.2016. The learned Tribunal, therefore, found fault with the very initiation of proceedings and held that the procedure prescribed for compulsory registration had not been followed in accordance with law.

11.At this stage, learned counsel for the applicant-department was specifically confronted as to whether the aforesaid finding of the learned Tribunal, relating to the legality of the compulsory registration proceedings and the validity of the show-cause notice

issued prior to such registration, had been assailed through any of the questions formulated in the instant Reference Application. Learned counsel was unable to identify any such question or otherwise controvert that the said finding had remained unchallenged.

12.The consequence is significant. A finding of law which has not been specifically brought under challenge before the reference Court cannot ordinarily be permitted to be reopened indirectly by raising questions which proceed on an assumption contrary to such finding. Once the foundational finding of the learned Tribunal has remained un-assailed, it has attained finality between the parties for the purposes of the present proceedings. The reference jurisdiction of this Court cannot be converted into an avenue for examining an issue which was neither specifically formulated as a question of law nor otherwise brought under challenge.

13.The principle that an unchallenged finding of the Tribunal cannot subsequently be displaced in reference proceedings has been recognized, inter alia, in "Commissioner Inland Revenue v. Messrs Pak Arab Pipe Line Company Ltd." (2014 PTD 982), "Messrs Azad Kashmir Logging and Saw Mills Corporation (AKLASC), Muzaffarabad v. Commissioner Income Tax, Inland Revenue, Muzaffarabad" (2017 PTD 1058) and "The Commissioner of Income Tax v. Messrs Fauji Foundation" (2021

PTD 1951).

14.The significance of the aforesaid finding becomes more apparent when the nature of the proceedings initiated by the department is examined. The show-cause notice dated 23.09.2016 constituted the foundation upon which the subsequent adjudicatory proceedings culminated in the Order-in-Original dated 21.01.2017 and thereafter the appellate proceedings. If the very notice initiating such proceedings was found by the learned Tribunal to

have been issued without lawful authority, the proceedings founded upon that notice could not independently survive.

15.In other words, where the foundational proceeding is legally unsustainable, the consequential proceedings deriving their authority therefrom cannot ordinarily be sustained merely by examining the merits of the allegations contained therein. The principle that proceedings built upon an invalid foundation cannot stand independently has been recognized by the superior Courts in "Yousaf Ali v. Muhammad Aslam Zia and 2 others" (PLD 1958 Supreme Court (Pak.) 104), "Rehmatullah and others v. Saleh Khan and others" (2007 SCMR 729), "Commissioner of Income Tax and Wealth Tax, Sialkot Zone V. Messrs Maqbool Ahmed Gill" (2007 PTD 1757), "Moulana Atta-ur-Rehman v. Al-Hajj Sardar Umar Farooq" (PLD 2008 Supreme Court 663), "Pakistan Peoples Party Parliamentarians (PPPP) through its Secretary General and 4 others v. Federation of Pakistan through Secretary, Ministry of Law and Justice, Islamabad and 4 others" (PLD 2022 Supreme Court 574), "Superintendent of Police, Headquarters, Lahore and others v. Ijaz Aslam and others" (2024 SCMR 1831), "Vice-Chancellor, Agriculture University, Peshawar and others v. Muhammad Shafiq and others" (2024 SCMR 527), "Commissioner Inland Revenue, Islamabad v. Messrs Fauji Foundation and another" (2024 SCMR 788), and "Commissioner Inland Revenue (Peshawar Zone), Regional Tax Office, Jamrud Road, University Town, Peshawar v. Messrs Diamond Filling and CNG Station, Jamrud Road, Peshawar"

(2026 PTD 1106).

16.There is yet another aspect of the matter. The learned Tribunal's conclusion that the show-cause notice had been issued on 23.09.2016, i.e., before the respondent's registration on 27.09.2016, is consistent with the legal position considered by this Court in "M/s Amina Z. Beauty Salon v. Federation of Pakistan, etc." (2016 PTD 654), which judgment was upheld by the Hon'ble

Supreme Court of Pakistan, as well as in "Commissioner Inland Revenue, Gujranwala v. M/s S.K. Steel Casting Gujranwala" (2019 PTD 1493), which was also upheld by the Hon'ble Supreme Court of Pakistan vide order dated 11.03.2020 passed in Civil Petitions No.2117-L and others emanating from the judgment dated 23.04.2019 passed by this Court while deciding a number of Sales Tax References. The principle emerging from the said judgments is that proceedings under the Sales Tax Act, 1990, including issuance of a show-cause notice, are to be undertaken within the statutory framework applicable to a person registered under the Act, whether by way of ordinary or compulsory registration.

17.In the present case, therefore, the show-cause notice preceded the respondent's registration. The department has not demonstrated any lawful basis whereby proceedings founded upon such notice could nevertheless be sustained after the Tribunal had specifically found the initiation thereof to be contrary to the statutory procedure. The subsequent registration, by itself, could not retrospectively validate proceedings which had already been initiated without lawful authority.

18.In view of the above conclusion, the questions raised by the applicant-department concerning the treatment of bank-credit entries, the opportunity allegedly afforded for production of documents regarding the constitution of the AOP, the alleged relationship of an individual with the AOP, the characterization of the proceedings as involving tax fraud, and the speaking nature of the Tribunal's order, would not have any bearing upon the ultimate outcome of the matter.

19.It is a settled principle that a Court, while exercising reference jurisdiction, does not ordinarily determine an academic question where, even if answered in favour of the party raising it, such determination would not alter the ultimate result of the

proceedings or confer any effective relief upon that party. The principle has been recognized, inter alia, in "Commissioner of Income Tax, Companies No.1, Karachi v. M/s Hassan Associates (Pvt.) Ltd., Karachi" (1994 SCMR 1321), "Commissioner of Income Tax, Rawalpindi v. Messrs Rural Food Products, Rawalpindi" (2001 PTD 2306), "Commissioner of Income Tax, Companies, Lahore v. Crescent Art Fabric Limited, Lahore" (2001 PTD 2553), "Commissioner of Inland Revenue, Lahore v. Messrs Sargodha Spinning Mills (Pvt.) Ltd., Faisalabad and others (2022 SCMR 1082), Commissioner Inland Revenue, District Zone, Regional Tax Office, Rawalpindi v. Sh. Ikram Ellahi and 2 others (2025 PTD 137), and Director (ASO), Customs Intelligence and Investigation v. Awais Khalid (2024) 130 Tax 457 (H.C. Lah.).

20.Consequently, even if the questions formulated by the applicant-department were examined independently, any answer thereto would not alter the legal consequence flowing from the unchallenged finding of the learned Tribunal regarding the validity of the foundational show-cause notice. This Court, therefore, would be embarking upon an academic exercise if it were to examine the remaining questions on their merits.

21.For what has been discussed above, the applicant- department has failed to demonstrate that the impugned order suffers from any error of law warranting interference in the present reference proceedings. The foundational finding of the learned Tribunal, namely, that the proceedings were initiated through a show-cause notice dated 23.09.2016 prior to the respondent's registration dated 27.09.2016 and without adherence to the prescribed procedure for compulsory registration, has remained unchallenged. The said finding, therefore, cannot now be indirectly reopened through the questions formulated in the instant Reference Application.

22.Accordingly, the impugned order dated 19.12.2017 passed by the learned Appellate Tribunal Inland Revenue, Lahore Bench, Lahore, in S.T.A. No.755/LB/2017 does not call for interference. The instant Reference Application is, therefore, dismissed, and the questions of law are answered accordingly.

23.Office is directed to transmit a copy of this judgment under the seal of the Court to the learned Appellate Tribunal Inland Revenue in terms of Section 47(5) of the Sales Tax Act, 1990.

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

APPROVED FOR REPORTING.

Judge Judge

M. Arsalan*