CIR RTO Faisalabad Vs Ms Mubashar Weaving Factory .

Stereo. H C J D A 38.

Judgment Sheet

IN THE LAHORE HIGH COURT LAHORE

JUDICIAL DEPARTMENT

Case No: STR No.7399/2021

Commissioner Inland Versus M/s Mubashar Weaving Revenue Factory

JUDGMENT

Date of hearing 06.10.2026 Applicant by Shahid Sarwar Chahil, Advocate Respondent by: Nemo

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 02.10.2020 passed by the learned Appellate Tribunal Inland Revenue, Lahore Bench, Lahore (“the learned Tribunal”) in MA(AG) Nos.68/LB/2020 and 69/LB/2020 arising out of S.T.A. Nos.1328/LB/2019 and 1329/LB/2019.

2.Briefly stated, the facts giving rise to the instant Reference Application are that the respondent, aggrieved of the departmental action taken against its sales tax registration, preferred the aforesaid appeals before the learned Tribunal. During the pendency of the appeals, the respondent filed miscellaneous applications seeking permission to raise additional grounds of appeal. The learned Tribunal, upon examining the proposed grounds, found that the same involved material questions having a bearing upon the just and proper adjudication of the controversy. Consequently, the miscellaneous applications were allowed and the respondent was permitted to advance its case on the basis of the additional grounds.

3.The controversy has its genesis in the suspension and subsequent blacklisting of the respondent’s sales tax registration bearing STRN-2400521012373. The registration was initially suspended vide order No.CIR/RTO/Fsd/1641 dated 05.06.2014 and was subsequently blacklisted vide order No.CIR/RTO/Fsd/212 dated 08.08.2014. The departmental action was founded, inter alia, upon the allegation that, following the promulgation of SRO 1125(I)/2011 dated 31.12.2011, the respondent had exhibited abnormal business activity in the zero-rated sector. It was further alleged that the respondent had made purchases from suspended or blacklisted units, had failed to bring the identities of its suppliers on record and was involved in tax fraud within the meaning of Section 2(37), read with Section 2(14), of the Act. According to the department, the respondent had undertaken mere paper transactions and had issued fake and flying invoices to suspended or blacklisted buyers.

4.On the basis of the aforesaid allegations, the Commissioner Inland Revenue proceeded under Section 21(2) of the Act, read with Rule 12 of the Sales Tax Rules, 2006 (“the Rules”), as well as the relevant provisions of clause “N” of Sales Tax General Order No.03/2004, as amended through Sales Tax General Order No.35/2012 dated 30.06.2012, and ordered blacklisting of the respondent’s sales tax registration.

5.The learned Tribunal, upon consideration of the record and the submissions made by the parties, allowed the appeals and set aside both the suspension and blacklisting orders. The operative portion of the impugned order reads as follows:

“We have no ambiguity in our mind in the light of facts available on record and judgments quoted supra and hereby declare the suspension order as illegal and without lawful authority because the same has been passed in contradiction to Article 10-A and 18 of the Constitution of the Islamic Republic of Pakistan. We are also in agreement with the viewpoint of the learned AR that consequential blacklisting is also illegal being

against the dictum of Apex Court and based on unconstitutional order. We, therefore, vacate the suspension and blacklisting orders vide No.CIR/RTO/Fsd/1641 dated 05.06.2014 and No.CIR/RTO/Fsd/212 dated 08.08.2014 passed by learned Commissioner IR, Zone-III (Chenab Zone), R.T.O., Faisalabad respectively. It is ordered to restore the sales tax number/restoration of the registration of registered person.”

“The appeals are allowed in the above terms.”

6.Learned counsel for the applicant-department contends that the learned Tribunal erred in law in allowing the miscellaneous applications and permitting the respondent to raise additional grounds of appeal. It is further contended that the departmental action had been taken in exercise of powers conferred by the Act and the Rules and, therefore, the learned Tribunal was not justified in setting aside the suspension and blacklisting orders. According to learned counsel, the impugned order suffers from errors of law and is liable to be set aside.

7.We have heard learned counsel for the applicant and have examined the available record with his assistance.

8.The controversy, in our view, falls for consideration under two broad aspects: first, whether the learned Tribunal committed an error of law in permitting the respondent to raise additional grounds of appeal; and, second, whether the applicant-department has demonstrated any legal infirmity in the Tribunal’s decision whereby the suspension and consequential blacklisting of the respondent’s sales tax registration were set aside. Both aspects, however, have to be examined within the limited scope of the reference jurisdiction conferred upon this Court by Section 47 of the Act.

9.So far as the first aspect is concerned, the mere omission of a particular ground from the original memorandum of appeal does not, by itself, render its subsequent consideration impermissible in every case. An appellate forum is not necessarily precluded from

permitting an additional ground where such ground involves a material question of law arising from the existing record and its consideration is necessary for the proper and effective adjudication of the dispute. The exercise of such discretion must, of course, remain within the parameters of the governing procedural law and the opposite party must be afforded a fair and adequate opportunity to meet the additional plea.

10.In the present case, the learned Tribunal entertained the miscellaneous applications upon finding that the proposed additional grounds raised substantial issues relevant to the controversy. The applicant-department has not been able to identify any statutory prohibition which rendered the Tribunal incompetent to consider such grounds, nor has any material prejudice caused to the department by their admission been demonstrated. The mere fact that the grounds were not incorporated in the original memorandum of appeal does not, in itself, constitute an error of law warranting interference by this Court in its reference jurisdiction. The question, therefore, is not whether the additional grounds could have been raised at the initial stage, but whether the learned Tribunal acted contrary to law in permitting their consideration at the stage at which they were brought forward. No such legal infirmity has been established.

11.The second and more substantive aspect concerns the legality of the suspension and subsequent blacklisting of the respondent’s sales tax registration. The powers conferred upon the tax authorities under the Act are undoubtedly statutory in character. Such powers, however, are required to be exercised strictly within the four corners of the statute and the rules framed thereunder. The existence of a statutory power does not dispense with the obligation to satisfy the conditions prescribed for its exercise, to consider relevant material, to exclude irrelevant considerations and to act upon a legally sustainable basis.

12.It is equally well settled that statutory authority must exercise its powers consistently with the constitutional guarantees applicable to the matter. Article 10-A of the Constitution guarantees the right to a fair trial and due process in the determination of civil rights and obligations, whereas Article 18, subject to reasonable restrictions imposed by law, protects the freedom to enter upon any lawful profession or occupation and to conduct lawful trade or business. These constitutional guarantees do not confer immunity upon a registered person from legitimate fiscal regulation, nor do they prevent the competent authority from taking lawful action where the statutory conditions are satisfied. They do, however, require that an adverse action having civil and commercial consequences be taken by the competent authority in accordance with law and through a procedurally and substantively sustainable process.

13.In the instant case, the departmental action was founded upon allegations of abnormal business activity in the zero-rated sector, dealings with suspended or blacklisted units, failure to disclose or establish the identities of suppliers, and issuance of fake or flying invoices. Such allegations are undoubtedly serious and, if established in accordance with law, may attract the consequences contemplated by the Act. Their seriousness, however, cannot by itself substitute for proof or compliance with the statutory requirements. The competent authority was required to consider the underlying transactions and the material relied upon against the respondent and to record a legally sustainable basis for the adverse action.

14.In particular, the allegation of tax fraud could not be treated as an established fact merely because it was incorporated in the departmental order. The characterization of a transaction as fraudulent must flow from relevant material and a lawful determination in accordance with the applicable statutory framework. The existence of suspicion, abnormality or association

with a suspended or blacklisted entity may justify further inquiry, where authorized by law, but cannot automatically dispense with the legal requirements governing suspension or blacklisting.

15.There is also a material distinction between suspension of a sales tax registration and its subsequent blacklisting. Although the two actions may arise from the same factual circumstances, each must derive its legal validity from the statutory provisions governing the particular action. The fact that a registration has been suspended does not, without more, establish the legality of a subsequent blacklisting order. Conversely, where a subsequent adverse order rests wholly upon an earlier order which has itself been found to be without lawful authority, the consequential order may not survive to the extent that its foundation has ceased to exist.

16.The learned Tribunal, after considering the record, found the suspension order to be without lawful authority and consequently held the blacklisting order to be unsustainable. In the present Reference Application, the applicant-department was required to demonstrate the precise legal infirmity in that determination. It was not sufficient merely to reiterate that the departmental authorities possessed statutory powers or that allegations of tax fraud had been levelled against the respondent. The department had to show that the learned Tribunal had misinterpreted the relevant statutory provisions, applied an erroneous legal principle, ignored a binding precedent, or otherwise committed an error of law giving rise to a question within the contemplation of Section 47 of the Act.

17.The jurisdiction of this Court under Section 47 of the Act is confined to questions of law arising out of the order of the learned Tribunal. The reference jurisdiction is not equivalent to an appellate jurisdiction enabling this Court to undertake a fresh appraisal of the entire factual controversy or to substitute its own

view merely because another conclusion may be possible on the evidence. Interference is warranted where the impugned order discloses an erroneous interpretation of the statute, application of an incorrect legal principle, disregard of a binding precedent, or a conclusion which is legally unsustainable on the material available. Conversely, where the Tribunal has considered the controversy within its jurisdiction and no specific error of law has been demonstrated, the reference cannot be converted into a vehicle for reopening factual findings.

18.The approach adopted by us finds support from the principles enunciated by the Honourable Supreme Court in Interquest Informatics Services v. Commissioner of Income Tax (2025 SCMR 257), Commissioner Inland Revenue (Special Zone for Builders and Developers), Regional Tax Office, Islamabad v. Khudadad Heights, Islamabad (2025 SCMR 716), Collector of Sales Tax and Central Excises, Lahore v. M/s Qadbros Engineering (Pvt.) Ltd., Lahore (2023 SCMR 939), Commissioner Inland Revenue, Lahore v. Sargodha Spinning Mills (Pvt.) Ltd., Faisalabad (2022 SCMR 1082), Pakistan Match Industries (Pvt.) Ltd. v. Assistant Collector, Sales Tax and Central Excise, Mardan (2019 SCMR 906), Army Welfare Trust (Nizampur Cement Project), Rawalpindi v. Collector of Sales Tax (now Commissioner Inland Revenue), Peshawar (2017 SCMR 9), F.M.Y. Industries Ltd. v. Deputy Commissioner Income Tax and another (2014 SCMR 907), Commissioner of Income Tax, Companies No.1, Karachi v. M/s Hassan Associates (Pvt.) Ltd., Karachi (1994 SCMR 1321), Commissioner of Income Tax, Central Zone-B v. Messrs Farrokh Chemical Industries (1992 PTD 523), and S.M. Ilyas & Sons v. Commissioner of Income Tax, Lahore Zone [(1982 46 Tax 113 (S.C. Pak.)].

19.Applying the above principles to the case in hand, we find that the applicant-department has failed to identify any specific question of law arising from the impugned order which would

justify interference by this Court. The department has essentially reiterated the legality of its own action and expressed disagreement with the conclusion reached by the learned Tribunal. Such disagreement, without demonstration of a legal error in the impugned order, does not convert the controversy into a referable question of law.

20.Likewise, the mere invocation of statutory provisions by the departmental authorities does not, by itself, establish that the resultant action was lawful. Statutory power must be exercised in the manner prescribed by the statute. Where the Tribunal has found the exercise of that power to be legally unsustainable, the department, in a reference under Section 47 of the Act, must demonstrate an error of law in that finding. No such error has been pointed out.

21.We are conscious of the fact that the allegations against the respondent relate to the integrity of the sales tax regime and the protection of public revenue. Such considerations are undoubtedly of substantial importance. Nevertheless, the imperative of safeguarding revenue cannot justify departure from the statutory framework or from the constitutional requirement of lawful and fair exercise of public power. At the same time, the setting aside of the impugned administrative orders on legal grounds should not be understood as a judicial declaration that every underlying transaction of the respondent was genuine or that the respondent is immune from any other proceedings lawfully permissible under the Act. The only question before us is whether the learned Tribunal committed an error of law within the scope of Section 47 of the Act. We find that it did not.

22.For the foregoing reasons, we are of the considered view that the applicant-department has failed to make out any question of law warranting interference with the impugned order of the learned Tribunal. The Reference Application is, accordingly,

dismissed. The order dated 02.01.2020 passed by the learned Tribunal is maintained.

23.Office is directed to transmit a copy of this judgment, under the seal of the Court, to the learned Appellate Tribunal Inland Revenue, Lahore Bench, Lahore, 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. Tahir*