Cir Multan vs M/S Al Muhammad Traders

Stereo. H C J D A-38.

JUDGMENT SHEET

IN THE LAHORE HIGH COURT, MULTAN BENCH,

MULTAN

JUDICIAL DEPARTMENT

STR No.62 of 2024

Commissioner Inland Revenue, Multan Zone, RTO, Multan Versus M/s Al-Muhammad Traders Near TMO Office, Multan Road, Kabirwala, Khanewal

JUDGMENT

Date of hearing: 05.10.2026.

Applicant by: Malik Muhammad Shahzad Awan, Advocate.

Respondent by: Nemo.

MUHAMMAD SAJID MEHMOOD SETHI, J.:- This consolidated judgment shall decide the instant Reference Application under Section 47 of the Sales Tax Act, 1990 (“the Act of 1990”), along with the following connected Reference Applications as common questions of law and facts are involved in these cases:-

1.STR No.83 of 2024 titled Commissioner Inland Revenue, Multan Zone, Regional Tax Office, Multan v. M/s Shahzad Enterprises

2.STR No.85 of 2024 titled Commissioner Inland Revenue, Multan Zone, Regional Tax Office, Multan v. M/s Al-Khair Traders, Multan

3.STR No.91 of 2024 titled Commissioner Inland Revenue, Multan Zone, Regional Tax Office, Multan v. M/s T.H. Enterprises, Multan

2.The following questions of law, asserted to have arisen out of the impugned orders, passed by the learned Appellate Tribunal Inland Revenue, Government of Pakistan, Division Bench, Multan (“Appellate Tribunal”), have been pressed and argued for our opinion:- I. Whether on the facts and in the circumstances of the case, the learned Appellate Tribunal Inland Revenue was justified to vacate the suspension order without appreciating the fact that

S.T.R. No.62 of 2024 & connected cases

show cause notice under Rule 12(a)(i) of the Sales Tax Rules, 2006 was issued before suspension of the registered person?

II. Whether the Appellate Tribunal has erred in law to vacate the suspension order on the plea that the Commissioner Inland Revenue has failed to mention number and date of show cause notice in his order, without appreciating that Commissioner had issued show cause notice and duly mentioned the same in his order and there was no requirement of mentioning the number and date of show cause notice?

III. Whether on the facts and in the circumstances of the case, the learned Appellate Tribunal is justified to set aside the suspension order without realizing that Section 21(2) of the Sales Tax Act, states that Commissioner can suspend a registered person if he is “satisfied” that the registered person is involved in issuance of fake invoices?

3.Briefly, the sales tax registration of the respondent was suspended by the Commissioner Inland Revenue vide order dated 11.12.2023 on the allegation that it had claimed/adjusted input tax against fake/flying invoices to reduce its actual tax liability and committed tax fraud within the meaning of Section 2(37) of the Act of 1990. The respondent challenged the suspension before the learned Appellate Tribunal. Vide order dated 04.03.2024, the learned Appellate Tribunal found that the Commissioner had failed to mention the number and date of the alleged show cause notice, as well as the particulars of the relevant invoices, supplies and sales tax involved. It was further noticed that the alleged supplier, M/s Sehar Boards (Pvt.) Ltd., continued to remain operative. Finding the suspension order to have been passed without fulfilling the legal requirements, the learned Appellate Tribunal set it aside and directed restoration of the respondent’s sales tax registration.

In S.T.R. No.83 of 2024, the respondent’s sales tax registration was suspended vide order dated 25.03.2024 on the allegation that it was a beneficiary of M/s Bilal Enterprises, which had allegedly claimed/adjusted input tax against fake/flying invoices. The learned Appellate Tribunal, vide order dated 17.05.2024, set aside the suspension, inter alia, on the grounds of absence of prior notice and failure to disclose particulars of the alleged invoices or supporting

S.T.R. No.62 of 2024 & connected cases

material establishing tax fraud, and directed restoration of the registration.

In STR No.85 of 2024, the respondent’s registration was blacklisted vide order dated 08.03.2024 on allegations of fake/flying invoices and tax fraud. The learned Appellate Tribunal, vide order dated 14.05.2024, set aside the blacklisting order, finding absence of prior notice and sufficient material connecting the respondent with the alleged fraud. It also noticed that the respondent’s suppliers were active and payments had been made through normal banking channels.

In STR No.91 of 2024, the respondent’s registration was suspended vide order dated 11.01.2024 on allegations of claiming inadmissible input tax against fake/flying invoices, including those relating to M/s Sehar Boards (Pvt.) Ltd. The learned Appellate Tribunal, vide order dated 13.03.2024, set aside the suspension on account of absence of prior notice, failure to disclose the particulars of the alleged invoices and lack of material establishing tax fraud or fake invoicing; it also noticed that the alleged supplier remained active.

4.Learned counsel for the applicant-department contends that the learned Appellate Tribunal erred in setting aside the suspension/blacklisting orders despite the fact that the competent authority had exercised the power conferred by Section 21(2) of the Act of 1990 on the basis of its satisfaction regarding the respondent’s involvement in tax fraud, fake/flying invoices and inadmissible input tax adjustment. He submits that the issuance of show cause notices under Rule 12 of the Sales Tax Rules, 2006 constituted sufficient compliance with the prescribed procedure and that the learned Appellate Tribunal fell into error by treating non-mentioning of the number and date of such notices, or the particulars of individual invoices, in the impugned orders as fatal to the exercise of statutory power. According to him, Section 21(2) is to be read harmoniously with Rule 12 and does not make an audit or prior adjudication of the alleged tax fraud a prerequisite for suspension or blacklisting. He,

S.T.R. No.62 of 2024 & connected cases

therefore, maintains that the learned Appellate Tribunal exceeded its jurisdiction in substituting its view for the statutory satisfaction recorded by the Commissioner and prays that the impugned orders be set aside and the questions of law answered in favour of the applicant- department.

5.The questions proposed in the four Reference Applications, though differently worded, substantially raise the same controversy: whether the power under Section 21(2) of the Act of 1990 was lawfully exercised by the Commissioners; whether the procedural requirements embodied in Rule 12 of the Sales Tax Rules, 2006 were complied with; and whether the learned Appellate Tribunal was justified in interfering with the suspension/blacklisting orders on account of absence of prior notice, particulars of the alleged transactions and material establishing the alleged tax fraud.

6.The common question must be examined in the light of the nature of the power exercised by the Commissioners. Suspension or blacklisting of a sales tax registration is not a mere procedural step. It directly affects the registered person’s statutory status and, consequently, his ability to carry on business. Such action, therefore, cannot be divorced from the requirements of fair hearing, due process and natural justice. The fact that the statute confers a power upon the Commissioner to act upon his “satisfaction” does not render such satisfaction immune from scrutiny, nor does it dispense with the statutory and constitutional safeguards governing exercise of that power.

7.The jurisprudential foundation of this requirement is found in Saleem Ahmed and others v. Federation of Pakistan and others (2021 PTD 1813), wherein the High Court examined Section 21(2) of the Act of 1990 and Rule 12 of the Sales Tax Rules, 2006 in the context of Articles 10-A and 18 of the Constitution. It was held that delegated legislation must remain within the limits of the parent statute and cannot enlarge the substantive power conferred thereby. The Court further held that the expression “satisfied” in Section 21(2)

S.T.R. No.62 of 2024 & connected cases

requires the Commissioner to reach a conclusion on the basis of sufficient material establishing that the registered person had issued fake invoices or otherwise committed tax fraud; such satisfaction could not rest upon a one-sided assessment without affording the affected person an opportunity to present his case. The Court consequently declared Rule 12(a)(i), to the extent it authorized suspension without prior notice, to be ultra vires the Constitution, violative of natural justice and in excess of the authority vested under Section 21(2).

8.The same principle had earlier been recognized in Messrs Imran Ali Lubricants through Managing Partner v. Federation of Pakistan through Secretary Revenue Division, Islamabad and 3 others (2018 PTD 1042) and was subsequently upheld by the Division Bench of this Court in Commissioner Inland Revenue, Lyallpur Zone, Faisalabad and 3 others v. Messrs Imran Ali Lubricants through Managing Partner (2019 PTD 1213). More recently, in Shell Pakistan Ltd. v. Federation of Pakistan and others (2025 PTD 538), while considering suspension under Section 21(2) read with Rule 12(a)(i), the High Court again set aside an order of suspension passed without issuance of a show-cause notice, reiterating the constitutional and natural-justice limitations upon the exercise of such power.

9.The requirement is not satisfied merely because reasons are subsequently recorded in the order of suspension. In Muhammad Tahir through Attorney v. Federal Board of Revenue through Chairman Ministry of Finance, Islamabad and another (2023 PTD 1087), the High Court held that even though the suspension order contained reasons, the action could not be sustained where those reasons had not been communicated beforehand, no reply had been obtained and no opportunity of hearing had been afforded before drawing an adverse inference. The Court reiterated that no person can be condemned unheard and treated the departmental action undertaken in breach of that requirement as non-est in law. Thus, the relevant

S.T.R. No.62 of 2024 & connected cases

inquiry is not merely whether the Commissioner recorded reasons, but whether the registered person was given a meaningful opportunity to know and answer the case against him before adverse action was taken.

10.Tested against these principles, the impugned orders of the Commissioners could not validly be sustained merely by making a general assertion that the respective registered persons had claimed or adjusted input tax against fake/flying invoices. In the instant case, the learned Appellate Tribunal specifically found that the Commissioner had not disclosed the number and date of the alleged show-cause notice or the particulars of the invoices, supplies and sales tax involved. In STR No.83 of 2024, no prior notice was found to have been given and no particulars of the alleged invoices were disclosed. In STR No.85 of 2024, the same deficiency was found in the blacklisting proceedings, coupled with absence of an audit or other supporting material. In STR No.91 of 2024, again, no prior notice was given, no fake invoice was confronted to the respondent and no particulars of the alleged transactions were disclosed.

11.These deficiencies cannot be treated as inconsequential technicalities. Where the very foundation of the adverse action is an allegation of fake/flying invoices, inadmissible input tax and tax fraud, the affected registered person must know what invoices, transactions, amounts and material constitute the basis of the allegation. Without disclosure of such particulars, the right of hearing becomes merely illusory. The Commissioner’s statutory “satisfaction” must be founded upon relevant and tangible material, and cannot be converted into an unreviewable subjective belief by merely recording the expression “satisfied” in the order.

12.The additional factual circumstances noticed by the learned Appellate Tribunal also lend further support to its conclusions, although they are not being treated as independently determinative of the genuineness or otherwise of the underlying transactions. In the instant case as well as connected STR No.91 of 2024, the alleged

S.T.R. No.62 of 2024 & connected cases

supplier, M/s Sehar Boards (Pvt.) Ltd., was found to be active/operative on the Department’s own system. In STR No.85 of 2024, the learned Appellate Tribunal noticed that the respondent’s suppliers were active in sales tax and that payments had been made through normal banking channels. These circumstances could not, by themselves, conclusively establish the genuineness of every transaction, but they were certainly relevant to the question whether the serious allegations of fake invoicing and tax fraud had been sufficiently substantiated when the drastic action of suspension or blacklisting was taken.

13.The above factual aspect also finds support from the recent judgment of the Hon’ble Supreme Court in Commissioner Inland Revenue, Lahore v. Messrs Eagle Cables (Pvt.) Ltd., Lahore (2025 SCMR 728). It was held therein that where purchases were made when the suppliers were active and duly registered, and payments were made through legitimate banking channels in compliance with Section 73 of the Act of 1990, subsequent suspension or blacklisting of such suppliers could not, by itself, retrospectively invalidate the invoices or justify denial of input tax adjustment. The principle is not that an active supplier’s invoice is immune from scrutiny; rather, subsequent blacklisting, without more, is insufficient to establish that an earlier transaction was fraudulent. This principle assumes relevance here because the Department relied upon allegations of fake/flying invoices while the learned Appellate Tribunal noticed the active status of the alleged suppliers and, in one case, banking-channel payments.

14.Likewise, in STR Nos.83, 85 and 91 of 2024, the learned Appellate Tribunal noticed the absence of an audit or other independent material establishing the alleged tax evasion, fraud or use of fake invoices. The applicant-department’s contention that an audit is not invariably required before action under Section 21(2), considered in isolation, does not resolve the controversy. The decisive question is whether the Commissioner’s satisfaction was founded

S.T.R. No.62 of 2024 & connected cases

upon sufficient and relevant material and whether the statutory power was exercised through a legally permissible procedure. The absence of an audit was noticed by the learned Appellate Tribunal along with the absence of specific invoices, transaction particulars, prior notice and other supporting material. Its conclusion, therefore, cannot be characterized as resting solely upon the supposed requirement of an audit.

15.It is also significant that the initial burden of establishing the factual foundation for an allegation of tax fraud rests upon the Department. This principle was recognized in Saleem Ahmed’s case supra with reference to Fancy Foundation v. Commissioner of Income Tax, Karachi (2017 SCMR 1395) and Al-Hilal Motors Stores v. Collector Sales Tax and Central Excise East (2004 PTD 868). In the present cases, the Department has not been able to demonstrate that the learned Appellate Tribunal ignored any concrete material establishing the respondents’ involvement in fake invoicing or tax fraud. Nor can the reference jurisdiction be converted into an exercise for reappraisal of the factual material which was before the learned Appellate Tribunal.

16.The applicant-department’s reliance upon the expression “satisfied” occurring in Section 21(2) of the Act of 1990, therefore, does not advance its case. Satisfaction is a statutory condition, not a substitute for evidence or procedure. It must be founded upon relevant material and reached in accordance with law. Equally, the power conferred by Section 21(2) cannot be enlarged through Rule 12 beyond the limits of the parent statute, nor can the safeguards of natural justice be displaced by an administrative assertion of urgency or statutory discretion. Where the exercise of such power produces serious civil and commercial consequences, the requirements of fair hearing and due process acquire particular significance.

17.In reference jurisdiction under Section 47 of the Act of 1990, this Court is concerned with a question of law arising from the order of the learned Appellate Tribunal, and not with a fresh determination

S.T.R. No.62 of 2024 & connected cases

of disputed factual matters. The learned Appellate Tribunal is the final forum for appreciation of facts. In the present cases, the findings recorded by it are based upon the material before it and upon deficiencies apparent from the respective orders of the Commissioners. The applicant-department has not demonstrated any perversity, misreading or non-reading of evidence, nor any legal infirmity in the Tribunal’s conclusion warranting interference.

18.In view of the foregoing discussion, the mere issuance of a show cause notice before suspension cannot, by itself, validate the exercise of power under Section 21(2) of the Act of 1990. The notice must disclose the factual basis of the proposed adverse action with sufficient particulars to enable the registered person to meaningfully answer the allegations. Likewise, the absence of the number and date of the notice cannot be viewed in isolation where the impugned order itself fails to disclose the material particulars forming the basis of the allegation of fake / flying invoices and tax fraud. The statutory requirement of the Commissioner’s “satisfaction” under Section 21(2) of the Act of 1990 also cannot be treated as an unreviewable subjective opinion; such satisfaction must be founded upon relevant and sufficient material and reached in accordance with law. The learned Appellate Tribunal, therefore, committed no error of law in interfering with the suspension/blacklisting orders in the circumstances brought before it.

19.Consequently, Question No.I is answered in the affirmative, Question No.II is answered in the negative, and Question No.III is also answered in the affirmative, against the applicant-department and in favour of the respective respondents.

Accordingly, instant Reference Application as well as connected S.T.R. Nos.83, 85 and 91 of 2024 are dismissed.

S.T.R. No.62 of 2024 & connected cases

20.Office shall send a copy of this judgment under the seal of the Court to the learned Appellate Tribunal in terms of Section 47(5) of the Sales Tax Act, 1990.

(Sultan Tanvir Ahmad) (Muhammad Sajid Mehmood Sethi) Judge Judge

APPROVED FOR REPORTING

Judge Judge

*A.H.S.*