with IR M/S Ziarat Gul Mehmood Zai Trading Company (SMC-Pvt) Ltd Vs The Federation of Pakistan through Federal Secretary, Ministry of Finance, Islamabad and others.

PESHAWAR HIGH COURT, PESHAWAR

(Constitutional Jurisdiction) W.P No.6825-P/2026 with IR

M/S Ziarat Gul Mehmood Zai Trading Company (SMC–PVT) Limited.

V.

The Federation of Pakistan through Federal Secretary, Ministry of Finance, Islamabad and others.

Petitioner(s) by: Syed Shams-ul-Islam, Advocate.

Respondent(s) by: M/S Akbar Yousaf Khalil, DAG and Muhammad Alamzeb Khan, Advocate alongwith Dr. Syed Mahmood Ali Shah, Assistant Director (Audit)/Law Officer, Directorate of I&I (IR), Peshawar.

Research assistance: Mazhar Ali Khan, Deputy Registrar (Judicial) Date of hearing: 12.08.2026

JUDGMENT

SYED ARSHAD ALI, J.-

1.The petitioner, a Single Member Company incorporated under the laws of Pakistan and a registered taxpayer, has invoked the constitutional jurisdiction of this Court through the instant petition, seeking, inter alia, the following reliefs:

(i)To declare the impugned summons issued under Section 37 read with Section 37A(4) of the Sales Tax Act, 1990 (“the Act”) dated 21.05.2026, served through WhatsApp on 29.05.2026, as well as the investigation/inquiry initiated by respondent No.5 through notice under Section 38B of the Act dated 24.04.2026, to be illegal, unlawful, without lawful authority and of no legal effect, being coram non judice, actuated by mala fide and arbitrary exercise of powers, and initiated without lawful mandate, in violation of Section 37A, as amended by the Finance Act, 2025, and the procedure prescribed through STGO No.2/2025 dated 06.08.2025 read with FBR Circular No.1(42) SA- M(IR-Ops)/2026/25980-R dated 03.03.2026;

(ii)To declare the impugned summons dated 21.05.2026, served through WhatsApp on 29.05.2026, and the investigation/inquiry initiated by respondent No.5 through notice under Section 38B of the Act dated 24.04.2026, to be void ab initio, having been undertaken in violation of the principles laid down by the Hon’ble Supreme Court of

Pakistan in M/s Taj International (Pvt.) Ltd., reported as PLD 2025 SC 633 / 2025 PTD 1270, and by this Court in Al-Hajj Steel Foundry, reported as 2025 PTD 662 (Peshawar), which, according to the petitioner, are binding upon the respondents under Articles 189 and 201 of the Constitution of the Islamic Republic of Pakistan, 1973;

(iii)To direct the respondents forthwith to close/drop the investigation/inquiry proceedings and return the record taken into possession vide Resumption Memo dated 02.04.2026, comprising eighteen items, including three laptops, one desktop computer and three mobile phones; and

(iv)To grant any other relief deemed just and appropriate in the circumstances of the case.

2.The case set up by the petitioner, in substance, is that being a registered person having an active tax profile, it was subjected to a search and raid at its premises by respondent No.5, allegedly without lawful authority or jurisdiction. During the course of the said operation, various documents, records and electronic devices were taken into possession by the respondents. On the basis of the material so obtained, respondent No.5 subsequently issued a notice under Section 38B of the Act, requiring the petitioner to participate in the investigation and produce certain documents and records for examination and consequential action. The petitioner, in response thereto, apprised the respondents that the documents and records sought had already been taken into their possession during the aforesaid search and, therefore, could not be produced by it. Notwithstanding the same, the petitioner was thereafter served with a summons dated 21.05.2026 under Section 37A(4) of the Act, requiring its personal appearance. The petitioner contends that the summons, as well as the proceedings initiated pursuant thereto, are a direct consequence of an initial exercise of jurisdiction which was itself unlawful and, therefore, the subsequent proceedings are without lawful authority and in violation of its fundamental rights.

3.The respondents, in their para-wise comments, have contested the petition and sought to justify the proceedings initiated against the petitioner. It has been contended that the inquiry is presently at an initial

stage and, under the statutory scheme, is required to be concluded within the prescribed period of six months. According to the respondents, no adverse or final determination has, thus far, been made against the petitioner. In support of the legality of the proceedings, the respondents have also placed on record documents purportedly demonstrating that the requisite prior authorization was obtained from the competent Commissioner Inland Revenue before initiation of the proceedings and conduct of the search and seizure operation.

4.The gravamen of the allegation against the petitioner is its alleged involvement in tax fraud. According to the respondents, the petitioner declared purchases of coal under HS Code 2701 from one Abdul Wahab, whereas the sales tax returns filed by the said Abdul Wahab for the corresponding period disclosed purchases from one Mishkatullah Khan. Further scrutiny allegedly revealed that Mishkatullah Khan had declared purchases from M/s Zahid Shahid & Sons, an entity which, according to the respondents, had neither the requisite stock of coal nor the nature of business to supply the commodity in question, as it was dealing in different commodities. The transactions forming part of the alleged supply chain have, therefore, been treated by the respondents as unverifiable. It is further alleged that the banking transactions amongst the various suppliers, including the petitioner, were merely accommodation or dummy transactions.

5.Learned counsel for the petitioner, while placing reliance upon the judgment of the Hon’ble Supreme Court in Taj International (supra), contended that the Supreme Court, affirming the judgment of the Lahore High Court in Taj International (Pvt.) Ltd. (supra), has authoritatively delineated the scope and manner in which proceedings under Section 37A of the Act could lawfully be initiated. According to learned counsel, the Lahore High Court, whose judgment was subsequently affirmed by the Hon’ble Supreme Court, had held that criminal prosecution, including

arrest under Section 37A of the Act, could not lawfully be resorted to unless the tax liability of the concerned person had first been determined through adjudicatory proceedings under Section 11 of the Act. It was, therefore, argued that, in the absence of any proceedings under Section 11 for determination and assessment of the petitioner’s tax liability, invocation of Section 37A and issuance of the impugned summons are premature, unlawful and contrary to the binding ratio laid down in Taj International (supra).

6.Learned counsel next contended that Section 40 of the Act specifically empowers a Magistrate to issue a search warrant. In the present case, however, the search warrant was issued by the learned Special Judge, Customs, Taxation & Anti-Smuggling, Khyber Pakhtunkhwa, Peshawar. According to learned counsel, the learned Special Judge was not vested with the statutory jurisdiction to exercise a power expressly conferred upon a Magistrate under Section 40 of the Act. Consequently, it was argued that the search warrant was coram non judice, and all actions undertaken pursuant thereto were without lawful authority and of no legal effect.

7.Conversely, learned Departmental Representative and learned counsel appearing for the Revenue controverted the submissions advanced on behalf of the petitioner. They contended that the Finance Act, 2025 introduced substantial amendments to Sections 37A and 33 of the Act, whereby the statutory scheme governing inquiry, investigation and prosecution for tax fraud underwent a material transformation. Particular emphasis was placed upon the non-obstante clause now incorporated in Section 37A, which, according to learned counsel, expressly enables proceedings under Section 37A to operate notwithstanding the provisions of Section 11E of the Act. It was further submitted that the proviso to Section 11E itself recognizes the independent operation of Section 37A by providing that Section 11E shall

not apply to the extent of proceedings already initiated under Section 37A. The Revenue, therefore, maintained that inquiry and investigation under the amended Section 37A constitute an independent statutory mechanism and are not contingent upon prior adjudication of tax liability under Section 11E.

8.We have heard the learned counsel for the parties and have examined the record with their assistance. The controversy arising in the instant petition essentially gives rise to three questions requiring determination. First, whether the ratio laid down by the Hon’ble Supreme Court in Taj International (supra), rendered in the context of the pre- amendment statutory framework, continues to govern proceedings initiated under Section 37A after the amendments introduced through the Finance Act, 2025. Second, whether the substituted Section 37A confers an independent statutory power upon the Inland Revenue authorities to initiate inquiry and investigation notwithstanding the absence or pendency of adjudicatory proceedings under Section 11E of the Act. Third, whether the search warrant issued by the learned Special Judge under Section 40 of the Act was without jurisdiction and, if so, what legal consequence, if any, such defect entails for the inquiry and investigation initiated against the petitioner. These questions shall be examined seriatim.

9.At the outset, we deem it appropriate to examine the first question, namely, the continued applicability of the ratio in Taj International (supra) to proceedings initiated under the amended Section 37A. For that purpose, it is necessary to appreciate the statutory scheme which fell for consideration before the Hon’ble Supreme Court and the precise legal infirmity which led the Court to hold that criminal proceedings under Section 37A were premature in the absence of prior determination of the tax liability. Prior to its substitution through the Finance Act, 2025, Section 37A of the Act provided as under:

“37A. Power to arrest and prosecute.— (1) An officer of Inland Revenue not below the rank of an Assistant Commissioner of Inland Revenue or any other officer of equal rank authorised by the Board in this behalf, who on the basis of material evidence has reason to believe that any person has committed a tax fraud or any offence warranting prosecution under this Act, may cause arrest of such person.

(2)All arrests made under this Act shall be carried out in accordance with the relevant provisions of the Code of Criminal Procedure, 1898 (Act V of 1898).

(4)Notwithstanding anything contained in subsection (1) to subsection (3) or any other provision of this Act, where any person has committed a tax fraud or any offence warranting prosecution under this Act, the Commissioner may, either before or after the institution of any proceedings for recovery of tax, compound the offence if such person

(5)Where the person suspected of tax fraud or any offence warranting prosecution under this Act is a company, every director or officer of that company whom the authorised officer has reason to believe is personally responsible for actions of the company contributing the tax fraud or any offence warranting prosecution under this Act shall be liable to arrest; provided that any arrest under this subsection shall not absolve the company from the liabilities of payment of tax, default surcharge and penalty imposed under this Act.”

The relevant portion of Section 33(24) of the Act, as it then stood, provided as follows:

“33. Offences, penalties and punishment.— Whoever commits any offence described in column (1) of the Table below shall, in addition to and not in derogation of any punishment to which he may be liable under any other law, be liable to the penalty mentioned against that offence in column (2) thereof.”

Offence:

13.(i) Any person who commits or causes to commit tax fraud as defined under sub-clauses (a), (b), (c), (d), (e) or (f) of clause (37) of section 2.

(ii)Any person who commits or causes to commit tax fraud as defined under sub-clauses (g), (h), (i), (j) or (k) of clause (37) of section 2.

Penalty and punishment:

(i)Such person shall be liable, upon conviction by a Special Judge, to imprisonment for a term which may extend up to five years. Such person shall also be liable to pay the amount equal to the loss of tax caused as confirmed by the Special Judge from such amount reported under subsection (11) of section 37B, including one hundred per cent penalty of tax loss and default surcharge under section 34 of the Act.

(ii)Such person shall be liable, upon conviction by a Special Judge, to imprisonment for a term which may extend up to five years. Such person shall also be liable to pay the amount equal to the loss of tax

caused as confirmed by the Special Judge from such amount reported under subsection (11) of section 37B, including one hundred per cent penalty of tax loss and default surcharge under section 34 of the Act.”

10.The factual backdrop of Taj International (supra) is also material to appreciate the ratio of the said judgment. In that case, criminal proceedings under Sections 37A and 37B of the Act were initiated against 134 persons in relation to an alleged tax fraud. The accused included registered sales tax persons allegedly benefiting from the fraud as well as other persons alleged to have facilitated its commission through negligence or connivance. On the basis of information regarding an alleged cartel involved in the issuance of fake sales tax invoices for generating inadmissible input tax adjustments, an FIR was registered on 26.03.2011 by the Additional Director, Intelligence and Investigation, FBR, Regional Office, Lahore. The investigation subsequently disclosed an alleged large-scale sales tax scam involving tax evasion of approximately Rs.7.5 billion and 144 dummy suppliers allegedly involved in the issuance of fake sales tax invoices.

11.The proceedings were initially challenged before the Lahore High Court, which ordered quashment of the FIRs on grounds that were subsequently affirmed by the Hon’ble Supreme Court in Taj International (supra). It is, therefore, apposite to reproduce the relevant observations of the Hon’ble Supreme Court, particularly paragraphs 16 and 18 thereof, which illuminate the legal basis of the decision:

“16. The cumulative effect of the provisions of Sections 11, 25(5), 33, 37A and 37B of the Act reflects upon the intention of legislature to provide for invoking criminal proceedings against such person who is found engaged in the offence of ‘tax fraud’ through registration of FIR and arrest of a person found involved in such offence and also to effectuate recovery of amount of sales tax evaded and not paid by the registered person. The two prerequisites for invoking the provisions of Sections 33 and 37A are: dependence of fine on the ‘amount or loss of tax involved’ and the window of compoundability which is available to the taxpayer, who can pay the ‘amount of tax due along with such default surcharge and penalty as determined under the provisions of this Act.’ If the purpose was simple retribution and deterrence, there was no need to make the fine dependent with the amount or loss of tax involved. However, if the fine under criminal prosecution is to be

dependent with the amount or loss of tax, such a criminal construct must be prefaced with the mandatory requirement of assessment of tax through civil adjudication provided under Section 11 of the Act. This precondition in our view, is the minimum constitutional requirement to ensure fair trial and due process under Articles 4 and 10-A of the Constitution.

18.Perusal of Section 37A shows that if such provisions are allowed to be invoked independently without any reference to the other relevant provisions of Sales Tax Act, 1990 including Section 2(37) ‘tax fraud’, Section 3 ‘Scope of Tax’, Section 11 ‘Assessment of tax’ and Section 33 ‘Offences and Penalties’, the same will be in violation of the substantial provisions relating to Charge of Sales tax and Assessment of Sales tax, as it will give unbridled powers to officials of sales tax to initiate criminal prosecution against a Registered person or any person within the supply chain, including Registration of FIR and Arrest, even without creating a lawful demand under the law. If such an interpretation is made in respect of provisions of Section 37A the same will make the aforesaid provisions of the Act as redundant, whereas, redundancy cannot be attributed to legislation. Reliance in this regard can be placed in the case of Collector of Sales Tax and Central Excise (Enforcement) and another v. Messrs Mega Tech (Pvt.) Ltd. (2005

SCMR 1166).”

12.Another significant consideration which weighed with the Hon’ble Supreme Court, as reflected in paragraph 15 of Taj International (supra), was the procedural difficulty arising from the fact that the “fine” prescribed under the Act was dependent upon the “amount or loss of tax involved”. The Court observed:

“Even if we assume that the Special Judge convicts the taxpayer, he cannot award the sentence, as ‘fine’ is dependent on the ‘amount or loss of tax involved’ and it is not within the competence or jurisdiction of the Special Judge to assess tax or determine the ‘amount or loss of tax involved’ which is not part of the offence but of the sentence. Further, the facility of compoundability under Section 37(A)(4) is not available to the taxpayer, unless the amount of tax due and penalties as determined under the Act”.

The ratio of Taj International, therefore, was founded upon the statutory relationship then existing between the civil adjudication of tax liability and the criminal consequences prescribed under Sections 33 and 37A of the Act.

13.The legislative landscape, however, underwent a material transformation through the Finance Act, 2025. In particular, Section 33(13) was amended so as to provide that a person convicted by a Special

Judge for the specified category of tax fraud shall, in addition to imprisonment which may extend to five years, be liable to pay an amount equal to the loss of tax caused, as confirmed by the Special Judge from the amount reported under subsection (11) of Section 37B, together with one hundred per cent penalty of the tax loss and default surcharge under Section 34 of the Act.

14.The significance of this amendment cannot be understated. The procedural incongruity identified by the Hon’ble Supreme Court in Taj International—namely, the inability of the criminal court to determine the amount or loss of tax upon which the criminal consequences were dependent—has been addressed by the legislature by expressly providing a mechanism whereby the amount of tax loss may be reported and confirmed within the criminal process itself. The statutory scheme, therefore, no longer proceeds upon the same premise that necessitated prior civil determination of the tax liability before recourse could be had to the criminal jurisdiction.

15.The present case must, therefore, be examined against this materially altered statutory backdrop. Although the factual allegation of tax fraud bears some resemblance to the circumstances considered in Taj International (supra), the statutory framework governing inquiry, investigation, arrest and prosecution has undergone substantial amendment. It is, consequently, necessary to examine the substituted Section 37A in order to determine whether the legislature has created an independent mechanism for inquiry and investigation which may operate notwithstanding proceedings under Section 11E of the Act. After its substitution through the Finance Act, 2025, Section 37A reads as follows:

“37A. Power to inquire, investigate offences warranting prosecution under this Act and Arrest of a person.—

(1)Notwithstanding anything contained in Section 11E of this Act, an officer of Inland Revenue not below the rank of Assistant Commissioner or any other officer authorized by the Board in this

behalf, on the basis of material evidence pointing to the commission of tax fraud or an offence warranting prosecution under this Act, may initiate an inquiry upon approval by the Commissioner.

(2)For the purpose of an inquiry under this Act, the officer of Inland Revenue shall have the powers of a civil court trying a suit under the Code of Civil Procedure, 1908 (Act No. V of 1908), in respect of the following matters, namely:—

(a)summoning and enforcing the attendance of any person and examining on oath; and

(b)requiring the discovery and production of documents and receiving evidence on affidavits.

(3)The officer of Inland Revenue shall complete the inquiry while exercising the powers under the provisions of section 37, 38, 38A, 38B, 40 or any other section of the Act, wherever required, within six months.

(4)During inquiry proceedings, the officer of Inland Revenue shall give an opportunity of being heard to the person whose actions alleged to have caused tax fraud warranting prosecution under this Act, confronting the person [with] the details of tax fraud committed or caused to be committed by such person for explanation.

(5)The officer of Inland Revenue shall submit inquiry report along with reasons to be recorded in writing indicating the amount involved in tax fraud worked out as a result of such inquiry to the Commissioner to obtain prior approval for investigation or the closure of inquiry without any further investigation.

(6)The Commissioner, on the basis of inquiry report under subsection (5) and after recording reasons in writing, shall either—

(i)approve initiation of investigation; or

(ii)require the officer of Inland Revenue to submit such further information or documents as he may direct for his decision; or

(iii)close the inquiry by rejecting the report or accepting the report, as the case may be.

(7)After approval of investigation under subsection (6), the officer of Inland Revenue shall complete investigation within three months and prepare investigation report for submission before the competent court.

(8)The three-member committee notified by the Chairman may authorize the Commissioner to issue warrant of arrest of a person, if it is satisfied on the basis of facts brought before it, that—

(a)the tax fraud falls within the ambit of sub-clauses (a), (b), (c), (d), (e) and (f) of clause (37) of section 2;

(b)the amount involved in tax fraud exceeds fifty million rupees; and

(c)it has been established during the course of investigation by the Inquiry Officer that—

(i)the accused is intentionally or willfully not joining the investigation after three duly served notices;

(ii)the accused is attempting to abscond; or

(iii)there are sufficient grounds that the accused would tamper with the evidence.

(9)Notwithstanding anything contained in subsection (8), the officer of Inland Revenue may arrest a person alleged to have committed a tax fraud after obtaining an arrest warrant from the Special Judge in a case of a fraud falling within the ambit of the subclauses of clause (37) of section 2 during the course of investigation if—

(i)the accused is intentionally or willfully not joining the investigation after three duly served notices;

(ii)the accused is attempting to abscond; or

(iii)there are sufficient grounds that the accused would tamper with the evidence.

(10)Where the person suspected of tax fraud or any offence warranting prosecution under this Act is a company, every director or officer of that company whom the officer of Inland Revenue has reason to believe is personally responsible for actions of the company contributing the tax fraud or any offence warranting prosecution under this Act shall be liable to arrest; provided that any arrest under this subsection shall not absolve the company from the liabilities of payment of tax, default surcharge and penalty imposed under this Act.

(11)Notwithstanding anything contained in this Act, where any person has committed a tax fraud or any offence warranting prosecution under this Act, the Commissioner may, either before or after the inquiry or investigation, compound the offence if such person pays the amount of tax evaded or sought to be evaded as determined in the inquiry or the investigation along with default surcharge and penalty as provided under this Act.

(12)Any person accused of an offence who is arrested under this Act shall at the time of arrest be informed of the grounds of arrest in writing on the basis of which he has been arrested.

(13)All arrests made under this Act shall be carried out in accordance with the relevant provisions of the Code of Criminal Procedure, 1898:

Provided that no arrest under this section shall be made before the completion of inquiry under subsection (1) of this section.

(14)The accused arrested may approach the competent court for his release on bail under the provisions contained in sections 497 and 498 of the Code of Criminal Procedure, 1898.

(15)The purpose of prosecution under the provisions of sections 37A and 37B of this Act shall remain to—

(a)create sufficient deterrence against tax fraud; and

(b)provide for retribution for commission of tax fraud.”

16.A plain reading of the substituted provision makes it evident that the legislature has introduced a materially different statutory scheme. Of particular significance is the non-obstante clause at the very inception of Section 37A, whereby the power to initiate an inquiry is expressly conferred “notwithstanding anything contained in Section 11E” of the Act. The provision thereafter sets out, in considerable detail, the manner in which inquiry is to be initiated, the powers exercisable during such inquiry, the time within which it is to be completed, the right of hearing available to the person proceeded against, the requirement of a reasoned inquiry report, the approval mechanism for initiation of investigation, the time prescribed for completion of investigation, and the circumstances in which arrest may be authorized. The statutory scheme thus manifests a legislative intent to create an independent mechanism for inquiry and investigation in cases involving tax fraud.

17.The legislative scheme introduced through the Finance Act, 2025 has subsequently been supplemented by administrative instructions intended to regulate the exercise of powers under Section 37A. In this regard, the Federal Board of Revenue, through notification dated 06.08.2025, prescribed the procedure for initiation of an inquiry under Section 37A. Subsequently, by circular dated 03.03.2026, the Board issued Standard Operating Procedures governing the initiation and conduct of proceedings under Section 37A, including in circumstances where proceedings under Section 11E are pending. While such administrative instructions cannot enlarge, restrict or otherwise alter the scope of the statutory power conferred by Parliament, they nevertheless demonstrate that the Revenue authorities have understood and

implemented Section 37A as an independent statutory mechanism capable of operating alongside the proceedings contemplated under Section 11E.

18.It is a settled principle of statutory interpretation that where the language employed by the legislature is clear and unambiguous, effect must ordinarily be given to its plain and ordinary meaning. The Court cannot, under the guise of interpretation, add words to or subtract words from an otherwise clear statutory provision, for doing so would amount to entering the legislative domain. The principle assumes particular significance in the present case because the substituted Section 37A expressly commences with a non-obstante clause and thereafter contains a comprehensive scheme governing inquiry, investigation, arrest and compounding. The limitations which were read into the pre-amendment statutory framework in Taj International (supra) cannot, therefore, automatically be transposed into a materially altered legislative scheme without first examining whether the statutory foundation underlying those limitations continues to exist.

19.We are conscious that the legislature cannot, merely by employing a non-obstante clause, declare a judicial decision ineffective or directly overrule a judgment rendered by a constitutional court in exercise of judicial power. The constitutional limits of legislative validation were authoritatively delineated by the Hon’ble Supreme Court in Molasses Trading & Export (Pvt.) Limited v. Federation of Pakistan (1993 SCMR 1905). It was held that a mere legislative declaration seeking to nullify the effect of a judicial decision would not be sufficient. Where legislation is intended to validate an action or remove the basis of a judicial determination, the conditions underlying the decision must themselves be altered in such a manner that the decision ceases to apply to the altered statutory circumstances. The essential test, therefore, is whether the legislature has removed the legal defect identified by the Court. This

principle was reiterated in Government of Pakistan v. Facto Belarus Tractors Limited (2000 SCMR 112), wherein the Supreme Court recognized the plenary legislative power to enact laws prospectively or retrospectively, subject to constitutional limitations.

20.Tested against the aforesaid principles, we are of the view that the Finance Act, 2025 has not merely sought to neutralize the effect of Taj International (supra) through a bare legislative declaration. Rather, the legislature has materially altered the statutory conditions upon which the said judgment proceeded. The amended Section 37A establishes an independent and structured mechanism for inquiry and investigation, notwithstanding Section 11E; prescribes the manner and time-frame for inquiry and investigation; requires the recording of reasons and successive levels of authorization; expressly affords an opportunity of hearing to the person proceeded against; provides a mechanism for determination of the amount involved in tax fraud during the inquiry/investigation; and regulates arrest and compounding within the amended statutory framework. In consequence, the very statutory incongruity identified in Taj International—namely, the dependence of the criminal consequences upon an amount of tax which could only be determined through civil adjudication—has been materially addressed by the legislature. The amended law consequently operates upon a different statutory foundation, and the absence or pendency of proceedings under Section 11E, by itself, cannot render an inquiry or investigation under the substituted Section 37A without lawful authority.

21.The present case may now be examined in the light of the foregoing statutory framework. The record reflects that an officer of the Directorate of Intelligence and Investigation initiated proceedings against the petitioner on the basis of allegations constituting, according to the Revenue, tax fraud. The allegation essentially concerns purportedly fictitious or “dummy” transactions between the petitioner and its

suppliers, with the further allegation that the goods shown in the relevant supply chain were not physically available or supplied. In order to secure access to the relevant records and material, the Revenue obtained a search warrant from the learned Special Judge, Customs, Taxation & Anti- Smuggling, Khyber Pakhtunkhwa, Peshawar, on 31.03.2026. Pursuant thereto, a search was conducted at the petitioner’s premises on 02.04.2026 and a Resumption Memo was prepared. Thereafter, the Revenue issued a notice under Section 38B on 14.04.2026, followed by a notice under Section 37 of the Act. These proceedings form part of the record before us.

22.The Revenue, in its comments, has further maintained that the inquiry has since been concluded and that the competent Director has authorized initiation of criminal investigation. It has also been stated that the investigation has been completed and that the matter is awaiting approval of the Member (Inland Revenue Operations) for further proceedings. In support thereof, the Revenue has placed on record the authorization granted by the Director, Directorate of Intelligence and Investigation, on 28.01.2026, together with the inquiry/investigation report prepared by the Deputy Director, which contains an assessment of the approximate amount involved in the alleged tax fraud. The precise allegation against the petitioner is that it claimed input tax adjustment on the basis of purchases of goods which, according to the Revenue, did not physically exist or were not actually supplied. Since the incidence and movement of sales tax in the relevant supply chain is intrinsically connected with the underlying supply of goods, the Revenue contends that the alleged non-existence of the goods and the corresponding input tax adjustment constitute matters requiring investigation under the criminal inquiry framework. Such investigative exercise is, by its very nature, wider in scope than the determination of civil tax liability.

23.The independent character of criminal proceedings is also consistent with the settled principle that the mere existence of civil proceedings on the same subject matter does not, as an inflexible rule, bar or render impermissible the initiation or continuation of criminal proceedings, where the ingredients of a criminal offence are otherwise made out. The amended statutory scheme reinforces this distinction by expressly authorizing inquiry and investigation under Section 37A notwithstanding Section 11E. The criminal process under the amended provision is consequently directed towards the investigation and prosecution of alleged tax fraud, whereas the proceedings under the civil provisions of the Act operate in their respective statutory field. The two processes may, therefore, coexist, subject always to observance of the safeguards expressly incorporated by the legislature.

24.In view of the foregoing discussion, we are of the considered view that the ratio of Taj International (supra) cannot be applied to proceedings under the substituted Section 37A. The legal deficiencies which weighed with the Lahore High Court and were subsequently affirmed by the Hon’ble Supreme Court were rooted in the pre-amendment statutory scheme, under which the criminal process was substantially dependent upon the civil determination of tax liability. In particular, the criminal fine was linked to the amount or loss of tax involved, while the Special Judge lacked jurisdiction to determine that amount, and the statutory mechanism for compounding also contemplated prior determination of the tax and allied liabilities under the Act. Those considerations constituted the foundation of the constitutional requirement identified in Taj International.

25.The Finance Act, 2025, however, has materially altered that statutory foundation. The substituted Section 37A, commencing with an express non-obstante clause vis-à-vis Section 11E, establishes an autonomous framework for inquiry and investigation and provides an

internal mechanism for determining the amount involved in the alleged tax fraud. It further incorporates procedural safeguards, including prior approval at successive stages, recording of reasons, a statutory opportunity of hearing, defined time-limits for completion of inquiry and investigation, and specific conditions governing arrest and compounding. The legislative scheme thus reflects a conscious departure from the statutory arrangement considered in Taj International. Consequently, the mere absence or pendency of proceedings under Section 11E does not, in itself, render proceedings under the amended Section 37A premature, without lawful authority or otherwise invalid. The inquiry and investigation under the substituted provision constitute a distinct statutory mechanism which may lawfully operate independently of, and notwithstanding, the proceedings contemplated under Section 11E of the Act.

26.Having answered the first and second questions concerning the statutory independence of inquiry and investigation under the newly substituted Section 37A of the Act, we now turn to the third and independent contention advanced by the learned counsel for the petitioner. It is contended that the search warrant issued in the present case was wholly without jurisdiction and coram non judice, as it was obtained from and issued by the learned Special Judge, Customs, Taxation & Anti-Smuggling, Khyber Pakhtunkhwa, Peshawar, on 31.03.2026, whereas Section 401 of the Act expressly and exclusively provides that a search warrant is to be obtained from a Magistrate. The petitioner contends that this jurisdictional defect not only invalidates the search itself but also vitiates the subsequent

1.40. Searches under Warrant.– (1) Where any officer of Inland Revenue has reason to believe that any documents or things which in his opinion, may be useful for, or relevant to, any proceedings under this Act are kept in any place, he may after obtaining a warrant from the magistrate, enter that place and cause a search to be made at any time.

investigation.

27.In evaluating this contention, we must first address the legal character of the search warrant issued by the learned Special Judge. Section 40 of the Act, in clear and unambiguous terms, authorizes “the Magistrate” to issue a search warrant. No such power has been expressly or impliedly conferred upon the Special Judge under Section 40 or any other provision of the Act. The Special Judge is appointed by the Federal Government under Section 37E2 of the Act to try offences and is expressly deemed to be a “Court of Sessions” under Section 37F of the Act. A Court of Sessions is entirely distinct from a “Magistrate”, both in terms of its legal status and in respect of its hierarchy and powers under the Code of Criminal Procedure, 1898. Nevertheless, Section 3(31) of the General Clauses Act, 1897 defines “Magistrate” to include every person exercising all or any of the powers of a Magistrate under the Code of Criminal Procedure, for the time being in force. The aforesaid provisions, when read together, clearly demonstrate that Section 40 of the Sales Tax Act, 1990 empowers a Magistrate, and not the Special Judge, to issue a search warrant.

28.Under Section 37E of the Act, the Special Judge has exclusive jurisdiction to try offences under the Act, while under Section 37F the provisions of the Code of Criminal Procedure, 1898, apply to the

2.37E. Special Judge, etc. to have exclusive jurisdiction. – Notwithstanding anything contained in this Act or in any other law for the time being in force, –

(a)no court other than the Special Judge having jurisdiction, shall try an offence punishable under this Act;

(b)no other court or officer, except in the manner and to the extent specifically provided for in this Act, shall exercise any power, or perform any function under this Act;

(c)no court, other than the High Court, shall entertain, hear or decide any application, petition or appeal under chapters XXXI and XXXII of the Code of Criminal Procedure, 1898 (Act V of 1898), against or in respect of any order or direction made under this Act; and (d) no court, other than the Special Judge or the High Court, shall entertain any application or petition or pass any order or give any direction under chapters XXXVII, XXXIX, XLIV or XLV of the aforesaid Code.

trial before the Special Judge. The statutory scheme governing inquiry, investigation and trial under the Act nowhere authorizes a Special Judge to issue search warrant at the investigation stage. Criminal proceedings ordinarily commence with inquiry or investigation at the pre-trial stage and culminate in the trial of the offence and the accused before the competent criminal court. Section 40 of the Act, in unambiguous terms, empowers the Magistrate to issue search warrant. The legislature was conscious of the fact that the trial of offences under the Act is to be conducted by a Special Judge, yet it has not empowered the Special Judge to issue a search warrant during the investigation or inquiry stage. Therefore, it cannot be assumed that the power conferred upon a Magistrate to issue a search warrant is the result of an accidental omission or legislative oversight. At the same time, the object of obtaining a search warrant is to safeguard the integrity and dignity of persons and to ensure transparency in the inspection of premises and seizure or production of documents. Obtaining a search warrant from the Special Court instead of the Magistrate can, at the best, be characterized as a procedural irregularity in the issuance of the warrant; however, such irregularity does not, by itself, render the entire subsequent proceedings invalid. The Special Court is, in any event, deemed to be a Court of Sessions and is superior in hierarchy to a Magistrate. Section 529 of the Code of Criminal Procedure, 1898 delineates certain irregularities which do not vitiate proceedings. Where a Magistrate, not empowered by law to issue a search warrant under Section 98, nevertheless issues such warrant erroneously and in good faith, the statutory scheme itself recognizes that such irregularity does not, by itself, vitiate the subsequent proceedings.3

3.529. Irregularities which do not vitiate proceedings. If any Magistrate not empowered by law to do any of the following things, namely—

(a)to issue a search-warrant under Section 98;

(b)..........

(c)..........

erroneously in good faith does that thing, his proceedings shall not be set aside merely on the ground of his not being so empowered.

29.This crucial decoupling of pre-trial procedural irregularities from the overall validity of the prosecution is a long-standing principle of our criminal jurisprudence, reflected in a continuous line of authoritative precedents. The genesis of this principle can be traced back to the landmark decision of the Privy Council in Prabhu4 which established that the competence of a court to try an offence is entirely unaffected by any illegality, defect, or want of jurisdiction in the pre-trial arrest or search warrant that brought the accused or evidence before the court. This foundational rule of trial insulation was shortly thereafter reinforced by the Lumbhardar Zutshi5, wherein it was held that a procedural failure to obtain mandatory statutory authorization for an investigation does not deprive a competent trial court of its jurisdiction once cognizance has been taken. These early common-law authorities laid down the guiding principle that, even where the evidence-gathering process is set in motion through an unauthorized pre-trial act, the core jurisdiction of the court to try the offence and the offender remains fully intact.

30.This jurisdictional demarcation was further clarified in the mid-1950s by the Supreme Court of India in H.N. Rishbud6, which drew a sharp legal distinction between the trial court’s core competence to take cognizance and the subordinate “machinery of collecting evidence.” The Court held that, while an irregular investigation does not nullify the cognizance or trial based thereon, as the irregularity of the preceding investigation has no bearing on the competence of the Court, it does not follow that the procedural defect is to be ignored. Rather, the Court established a critical procedural distinction depending upon the stage at which the objection is raised: if the breach of a mandatory provision is

4.Prabbu v. Emperor (AIR 1944 PC 73).

5.Lumbbardar Zutshi v. The King (AIR 1950 PC 26).

6.H.N. Rishbud and another v. State of Delhi (AIR 1955 SC 196).

brought to the notice of the Court at a sufficiently early stage, the Court, while not declining to take cognizance, must take the necessary steps to have the irregularity cured and the defect rectified by ordering such reinvestigation as the circumstances of the case may require. Conversely, where the objection is raised after the trial has proceeded to its conclusion, the irregularity of the preceding investigation will not vitiate the final result unless it is shown to have occasioned a miscarriage of justice. This fundamental distinction was shortly thereafter adopted by the Supreme Court of Pakistan in S.M.R. Ibrat7. Chief Justice Muhammad Munir, writing for the Court, declared in unequivocal terms that an irregularity in pre-trial arrest or any other procedural defect does not affect the jurisdiction of the tribunal before which the accused is subsequently produced.

31.This question of curability was further examined in Aziz Maseeh8, where the Lahore High Court confronted a situation in which an investigation and search were conducted by an officer below the rank of Inspector, in direct violation of the mandatory statutory prohibition contained in Section 5-A of the Pakistan Criminal Law Amendment Act, 1958. Relying upon Abdul Noor9 and Walizar10, the Court held that such statutory violation did not vitiate the trial; rather, it constituted a procedural irregularity falling within the curable provisions of Section 537 of the Cr.P.C. Subsequently, the Karachi High Court in Azizullah11 considered the mandatory requirement of issuing a notice under Section 171 of the Customs Act upon arrest or search. The Court held that the consequence of such pre-trial procedural non-compliance is not the

7.S.M.B. Ibrat v. The Commander in Chief, Royal Pakistan Navy and 2 others (PLD 1956 SC 264).

8.Aziz Maseeh v. The State (PLD 1976 Lah. 53).

9.Abdul Noor v. State (PL 1958 Dacca 165).

10.Walizar v. The State (PLD 1968 Kar. 204).

11.Azizullah v. The State (P D 1981 Kar. 250)

invalidation of the prosecution case. Rather, the sole legal consequence of an illegal search is that the statutory presumption shifting the burden of proof upon the accused is rendered inoperative. The State is thereby deprived of the procedural advantage otherwise available to it, and the prosecution is required to establish its case through positive and independent evidence. The case does not, therefore, collapse; it merely proceeds in accordance with the ordinary and rigorous standards applicable to a criminal trial.12

32.These disparate historical legal strands, spanning four decades, were ultimately consolidated and harmonized by the Balochistan High Court in Hizbullah13 case. In Hizbullah, the Court brought these chronological authorities together into a unified doctrine, holding that pre-trial procedural irregularities and defects in search proceedings, or a breach of mandatory statutory safeguards, do not affect the core competence of the trial court or, by themselves, invalidate the prosecution. The Court held that:

14.In case of Abdul Noor v. State P L D 1958 Dacca 165 and Walizar v. The State P L D 1968 Kar. 204, and in the judgment of State v. Muhammad Hussain it was held in such circumstances that the trial is not vitiated but the violation of legal provision specifying by which Police Officer a case of corruption by a public servant is to be investigated, is an irregularity falling to be dealt with under section 537, Cr.P.C. P L D 1968 Kar. 599 is the leading case on the subject and the reliance on this judgment has been placed in P L D 1981 Kar. 250 and P L D 1981 Lah. 13 referred to above. Section 172(a) of the Sea Customs Act corresponds to section 163 of the Customs Act. This provision is a safeguard against the arbitrary action of the Customs Authorities. Certain observations made by the eminent Judges in this case would support the contention that an illegality in the investigation preceding the trial does not invalidate the trial itself. In coming to this conclusion, large number of cases have been

12.Shaukat Hussain v. Zulfiqar Ahmed and 2 others (PLD 1981 Lah. 13); Crek v. Brajendra Kishore Roy Chaudhry and another (ILR 39 Cal. 953); State v. Muhammad Hussain (PLD 1968 S C 265).

13.Hizbullah v. State (1984 MLD 1510).

cited in this judgment by Mr. Justice Anwar-ul-Haq, as he then was (some of these cases have been referred to by me in this judgment). In para. 28 of the judgment, it has been observed that "apart from the cases cited by Mr. Shah Jamil Alam, there are several others as well in which a similar view has been taken, namely that any illegality in the investigation preceding a trial does not invalidate the trial itself." In Para. 30, it was observed by his Lordship that "it seems to me that in view of the overwhelming weight of authority the prosecution of the petitioners in a Court of Law could not be held to be vitiated on account of the illegal search and seizure of the goods, and it has to be held that the Court would have jurisdiction to try the offence and the offenders in respect of the goods seized as a result of the illegal search in question".

In Hizbullah, the Court unified the principle that the admissibility and relevance of evidence discovered during an illegal search are distinct from the jurisdiction of the trial court. It held that, unless a pre-trial defect is shown to have actually prejudiced the accused, the trial remains competent, and the trial court retains the exclusive authority to assess the admissibility, relevance, and reliability of the recovered evidence.

33.Our domestic statutory framework addresses and governs the curability of procedural irregularities under Section 537 of the Code of Criminal Procedure, 1898, which protects the findings and orders of a “Court of competent jurisdiction” from being reversed merely on account of irregularities in a “warrant.”:

Section 537. Finding or sentence when reversible by reason of error or omission in charge or other proceedings Subject to the provisions hereinbefore contained, no finding, sentence or order passed by a Court of competent jurisdiction shall be reversed or altered under Chapter XXVII or on appeal or revision on account__ (a) of any error, omission or irregularity in the complaint, report by police-officer under section 173, summons, warrant, charge, proclamation, order, judgment or other proceedings before or during trial or in any inquiry or other proceedings under this Code, or (b) of any error, omission or irregularity in the mode of trial, including any misjoinder of charges, unless such error, omission or irregularity has in fact occasioned a failure of justice. Explanation_ In determining whether any error, omission or irregularity in any proceeding under this Code has occasioned

a failure of Justice, the Court shall have regard to the fact whether the objection could and should have been raised at an earlier stage in the proceedings.]

34.In Muhammad Hanif,14 the Supreme Court of Pakistan addressed non-compliance with search-warrant requirements and held that non- compliance with the provisions of Sections 21 and 22 of the CNSA, 1997, does not vitiate the trial, and that such omission, being an “irregularity,” can be remedied under Section 537 of the Cr.P.C. Similarly, in Muhammad Younas,15 the Supreme Court observed that the trial court is required to determine the guilt or innocence of an accused on the basis of the evidence produced before it, irrespective of the manner in which such evidence is brought before the court. These principles were reaffirmed in Syed Zulfiqar Shah16. wherein the Supreme Court observed that the statutory provisions requiring search warrants are directory and that their non-compliance “may entail departmental disciplinary action or penal action or both against the delinquent police official, but do not affect the admissibility of the fact of recovery of the narcotics in evidence before the trial court.” Given that the Special Judge is the exclusive statutory forum for the trial of offences under Section 37E, any procedural misstep at the warrant stage is a matter of “process” rather than “jurisdiction.” To treat a single investigative brick as the entire edifice would be to allow technical procedural defects to override the substantive legislative intent underlying the prosecution of tax fraud.

35.This functional distinction between curable procedural irregularities and fatal jurisdictional defects is embedded in the statutory architecture of the Sales Tax Act itself, mirroring the classic distinction

14.Muhammad Hanif v. The State (2003 SCMR 1237).

15.Muhammad Younas v. Mst. Perveen (2007 SCMR 393).

16.Syed Zulfiqar Shah v. State (2022 SCMR 1450).

between Sections 529 and 530 of the Cr.P.C. Under the Act, it is necessary to distinguish between those provisions regulating the machinery of inquiry, investigation, and evidence-gathering and those governing the judicial competence and cognizance of the Trial Court. Sections 37, 37A, 37B, 38, 38A, 38B, and 40 of the Act constitute the administrative and pre-trial processes of the Inland Revenue investigative wing. These provisions prescribe procedural mechanisms for inquiry, investigation, and discovery, such as summoning witnesses, requiring the production of documents, conducting searches pursuant to warrants, and recording arrests, which are designed to facilitate the detection and investigation of tax fraud. Being ancillary and subordinate to the trial itself, any procedural departure, technical defect, or non-compliance at these pre-trial stages does not, by itself, affect the Court’s core trial jurisdiction and is prima facie capable of being cured or assessed for its effect under Section 537 of the Cr.P.C. Conversely, Sections 37C (appointment of Special Judges), 37D (jurisdictional cognizance), and 37E (exclusive trial jurisdiction of the Special Court) are of an entirely different legal character. These provisions regulate the very competence and judicial authority of the Court. Any defect affecting these core provisions—such as a trial conducted by a person not qualified for appointment as a Special Judge under Section 37C, a Trial Court assuming cognizance in a manner not authorized under Section 37D, or a court other than the designated Special Court attempting to try an offence in violation of the exclusive trial jurisdiction conferred by Section 37E— would constitute a fundamental want of jurisdiction, rendering the proceedings void ab initio. Since the Special Court in the present case is lawfully constituted and vested with jurisdiction under Sections 37C and 37E, its trial jurisdiction remains intact. Whether the specific pre-trial irregularity concerning the search warrant issued under Section 40 has, in fact, caused prejudice to the accused or occasioned a failure of justice remains a question of fact and law to be determined by the Trial Court.

This Court, therefore, refrains from expressing any definitive opinion on the merits of the prosecution or the ultimate admissibility of the seized materials, so as to avoid causing prejudice to either party at the trial.

Whether the procedural defect in obtaining the warrant has caused prejudice to the petitioner or affected the fairness of the prosecution is a mixed question of law and fact. Under Sections 37E and 37F of the Act, the Special Court (Trial Court) is vested with exclusive jurisdiction to try offences under the Act and to apply the provisions of the Code. It is, therefore, the Trial Court that must evaluate the evidence, determine its admissibility and evidentiary weight, and adjudicate whether the procedural lapse has caused any actual prejudice to the accused. Any pre- emptive determination of these matters in the exercise of constitutional jurisdiction under Article 199 of the Constitution of the Islamic Republic of Pakistan would be premature and would bypass the statutory forum specifically constituted for criminal adjudication. Permitting litigants to bypass an adequate alternative statutory remedy and approach the High Court directly in its constitutional jurisdiction would amount to an abuse of process and would unnecessarily burden the judicial system. The petition is, therefore, dismissed to the extent of this challenge, leaving the aforesaid questions open for determination by the Trial Court.

36.Before parting with this judgment, we feel constrained to observe, with a measure of concern, that it is not appropriate for the learned Special Court, notwithstanding its status as a Court of Session for the limited purposes of trial under the Act, to assume upon itself the exercise of issuing search warrants. Such an exercise is procedurally inconsistent with the express terms of the law. Since Section 40 of the Sales Tax Act, 1990, explicitly and specifically empowers the Judicial Magistrate in this regard, the issuance of a search warrant must strictly remain within the statutory channel so designated. However, in view of the curative statutory mechanisms and the directory nature of the

provisions relating to search warrants under the Code of Criminal Procedure, 1898, as discussed hereinabove, we clarify that such procedural departure does not constitute a fatal or irreversible illegality so as to dismantle the prosecution; rather, it constitutes an irregularity occurring at the pre-trial stage of the evidence-gathering process. Nonetheless, the learned Special Court is expected to remain highly circumspect and vigilant in the future and to ensure that the statutory boundaries are scrupulously respected. Let a copy of this judgment be forwarded to the learned Judge, Special Court, Customs, Taxation & Anti-Smuggling, Khyber Pakhtunkhwa, Peshawar, for information and future guidance.

37.The petition stands disposed of in the above terms. No order as to cost.

JUDGE

JUDGE

Date of hearing: Date of Signing:

Mahmood Shah PS (DB) Honorable Mr. Justice Syed Arshad Ali & Honorable Justice Dr. Khurshid Iqbal