LAHORE: In a significant ruling, the Lahore High Court (LHC) has held that no criminal proceedings can be initiated against a taxpayer for the recovery of tax arrears until the final determination of liability against them by a competent authority.
The court also observed that in the absence of a proper assessment of tax or determination of the tax amount involved, a special judge cannot impose a fine equivalent to the tax involved, which forms part of the penalty under the law.
The LHC clarified that the mechanism for the recovery of arrears of tax, as provided in Section 48 of the Sales Tax Act, would only become applicable once the tax has been finally assessed and any imposed penalties remain unpaid.
This crucial order was passed in response to a petition filed by a tobacco company and others who had approached the court against revenue officials for the registration of criminal reports alleging their involvement in tax evasion.
The court acknowledged the competence of the complainant (revenue authorities) in carrying out criminal investigations in cases involving tax fraud. However, it highlighted that the dispute lay in the “modus operandi” or the manner in which such investigations were launched.
The LHC noted that a taxpayer has established legal avenues to contest tax decisions, including preferring a departmental appeal against a revenue official’s decision, then approaching the Appellate Tribunal of Inland Revenue, and ultimately the High Court through a tax reference.
Civil & criminal proceedings
While affirming that civil and criminal proceedings can run concurrently, the court emphasized a fundamental principle of law: where criminal liability is dependent upon or intrinsically connected with the result of a civil adjudication, criminal proceedings can be halted until the outcome of the civil matter. This, the court stated, ensures the “safer administration of justice.”
The court also pointed out that the provisions of the Sales Tax Act grant taxpayers the privilege to “compound the offence” (settle the matter) subject to the payment of the amount of tax due against them. The LHC reasoned that if the amount of tax due against a taxpayer is not assessed prior to the launching of criminal proceedings, it would effectively “shut the window of compoundability” for the taxpayer, as the Commissioner would be unable to compound the offense without a clear determination of the tax amount.
Lack of prior assessment
In the specific case of the petitioners, the court observed that they had been regularly filing sales tax returns. Crucially, prior to the launching of the impugned criminal complaint, there was no audit report, show-cause notice, or any formal assessment order “in the field” against them.
Based on these grounds, the Lahore High Court therefore quashed the impugned criminal complaint registered against the petitioners, declaring it to be “unconstitutional, ultra vires of the Act and against the fundamental right of the petitioner.” This ruling reinforces the importance of due process, proper tax assessment, and the sequential nature of tax recovery procedures before resorting to criminal prosecution.
