Show Cause and Condonation of Delay in Tax Assessments

The Lahore High Court examined the legality of show cause notices issued to Mehr Dastgir Leather and Footwear Industries (Private) Limited after a significant delay of 15 years (2024 LHC 4061). The Court found that the extension of the limitation period by the Federal Board of Revenue (FBR) under Section 74 of the Sales Tax Act, 1990, lacked reasonable justification and failed to comply with the guidelines set by the Supreme Court of Pakistan.

Background:

The petitioner, Mehr Dastgir Leather and Footwear Industries (Private) Limited, challenged the issuance of show cause notices served in 2022, relating to tax periods as far back as 2005-2007. The notices were issued pursuant to a condonation of the time limit granted by the FBR under Section 74 of the Sales Tax Act, 1990. The petitioner argued that the dispute had already been settled by the Supreme Court of Pakistan, and that the revival of the matter after 15 years through condonation of time was illegal and constituted mala fide action by the tax authorities.

Key Issues:

Legality of Condonation of Time Under Section 74 of the Sales Tax Act: Whether the FBR's condonation of the time limit for issuing show cause notices, nearly 15 years after the relevant tax periods, was valid under the law.

Reasonableness and Justification for Extending the Limitation Period: Whether the FBR provided adequate reasons for condoning the limitation period, as required by law and established judicial principles.

Issuance of Show Cause Notices After Prolonged Delay: Whether the issuance of show cause notices after such a long period was legally sustainable and in conformity with the petitioner’s vested rights, particularly in light of previous Supreme Court rulings.

Court's Analysis:

Condonation of Time Under Section 74: The Court scrutinized the FBR's use of Section 74, which allows the Board to condone time limits under specific conditions. The Court noted that while Section 74 grants discretionary power to condone time limits, it must be exercised with rational and justifiable reasons. The FBR failed to provide any substantive reasons for the delay, rendering the condonation arbitrary and lacking legal basis.

Failure to Provide Reasonable Grounds for Condonation: Citing the Supreme Court's decision in Federal Board of Revenue vs. Abdul Ghani (2021 SCMR 1154), the Court emphasized that condonation of time must be supported by clear and convincing reasons. The absence of such reasons in the FBR’s decision violated the principle of fairness and transparency in administrative actions, as no extraordinary circumstances justified the condonation. The Court held that the condonation was merely a mechanical exercise without sufficient grounds.

Issuance of Show Cause Notices After 15 Years: The Court ruled that the issuance of show cause notices after 15 years was ultra vires and contrary to established legal principles. It noted that the petitioner’s rights had vested over time, particularly since the dispute had already been resolved by the Supreme Court in earlier proceedings. Reviving the case after such an extended period was deemed an abuse of power, especially since the department had delayed processing the petitioner’s refund claims.

Mala Fide Action by the Department: The Court found that the show cause notices appeared to be issued in bad faith, as they were triggered only after the petitioner’s persistent demands for a refund. The notices were seen as an attempt to deflect from the department’s failure to honor the Supreme Court's earlier rulings regarding the petitioner’s claims. This mala fide action further invalidated the legality of the notices.

Court's Conclusion: The Lahore High Court allowed the petition and quashed the impugned show cause notices, holding them to be ultra vires due to the lack of reasonable grounds for condoning the time limit under Section 74 of the Sales Tax Act, 1990. The Court also directed the respondent department to process the petitioner’s refund claims within three months, reinforcing the petitioner’s vested rights in accordance with earlier judicial rulings.

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