2022 P T D (Trib.

) 783
[Inland Revenue Appellate Tribunal]
Before Shahid Masood Manzar, Chairman and Dr. Muhammad Naeem, Accountant Member
Messrs AYAN TRADING COMPANY, FAISALABAD
Versus
COMMISSIONER INLAND REVENUE (APPEALS), RTO, FAISALABAD
S.T.A. No.1223/LB of 2019, decided on 24th March, 2021.
(a) Sales Tax Act (VII of 1990)---
----S.11---Sales Tax Special Procedures Rules, 2007, Chap. XIII [Rr. 58S & 58T]---Special procedure for
payment of extra sales tax on specified electric home appliances---Assessment of tax and recovery of tax not
levied or short levied or erroneously refunded---Scope---Appellant was engaged in business of Storage
Batteries falling at Sr.No.7 of the Table provided in Chap. XIII of the Sales Tax Special Procedures Rules,
2007; was conducting its business as an authorized distributor and was paying sales tax at the rate of 17%
along with 2% extra sales tax at the time of purchases and its subsequent supplies were exempt from
'payment' of sales tax under sub-rule (5) of R.587 of the Chap. XIII (Special Procedure for Payment of Extra
Sales Tax on Specified Good)---Appellant had paid extra tax on the items therefore, subsequent supplies
made by it were exempt from 'payment' of sales tax under R.58-T(5) of the Sales Tax Special Procedures
Rules, 2007, as payment of extra tax was considered as its final discharge of tax liability---Since, the
appellant had duly fulfilled all prescribed requirements by discharging its sales tax liability on account of
extra tax as a final discharge in terms of the Sales Tax Special Procedures Rules, 2007, as such, the appellant
was not legally required to pay sales tax on supply of items---Appeal was accepted, impugned show cause
notice and consequent orders of both the authorities below being illegal and unlawful were set aside.
Collector of Customs Sales Tax and Central Excise and others v. M/s Sanghar Sugar Mills Ltd., Karachi
and others PLD 2007 SC 517 = 2007 PTD 1902; M/s. Siddique Brothers (Pvt.) Ltd v. Federation of Pakistan
and others (W.P. No.5186 of 2014), 2019 PTD (Trib.) 120; 2015 PTD 2256; 2016 PTD 467; 2018 PTD 986;
2019 PTD 257; 2019 PTD 298; M/s D.G. Khan Cement Factory Ltd's case 2004 SCMR 456 = 2004 PTD
1179 and M/s. K.B. Enterprises, Faisalabad's case 2019 PTD (Trib.) 56 ref.
(b) Sales Tax Act (VII of 1990)---
----Ss.21 & 73---De-registration, blacklisting and suspension of registration---Certain transactions not
admissible---Scope---Appellant had transacted all payments to his suppliers through Banking channel by
complying with the mandatory provisions of S. 73 of the Sales Tax Act, 1990, which was the sole obligation
of the buyer to ensure veracity of transactions in addition to verifying normal and operative status of his
suppliers---Both necessary conditions of verifying genuineness of suppliers from e-portal of FBR for its
operative status and sufficient condition of making payments through Banking channel to ascertain the
varsity of such transactions were complied with by appellant---Legislature had consciously given a right to
a buyer in such cases to reclaim input tax so paid---Input tax adjustment of the appellant was denied only
for the reason that the suppliers of the appellant were subsequently blacklisted---Held; subsequent
blacklisting did not disentitle the buyer from his lawful right of input tax in respect of invoices issued when
the supplier was a registered and an active person unless those invoices were specifically declared fake and
had direct nexus with blacklisting---Appeal was accepted, impugned show cause notice and subsequent
orders of both the authorities below being illegal and unlawful were set aside.
(c) Sales Tax Act (VII of 1990)---
----Ss.33 & 34---Offences and penalties---Default surcharge---Scope---In case of penalty for late filing of
returns, the initial onus of proving of mens rea is on the department---Imposing of penalties in case of
committing default in payment of tax or late filing of sales tax returns is not automatic and some
determination which regard to element of mens rea is required and the presence of mens rea is essential for
imposition of any penalty under the law---Mens rea, in short, denotes the state of mind that would compel a
person to deviate from the law or to commit an offence which also encompasses recklessness within its
ambit---Concept of mens rea basically resolves around the state of mind and the conduct of the person and
it is necessary to establish mens rea before levying penalty.
Commissioner Inland Revenue v. Tariq Poly Pack (Pvt.) Ltd. 2015 PTD 2256 rel.
(d) Jurisdiction---
----Power vested in any authority can only be exercised by that authority, in default whereof, the entire action
would be without jurisdiction, void ab initio and of no legal effect.
M/s. Ayan Battery Traders, Faisalabad v. The CIR (Chenab Zone), RTO, Faisalabad 2018 PTD (Trib.)
787 and 2014 PTD 104 ref.
(e) Jurisdiction---
----Question of jurisdiction in forum is considered to be very important and any order passed by a Court or
a forum having no jurisdiction, even if it is found to be correct on merits, is not sustainable under law.
PLD 2005 SC 482 rel.
(f) Sales Tax Act (VII of 1990)---
----S.11---Assessment of tax and recovery of tax not levied or short levied or erroneously refunded---Scope-
--Where show-cause notice issued by the officer is without jurisdiction, any subsequent proceeding and
superstructure based on such illegal or void notice has no legs to stand and has to fall on the ground
automatically along with the orders on which it is based.
Muhammad Tariq Khan v. Khawaja Muhammad Jawad Asami and others 2007 SCMR 818; Moulana
Atta-ur-Rehman v. Al-Hajj Sardar Umar Farooq and others PLD 2008 SC 663 and Rehmatullah and others
v. Saleh Khan and others 2007 SCMR 729 ref.
M/s. Ayan Battery Traders, Faisalabad v. The CIR (Chenab Zone), RTO, Faisalabad 2018 PTD (Trib.)
787 and Izhar Alam Farooqi v. Sheikh Abdul Sattar 2008 SCMR 240 rel.
Khubaib Ahmad for Appellant.
Atif Bashir, (DR) for Respondent.
Date of hearing: 18th March, 2021.
ORDER
SHAHID MASOOD MANZAR, CHAIRMAN.----Titled appeal has been filed under section 46 of the Sales
Tax Act, 1990 at the instance of registered person/taxpayer calling in question the impugned Order-in-
Appeal No. 39 of 2019 dated 20-02-2019 passed by the learned CIR(A), Faisalabad On the following
grounds:-
1. Collection of excess sales tax wrongly collected.
1.1 That the appellant is engaged in business of storage batteries falling at Sr.No.7 of the Table provided
in Chapter XIII of the Sales Tax Special Procedure, 2007 as amended vide SRO 896(I)/2013 and
conduct his business as an authorized distributor of M/s. Century Engineering Industries (Pvt.) Ltd.,
(formerly Phoenix Batteries) and M/s Exide Pakistan Ltd., and pay sales tax at the rate of 17% along
with 2% extra sales tax at the time of purchases and its Subsequent supplies are exempt from payment
of sales tax under sub-rule (5) of Rule 58T of the Chapter-XIII (Special Procedure for Payment of
Extra Sales Tax on Specified Good).
1.2 That it is pertinent to point out here that appellant has paid 'extra tax' on these items therefore,
subsequent supplies made by him are exempt form 'payment' of sales under Rule 58T(5) of Chapter
XIII of the Sales Tax Special Procedure, 2007 as amended vide SRO 525(I)/2008 as payment of extra
tax should be considered as his final discharge of tax liability.
1.3 that since the appellant has duly fulfilled all prescribed requirements by discharging his sales tax
liability on account of extra tax as a final discharge in terms of the Special Procedure Rules, 2007
therefore, the appellant was not legally required to pay sales tax on supply of these items enough
ground to declare impugned show-cause notice as well as the assessment order illegal, void ab initio
and without lawful authority hence, provisions of section 3(B) of the Act are not attracted at all in
the instant case.
1.4 That the provisions of Rule 58T(5) of Chapter XIII of the Sales Tax Special Procedure, 2007 are very
much clear in its tone and tanner because the words "exempt from payment of sales tax" has been
mentioned therein instead of the words "Exempt from payment of sales tax" has been mentioned
therein instead of the words "exempt from charging, levying and collection of sales tax" therefore;
impugned observation to this effect is not legally sustainable.
1.5 That the allegation of excess collection of sales tax is unjustified, unfounded and illegal as no excess
sales tax was levied, charged and collected on subsequent supplies of these items hence, the
department has wrongly applied the provisions of section 3(B) of the Act. It may be applied when
rate of sales tax was chargeable @ 17% but the appellant charged 20% then it may be said that 3%
excess sales tax was collected. The appellant has not charged and collected a single rupee in excess
of 17% on his subsequent supplies but has charged and collected standard rate of sales tax as
prescribed under section 3 of the Act.
1.6 That, intention of law is otherwise clear from the provisions of section 7 of the Act existing at the
relevant time and even those as exist today that a registered person shall claim input tax adjustment
against output tax in accordance with the provision of section 7 read with section 73 of the Sales Tax
Act, 1990. In case, the interpretation of the department is accepted then the provisions of section 7
of the Act as presently existing would become redundant. That can hardly be the intention of the law.
1.7 That nevertheless, Federal Government may specify the goods to be exempted from levy of sales tax
under section 13 of the Act read with the Sixth Schedule but the alleged goods have never been
 provided in the list of exempted goods as available in the Sixth Schedule hence, disposal of the alleged
goods by the appellant, being not exempted under section 13 of the Act or being not specified in the
Sixth Schedule were chargeable to sales tax thus, the appellant has rightly charged and collected sales
tax on supply of the said goods. Reliance is placed on the judgment of the Hon'ble Supreme Court of
Pakistan in case of "Collector of Customs Sales Tax and Central Excise and others v. M/s Sanghar
Sugar Mills Ltd., Karachi and others" reported as (PLD 2007 SC 517 = 2007 PTD 1902)
1.8 That, whole exercise of creating huge demand of sales tax has been carried out under Notification
No.S.R.O. 896(I)/2013 dated 04.10.2013 which has already been declared without lawful authority
and of no legal effect by the Hon'ble Lahore High Court in W.P. No.5186/2014 in case of "M/s
Siddique Brothers (Pvt.) Ltd. v. Federation of Pakistan and others".
2. Inadmissible input tax against fake suppliers (suspended/blacklisted).
1.1 That the allegations against the appellant are frivolous and baseless because the appellant procured
the alleged goods under coverage of proper sales tax invoices issued under section 23 of the Act as
duly incorporated in suppliers' sales registers, sales tax returns, sales tax returns, summary statements
and due tax was also paid in its monthly sales tax returns for periods in question therefore, appellant
was legally entitled for input tax adjustment under section 7 of the Act.
1.2 That all the payments (where required) to the alleged suppliers have also been made through banking
channel from the business bank account of the appellant as requisitioned under section 73 of the Act
and no violation whatsoever has been committed therefore, input tax credit against invoices of such
suppliers cannot be denied and sales tax refunded thereon cannot be recovered.
1.3 That suspension of registration of M/s Tayyab Enterprises on 30.06.2013 has never been converted
into a blacklisting order within 90 days of basic hearing notice as per sub-rule b(iii) of Rule 12 of the
Sales Tax Rules, 2006 therefore; order for its suspension has become illegal and ab initio void having
no effect of enforcement therefore, recovery of sales tax against their invoices has also become illegal
and unlawful and all the subsequent proceedings carried out on its basis are also void ab initio, and
unlawful. Reliance is placed on the judgment of a Division Bench of Hon'ble ATIR, Lahore reported
as (2019 PTD (Trib.) 120).
1.4 That it is now well- settled law that subsequent blacklisting will not disentitle the buyer from his
lawful right of input tax in respect of invoices issued when the supplier was a registered and active
person unless, those invoices are specifically declared fake through speaking order and have direct
nexus with blacklisting and admittedly, invoices in question had no direct nexus with the subsequent
blacklisting of the alleged supplier. Reliance is placed on the judgments of Hon'ble Lahore High
Court reported as (2015 PTD 2256), (2016 PTD 467), (2018 PTD 986), (2019 PTD 257) and (2019
PTD 298).
3. Inadmissible input tax claimed/adjusted.
3.1 That beyond any doubt, appellant has made transactions with the alleged registered suppliers under
the coverage of proper sales tax invoices issued under section 23 of the Act and accordingly declared
sales vis- -vis output tax thereon in his respective monthly sales tax returns for the periods in question
and all the payments (where required ) to the alleged suppliers have also been made through banking
channel as requisitioned under section 73 of the Act and no violation whatsoever has been committed
therefore, input tax credit against invoices of such suppliers cannot be denied.
4. Late filing of sales tax returns.
4.1 that the alleged late filing of sales tax returns for tax periods in question is not intentional and
contumacious but is due to certain financial problems which are beyond human control and
respondent, being constrained by these liquidity hardships, could not file sales tax returns within time
which cannot be termed as 'deliberate and intentional failure' particularly in instant case where no
mala fide and willful default is attributed at his part therefore; imposition of penalty under section
33(1) of the Act is not justified as also held by superior Courts in different identical cases. Reliance
is placed on the judgment of Hon'ble Sindh High Court, Karachi in case of M/s Nizam Impex (Pvt.)
Ltd., reported as (PTCL 2014 CL 426), judgment of Supreme Court of Pakistan in case of M/s D.G.
Khan Cement Factory Ltd., reported as (2004 SCMR 456 = 2004 PTD 1179) and judgment of ATIR,
Lahore in case of M/s K.B. Enterprises, Faisalabad reported as (2019 PTD (Trib.) 56).
Nevertheless, the appellant carves his right to add any fresh ground (s) at the time of hearing besides
placing any valid incriminating evidence/document.
2. Succinctly stated, facts of the instant case are that appellant is a registered person running its business
as an authorized distributor of M/s. Century Engineering Industries (Pvt.) Ltd. (formerly Phoenix
Batteries) and M/s. Exide Pakistan Ltd dealing with storage batteries. During scrutiny of Annex-A of
sales tax return for the tax period of January-2017 filed by the appellant, certain discrepancies were
 pointed out which were duly communicated to the registered person through a show-cause notice
dated 25-10-2017. Detail is as under:-
(i) Collection of excess sales tax wrongly collected.
(ii) Inadmissible input tax against fake suppliers.
(iii) Inadmissible input tax claimed/adjusted.
(iv) Late filing of sales tax returns.
In response to show-cause notice, appellant filed written reply on 26-03-2018 supported with
documentary evidences but upon culmination of adjudication proceedings, the DCIR (Lyallpur Zone) uphold
the charges and adjudged recovery of Rs. 4,918,323/- along with default surcharge and penalty vide Order-
in-Original No. 02/2018 dated 18-04-2018 without considering the documents and without appreciating the
facts and law on the subject matter. Being discontented and aggrieved by the said order, appellant filed the
first appeal before learned CIR(A), Faisalabad who dismissed the appeal vide order dated 30-10-2019. Now,
the appellant has filed the second appeal before this Tribunal.
3. At the very outset of his arguments, learned AR for the appellant assailed that impugned show cause
notice issued by the Inland Revenue Officer (Unit-4, Chenab Zone) RTO, Faisalabad is illegal and without
lawful jurisdiction as jurisdiction over the case of appellant vests with (Lyallpur Zone), RTO, Faisalabad as
per Jurisdiction Order No. 05 dated 06-09-2016. Learned counsel vociferously contented that the appellant
is an authorized distributor of M/s. Century Engineering Industries (Pvt.) Ltd and M/s. Exide Pakistan Ltd
and sales tax at the rate of 17% along with 2% extra sales tax is paid at the time of purchases and its
subsequent supplies are exempt from `payment' of sales tax under sub-rule (5) of Rule 58T of the Chapter-
XIII (Special Procedure for Payment of Extra Sales Tax on Specified Good) and the principal companies
have also verified all the purchases through certificates dated 01-08-2016 and 08-09-2017 therefore, charge
of tax evasion is illegal and unfounded when due amount of sales tax along with extra sales tax have already
been deposited in the national exchequer by the respective suppliers. Learned counsel further argued that the
provisions of Rule 58T(5) of Chapter XIII of the Sales Tax Special Procedure, 2007 are very much clear in
its tone and tanner because the words "exempt from payment of sales tax" has been used therein instead of
the words "exempt from charging, levying and collection of sales tax" therefore; impugned observation to
this effect is not legally sustainable. It is further contended by the learned AR that appellant has procured
the alleged goods under the coverage of proper sales tax invoices issued in terms of section 23 of the Sales
Tax Act, 1990 duly incorporated in suppliers' sales registers and summary statements and his suppliers have
duly discharged their sales tax liabilities under section 7 of the Act in their monthly sales tax returns for
periods in question, hence, appellant was legally entitled for adjustment of input tax under section 7 of the
Act and too the alleged suppliers at the time of making transactions were operative/active and all the
payments against those transactions were also made through banking channel as required under section 73
of the Act. In support of his contention, he placed reliance on the judgments of Hon'ble Lahore High Court
reported as (2015 PTD 2256), (2016 PTD 467), (2018 PTD 986), (2019 PTD 257) and (2019 PTD 298). It is
submitted by the learned AR that appellant has made transactions with the alleged registered suppliers under
the coverage of proper sales tax invoices issued under section 23 of the Act and accordingly declared sales
vis- -vis output tax thereon in his respective monthly sales tax returns for the periods in question and all the
payments to the alleged suppliers have also been made through banking channel as requisitioned under
section 73 of the Act and no violation whatsoever has been committed therefore, input tax credit against
invoices of such suppliers cannot be denied. Lastly, learned AR stated that alleged late-filing of sales tax
returns for tax periods in question is not intentional and contumacious but is due to certain financial problems
which are beyond human control and respondent, being constrained by these liquidity hardships, could not
file sales tax returns within time which cannot be termed as 'deliberate and intentional failure' particularly
in instant case where no mala fide and willful default is attributed at his part therefore; imposition of penalty
under section 33(1) of the Act is not justified as also held by superior Courts in different identical cases.
4. Conversely, when the learned DR was confronted with the situation cited supra, in counter arguments,
he has assailed the case on similar grounds and charges as levelled earlier in the impugned orders and has
failed to put forth any explanation to justify any deviation from the arguments advanced by the learned AR
and has fully supported the orders of both the authorities below, simply re-endorsing the basis evolved
therein and nothing newel is put forth except to reiterated earlier set of contentions.
5. The arguments of the learned representatives of both the rival parties have been heard, the orders of
the authorities below as well as relevant record and provisions of law and the case laws cited by the learned
AR of the taxpayer have also been perused carefully.
It is an admitted fact that the show-cause notice issued by the Inland Revenue Officer of Chenab Zone,
RTO, Faisalabad for assessment and recovery of sales tax is illegal and without lawful jurisdiction as
jurisdiction over the case of the appellant vests with the Lyallpur Zone, RTO, Faisalabad as per Jurisdiction
Order No. 05 dated 06-09-2016 assigning jurisdiction for assessment and recovery of sales tax as conferred
under the Sales Tax Act, 1990 falling under respective territorial and legal jurisdiction. The jurisdictional
order clearly reveals that all cases or classes of cases, persons or classes of persons of non-corporate whose
place of business is situated within the limit of "Maher Sadiq Market" shall be the jurisdiction of Lyallpur
Zone. Learned counsel for the appellant has invited our attention towards online application for change in
the business address of the appellant duly accepted/approved by the FBR on 08-12-2015, showing new
business address of appellant "Shop No. 6, Khan Plaza, Maher Sadiq Market, Railway Road, Lyallpur Town,
Faisalabad" and resultantly, this new business address was also updated by the FBR on 'Taxpayer Online
Verification'. Learned counsel, in support of his stance, has placed on record, the copies of jurisdictional
order dated 06-09-2016, application for change in particulars of registration along with online approval of
FBR as well as latest computer profile of the appellant showing current business address of the appellant.
While confronted with such factual and legal position, learned DR has candidly conceded to the legal
position as stated hereinabove. We are of the considered view that it is the officer of Lyallpur Zone who was
legally empowered to proceed under section 11 of the Act for recovery of sales tax therefore; whole
proceedings for recovery of sales tax being illegal and without jurisdiction are infested with inherent legal
infirmities and substantive illegalities. It is a well-settled principle of law that power vested in any authority
can only be exercised by that authority, in default whereof, the entire action would be without jurisdiction,
void ab initio and of no legal effect. Reliance is placed on the judgments of ATIR, Lahore ref: (2018 PTD
(Trib.) 787) and (2014 PTD 104). In this regard, reliance is also placed on the judgment of Apex Court of
Pakistan reported as (PLD 2005 SC 482) while observing the issue of jurisdiction, it was observed that the
question of jurisdiction in forum is always considered to be very important and any order passed by a Court
or a forum having no jurisdiction, even if it is found to be correct on merits, is not sustainable under law.
There is nothing to defy with the earlier judgment of this Appellate Tribunal propounded in case of the
same appellant ref: "M/s. Ayan Battery Traders, Faisalabad v. The CIR (Chenab Zone), RTO, Faisalabad"
reported as (2018 PTD (Trib.) 787) wherein it was held as under:-
"In view of the foregoing facts and law, we have no hesitation to hold that suspension and consequent
blacklisting of the appellant has been passed by the CIR (Chenab Zone) without lawful jurisdiction
as its jurisdiction vests with the CIR (Lyallpur Zone), hence, the impugned order as annulled. Since,
the appeal is accepted on point of jurisdiction, other grounds need not to be dilated upon."
We also derive strength from the ratio settled by the Hon'ble Supreme Court of Pakistan in case of "Izhar
Alam Farooqi v. Sheikh Abdul Sattar" reported as (2008 SCMR 240). The relevant excerpt of the said
judgment is reproduced as under:-
"If a mandatory condition for the exercise of a jurisdiction before Court. Tribunal or Authority is not
fulfilled. then the entire proceedings which follow become illegal and suffer from want of
jurisdiction. Any order passed in continuation of these proceedings in appeal or revision equally
suffers from illegality and is without jurisdiction."
We are of the considered view that since basic show-cause notice issued by officer of Chenab Zone is
illegal and without lawful jurisdiction therefore, any subsequent proceeding and superstructure based on
such illegal or void notice has no legs to stand and has to fall on the ground automatically along with the
order on which it is based. In this regard, we are supported by the judgments of Hon'ble Supreme Court of
Pakistan in ref: "Muhammad Tariq Khan v. Khawaja Muhammad Jawad Asami and others" (2007 SCMR
818), "Moulana Atta-ur-Rehman v. Al-Hajj Sardar Umar Farooq and others" (PLD 2008 SC 663) and
"Rehmatullah and others v. Saleh Khan and others" (2007 SCMR 729) wherein it has been laid down that
when the basic order is void ab initio and without lawful authority, then the entire superstructure raised
thereon falls to the ground automatically.
On merits of the case, the learned AR has also very strong case although we have already declared very
initiation of assessment proceedings ab initio void and without lawful jurisdiction. There is no denying the
fact that the appellant is engaged in business of Storage Batteries falling at Sr. No. 7 of the Table provided
in Chapter XIII of the Sales Tax Special Procedure, 2007 as amended vide SRO 896(I)/2013 and conduct his
business as an authorized distributor of M/s. Century Engineering Industries (Pvt.) Ltd. and M/s. Exide
Pakistan Ltd and pay sales tax at the rate of 17% along with 2% extra sales tax at the time of purchases and
its subsequent supplies are exempt from 'payment' of sales tax under sub-rule (5) of Rule 58T of the Chapter-
XIII (Special Procedure for Payment of Extra Sales Tax on Specified Good). The appellant has paid extra
tax on these items therefore, subsequent supplies made by him are exempt from `payment' of sales tax under
Rule 58T(S) of Chapter XIII of the Sales Tax Special Procedure, 2007 as amended vide SRO 525(I)/2008 as
payment of extra tax should be considered his final discharge of tax liability. Since, the appellant has duly
fulfilled all prescribed requirements by discharging his sales tax liability on account of extra tax as a final
discharge in terms of the Special Procedure Rules, 2007 therefore, the appellant was not legally required to
pay sales tax on 'supply' of these items. The allegation of excess collection of sales tax is unjustified,
unfounded and illegal as no excess sales tax was levied, charged and collected on subsequent supplies of
these items hence; the department has wrongly applied the provisions of section 3(B) of the Act. It may be
applied when rate of sales tax was chargeable @ 17% but the appellant charged 20% then it may be said that
3% excess sales tax was collected. The appellant has not charged and collected a single rupee in excess of
17% on his subsequent supplies but has charged and collected standard rate of sales tax as prescribed under
section 3 of the Act.
The interpretation of the department cannot be accepted that the subsequent supplies of storage batteries
made by appellant were exempted from "levy" of sales tax because it is statutory authority under subsection
(1) of section 13 of the Sales Tax Act, 1990, which vests in the Federal Government the power to 'exempt'
any taxable supply made in Pakistan or any goods or class of goods from the whole or any part of the tax
chargeable under the said Act, subject to the conditions and limitations so specified but the alleged goods
have never been provided in the list of "exempted goods" as available in the Sixth Schedule hence, supply
of the alleged goods by the appellant, being not exempted under section 13 of the Act or being not specified
in the Sixth Schedule were chargeable to sales tax thus, the appellant has rightly levied, charged and collected
sales tax on 'supply' of the said goods. Reliance can safely be placed on the judgment of Hon'ble Supreme
Court of Pakistan in case of "Collector of Customs Sales Tax and Central Excise and others v. M/s. Sanghar
Sugar Mills Ltd., Karachi and others" reported as (PLD 2007 SC 517 = 2007 PTD 1902) where in it has been
laid down as under:-
"The disposal of fixed assets, scrap by a registered person, being not exempted under section 13 or being
not specified in the 6th Schedule to the Sales Tax Act are chargeable to sales tax and supply thereof,
are taxable supply."
The intention of law is otherwise clear from the provisions of section 7 of the Act existing at the relevant
time and even those as exist today that a registered person shall claim 'input tax adjustment' against 'output
tax' in accordance with the provisions of section 7 read with section 73 of the Sales Tax Act, 1990. In case,
the interpretation of the department is accepted that subsequent supplies of the alleged goods were exempted
from 'levy' of sales tax and no sales tax was chargeable thereon then the provisions of section 7 of the Act
as presently existing would become redundant. That can hardly be the intention of the law.
There is no doubt that the appellant in the instant case has transacted all payments to his suppliers through
banking channel by complying with the mandatory provisions of section 73 of the Act which is the sole
obligation on the buyer to ensure veracity of transactions in addition to verifying normal and operative status
of his suppliers. Both, the necessary condition of verifying genuineness of suppliers from e-portal of FBR
for its operative status and sufficient condition of making payments through banking channel to ascertain
the varsity of such transactions was also complied with by appellant therefore, the legislature has consciously
given a right to a buyer in such cases to reclaim input tax so paid, where registration of the supplier has been
suspended or has been declared blacklisted, either as a refund or by way of adjustment. There is no dispute
between the parties that input tax adjustment of the assessee was denied only for the reason that the suppliers
of the appellant were declared blacklisted subsequently. Learned AR, in support his stance, has placed on
record the computer profiles all dated 13-03-2021 in case of M/s. Usman Packages (blacklisted on 26-04-
2017), M/s. Paramount Industries (blacklisted on 26-04-2017) and M/s. Tayyab Enterprises (suspended on
30-06-2013). We are therefore of the firm opinion that subsequent blacklisting will not disentitle the buyer
from his lawful right of input tax in respect of invoices issued when the supplier was a registered and active
person unless those invoices are specifically declared fake and have direct nexus with blacklisting and
admittedly, the invoices in question had no direct nexus with the subsequent blacklisting of the alleged
suppliers. The ratio decidendi by the Hon'ble Lahore High Court in case of "Commissioner Inland Revenue
v. Tariq Poly Pack (Pvt.) Ltd." reported as (2015 PTD 2256) is the most relevant in all fours to the case at
instance of the assessee. The relevant extract of the said judgment is reproduced as under:--
"In our view, it will be a fallacy to hold that mere blacklisting will automatically reject claims of input
tax and refund against all validly issued previous invoices, when the supplier was not blacklisted
rather was duly registered and active on FBR website and said invoices having not been declared fake
specifically, have no nexus with blacklisting. No doubt ambiguity abounds rule 12(5) but it will be
unreasonable to hold that merely because supplier has become blacklisted, the entire series of invoices
issued by him before blacklisting will be rejected. It will also infringe the accrued vested rights of
the registered person/purchaser who held valid invoices when the supplier was not blacklisted rather
active and duly registered."
We have also observed that appellant has made transactions with the alleged registered suppliers M/s.
Saleem Battery Center, M/s. Anas Traders, M/s. WLIGSPRO, M/s. M.H. Dynamics amd M/s. F.M.
Corporation under the coverage of proper sales tax invoices issued under section 23 of the Act and
accordingly declared sales vis- -vis output tax thereon in his respective monthly sales tax returns for the
periods in question and the payments to the alleged suppliers have also been made through banking channel
as requisitioned under section 73 of the Act and no violation whatsoever has been committed therefore, input
tax credit against invoices of such suppliers cannot be denied.
In the context of penalty for late filing of returns, the initial onus of proving of mens rea is on the
department. The imposing of penalties in case of committing default in payment of tax or late filing of sales
tax returns is not automatic and some determination which regard to element of mens rea is required and the
presence of mens rea is essential for imposition of any penalty under the law. Mens rea in short denotes the
state of mind that would compel a person to deviate from the law or to commit an offence which also
encompasses recklessness within its ambit. Concept of mens rea basically resolves around the state of mind
and the conduct of the person. It is necessary to establish mens rea before levying penalty and imposition of
penalty is a quasi-criminal and the presence of mens rea is mandatory however, no material is available on
record to the effect that the late filing of sales tax returns was mala fide or willful act on part of registered
person. The Assessing Officer has failed to establish mens rea and male fide on the part of the appellant,
which is a necessary ingredient for imposing penalty therefore, imposition of penalty for late filing of sales
tax returns under section 33(1) of the Act is illegal and not sustainable under law.
In view of what has been stated and particularly in the light of legal propositions discussed hereinabove,
the titled appeal is accepted and impugned show cause notice and consequent orders of both the authorities
below being illegal and unlawful are hereby set aside.
6. The instant appeal filed by the taxpayer is disposed of in the manners as indicated above.
SA/61/Tax (Trib) Appeal allowed.