Taxpayer Remains Immune from Criminal Prosecution over Arrears Recovery: LHC Decision
In a significant decision, the Lahore High Court (LHC) has ruled that criminal proceedings cannot be initiated against a taxpayer for the recovery of tax arrears until a competent authority has definitively determined their liability. The court further observed that, in the absence of a tax assessment or a determination of the tax involved, a special judge lacks the authority to issue a fine, which constitutes the amount of tax and part of the penalty as per the law.
The court's order stems from a petition filed by a tobacco company and others, who challenged the revenue officials' intent to register criminal reports against them for their perceived involvement in tax evasion. The judgement clarified that, while the complainant retains the competence to carry out criminal investigations in cases of alleged tax fraud, the issue at hand revolves around the proper execution of such investigations.
According to the ruling, a taxpayer can challenge a revenue official's decision through a departmental appeal and subsequently appeal to the appellate tribunal of Inland Revenue, or file a tax reference in the High Court. The court further stated that civil and criminal proceedings may run concurrently, but it is a principle of law that criminal proceedings should be halted if criminal liability is contingent upon the outcome of civil adjudication. This practice ensures a more efficient administration of justice.
The court, however, noted that the provisions of the Act grant taxpayers the privilege to compromise (settle) offences upon payment of the dues owed to them. Critically, the judgement pointed out that if criminal proceedings are initiated before the tax owed has been assessed, the taxpayer's ability to compromise the offence is effectively curtailed, as the amount of tax owed would remain undetermined, and the commissioner would be unable to compromise the offence.
The impugned complaint, registered against the petitioners, was quashed by the court due to its unconstitutional nature, violation of the Act, and infringement on the petitioners' fundamental rights. The court's decision was based on the fact that, prior to the commencement of the impugned complaint, neither an audit report, show-cause notice, nor an assessment order had been issued against the petitioners, who had been regularly submitting sales tax returns.
The LHC's ruling provides valuable insights into the legal landscape of criminal proceedings for tax arrears recovery in Pakistan, highlighting the importance of proper assessment and due process to ensure a fair and efficient system. More specifically, the judgement demonstrates that criminal proceedings can only be lawfully initiated after a comprehensive assessment of a taxpayer's liability, and in accordance with the due process of law.
The court's decision suggests that a taxpayer, who has been regularly submitting sales tax returns, can contest the initiation of criminal proceedings for tax arrears by first attempting to compromise (settle) offenses through the payment of owed finances, only after a comprehensive assessment of their liability has been conducted in accordance with the due process of law. Furthermore, the ruling emphasizes that the authority to issue fines, which constitute part of the penalty as per the law, lies with a competent authority that has definitively determined a taxpayer's liability in a tax assessment or determination of the tax involved.
