LAHORE: The Lahore High Court (LHC) has held that sales tax proceedings founded on a show-cause notice issued before the taxpayer’s registration cannot be sustained, dismissing a reference filed by the Commissioner Inland Revenue, Zone-II, Regional Tax Office, Gujranwala, against M/s Malik Silk Emporium.
A division bench comprising Justice Muhammad Ajmal Zahid and Justice Hassan Nawaz Makhdoom announced the judgment in Sales Tax Reference No. 185185 of 2018, after hearing the parties on September 23, 2026. Justice Zahid authored the judgment.
The dispute
The department had raided the respondent’s Gujranwala business premises on August 18, 2016, under Section 175 of the Income Tax Ordinance, 2001, alleging under-declaration of sales. On the basis of the record resumed, the Assessing Officer passed an Order-in-Original on January 21, 2017, treating the respondent as an Association of Persons (AOP) and holding it liable for carrying on taxable business without registration and for “tax fraud” under Section 2(37) of the Sales Tax Act, 1990.
The order directed deposit of the remaining sales tax of Rs19,421,611 under Section 11(2), with default surcharge under Section 34(1)(c), and imposed a penalty of Rs22,921,611 under Section 33. The Commissioner Inland Revenue (Appeals) upheld the order, but the Appellate Tribunal Inland Revenue, Lahore Bench, set it aside on December 19, 2017. The department then invoked Section 47 of the Act.
The question before the court
The department framed five questions of law, relating to bank credit entries, the opportunity to produce documents on the AOP’s constitution, an individual’s alleged link with the AOP, the allegation of tax fraud and whether the Tribunal’s order was a speaking order under Section 24-A of the General Clauses Act, 1897.
The bench, however, said the real issue lay in the basis on which the Tribunal had interfered. The Tribunal had found that the department did not follow the procedure for compulsory registration under Rule 6 of the Sales Tax Rules, 2006, and that the show-cause notice, dated September 23, 2016, was issued before the registration order of September 27, 2016.
Court’s reasoning
The court noted that the department’s counsel could not point to any question in the reference challenging that finding. It held that a finding not assailed before the reference court attains finality and cannot be reopened indirectly through other questions.
The bench further held that where the foundational proceeding is legally unsustainable, the consequential proceedings cannot stand independently. It said the show-cause notice was the foundation of the Order-in-Original and the appellate proceedings, and a later registration could not retrospectively validate proceedings begun without lawful authority.
The court also observed that the Tribunal’s conclusion accords with earlier LHC rulings in Amina Z. Beauty Salon (2016 PTD 654) and S.K. Steel Casting (2019 PTD 1493), both upheld by the Supreme Court. Those decisions hold that proceedings under the Act, including the show-cause notice, must be undertaken within the framework applicable to a registered person, whether registered ordinarily or compulsorily.
Outcome
Since the unchallenged finding was decisive, the court held that answering the department’s five questions would be an “academic exercise” that could not alter the result. It found no error of law in the Tribunal’s order, dismissed the reference and answered the questions accordingly.
The court directed its office to send a copy of the judgment to the Appellate Tribunal under Section 47(5) of the Act.
