LAHORE: The Lahore High Court (LHC) on Wednesday set aside two sales tax notices issued to a sugar mill of former MNA Jahangir Khan Tareen, ruling that a Inland Revenue commissioner cannot declare a taxpayer’s case selected for audit first and demand its records afterwards.
A division bench headed by Justice Jawad Hassan and comprising Justice Abid Hussain Chattha allowed a petition filed in 2017 by JK Sugar Mills (Pvt) Ltd, formerly Shamim and Company (Pvt) Ltd, against notices issued on March 3 and March 6, 2017.
Advocate Malik Ahsan Mahmood, the counsel for mills, said it had filed returns for all 12 tax periods of Tax Year 2016 and paid about 91 per cent more sales tax than the previous year.
However, the Commissioner Inland Revenue told the mills that its case had been selected for audit under Section 25 of the Sales Tax Act, 1990.
Says Inland Revenue commissioner cannot declare a taxpayer’s case selected for audit first and demand its record afterwards
He said, days later, a deputy commissioner also asked the mills to produce its sales tax record.
The counsel argued that section 25 only allows officers to call for documents and gives no independent power to select a taxpayer for audit.
The selection, he said, must be made by the Federal Board of Revenue (FBR) through a computer ballot under section 72B and a general provision cannot be used to bypass it.
He argued that where the legislature expressly prescribed the manner, authority and procedure for selection of taxpayers for audit, such statutory mechanism cannot be bypassed, circumvented or rendered redundant by invoking a general provision.
Sulaman Bhatti, the counsel for the tax authorities, opposed the petition, saying the notices were lawful and had no jurisdictional defect.
The judgement, authored by Justice Hassan, noted that Section 25(1) lets the Commissioner require production of record as and when required, while section 25(2) allows an audit on the basis of the record obtained under the first sub-section.
In the case in hand, the judgement said, the Commissioner first declared the case selected for audit and only later asked for the record, using sub-section (1) to support a decision already taken.
“Such an approach cannot be reconciled with the statutory sequence expressly envisaged by the legislature,” it ruled.
The judgement maintained that the two provisions are intertwined stages of one scheme, the bench held, and must be applied in that sequence.
The bench said the phrase “as and when required” gives flexibility on timing but does not enlarge the Commissioner’s jurisdiction or allow a “roving” inquiry or a “fishing” expedition.
It relied on earlier rulings, including Wazir Ali Industries, Indus Motor Company, PTCL and Dewan Sugar Mills, which held that selection for audit without reasons is arbitrary.
The judgement also cited the Supreme Court’s ruling in Pakistan Beverages that statutory discretion must be exercised reasonably and fairly.
Drawing on Pakistani and United Kingdom case law on reading statutory provisions together, the judgement held that any use of Section 25 for audit must be backed by a reasoned order showing why it is necessary, particularly where Section 72B already provides a mechanism for selection.
The bench allowed the petition and set aside both impugned notices issued by the commissioner and the deputy commissioner Inland Revenue.
Published in Dawn, October 15th, 2026
