Lahore, June 1, 2025 – The Lahore High Court has issued a detailed judgment clarifying the legal process regarding the recovery of tax arrears and the initiation of criminal proceedings against taxpayers.
This landmark ruling is expected to have far-reaching implications for both tax authorities and the business community.
The Court emphatically ruled that no criminal action can be taken against a taxpayer for the recovery of unpaid taxes unless and until a competent authority has made a final determination of the taxpayer’s liability. The Court stressed that assessment of tax must precede any punitive action, as the absence of such assessment undermines the due process guaranteed by law.
The Court further observed that under Section 48 of the Sales Tax Act, the legal framework for recovery only becomes applicable once a formal assessment of tax dues is completed, and those dues remain unpaid even after penalties are imposed. Without this sequence, the Court held, initiating criminal prosecution for recovery is premature and unlawful.
This judgment came in response to a petition filed by a tobacco company and other petitioners who challenged the registration of criminal cases by revenue authorities, accusing them of tax evasion. The petitioners argued that no proper assessment or legal procedure had been followed prior to the registration of criminal complaints.
The Court acknowledged the authority of tax officials to investigate cases involving tax fraud, but noted that the investigative process must adhere to due legal procedures. It pointed out that a taxpayer has the right to file appeals within the departmental hierarchy, including appeals to the appellate tribunal and references to the Lahore High Court, before any criminal prosecution is initiated.
In its ruling, the Court emphasized that while civil and criminal proceedings may proceed in parallel, when the criminal liability depends on the outcome of civil adjudication, the criminal process should be held in abeyance to protect the integrity of justice.
Additionally, the Court highlighted that tax laws allow for the compounding of offences, but this right becomes meaningless if a proper tax recovery process—beginning with assessment—is not followed. In the absence of such assessment, the window to settle through compounding remains closed.
Consequently, the Lahore High Court declared the criminal complaint registered by the tax authorities as unconstitutional, contrary to the statutory framework, and violative of the petitioners’ fundamental rights. This ruling is expected to serve as a precedent in future disputes involving premature or unjustified recovery efforts.