The titled Sales Tax Appeal has been directed against the Order in-Appeal No.26/ST/2011 dated 11- 8-2011 passed by the learned commissioner Inland Revenue (Appeals-III), Lahore.
2. Facts giving rise to the instant appeal are that on obtaining information by the sales tax authorities, it was transpired that one supplier of goods Sheikh Haider Ali son of Shakeel and the others managed to have dummy/fictitious firms registered in their on names and also in the names of their different accomplices with the CollectOrate of Sales Tax and Federal Excise Lahore and Karachi. They used fake sales tax invoices only to cause loss to national exchequer by claiming input tax adjustment in the names of various registered persons. A team was constituted to verify the addresses and status of those firms who reported that such suppliers are non existent. The entire sales tax record for the period July 5 to June 9 was provided and investigative audit was conducted against the appellant wherefrom it was observed that Messrs Rain Drop, Lahore claimed illegal sales tax input of Rs.10,836,f44 on account of sales tax invoices issued by dummy/fictitious suppliers i.e. Al-Nusrat Corporation, United Traders, Farhan Traders and M.K.
Traders. Thus, violated the provisions of sections 3, 6, 7, 8, 8A, 14, 22, 23, 25, 26 and 73 of the Sales Tax Act, 1990. Accordingly, the appellant was issued a show cause notice vide No.1398 dated 28-3-2011 as to why illegally claimed input tax amounting to Rs.10,836,144 may not be recovered in terms of sections 11(2) and 36(1) along with default surcharge and penalty under sections 33 and 34 of the Sales Tax Act, 1990 and also committed offences punishable under section 33 read with section 2(37) ibid. In response to the notice for 8-4-2011, the reply furnished could not satisfy the Additional Collector Inland Revenue Audit, Zone-I, RTO, Lahore and proceedings against the appellant were initiated which culminated by giving direction to make payment of principle amount of sales tax at Rs.10,836,144 and the penalty equal to 100% in terms of section 33(11)(c) of the Sales Tax Act, 1990.
The registered person impugned the said order before the CIR(Appeals-III), RTO, Lahore who, after going through the relevant record, partially modified the order of the Additional Commissioner. This has forced the registered person/appellant to come up in appeal before the Hon'ble Appellate Tribunal Inland Revenue on the following grounds:--
(I) That the respondent No.1 did not give due consideration to the argument of the registered person qua section 2(37), while passing the impugned order he admitted that the registered person did not commit any tax fraud revised the penalty under the provisions of section 25(5) of the Sales Tax Act, 1990.
(II) That impugned order is based on the criminal case registered by the Directorate of Intelligence and Investigation and on the 'confessional statement of some of the gang members.
(III) That the appellant purchased all the raw materials from the registered persons and obtained sales tax invoices under the provision of section 23 as well as made payment fulfilling the provisions of section 73 of the Ordinance.
(IV) That the appellant in good faith and bona fide fulfilled all the requisite conditions in terms of section 7 of the Act for claiming input tax and paid the tax to the supplier, fulfilling the condition of section 73 of the Act.
(V) That, even otherwise the recovery of said amount from the appellant is tantamount to double taxation which is ultra wires to the Act.
(VI) That, the alleged contravention of provisions of sections 8 and 8A of the Act does not apply on the appellant and has been alleged to contravene the provisions of sections 1(ca) and 1(d) of section 8, the allegation is not only contrary to facts but also to normal business practice.
(VII) That, invocation of sections 33 and 34 of the Act is also against the norms of justice as the Hon'ble Supreme Court of Pakistan in its judgment GST 2004 79 had settled the principle of sections 33 and 34 of the Act.
3. On the contrary, the learned DR supported the impugned orders by arguing that those are well reasoned and well based and have passed after taking into consideration of the documentary evidence. Thus, the impugned order may be maintained.
4. We have given anxious thought to the rival arguments and perused the orders of the authorities below as well as the case-law cited at the bar. Coming to the first contention of the learned counsel which relates to non consideration of submission of the appellant qua section 2(37) at the time of passing the impugned order. Admittedly, the appellant did not commit any tax fraud and revised the penalty under section 25(5) of the Sales Tax Act, )990. Before reaching to an inescapable conclusion, we deem it appropriate to reproduce section 2(37) of the Sales Tax 'Act, 1990 as under:- "(37) 'tax fraud' means knowingly, dishonestly or fraudulently and without any lawful excuse (burden of proof of which excuse shall be upon the accused)
(i) doing of any act or causing to do any act; or
(ii) omitting to take any action or causing the omission to take any action, including the making of taxable supplies without getting registration under this act; or (i.e) falsifying or causing falsification the sales tax invoices, in contravention of duties or obligations imposed under this Act or rules or instructions issued thereunder with the intention of understating the tax liability or underpaying the tax liability for two consecutive tax periods or overstating the entitlement to tax credit or tax refund to cause loss of tax."
5. Bare reading of the above section, it clearly depicts that the mandatory condition precedent for tax fraud is that the registered person has acted knowingly, dishonestly or fraudulently and without any lawful excuse committed tax fraud. Whereas in the present case, there is not an iota of evidence on record wherefrom it could be deduced that the appellant has intentionally, knowingly or dishonestly or fraudulently A committed tax fraud by claiming in put tax adjustment against the sales tax invoices issued by the so called fraudster gang. It is significant to state here that even that the audit/contravention report coupled with it the show cause notice did not spell out or it could be proved by the department that the appellant had claimed illegal input tax adjustment with prior knowledge regarding fakeness of the sales tax invoices. In support of his contention, the appellant cited a reported judgment of the Hon'ble Sindh High Court in the written arguments in re:--GST 2004 CL 102. The relevant extract of which is being reproduced for ready reference only:-- A perusal of the show-cause notice as well as material produced before us further shows that no case of any tax fraud has been made out whereby the burden of proof can be shifted to the appellants. The learned two forums below have misdirect in placing the burden of proof on the appellants in terms of the provisions contained in section 2(37) defining the expression "tax fraud" without realizing that in order to attract the above provisions, the initial burden lies on the department to show that an assessee, knowingly, dishonestly or fraudulently and without lawful excuse has done any act or has caused the omission to take any action in contravention of duties or obligations imposed under this Act or rules or instructions issued there under with intention of understanding the tax liability or underpaying the tax liability.
6. From the above Para of the judgment, it is crystal clear that any. Act Which has not been done knowingly, dishonestly or fraudulently does not come within the ambit of tax fraud. We have also gone through the impugned order passed by the learned Commissioner Appeal himself whereby he has observed that the appellant did not commit any tax fraud and he therefore modified the amount of penalty. In the present case, the appellant was not intentional defaulter and were equally cheated by the fraudulent persons. The fraudsters charged tax from the appellant.
Evidently., the contention raised by the learned counsel obviously carries much weight and we are of the considered opinion that the revenue had wrongly invoked the provisions of section 2(37) in the show-cause notice dated 28-3-2011 which is liable to be struck down.
7. Next contention of the registered person/appellant is that issuance of show cause notice is based on the criminal case registered by the Directorate of Intelligence and Investigation against the fraudster gang allegedly to be engaged in issuance of fake/dummy sales tax invoices. This contention is also part of the first ground which has been dealt with in elaboration whereby we have observed that the appellant is neither involved in the illegal activities nor there is any evidence or record that he is in contact with the fraudster gang regarding issuance of fake and dummy sales tax invoices. So, we have no option except to accept this ground as well.
8. Coming to the contentions Nos.3, 4 and 5 supra, we have observed that in the instant case the appellant had purchased the entire raw material from the registered persons and also obtained sales tax invoices issued under the provisions of section 23 and the payments were made in terms of section 73 .Of the Sales Tax Act. 1990. Besides, we have also noticed that the appellant fulfilled all the requisite conditions laid down in section 7 for claiming input tax were complied and paid .The sales tax to the suppliers as well. Now, this is the entire liability of the suppliers to deposit the tax in terms of section 3(3) of the Act especially when they were registered with the Sales Tax Department and were filing their monthly returns and summaries with it. Further this is also the foremost responsibility/duty of the Sales Tax Department to check veracity as to whether the suppliers are depositing sales tax in the government exchequer or not. But we are constrained to observed that the department has failed to fulfill its official obligations in the instant case and is trying to shift onus on the appellant's shoulders in order to burden him for depositing the Sales Tax payments twicely which act is extremely unwarranted. Conversely, the appellant after verifying the status and antecedents of the suppliers from the website www.Cbr.Gov.Pk paid the tax and made the payment to them. In this view of the matter, we find a lot of force in the contention raised at this juncture and in order to meet the ends of justice having found merits for its acceptance.
9. In so for as, the allegation that the provision of sections 8 and 8A of the Act have been contravened and the other allegation that the provisions of sections 1(ca) and 1(d) of section 8 have been violated are concerned, the contention put forth is that the provision of sections 8 and 8A of the Act do not attract to the facts of the present case. Even the allegations are not only contrary to the facts but are also against the normal business practices.
For the purposes of awareness of the law, we deem it proper to reproduce sections 8 and 8A of the Sales Tax Act, 1990 as under:-- Section 8 Tax credit not allowed.---(1) Notwithstanding anything contained in this Act, a registered person shall not be entitled to reclaim or deduct input tax paid on--
(a) the goods or services used or to be used any purpose other than for taxable supplies made or to be made by him;
(b) any other goods or services which the Federal Government may, by a notification in the official Gazette, specify;
(c) the goods or services in respect of which sales tax has not been deposited in the Government treasury by the respective supplier;
(d) fake invoices; and
(e) purchases made by such registered person, in case he fails to furnish the information issued under subsection (5) of section 26.
Section 8A Joint and several liability of registered person in supply chain where tax unpaid. Where a registered person receiving a taxable supply from another registered person is in the knowledge or has reasonable grounds to suspect that some or all of the tax-payable in respect of that supply or any previous or subsequently supply of the goods supplied would go unpaid, such person as well as the person making the taxable supply shall be jointly and severally liable for payment of such unpaid amount of tax.
10. During the court proceedings, the learned counsel vehemently contended that on the legal side it is stated that our business activity i.e. (between July 2005 to June 2006 ) do not fall within the ambit of clause (ca) of subsection (1) of section 8 of the Act, under which our input tax has been rejected and section 8A under which unpaid tax was demanded as both these clauses are inserted by the Finance Act, 2006 (III of 2006), assented on 30th June, 2006 and applicable with effect from 1st July, 2006, therefore, the taxable activity prior to 1st of July, 2006 cannot be charged under the above Sections, therefore, the show cause notice needs to be quashed.
11. Further argued that under the prescribed mechanism of VAT, the appellant made payment of input tax to the suppliers after verifying its status from the website of the department and there was no other mode or source wherefrom it could be confirmed as to whether the suppliers have deposited the payment in the Government treasury or not. This is, in fact, the obligation of the department to check veracity of the suppliers that they have made payment ()flax due particularly when the registered suppliers are regularly filing their monthly sales tax returns and summaries with the department.
12. We have given due consideration to the averments made by the learned counsel and we are in agreement with the counsel because section 8A of the Sales Tax Act, 1990 clearly states that whenever the registered person is in the knowledge or has reasonable ground to suspect that some or all of the tax would go unpaid from the supplier's side then it would be the joint liability of such person as well as the person making the taxable supply for making payment of such unpaid .Amount of tax. While in the instant case, the position is very different because the registered person/appellant, after verifying the status. And genuineness of the suppliers made the payments of input tax to the suppliers and fulfilled all the legal responsibilities on his part. So the appellant is neither jointly not severally liable for making payment of such unpaid amount of tax. For the foregoing discussion, we are of the view that the department was not within the ambit of law while invoking the provision of sections 8 and 8A of the Sales Tax Act, 1990 against the registered person/appellant, so the proceeding conducted in pursuance thereof could not be held legal proceedings. Consequently, the contentions raised by the appellant seems to be reasonable and are accepted hereby us.
13. Coming to the last contention of the registered person which relates to invocation of sections 33 and, 34 of the Act in the present case . Reason being the Hon'ble Supreme Court of Pakistan in its judgment GST 2004-79 has settled the principle that while invoking sections 33 and 34 of the Act each and every case has to be decided on its on merits as to whether evasion of payment of tax was wilful or I mala fide or not. Relevant portion of the judgment is being reproduced hereunder for ready reference:-- Each and every case has to be decided on its on merits as to whether the evasion or payment of tax was wilful or mala fide, decision on which would depend on the question of recovery of additional tax. In fact and circumstances of this case, we find that non payment of the sales tax within tax period neither wilful nor it could be construed to be mala fide evasion or payment of duty, therefore the recovery of additional tax as penalty or otherwise was not justified in law.
14. Having taken regard to the facts of the case in its entirety, and also going through the reported judgment of the Hon'ble Supreme Court of Pakistan referred to supra, we feel no hesitation except to declare that the orders passed by the authorities below on this ground have no legal sanctity in the eyes of law. Consequently, the assessee's appeal is accepted on this ground as well.
15. Resultantly, the show-cause notice is hereby set aside and the impugned orders are cancelled/annulled. .