' Through this appeal the appellant registered-person has assailed the impugned Order-in-Appeal No,108 dated 14-2-2012 passed by the learned Commissioner Inland Revenue (Appeals-III), Lahore which is arising from the Order-in-Original No,30 of 2011 dated 15-12-2011.
2. Facts leading for disposal of the instant case are that on receipt of an information from Directorate of Intelligence and Investigation FBR, Lahore that a firm Messrs I.J. Traders is involved in issuance of fake/flaying invoices to other registered persons facilitating them to claim illegal and inadmissible input tax adjustment a criminal case was got registered against the fraudsters through F.I.R. No,12 of 2010 dated 12-7-2010 in terms of Board's approval bearing C.No,1(9)STEM/2009- Pt dated 24-6-2010. During the course of investigation it was observed that the appellant Messrs Unity Traders, Lahore in connivance and collusion with the above culprits was found involved in claiming illega l and inadmissible input tax adjustment amounting to Rs,337,234 on the basis of fake invoices issued by the aforesaid supplier and resultantly caused loss to the Government Ex-cheque. The appellant was accordingly asked to join the investigation and explain the circumstances of purchases shown to have been made from the above dummy suppliers. The appellants provided the requisite record but according to the department he failed to give any plausible explanation, therefore, it was alleged by the department that the appellant was involved in tax fraud. It was also noted that the appellant had voluntarily deposited an amount of Rs,145,774 therefore remaining amount of Rs,191,460 shall stand recoverable from them along with default surcharge and penalty. On the basis of these allegations a show cause notice dated 20-4-2011 was issued calling upon the appellant as to why the alleged input tax may not be recovered front them along with default surcharge and penalty. In response thereto the appellant furnished written arguments which were not considered to be satisfactory, hence the Order-in-Original No,30 of 2011 dated 15-12-2011 was passed directing the appellant to pay the balance sales tax amounting to Rs,191,460 along with default surcharge (to be calculated at the time of deposit) under section 34 of the Sales Tax Act, 1990. A penalty equal to 100% of the principal amount of tax was also imposed.
Against this treatment appeal was filed before the learned Commissioner Inland Revenue, Lahore who by virtue of his order dated supra rejected the appeal which is now being impugned in this further appeal before this forum.
3. On merit the learned AR contended that the provision of section 2(37) has wrongly been invoked in the instant case. To invoke this section pre-requisite condition is that the registered person has committed tax fraud and has acted knowingly, dishonestly, fraudulently and without any lawful excuse. To refute this allegation, the learned counsel pointed out that all the raw materials were purchased by the appellants from the registered persons and the invoices issued under the provisions of section 23 of the Act were also obtained. Moreover, status of the supplier was also checked and verified from the website of the FBR (www.Fbr.Gov.Pk) and it was reported by it to be active. Further, all the payments were made by the appellant, after adhering to the provisions of section 73 of the Act. Besides, the suppliers were also submitting copies of their monthly Sales Tax Returns and the summaries of the relevant period to the Department. It was also added by the learned counsel, that the appellant did all the possible precautions and endeavors as well as used all the official resources to verify status and genuineness of the suppliers. Such acts clearly speak for themselves that the appellant discharged all his legal and the ethical responsibilities to bring the truth at the door in a good faith. Further all the requisite conditions as are laid down in sections 7 and 73 of the Act for claiming input tax were fulfilled bonafidely. He has stressed that in the given situation the entire liability of depositing the tax in terms of section 3(3) of the Act, was the exclusive responsibility of the suppliers who are or were duly registered at the relevant time and were regularly filing their monthly returns and summaries with Sales Tax Department. According to him, in fact, it was the sole duty of the Sales Tax Department to check and find out as to whether the suppliers are depositing their sales tax in the government 'exchequer or not? As the department has failed to fulfill its official obligations rather shifting its responsibilities on the appellant's shoulder which is highly unwarranted and uncalled for. He has contended that the appellant has been alleged contravene the provisions of sections 6, 7, 8 8A, 11, 14, 22, 23, 25, 26, 36, 38 and section 73 of the Sales Tax Act, 1990. This allegation in not only contrary to the facts but is also against the normal business and legal practice. He has argued that how could the appellant be held to be jointly liable under section 8A of the Act particularly when the supplier was registered with the department and submitting the monthly Sales tax returns and the summaries regularly.
According to learned Counsel, in the given circumstances the Order-in-Original is unsustainable and has been wrongly maintained by the learned CIR(A). He has therefore requested to cancel both the impugned order of the officer's below. On the other hand the learned D.R. Is supporting the impugned orders of both the officers below on the reason the reason discussed in their respective orders and has requested to uphold the impugned orders of the officers below.
4. We have heard both the learned representatives and have also perused the impugned orders and relevant record. We have observed that the appellant is engaged in the business of wholesaling and supply thereof to verified purchases since long and as per the counsel of the appellant enjoys a very good reputation amongst the business circle. The main allegation levelled by the audit authorities is that the appellant is involved in a sales tax fraud by claiming illegal input tax adjustment of Rs,337,234 and in this manner the provisions of sections 6, 7, 8, 8A, 11, 14, 22, 23, 25, 26, 36, 38 and section 73 of the Sales Tax Act, 1990 have been violated. During the court proceedings, the learned counsel for the appellant pressed all the grounds, as are enumerated in the paper book, out of which some are legal while the others are factual. To evaluate the legal grounds, we would like to reproduce section 2(37) which defines "tax fraud" as follows:-- 2(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
(iii) 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 understanding 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. It is abundantly clear from reading definition of "tax fraud" that the mandatory condition put forth for committing tax fraud is that the alleged person should have done any act knowingly, dishonestly or fraudulently and without any lawful excuse. Reverting to the facts of the instant case, there is not an iota of evidence whatsoever wherefrom it could be deduced that the appellant has knowingly or dishonestly or fraudulently committed tax fraud by claiming input tax adjustment against the sales tax invoices issued by the alleged fraudster gang. As per the learned A.R. Even the audit/contravention report could not establish with any concrete reasoning that the appellant was involved in tax fraud by claiming illegal sales tax input tax of Rs,337,234 and have violated the provision of section 2(37). In fact the department has miserably failed to fasten blame at the appellant's door. On going through the audit/contravention report, we are convinced that the entire edifice has been built, to hold the appellant as fraudulent, on conjectures and surmises and whimsical inference has been drawn against the appellant on the so called set of facts. On the other hand, the record proves that there was ample justification with the appellant to claim adjustment of input tax. Such as all the suppliers were registered persons and their status was active as per FBR Website. They were regularly submitting their sales tax returns and summaries thereof. All the payments were made by the appellant in accordance with the provisions of section 73 of the Sales Tax Act, 1990. The appellant did not have any prior knowledge about fakeness of the sales tax invoices issued by the suppliers. We also deem it appropriate to reproduce section 36(1) which reads as under:-- "where the reason of some collusion or a deliberate act any tax or charge has not been levied or made or has been short-levied or has been erroneously refunded the person liable to pay any amount of tax or charge of the amount of refund erroneously made shall be served with a notice, within five years of the relevant date, requiring him to show cause notice for payment of the amount specified in the notice".
6. Premises of this section is that show cause notice can only be issued where non levy, short levy or erroneous refund has been caused by the reason of some collusion or a deliberate act. On going through the facts available on record, the department could not prove its allegation of collusion of the appellant with the supplier nor could bring on record any evidence that the appellant has done fake transaction with deliberate act. The honourable High Court in a case reported as 2007 PTD 2265 while interpreting section 36 has observed as under:- "10. To put it succinctly, show cause notice can only be served under section 36 ibid if;
(a) Any tax or charge, has not been levied or has been short-levied or has been erroneously refunded.
(b) Such non-levy, short-levy, or erroneous refund has been caused by the reason(s) of "some collusion or a deliberate act" under section (1) of section 36 of the Sales Tax Act or owing to inadvertence or error or misconstruction per subsection (2) thereof and;
(c) Within the period of five years under subsection (1) and three years under subsection (2) of section 36.
' The unarguable conclusion thereto is that mere no-levy, short levy, or erroneous refund of tax or charge cannot be basis for a show cause notice. It has to be founded upon non-levy, short levy, or erroneous. Refund caused by any of the above reason which being the dominant factor also determine the period of limitation thereto, in the absence of any of the three conditions or the jurisdiction facts, the taxing authorities shall have no power or jurisdictional to serve a show cause notice under section 36 ibid".
7. Coming to the issue which relates to section 8A in respect of the joint and several liabilities of registered persons in supply chain where tax is unpaid, during the court proceedings, the learned counsel for the appellant contended that this fact was never in the knowledge of the appellant that the supplier is not making payment of the tax due to him since July, 2006 and even the department was unaware that the suppliers are not making payment of tax. He has contended that the alleged fake suppliers is not duly registered with the department and were regularly submitting their monthly sales tax returns and summaries. Therefore, the appellant cannot be evolved as a joint liable and induction of contravention does not qualify. We are of the view that such nonspeaking order is not sustainable as in the similar circumstances it has been declared null and void by this Tribunal as well as by the superior courts. Reference in this regard is placed on the decisions reported as GST 2004 CL 71 GST 2003 CL 562 and GST 2004 CL 79.
' We have further noted that the appellant under the prescribed mechanism of VAT, has made payment of the input tax to the suppliers and had no access to confirm that the supplier had made the payment in the Government Treasury or not? In fact, this was the duty of the revenue to check as to whether the supplier has made payment of tax due to him especially when he was filing his monthly sales tax returns and summaries with the department. We have also observed that the learned Commissioner Inland Revenue had passed the impugned order under the influence of DII without application or his independent and judicious mind, We have also noted that the department has heavily relied upon the statements of the suppliers but none of the suppliers or member of the gang stated that they issued the invoices with the prior connivance with the appellant. Even the confessional statement of member of gang neither confessed that he was involved issuing fake invoices nor have any connivance with the appellant. Actually, the department has totally misread the confessional statements and interpreted the same without application of Mind. Since show cause notice was issued and the impugned order passed thereunder on the strength of concocted and fabricated facts, therefore, such notice and the order are not sustainable in the eye of law. We are of the view that after adopting the method for making the payment as is prescribed by the law, the appellant has discharged his onus, so no responsibility lies on the appellant's shoulders to haunt his suppliers for depositing his liability in the government exchequer or not.
9. We also find a lot of force in the contention put forth by the learned counsel that the appellant has clean tax history which cleary depicts that huge payments of tax is being made towards the national exchequer by the appellant.
10. Having taken regard to the facts of the case in its entirety and after respectively following the ratio decided in the referred judgments, we have no option except to reach the conclusion that proper show cause notice as envisaged under section 36 has not been issued, consequently, the proceedings conducted in pursuance thereof could not have any legal consequences in the eye of law. As a result, we are of the view that the Revenue has failed to prove the charge levelled in the show cause notice.
11. We are not in a position to give any conclusive findings with regard to mala fide of the officials of the Directorate General. However, it goes without saying that the way the recovery memo was prepared, documents recovered and evidence obtained leaves much to desire. There is no independent witness of the recovery memo and the only person who, through a friend of accused, could perhaps be treated as an independent witness has retracted from his statement. The RIR is advised to take necessary stock of the things and issue instructions to its field formations regarding the methods to be adopted in cases of arrest and investigation.
12. In view of the above discussion, the appeal is accepted. The Finding recorded by both the authorities below are declared to null and void and of no legal consequence.
13. Consequently, the SCN, orders of the authorities below are hereby annulled, and the appeal of the appellant registered person stands accepted.