SHAHID MASOOD MANZAR, CHAIRMA N.----The titled sales tax appeal has been filed at the instance of the appellant registered person calling in question the impugned Order-in-Appeal No. 78A-II / 2016 dated 30.06.2016 passed by the Learned Commissioner Inland Revenue Appeals-II, Lahore.
2. Briefly stated the facts of the case are that the registered person is involved in the transactional affair pertaining to chemicals and its allied products. During the audit of the appellant, the Officer of Inland Revenue concerned came to know that the appellant claimed inadmissible adjustment of input tax amounting to Rs.2,777,445/- during the alleged periods on account of fake/flying invoices issued by fraudsters and thus, contravened various provisions of sections 3, 6, 7, 8(1)(D), 8A., 22, 23, 26, 37, 38-B and 73 of Sales Tax Act, 1990 read with section 2(37) ibid. Consequently , the appellant was called upon to show-cause as to why demand amounting to Rs.2,777,445/- along with default surcharge and penalties should not be recovered. In response to the show-cause notice appellant submitted reply which could not satisfy the DCIR. The Deputy Commissioner accordingly passed the impugned order directing the appellant to pay the demand amounting to Rs.2,777,445/along with default surcharge under section 34(1)(c) of the Act. Moreover , a penalty equal to 100% of the amount involved was also imposed upon the appellant under section 33(13) of the Sales Tax Act, 1990 read with section 2(37) ibid. Being aggrieved the taxpayer filed first appeal before the learned CIR(A) who vide an order dated 30.06.2016 upheld the impugned finding of the DCIR, hence, the instant appeal by the taxpayer on the following ground:
1. That the impugned order is fraught with legal inconsistency and is reflective of misreading of both facts and law at hand.
2. That the respondent No.2 has badly erred in terms of comprehending the fact that allegation of tax fraud is only maintainable under section 11(3) Sales Tax Act, 1990 to be read with section 2(37) Sales Tax Act, 1990 and not under section 1 1(2) Sales Tax Act, 1990.
3. That it is the conceptualization of law that when a thing is to be done in a particular manner it is to be done in that specific manner and therefore issuance of show cause notice while inserting two sections at the same time sections 1 1(2) and 1 1(3) of Sales Tax Act, 1990 rendered this exercise illegal and void.
4. That the respondent No.2 has committed gross illegality in terms of understanding the fact that law with reference to fake invoice as any invoice which has been issued in accordance with section 23 of Sales Tax Act, 1990 is to be taken as valid invoice therefore, declaring the invoices of the appellant 's record.
5. That the allegation of Tax fraud raised by the department under section 2(37) of Sales Tax Act, 1990, as per the intent of law is to be followed by an irrefu table evidence on the part of the prosecution and the same is sufficient factor to relegate this entire episode an illegal assumption of power .
6. That the impugned order is non-speaking in its nature and is violative of section 24-A of General Clauses Act.
7. That the supplier of the appellant M/s Khanjee Corporation and Messrs G&B Enterprises were not black listed prior to transacting business with the appellant and the same was done subsequently and there were operative as per ATL status.
8. That it is the fundamental principle of Sales Tax Act, 1990, where there is taxable activity being performed and obligations under erstwhile sections are being fulfilled in such instance drawing input tax adjustment is a matter of right duly safe guarded by fiscal statute.
9. That the allegation of violation of sections such as 3, 6, 7, 8, 22, 23 26, 37 and 38 is contrary to fact and therefore, meant to be deleted.
10. That the evidence encompassing bank statement, sale and purchase register and gate passes has not been given consideration which tantamount to denial of justice.
11. That the respondent No.2 has not adjudicated upon all the grounds raised before him and entire impugned order is passed in mechanical and slipshod manner .
12. That the imposition of default surcharge along with the penalty is capricious and uncalled for in the eye of law and seeks deletion.
3. The learned AR agitated the foundational basis of impugned order , wherein order-in-original was upheld in a unilateral proceeding, under the notions that accorded treatment bespoke imaginative inference as the entire record which was produced in support of appellants' contention was intentionally put to denial. It was argued that the taxpayer produced the copies of crossed cheques with reference to alleged transactions showing transfer of the amount of the sales tax invoices in favour of the supplier i.e. Messrs Khanjee Corporation and G&B Enterprises from the business bank account of the buyer and following endeavor was followed by sales tax Invoices under section 23, Sales Tax returns under section 26 and records under section 22(b)(e)(ea) as purchase registers, Ledgers, Bank statement along with gate passes, delivery notes and FBR online ATL status of supplier under section 21A of the Sales Tax Act, 1990. He also contended that allegation of tax fraud was levelled in slipshod manner and the department did not discharge its part of onus and pre requisite of tax fraud was never fulfilled.
The learned AR contended that compliance of section 73 of the Sales Tax Act, 1990 was duly made and submitted that the appellant was never involved in tax fraud as its supplier , Messrs Khanjee Corporation and G&B Enterprises had not issued fake tax invoices. He also produced the entire record of tax invoices which carried all the jurisprudential requirement.
The learned AR contended that subseq uent blacklisting of his supplier Messrs Khanee Corporation and G&B Enterprises cannot disentitle him .of seeking input tax adjustment as the same would not corresponds retrospectively . In this regard he has relied upon judgments of the superior courts where in it has held that: if blacklisting or suspension of registration of a supplier was effected subsequent to a period in which purchases and bank payments were transacted, supplier could not be made a tool to deprive the buyer of a valuable right accrued in his favour prior to such blacklisting or suspension of registration of any supplier due to subsequent default whatever on his part -Executive orders or notification, which conferred rights and were beneficial, would be given retrospective effect; and those which adversely affect or invade upon vested right, could not be applied with retrospective effect --- Taxpayer , could not be deprived from his valuable right through retrospective application of S.21 of the Sales T ax Act, 1990.
Reliance is placed upon 2001 SCMR 1 161; 2002 PTD 976 ; 2014 PTD 558 and 2005 SCMR 492 .
The learned AR also drew the attention of this court that both default surcharge under section 34 of the Sales Tax Act, 1990 and levy of penalty under section 33(13) of the Sales Tax Act, 1990 were a capricious and whimsical display of executive power as the alleged violation was never established therefore structuring the penalization of un-established charged was itself treading to the path of legal impropriety and did not enjoy the admissibility of the cannons of law . It therefore requested by the learned AR to allow the appeal.
4. To the contrary what has been narrated above the learned DR came up with the assertion that since the supplier of the appellant was blacklisted therefore, the entire business affected with it would tantamount to an illegal affair depriving the taxpayer of his claimed adjustment and that both penalty and default surcharge was rightly slapped.
According to learned DR the impugned order is in accordance with law which should have to be upheld.
5. After , having given insightful introspection to the arguments raised by both the learned DR and AR and after taking a due glance of records presented, the preliminary question which emerges is whether allegation of tax fraud is maintainable where due compliance of section 73 of the Sales Tax Act, 1990 has been affected by the Buyer/ Appellant and tax invoices have been maintained in accordance with the Sales Tax Act, 1990 and at the same time whether blacklisting can operate retrospectively . The connotation of Tax Fraud is enunciated under section 2(37) of the Sales Tax Act, 1990 which goes as under: Section 2(37) "tax fraud" means knowingly dishonestly or fraudulently and without any lawful excuse
(i) Doing of any act or causing to do any act; or
(ii) Omitting to take any action or caus ing the omission to take any action, [including the making of taxable supplies without getting registration under this Act {;od,},}
(iii) Falsifying for causing falsification) the sales tax invoices,} Perusal of the definition leads us to the legal wisdom that legislative intention under section 2(37) of the Sales Tax Act, 1990 is not to opt for fishy or sup-positional exercise and the initial burden lies on the department to show that an assessee knowingly, dishonestly or fraudulently and without any lawful excuse has done any act or has caused to be done or has omitted to take any action or has caused the omission to take any action in contravention of duties or obligations imposed under the sales tax act or Rules or Instructions issued there under the intention of understanding the tax liability or underpaying the tax liability. Once this burden is discharged by the Department only then the burden is shifted to the assessee to establish that the act done was without any knowledge on his part or without any intention of dishonesty or fraud and was done without any lawful excuse. "Reliance is placed on 2015 PTD 1490 and 2002 SCMR 134 .
In the instant case, provision of section 73 of the Act for bank payments have duly been complied with by the appellant consequently , input tax credit against invoices of such blacklisted perso ns cannot be denied and sales tax refunded thereon cannot be recovered after insertion of subsection (3) of section 21 to the Act wherein it has categorically been laid down that input tax shall be allowed if payments are made through banking channel irrespective of the fact that the suppliers units are subsequently blacklisted or their registration have been suspended or blacklisted.
The appellant provided purchase invoices issued by the suppliers, as an evidence to claim input tax adjustment.
The Department had power to conduct post refund audit and call for any record. The appellant firm having maintained and retained all records in accordance with sections 22 and 24 of the Sales Tax Act, 1990. The question of non-availability of records did not arise in the case of appellant. The appellant provided the department all relevant records of purchases along with written arguments but same was not considered by the adjudicating authority . It was argued that the department was liable to conduct inquiry in order to ascertain the facts that as to why the registered suppliers had not declared correct supplies in their record and concealed the supplies and why the suppliers failed to deposit due tax in the Nation exchequer . It was further argued that the department was further liable to conduct verification, or complete audit of the record of alleged supplier to issue them show-cause notice pointing out discrepancies. Appellant firm had purchased the goods from the registered supplier and paid due tax at the time of payment of goods including sales tax. Further argued that the check and balance rested with the department and not with the third party. Since the appellant being third party was not responsible of activities of alleged suppliers, hence, provisions of section 8(1)(a) of the Sales Tax Act, 1990 were not attracted in appellant's case. The learned counsel contended that the said provisions could only be invoked in cases, where charge of "collusion" or "tax fraud" had been levelled and established by the department. It was argued that party making an allegation, must bring material evidence to prove the irregular , false, collusive and fraudulent transaction, but department had not been able to place on record any evidence by which it could be inferred that invoices issued by the supplier were fake. Appellant firm, which had paid the input tax covered by the invoices, could not be denied the statutory right of claiming its adjustment. Neither the charge of "tax fraud" nor "collusion", had been established against the appellant firm and whole proceedings were infested with inherent legal infirmities.
Under section 21A of the Sales Tax Act, 1990, FBR is to be assumed as custodian and watch dog of all those who work under its umbrella. The position is further clarified by the fact that section 21A holds FBR responsible for maintaining the list of Active Tax Payer and Tax Payer is to transact its business therefore, once the tax payer while giving a nodding to the list maintained by the FBR under above cited arrangement, produces a copy of status of its supplier to be active in accordance with the scheme of law as discussed not subsequent act by the department would land the appellant in the quagmire of uncertainty as it would amount to nullity of legal percept of input tax as defined under section 7 of the Sales Tax Act, 1990. In view of the above imposition of 100% penalty and default surcharge without first establishing that appellant committed anything wrong or contravened any provision of law knowingly and dishonestly is patently illegal, harsh, unjustified and without any logic. Therefore, confirmation of the action of the DCIR to impose 100% penalty on the strength of section 2(37) of the Act by the learned CIR(A) is an act void ab initio and without any justification. It is now settled law that no penalty could be imposed without first establish the mens rea. Reliance in this regard is placed on the ratio of the judgment of the Hon'able Lahore High Court Lahore reported as 2004 PTD 1048 . On the issue of penalty the Hon'able High Court was pleased to observe as under:- "The nature of penalty provisions in taxing statutes and the proceedings held to bring them home are criminal or at least quasi criminal in nature. In such like proceedings proving of mens rea, in the view of their Lordships in re: Additional Commissioner of Income Tax v. Narayan Das Ram Kishen 1994 PTD 199 is an essential ingredient. It was held that the Revenue was under a statutory obligation to prove that the assessee had acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest or acted in conscious disregard of his obligation ---- the principle that was laid down by their Lordships needs to be kept in mind by all revenue authorities while enforcing penalty provisions. It is that; "Levy of penalty is a matter of discretion which must be exercised by the authorities judiciously on consideration of relevant circumstance s. Penalty should not be imposed merely because it is lawful to do so. If the offence is of a technical or venial nature, the authorities will be justified in refusing to levy penalty ."
Reliance is placed on another judgment of Hon'able Sindh High Court reported as 2007 PTD 901. The Hon'able High Court has held that nature of penal provisions being quasi criminal existence of mens rea was an essential and mandatory condition for levying pena lty and department must establish mens rea before levying such penalty .
Reliance is also placed on the ratio of the decision of this Tribunal reported as 2011 PTD 693 wherein in the identical circumstances this Tribunal deleted the penalty with the observations that the penalty has not only been levied in a haste but also without substantiating mens rea, which is an integral part of the penalty proceedings.
The second Supplier namely Messrs Khanjee Corporation and G&B Enterprises were Blacklisted on 03.07.2013 as verified with the F.B A's Taxpayer online verification system dated 14.05.2015 while the purchases were made from the said business unit for the period Dece mber 2010 and January 2011 and the said business unit was also active and operative at the time of purchases made from them and never has been suspended or blacklisted at the time of purchases, which is also evident from the taxpayer's online verification system dated 19.04.201 1 and ATL status.
If the supplier unit has committed tax fraud then why should the Answering Respondent be penalized for the act of the suppliers; the action of the department is based only on the report of the I&I Department. As mentioned above and by following the dictum laid down in the above referred judgments of this Tribunal and the Hon'able High Court recent judgment the contention made by the learned AR denied.
6. After having gone through the relevant record, aforementioned discussion as well as bare reading of the reported judgments cited supra and the annexed documents produced by the registered person, we are of the view that the contentions raised by the learned counsel for the registered person carry weight so we hold that order-in-original dated 12-8-2015 is illegal and void ab initio. Consequently , the impugned order of the learned CIR(A) is vacated and the order passed by the DCIR H is hereby annulled.