1. SALEEM AKHTAR, J.--These two applications have been filed by the assessee in respect of assessm ent years 1962-63 and 1963-64. The following question has been referred in I. T. R. 689/72.
2. "Whether on the facts and in the circumstances of the case there was any material with the Tribunal to hold that the applicant was not entitled to exemption under section 4(a) of the Sales Tax Act in regard to sale aggregating to Rs. 54,444 ?
3. In S. T. R. 690/72 relating to assessm ent year 1963-64 question is the same except that the amount is Rs. 15,998. .
4. The applicant is a private limited Company carrying on 'business of manufacture and sale of cloth and yarn at Karachi: During the assessment year 1962-63 the applicant had sold partly manufactured goods aggregating to Rs. 54,444 and during the assessment year 1963-64 to Rs.
5. 1,15,99$ to licensed manufacturers and claimed exemption under section 4(a) of the Sales Tax Act, 1951. In support of the applicant hail filed before the Sales Tax Officer certified prescribed under rule 16 of the sales tax and the photostat copy of the manufacturing licences issued to the purchasers under section 8 of the Sales Tax Act. "The Sales Tax Officer rejected the claim of exemption on the ground that the purchasers were not genuine parties and that the applicant has failed icy produce evidence about their genuineness. The applicant filed an appeal before the learned Tribunal which was dismissed. The learned Tribunal held that in spite of the fact that the sales were accepted as genuine in the corresponding income-tax assessment, as the genuineness of the purchaser could not be established during the sales tax proceedings, the claim was rightly rejected.
6. Mr. I. N. Pasha, has contended than the manufacturing licences are issued by the Department, and the applicant had no option, but to sell to such licences on the production of photo copies of the licences and on issuing a certificate under rule 16. As the assessee had complied with all these conditions, the Department cannot place burden on the assessee to prove that such licences were genuine parties. To appreciate these contentions of the learned counsel it would be necessary to refer to the Sales Tax Rules, 1951 as applicable during the relevant assessment year. It may be noted that the amendments made in the Sales Tax Rules in 1966 are not applicable to the present case.
7. At the relevant time the procedure provided under the Rules of 1951 was that every manufacturer, purchaser, producer or exporter unless exempted was required to obtain a licence under section 3 of the Sales Tax Act. The application for licence was to be made in Form S. S. T. I. To the Sales Tax Officer. Under rule 4, sub-rule (4) the Sales Tax Officer on satisfaction that the application was in order and that the prescribed fee was paid was to grant a licence in Form S. S. T.
3. Form S. S. T. I.
8. Required the manufacturer or producer to declare its principal plate of business and the branches with an undertaking that in case of discontinuance of business he will pay tax-in respect of the goods in his possession at the date of discontinuance of the business. The grant of licence was subject to the satisfaction of the Sales Tax Officer, which could be issued after the Sales Tax Officer has satisfied himself that the facts stated in the application are correct. The licence issued in Form S. S. T. 3 also provided a condition that "the licence is issued subject to the condition that on the discontinuance of the business tax shall be forthwith payable in respect of goods in the possession of the licensee at the date of discontinuance". Similar conditions were provided under Rule 6 where licences were required to give notice of discontinuance within 15 days and clear tax in respect of goods in their possession. In the background of these rules we have to now consider whether, the Tribunal was justified in rejecting the claim that the assessee was not liable to exemption on the goods sold to the licensee.
9. The procedure for sale of partly manufactured goods was that on the presentation of certified copy of the licence and a certificate under section 16 the licensed manufacturers were to sell it and no tax was payable on such sale. Both these certificates have been produced by the applicant but the Tribunal has held that the licensees were not genuine parties and did not exist. The Department has not disputed that the licence was not issued to the purchasers. It only disputed that at the time of sale these parties did not exist. From the order of the learned Tribunal and the Income-tax Officer it does not seem what type of enquiry they had made before coming to the conclusion that these purchasers did not exist. The admitted position is that as the licences had been issued to the purchasers it cannot be denied that they did not exist at that time. In fact the Sales Tax Officer had issued the licences after satisfying himself about their existence and particulars mentioned in the application, and therefore, there existence cannot be denied. The question will be whether they were non-existent on the date when the sale were made to them. The Department has not produced any notice issued by these purchasers intimating the Department about the discontinu- -ance of the business. The only fact on which reliance has been placed is that the purchasers were not available. This by itself is not sufficient to charge the assessee with tax in respect of sale on which tax is not- payable.
10. Mr. Sheikh Hyder, the learned counsel for the department has referred to the order passed in I. T. R.
11. 6/79 by the Tribunal where it seems that the Sales Tax Officer had made some enquiries about the licensed purchasers some of whom are purchasers in the present case also. It seems that the sales Tax Officer had issued notice for their appearance and it was found that they were not available.
12. This happened in the year 1965 and thereafter a letter, dated 29-5-1965 was addressed by the Commissioner of Sales tax to the Secretary of Pakistan Textile Mills Association, Karachi Zone, intimating) the cancellation of licence of about 18 parties, who were found to be fake and bogus in the subsequent enquiries. Could such an enquiry in the year 1965 be made basis for the purpose of declining the relief to the assessee? Although it may not be proper to refer to such a finding made in another case to the disadvantage of the assessee as he was not a party to such an enquiry, from the record of 1. T. R. 694/72 it seems that the inquiry was only to the extent that the notices issued to the licensees were returned unserved and they did not appear. One does not know whether these purchasers have ceased to carry on business from 1965. On this basis it also cannot be said that these licensees were not carrying or business during 1962-63 and 1963-64. Such conclusion will be based entirely on presumption and conjucture. Once it is established that the licences had been issued as provided by section 8 and Rules framed thereunder then unless the same is cancelled before the sale or the assessee is notified that it has been cancelled, or it is proved that the assessee at the time of sale was aware that the licence has been cancelled or the parties do not exist, sale made under the procedure provided by the! Rules shall qualify for relief under section 4-A.
13. Mr. Salahuddin, the learned counsel for the Department has contended that the Tribunal has given a finding that the licensed purchasers are not in existence and, therefore, under these proceedings such finding cannot be disturbed. The order of the Tribunal has merely referred to its own order in S. T. A. No. 13/69-70. In fact there does not seem to be any proper finding except that while referring to its own judgment in another case, it was held that the exemption was properly refused. This can hardly justify such an order where the department is seeking to impose a liability. Mr. I. N. Pasha, the learned counsel has referred to an unreported order of this Court, in Commissioner of .Sales Tax, Karachi v. Sultan Textile Mills S. T. C. No. 26/77 where in respect of assessment year 1962-63 the assessee claimed that the sales to licence manufacturer was not liable to tax. This claim was rejected mainly on the ground that the sales were made to parties who were not traceable and were not genuine parties. The Bench while dismissing the case in limine observed as follows "Further, another aspect of the case which has disturbed us is this .... It is admitted that the buyers to whom the goods were sold by the assessee held. Manufacturing licences, photostat copies of which were supplied to the sellers. These licences were issued by the Sales Tax Officer and the number of the licences were available in the Sales Tax Department itself. If the Department had any suspicion about the genuineness of the buyer's character as holders of manufacturing licences, then it was for the Department to make inquiries from the Sales Tax Officer who issued those licences or to take action against that Sales Tax Officer if he wrongly issued those licences.
14. We arefurther of the view that it is that Sales Tax Officer -who should have been required to trace out the buyers. Therefore, the burden in this case was throughout on the Department as the Department had issued the manufacturing licences."
15. This observation of the learned Bench equally applies to this case also. The learned Tribunal has wrongly placed the burden on the assessee to establish the genuineness of parties particularly in the circumstances when the initial burden has been discharged by the assessee by producing a copy of a valid licence issued under section 8 and the Certificate under rule 16. Moreso, when the Department has not been able to establish that the parties: to whom the licences were issued were not existing at tile time of issuing; the licence or at the time of sale, The letter regarding cancellation of the licence was such after the sate, and, therefore, on the basis of that letter that Department cannot state that the sale were not to genuine parties, If the Department- has taken action to cancel the licence then in terms of rule 8 and the condition of licence it should have asked the licence holders to declare the goods in their possession and pay sales tax on it. No such enquiry seems to have been made by the Department instead it adopted a very convenient way of realising the tax from the applicant. If such an enquiry would have been made and facts would have been brought on record, that the licensed purchasers did not exist at the time of sale by the licensed manufacturer then the action of the Department could have been justified. These observations have been made because of the fact that the licence issued to the purchaser have not been held by the Tribunal as bogus or false. The existence of the licensees at the time when the licence was issued has not been disputed but the subsequent non-existence at the time of sale has not been established at all. There was no justifiable material on record on the basis of which any contrary conclusion could be drawn. Mr. 1. N. Pasha has referred to Abbas Textile Milk v.
16. Commissioner of Sales Tax (East) Karachi 1983 PTD 53 and Fazal Textile Mills Ltd. Case 1983 PTD 43 where in similar circumstances it was held that tae Department was not justified in imposing tax on such sales. The result we answer the question in both the applications in the negative.