MANSOOR AHMED, J.~ The present appellant preferred an appeal under Section 47 of Sales Tax Act, 1990 from an order dated 1 May, 1999 passed by the Custom Excise and Sales Tax Tribunal, Lahore in Sales Tax Appeal No. 575/LD/98.
2. Admittedly an appeal under Section 47 ibid, is competent before this Court to consider any question of law arising out of an order passed by Tribunal. The appellant did not formulate any question of law, as was required under Section 47 for consideration of this Court, however, vide order dated 31.10.2000 passed by this Court, the appellant was allowed to frame questions of law which according to him have arisen out of order of Tribunal. The appellant through Civil Misc. No. 411/2001 urged the following legal questions:-
(1) Whether input tax deduction can be made under Section 7 of the Sales Tax Act, 1990 in respect of goods which got destroyed by fire and which do not remain available for making taxable supplies?
(2) Whether the learned Tribunal erred in law in invoking Section 8 of the Sales Tax Act, 1990 without keeping in view that the show-cause notice did not contain a reference to Section 8?
(3) Whether the learned Tribunal erred in law in holding, without any evidence, that the appellant intentionally did not inform the authorities of sales tax in time about the five incidence?
(4) Whether the Sales Tax Act, 1990 cast no obligation on a registered person to report to the department instantly in case input tax paid goods get burnt?
(5) Where the learned Tribunal erred in law in holding that the appellants failure to inform the department instantly renders the refund claim of the appellant in justice in the eyes of law?
(6) Whether the learned Tribunal erred in law in relying on the alleged failure of the appellant to report the fire incident instantly to the Sales Tax Authorities as a ground to up hold the disallowance of appellant's refund claim without keeping in view that such alleged failure was not taken as a ground in the show-cause notice?
(7) Whether the learned Tribunal erred in law in holding into consideration, the insurance claim received by appellant, for denying the refund to the appellant?
(8) Whether the learned Tribunal erred in law in failing to decide all the points raised in the appeal before the learned Tribunal?
(9) Whether the learned Tribunal has erred in law in allowing the departmental representative to raise the issue of instant reporting of the fire incident to the department for the first time before the learned Tribunal disregarding competently that a point raised before the lower forum could not be allowed to be raised for the first time before an appellate forum?
2. In view of the legal question raised this Court vide order dated 19.6.2001 admitted the appeal to regular hearing to consider the question whether the provision of Sections 7 and 8 were applicable in the facts of the case particularly when a part of goods in question were destroyed by fire.
3. Facts of the case, in brief are that appellant which is a public limited company, engaged inter alia in the manufacture of cotton yarn is registered person under Sales Tax Act. The appellant purchased ginned cotton during the cotton season of 1996-97. Total numbers of cotton bales purchased by the appellant were 28899 having a value of Rs.305,120,240/- and paid input sales tax of Rs.30,512,024/- at the rate of 10%. The appellant submitted sale tax return for December, 1996 on 20.1.1997 and claimed refund of Rs.28,579,872/-, as the excess amount of input tax paid by the appellant for that period, In the return the total output tax for the same period was showed as Rs.2,113,969/-. Thus after deducting the output tax from the total input tax of Rs.30,693,841/- a refund for a sum of Rs.28,579,872 was claimed by the appellant under Section 10 of the Sales Tax Act.
4. The Assistant Collector Sales Tax Refund, Lahore vide his memo, dated 2.4.1 997 issued a show- cause notice to the appellant in terms of Sections 7, 9 and 10 of Sales Tax Act, 1990 read with the Sales Tax Refund Rules, 1996, on the ground that cotton bales 4102 involving Rs.244,3472/- have been partially damaged as a result of fire which broke out on 11.1.1997 and cotton bales 16786 valuing Rs.175,881,240/- were completely burnt and could not be used in taxable supplies. The appellant accordingly was called upon to justify the claim of refund. Reply to the show-cause notice was submitted by appellant and Assistant Collector Refund, Lahore vide his order dated 5.4.1997 partially accepted the appeal of the appellant inter alia on the ground that they were condemned unheard. The Collector of Appeals Central Zone, Lahore vide his order dated 3.6.1997 accepted the appeal of appellant and remanded the case to adjudicating authority for passing an order afresh after giving appellant adequate opportunity of hearing. The appellant on remand appeared before D.C. (Sale Tax Refund), Lahore who passed an order in original dated 15.9.1998 and found the appellant entitled to partial input credit against taxable supply made or to be made under the law. The sanction of Rs.12,950,669/- after adjustment of output payable was allowed. This order was again put to challenge by the appellant and Collector (Appeals) Central Zone, Lahore vide his judgment dated 25.11.1998 upheld the order in original and rejected the appeal. The appellant lifted the matter in appeal before Custom, Excise and Sales Tax Tribunal, Lahore through an appeal which was also rejected vide order dated 1.5.1999. This led to the filing of present appeal.
5. The appellant raised as many as nine legal questions but we admitted the appeal to interpret the provision of Sections 7 and 8 viz-a-viz the fact of the case. As according to us the material question were only questions Nos. 1 and 2. Remaining questions raised by the appellant were not of any substantive nature, therefore, we were not inclined to deal with them and hold that these question are not of any substantial importance. The main and crucial question of law on which this appeal was admitted relate to the interpretation and application of provision of Sections 7 and 8 of Sales Tax Act, 1990, in relation to the peculiar circumstances of case in hand Provision of Sections 7 and 8 are reproduced hereunder:- Section 7:- Determination of tax liability.- For the purpose of determining his tax liability in respect of taxable supplies made during a tax period, registered person shall (subject to the provisions of Section 73), be entitled to deduct input tax paid during the tax period for the purpose of taxable supplies made, or to be made by him from the output tax that is due from him in respect of that tax period and to make such other adjustments as are specified in Section 9.
(2) A registered person shall not be entitled to deduct input tax from output tax unless:-
(i) In case of a claim for input tax in respect of a taxable supply made in Pakistan he holds a tax invoice in respect of such supply for which a return is furnished.
(ii) In case of goods imported into Pakistan, he holds the bill of entry duly cleared by the customs under Section 79 or Section 104 of the Customs Act, 1969 (IV of 1969).
Section 8: Tax credit not allowed.- (1) Notwithstanding 4 anything contained in this Act, a registered person shall not be entitled to reclaim or deduct input tax paid on
(a) the goods used or to be used for any purpose other than for the manufacture or production of taxable goods or for taxable supplies made or to be made by him;
(b) any other goods which the Federal Government may, by a Notification in the official Gazette, specify; and
(c) on the goods under sub-section (1A) and (5) of Section (3).
(2) If a registered person deals in taxable and non-taxable supplies, he can reclaim only such proportion of the input tax as is attributable to taxable supplies in such manner as may be specified by the Board.
(3) No person other than a registered person shall make any deduction or reclaim input tax in respect of taxable supplies made or to be made by him.
(4) No person engaged in taxable activity specified in 5 (Section 3A) shall make any deduction or reclaim input tax, nor shall this tax be credible as input tax or the taxable activity of any other registered person.
(5) Notwithstanding anything contained in any other law for the time being in force or any decision of any Court, for the purposes of this section no input tax credit shall be allowed to the persons who paid fixed tax under any provisions of this Act as it existed at any time prior to the first, day. Of December, 1998.
(6) Notwithstanding anything contained in any other law for the time being in force or any provision of this Act the Federal Government may by notification in the official Gazette, specify any goods of class of goods which a registered or enrolled person cannot supply to any person who is not registered or enrolled under this Act.
(7) Notwithstanding anything contained in any of the provision of this Act. The Federal Government may by notification in the official Gazette, specify any goods or class of goods in respect of which the provisions of Section 3A shall not apply.
In the scheme of Sales Tax Act, 1990, the provision of Sections 7 and 8 are not the charging section.
Both the sections pertains to the domain of payability. Section 7 enunciate the principle for determining the tax liability for particular tax period of a registered person in respect of taxable supplies and it is provided that such registered person shall be entitled to deduct input tax paid during the tax period for purpose of taxable supplies made or to be made by him from the output tax that is due from him in respect of a particular tax period. For appreciating the mechanism provided under Section 7 reference to Section 3 of the Act contemplating chargeability, Section 2(14) defining input tax and Section 2(41) defining taxable supply would be imperative and relevant which are reproduced as under:- "Input tax" in relation to a registered person, means the tax-
(a) levied under this Act on the supply of goods received by that person;
(b) levied under this Act on the goods imported, entered and cleared under Section 29 or Section 104 of the Customs Act by that person.
(c) levied under the Sales Tax Act, 1990 of Pakistan as adopted in the State of Azad Jammu and Kashmir, on the supply of goods received by that person (and shall include duties of excise chargeable under Section 3 of the Central Excise Act, 1944 (I of 1944) on such excisable services as are notified by the Federal Government under the third provision to subsection (1) thereof and on which such duties are charged, levied and paid as if it were a tax payable under Section 3 of this Act).
2(41) "taxable supply", means a supply of taxable goods made in Pakistan by an importer, manufacturer, wholesaler (including dealer, distributor or retailer) other than a supply of goods which is exempt under Section 13 and includes a supply of goods chargeable to tax at the rate of zero per cent under Section 4.
3. Scope of tax.- (1) Subject to the provisions of this Act, there shall be charted, levied and paid a tax known as sales tax at the rate of (fifteen) per cent of the value of-
(a) taxable supplies made in Pakistan by a registered person in the course or furtherance of any (taxable activity) carried on by him; and
(b) goods imported into Pakistan.
(1A) Subject to the provision of sub section (6) of Section 8 or any notification issued thereunder where taxable supplies are made in Pakistan, to a person other that a registered person there shall be charged, levied and paid a further tax at the rate of (three) per cent of the value in addition to the rate specified in sub-section (1), clause (a) of the subsection (2) and sub-sections (4) and (5).
(1) --------------------- ----------------------
(2) ----------------------------------------
(3) -------------------------------------
(i) -.... -......... -............ -----
(ii) -----------------------------
(iii) ---------------------------
(iv) -- - ----------------------
(4) ------------------ (2)------------ (a)
(b)
(3) ----- (a)
(b)
(3A)------ (4)------------ (5)----------------------------------------------------- - (6).
8. Chargeability of sale tax is provided under Section 3 of the Act which enunciate that there shall be charge levied and paid a tax known as sale tax at the rate of 15% of the value of taxable supplies made in Pakistan by a registered person in the course or furtherance of any taxable activity carried on by him and goods imported into Pakistan.
9. The purchase of ginned cotton for manufacturing yarn is a taxable activity and it was based on a taxable supply. The appellant paid the sale tax on the taxable supply of ginned cotton. The payment of sales tax was taken to be as input tax because the appellant purchased the ginned cotton for utilizing the same in its manufacturing process. After going through the manufacturing process, the same cotton, assuming the form of yarn would be subject to another taxable supply and inviting a further charge of sale tax at the higher value, In order to avoid double taxation and ensure the proper levy of sale tax, a mechanism of input tax and its adjustment was provided under Section 7 of the Act.
10. A registered person is entitled to deduct input tax paid during the tax period for the purpose of taxable supply made or to be made by him from the output tax, that was due from him in respect of tax period. The registered person was also provided such other adjustment as was specified in Section 9 and under Section 10 the registered person is allowed to carry forward the excess amount or seek the refund.
11. It was vehemently argued by the learned counsel for the appellant that the appellants were entitled to refund of the input tax paid by them at the time of purchase of ginned cotton for that portion of consignment which was admittedly lost through the out break of fire. Relying on Section 10 and Section 7 of Sales Tax Act, the learned counsel claimed the accrual of right and argued that as after the purchase of goods, no taxable supply was possible from the cotton lost, therefore, the input tax paid by the appellant was refundable to them. Adding further the learned counsel submitted that the provision of Section 10 and Section 7 have to be interpreted in favour of the assessee and these being the provision related to the refund are to be construed liberally.
12. The expression taxable supply made or to be made used in Sections 7 and 8 is of paramount significant because determination of tax liability, right to seek the adjustment of input tax depended on the taxable supply made or to be made, In case, the taxable supply made or to be made is lacking or missing the contingency for accrual of right is not fulfilled, leading to non- accrual of any right. Would it create any vacuum or any infirmity in the law. We have examined this question with great concerned. Our conclusion is that the sale tax paid on a taxable supply would only be denominated as input tax subject to adjustment if same taxable supply is consumed for converting it into another kind of taxable supply, In case the taxable supply procured of a further taxable activity, but for one or the other reason the same is not consumed or the purchaser is prevented to consume the same, the tax paid on the goods in the first instance would be sales tax simpliciter and it would not be taken as input tax. The right to seek adjustment would only follow hen the same goods are utilized in furtherance of taxable activity for making another taxable supply, In the instant case the ginned cotton was purchased by appellant with the object to use the same for manufacturing of yarn which in term was taxable supply but unfortunately due to the incident of fire, the purchased cotton was lost and no further taxable supply could be made out of it. Therefore, there could not be any output tax as such right tot seek any adjustment of tax already paid could not accrue in favour of registered person. We therefore, hold that the claim of the appellant was misconceived.
13. We have examined the contention of learned counsel. The provision of Sections 7 and 10 are a part of machinery section and are not the charging provision, but the correct principle of interpretation is that machinery section has to be construed in a manner where by the realization of proper tax is made possible. Any construction otherwise defeating the intention of legislature and preventing the realization of the tax is to be avoided. Refer the cases of It. Col. Nawabzada Muhammad Amir Khan v. Controller of Estate Duty. (PLD 1961 SC 119) and the case of Court of West Pakistan and others v. M/s. Jabees Ltd. (PLD 1991 SC 870). The doctrine of input and output tax is introduced in the sale tax act to avoid multiplicity of taxation because sale tax is one time tax and in large number Of cases before a Goods, become a consumable item/goods, it is subject to taxable supplies at various intermediary stages. Therefore the sale tax paid on the goods would be taken an input tax if the said goods travel to another stage of taxable supply. If the journey of goods to another taxable supply fails, the liveability of Sales Tax thereon would be defeated by construing Sections 7 and 10 in isolation. We therefore, hold that the tax paid on the ginned cotton would remain a sales tax simpliciter because no further taxable supply was made or were to be mad out of the said cotton. Section 8(a) of the Act further clarifies the provision of Section 7. It lays down that a registered person shall not be entitled to reclaim or deduct input tax if the goods used or to be used for any purpose other than for the manufacture or production of taxable goods or for taxable supplies made or to be made by him. Section 8 is couched in the negative language providing that if taxable supplies made or to be made is not achieved or the goods are used for any purpose other than manufacture or production, the reclaim or deduction of input tax would not be available, In the instant case, no taxable supplies was made or was to be made, therefore, it negated the right of appellant to claim any refund of any tax paid.
14. In view of our findings recorded herein before, we do not find any substance in this appeal, the same is accordingly dismissed.
NASIM SIKANDAR, J.- Having gone through the proposed order, with utmost respect, it is stated that I have not been able to persuade myself to agree with the opinion expressed therein by his Lordship.
16. The facts of the case having already been recounted with absolute clarity in paras 4 and 5 (ante), their re-counting is not needed, It will be noted that after remand the first appellate authority epitomized the view point of the department which is reproduced as under:- "To my mind, there is no ambiguity in the words of section 7 ibid and no word of statute can be said as redundant. I have no hesitation to say that the very purpose of taxable supplies is achieved only if the taxable supplies have been made out 'of the goods purchased for the purpose. If no taxable supplies have been made or there is no possibility of making them the purpose for which the goods were purchased against payment of sales tax (input tax) is entirely vanished and there remains no sense in deducting the same, In the instant case 16763 bales of cotton were reportedly burnt in the Mills which would, obviously, mean that the purpose for which the said bales of cotton were purchased was not served. Hence the question of deduction/adjustment or refund of input tax credit does not arise from any stretch of imagination."
17. Learned Tribunal also reproduced the above Para from the appellate order to proceed/decide against the appellant lor two reasons which were totally extraneous. Firstly it was observed that the appellant did not intentionally inform the authorities of the Sales Tax in time which fact, according to the learned Tribunal, rendered their claim for refund as totally infructuous. Secondly, that they received compensation from the Insurance Company and were thereafter trying to play smart with the national exchequer by assigning novel meanings to Section 7 of the Sales Tax Act, 1990. That interpretation by the appellant, according to the learned Division Bench of the Tribunal, completely ignored the provisions as contained in Section 8 and over all rationals and logic of the Act.
18. The reasons assigned by the first appellate authority as well as those added by the Tribunal does not find support from any of the provisions of the Sales Tax Act. To start with it will be seen that charging provisions of Section 3 of the Act provided for the charged and levy of a tax known as Sales Tax. This charge is "subject to the provisions of this Act". Sub-section (3) of Section 3 goes to state that liability of pay tax shall be, in the case of supply of goods in Pakistan, of the person making the supply. These provisions are to be seen in the perspective of over all scheme and definition of word "input tax" as given in Section 2(14), the word "output tax" as given in Section 2(20) and the "taxable activity" and "taxable supply" as defined in Section 2(35) and 2(41) of the Act respectively. The view of the department that Sales Tax Act is not a tax on consumption is also not well based. If nothing else, subsection (1) and sub-section (3) of Section 3-B make it clear that the incidence of tax charged under Section 3 has to pass on to the consumer ultimately. The provisions regarding input as well as out put tax as defined in the definition clause of the Act read with Sections 7 and 8 thereof are only the modalities prescribed to protect the interest of the exchequer against any pilferage, evasion or fraud. Every maker of a taxable supply is an agent of the exchequer to receive the amount on its behalf and then to pass it on to the next supplier till finally the consumer bears the burnt.
19. According to Section 7 a registered person is entitled to deduct input tax paid during the tax period for the purpose of taxable supply made or to be made by him from the out put tax. The learned counsel for the appellant is correct in pointing' out that the use of word "purpose" and "supplies made or to be made" are indicative of the fact that the payment of input tax is available for adjustment as well as refund not with regard to any specific goods but with regard to the input tax paid during a particular tax period. The negatives contained in Section 8 were also improperly interpreted by the Departmental authorities. According to sub-section (1) of Section 8, a registered person is not entitled to reclaim or deduct input tax paid inter alia on the grounds used or to be used for any purpose other than for taxable supplies made or to be made by him. The goods on which input tax was paid by the appellant and were subsequently destroyed were not meant for use nor were intended to be used for any purpose other than taxable supplies. The intention of the appellant at the time of receiving the supplies and making and paying (input tax) was apparently to make taxable supply of them, It has never been the case of the Department that either the supplies were not received or that these supplies were covered by the negative list as given in Section 8 of the Act, The only objection of the department being that the goods for which input tax was paid were no more available for taxable supplies. While holding that opinion, as noted earlier, the departmental authorities over looked the use of word "purpose" and "supplies made or to be made", as used in Section 7.
20. It is rightly pointed out in the order of the Customs authorities that the provisions of Sections 7 and 8 of the Act are not charging provisions and that these are machinery provisions to crystallise the liability to pay the tax as contemplated in sub-section (3) of Section 3 of the Act. To co-relate payment of input tax to the goods in question, in my way of thinking, is not in accordance with the provisions of the Act. The interpretation of departmental authorities does not appear justified while placing stress more on goods in respect of which the input tax was paid rather than the amount of tax itself and the period during which it was paid. Section 7 of the Act supports outrightly the submissions made at the bar by the learned counsel for the appellant that the claim of input tax for adjustment as well as for refund is co-related only to the payment of input tax "paid during the tax period" and for the purpose of "supplies made or to be made". The purpose for which supplies were received as also the amount of input tax paid having never been doubted, at least by the departmental authorities, their refusal to allow either refund or adjustment cannot be supported on any premises. The claim that input tax is related more to a tax period rather than the goods in relation to which it was paid is also supported by the provisions of Section 10 (excess amount to be carried forward or refunded) and Section 11 (assessment of tax) of the Sales Tax Act, 1990.
21. The acceptance of interpretation of the department will create an anomalous situation. To wit a registered person receives goods and pays input tax which are found to lie effective. He negotiates with the suppliers either for replacement or for return of his money. During this period parts of goods so received by him diminish in value and do not remain fit either for use in manufacturing or for further supply. Should that registered person be punished twice for none of a fault on. His part inasmuch as on the one hand he lost his investment in the goods as also the input tax which had gone to national exchequer, In my opinion this could never be the intention of the legislature. Also I am of the view that basic premises of interpretation by the departmental authorities was wrong as they conveniently over looked the most vital fact that he input tax paid by the appellant had gone to the national exchequer. The big question remains as to the head of account under which both the appellant as well as the Revenue will show the receipt in their books. For the appellant it is input tax which it is entitled to be returned or adjusted. The Revenue by implication denies that it is input tax. However, the Revenue, at the same time does not show the nature of the receipt in its coffer.
The departmental authorities are silent as to the head under which they will classify it. It falls for the Revenue to show, and justify as to how it is entitled to retain the money belonging to the subject if it is not ready to accept it as input tax.
22. I cannot believe that the State through its revenue department, like an ordinary individual will try to retain the money which was in the first instance paid to it as a trust till the time it was to be adjusted or refunded. The charging provisions of Section 3 read with sub-section (3) thereof are conditional that the levy would be subject to other provisions of the Act. The other provisions inter alia contemplate input tax and output tax and their adjustment in certain specific situations. The liability to pay tax under Section 3(3) is on the person making taxable supplies. The appellant, it will be noted while paying input tax was not making any taxable supplies. Looking at the preposition from that angle as well, I am of the view that if the appellant paying input tax on the supply of goods received by him was not entitled to its adjustment or refund then he was not covered, by the said charging provisions inasmuch as he never made taxable supplies and therefore, was entitled to receive the sum paid as input tax to the exchequer. To withhold the amount paid as input tax in this situation, amounts to confiscation which the State cannot resort to except in due process of law. To state it does not behave to eye upon the money paid by a citizen either on the promise of refund or adjustment or even due to any misconception. The amount paid by the petitioner in this case by all reasonable interpretation of the provisions of law belonged to him and the appellant was entitled to seek, at its discretion, either adjustment or refund.
23. For these reasons l am of the view that Notification SRO No. 1307(l)/97, dated 20th December, 1997 disentitling a person to claim adjustment or refund of input tax on some what similar interpretation as made by the departmental authorities in this case is totally illegal and devoid of any legal consequence.
24. For the aforesaid reasons, I will allow the appeal.
25. Since we have disagreed as to the interpretation of the aforesaid provisions, the Hon'ble Chief Justice is requested to refer the question No. 1 as stated in para 2 of this order for the opinion of the Hon'ble third Judges.
JAWWAD S. KHAWAJA, J.-- This appeal has been preferred by Mayfair Spinning Mills Ltd., under Section 47 of the Sales Tax Act, 1990. It was heard by a learned Division Bench comprising of my learned brothers Nasim Sikandar and Mansoor Ahmed, JJ. The appellant had raised as many as nine legal questions for the determination of the learned Division Bench but the appeal was admitted only to answer questions Nos. 1 and 2 as the remaining questions were found by the learned Division Bench not to be of a substantive nature. Questions Nos. 1 and 2, as framed by the appellant, read as under:-
(1) Whether input tax deduction can be made under Section 7 of the Sales Tax Act, 1990 in respect of goods which got destroyed by fire and which do not remain available for making taxable supplies?
(2) Whether the learned Tribunal erred in law in invoking Section 8 of the Sales Tax Act, 1990 without keeping in view that the show-cause notice did not contain a reference to Section 8?
2. While considering and deciding the aforesaid questions their Lordships have differed. As a result, my learned brother Mansoor Ahmed, J., has decided that the appeal be dismissed, whereas my learned brother Nasim Sikandar, J., has decided that it be allowed, It is, in these circumstances, that the matter has been referred to me.
3. I have gone through the elaborate and erudite judgments of my learned brothers and with utmost respect agree with my learned brother Nasim Sikandar, J., that this appeal be allowed.
4. The facts leading up to the filing of the appeal and the relevant provisions of the Sales Tax Act, 1990 have already been reproduced in the judgment of my learned brother Mansoor Ahmed, J. The same, therefore, need not be repeated.
5. Both learned Judges have agreed on the essential features of the Sales Tax Act and the scheme established thereunder which envisages that the incidence of sales tax falls on the end consumer, It. Is only with respect to the specific provisions of Sections 3, 7 and 8 that they have differed.
6. The judgment of my learned brother Nasim Sikandar, J., has set out the reasoning leading up to the interpretation of the aforesaid statutory provisions. The said reasons reflect fully my understanding of the said provisions in an articulate manner. I, therefore, do not consider it necessary to repeat the said reasoning or to paraphrase the same in my own words, In the circumstances, I would answer the reference by construing the provisions of Sections 3, 7 and 8 of the Sales Tax Act in the same manner as has been done by my learned brother Nasim Sikandar, J.
As a consequence, agreeing with him I would allow the appeal.