Claim of exempt. from tax on slaes to purchasing dealers upheld, HC

Facts in Brief:

1. An assessment was framed on the appellant by order passed under Section 23(3) of the Delhi Sales Tax Act, 1975. In the course of assessment proceedings the assessing authority noted that the appellant had sold most of the goods to registered dealers against ST-1 forms in Delhi. He conducted a cross verification of these sales and found that the purchasing dealers had given a different account of these forms in their ST-2 account.

2. This was put to the appellant for explanation and it was asked to adduce proof of payments, delivery of the goods etc. The appellant filed statements showing the mode of payment by draft. The assessing authority also found that ST-1 forms bearing same numbers were issued to the purchasing dealers. He therefore, wrote letters to get these verified by the respective wards. On the basis of the enquiries, he came to the conclusion that in all ST-1 forms where the ST-2 accounts given by the purchasing dealers were different and the payment was also not by cheque and the appellant was not able to show proof of delivery of the goods, the exemption claimed by the dealer cannot be allowed.

3. The total turnover in respect of these forms came to `84,94,942/- which was taxed at the rate of 5%. In respect of ST-1 forms issued to M/s Naval Kishore & Co., M/s Durga Trading Co. and M/s Rajan & Co., the assessing authority refused to allow the exemption against the ST-1 forms on the ground that the payments made by them were not by cheque and the dealer was not able to adduce proof of delivery. Such transactions amounted to `94,96,443/- which was also taxed at the rate of 5%. The assessment so framed resulted in a demand of `12,18,211/- and a nominal penalty under Section 55 of the DST Act.

4. The dealer filed an appeal against the assessment order to the Additional Commissioner, Sales Tax. The Additional Commissioner allowed exemption in respect of the turnover of `48,450/- to M/s Aatma Ram Hukamchand and `60,562/- on account of sales made to M/s Richo Mal Krishan Swarup. The refusal of exemption claimed in respect of sales to other registered dealers was upheld on the ground that the appellant did not bring on record either before the assessing authority or before him during the appeal proceedings any evidence in support of the claim for exemption. The findings of the assessing authority were thus confirmed, except with regard to the sales made to M/s Aatma Ram Hukamchand and M/s Richo Mal Krishan Swarup. Though the penalty of `400/- imposed under the Central Sales Tax Act was cancelled, the demand of `29,278/- under that Act was upheld.

5. The dealer filed a further appeal before the Appellate Tribunal Value Added Tax and raised several contentions. It was argued that a registered dealer had a right to purchase goods free of sales tax from another registered dealer, that the assessee could not therefore collect sales tax on its sales to other registered dealers who purchased the goods from it, that the forms in ST-1 were printed and issued only by the authorities and on assurance that on production of the forms the exemption claimed would be allowed by the sales tax authorities, that once the forms are produced the exemption cannot be denied for extraneous reasons such as mode of payment of the sale price, mode of delivery etc., and that the reason given i.e., that the colour of the paper on which the forms were printed did not appear to be genuine was not substantiated by any clinching proof and in these circumstances the assessing authority and the first appellate authority were not justified in refusing the claim for exemption.

6. It was further submitted that under the second proviso to Section 4(2)(a)(v) of the DST Act the burden is on the purchasing dealer and not upon the appellant who was the selling dealer, and if any breach is committed by the purchasing dealer in the matter of producing the ST-1 forms or in the matter of utilization of the ST-2 accounts, then the selling dealer- appellant here-cannot be penalized by refusing to accord the exemption.

7. In support of this submission the appellant relied upon several authorities before the Tribunal. It was also submitted that in the case of sales to M/s Aatma Ram Hukamchand and M/s Richo Mal Krishan Swarup also the payments were by draft and there was no proof of delivery but still the first appellate authority allowed the assessees claim and the facts being similar in respect of the sales to other registered dealers, exemption should have been given.

8. In respect of the other sales treating them at par with the sales made to above two concerns, the contention of the appellant appears to have been that the sales tax authorities themselves in the two cases have rightly not considered the fact that the payments were made by draft and the absence of any proof of delivery of the goods to be relevant to the consideration of the question of allowing exemption.

9. The above submissions did not find favor with the Tribunal. It took the view that it was open to the assessing authority to compare the colour of the forms and hold that the difference in the colour threw doubt upon the veracity of the forms. As regards the argument based on the differential treatment given to the forms issued by the above two registered dealers and the other registered dealers, the Tribunal held that the forms submitted by these registered dealers bore the R.C. stamp whereas the other forms did not.

10. It placed reliance on its previous order dated 11.05.2001 in the case of M/s Janta Hardware Store v. Commissioner, Sales Tax in appeal No.395/STT/1999 and held that the contentions of the appellant were without merit. The Tribunal also rejected the argument based on Rule 7 of the DST Rules, 1975. Under this Rule the selling dealer shall produce the copies of the relevant cash memo in case of cash sales or bills in the case of credit sales.

11. The Tribunal rejected the contention based on Rule 7 on the ground that the appellant could not state whether the disputed sales were for cash or on credit. This, coupled with the non-production of any proof of delivery of the goods, according to the Tribunal, raised a reasonable doubt about the genuineness of the ST-1 declarations on the basis of which the sales tax authorities were justified in refusing the exemption. As regards the argument based on burden of proof under Section 4(2)(a)(v) of the DST Act, the Tribunal opined that the proviso to the Section did not cast any burden but only provided for certain conditions under which the deduction was to be allowed. The Tribunal relied on Section 6 of the DST Act which stated that the burden is upon the selling dealer.

12. Tribunal held that there was no merit in the appeal of the appellant in respect of the claim for exemption from tax on sales to the purchasing dealers, namely M/s Nawal Kishore & Co., M/s Durga Trading Co. and M/s Rajan & Co. The demands raised and penalties imposed under the Central Sales Tax Act were however set aside by the Tribunal.

On appeal HC held,

13. Reading section 50(1)(a) together with section 56(2), it is seen that they provide for penalty on the dealer who holds, gives, produces or accepts a declaration under the second proviso to section 4(2)(a)(v) which he knows or has reason to believe to be false. It is the burden of the assessing authority to show that the appellant knew or had reason to believe that the ST-1 forms were false. Nothing has been brought on record to discharge this burden.

14. According to the Tribunal, the mere fact that the forms were found in the premises of the appellant during the survey conducted on 13.07.1983 was sufficient to show that the appellant knew that the forms were false. We are unable to uphold this broad proposition. In several judgments, both of the Supreme Court and of the High Courts which we have referred to while disposing of the appeal in STA No.14/2011, it has been held that it was for the Sales Tax authorities to establish that the certificates were false to the knowledge of the selling dealer or that there was collusion between the selling and purchasing dealers.

15. The Supreme Court recognised that the seller can have no control over the purchaser in such transaction and has to necessarily rely upon the representation made to him by the purchasing dealer (State of Madras v. M/s. Radio & Electricals Ltd. and Anr.) (supra). According to the Supreme Court, the duty of the selling dealer is only to satisfy himself that the purchaser is a registered dealer and the goods purchased are specified in his registration certificates and no further. He is under no obligation to see that the application of goods for the purpose for which it was represented that they were intended to be used.

16. This indicates that for the acts of the purchasing dealer, the selling dealer cannot be held responsible. The ST-1 forms are issued by the sales tax authorities to registered dealers. The selling dealer is accordingly entitled to rely upon the certificates as having been genuinely issued. In A.D.M. Stores and Anr. v. Commissioner of Sales Tax & Ors. (supra) it was held that the inaction, neglect or even a fraud of a registered purchasing dealer cannot result in penalising the innocent selling dealer in the absence of his having been a party to the fraud, deception or misrepresentation.

17. However, if there is evidence or material on record to show the involvement of the selling dealer in the procurement of fake or false ST-1 forms, the penal provisions of section 50(1)(a) read with section 56(2) of the Act would come into play. Moreover, the appellant is right in its contention that the observations of the Tribunal in the order dated 17.11.2004, which has become final, are in its favour. The other decisions referred to by us (supra) would equally apply to the case of penalty.

18. There is no evidence to show that the appellant was in any way involved in the procurement of the allegedly fake or false ST-1 forms, so that any culpable knowledge can be imputed to it. The Tribunal failed to note that the main ingredient of section 50(1)(a) - that the dealer should know that the forms are false or had reason to be believe that they are false - has not been proved by the Sales-Tax authorities. We accordingly hold that no penalty was payable by the appellant.

19. The Tribunal, therefore, committed an error in sustaining the penalty to the extent of `25,73,072/- The substantial question of law is accordingly answered in the negative, in favour of the appellant dealer and against the Commissioner of Sales Tax.

20. In the result both the appeals filed by the appellant are allowed. In the circumstances there shall be no order as to costs. 

Case Reference - Milk Food Ltd. vs Commissioner Vat & Ors.