1972 (3) TMI 74 - HC - VAT and Sales Tax

Court rules in favor of assessee citing violation of natural justice, upholds compliance with sales requirements.

The court ruled in favor of the assessee, finding that the assessing authority's decision to disallow deductions was unjustified. It held that the use of ... Compliance with declaration form S.T. XXII and entitlement to deduction under section 5(2)(a)(ii) - use of material collected privately / by departmental enquiries conducted behind the back of the assessee - natural justice - right to know and rebut material relied upon and to cross-examine witnesses relied upon by the department - rejection of books of account on the basis of extraneous or undisclosed material - finding of fact vitiated if based on irrelevant or inadmissible material - burden on the assessee to prove genuineness of sales and concomitant right to disclosure of adverse materialCompliance with declaration form S.T. XXII and entitlement to deduction under section 5(2)(a)(ii) - use of material collected privately / by departmental enquiries conducted behind the back of the assessee - natural justice - right to know and rebut material relied upon and to cross-examine witnesses relied upon by the department - finding of fact vitiated if based on irrelevant or inadmissible material - Refusal to allow deduction claimed for sales to M/s. Gurdial Singh Sohan Singh under section 5(2)(a)(ii) on the ground that the sales were not genuine was legally justified or not. - HELD THAT: - The Court held that the assessing authority's conclusion that the sales to M/s. Gurdial Singh Sohan Singh were fictitious was vitiated because it rested on material gathered by departmental enquiries which was not disclosed to the assessee and was relied upon without affording the assessee an opportunity to meet or to cross-examine the witness (Joginder Singh) whose signatures and alleged statements featured in the enquiries. The sales in question were to a registered dealer and the requisite declaration in form S.T. XXII had been produced; there was no finding that the statutory formalities were not complied with or that the goods remained with the seller. Where an assessing officer proposes to act on private enquiries or third party material such material must, to the extent it is to be used as the basis for rejecting the assessee's books or disallowing claimed deductions, be communicated to the assessee so as to enable rebuttal; failure to do so renders the resultant finding of fact legally unsustainable. A finding of fact based on irrelevant or inadmissible material, or on material partly relevant and partly irrelevant, is no legal finding. The consequence is that, in the circumstances of this case, the assessing authority could not validly reject the sales as non est or disallow the deduction when the statutory declaration forms had been produced and the assessee was not given a fair opportunity to meet the departmental material.The refusal to allow the deduction for the sales to M/s. Gurdial Singh Sohan Singh was legally unjustified; the reference is answered in the affirmative in favour of the assessee.Final Conclusion: The Court held that the assessing authority's disallowance of the deduction claimed for sales to M/s. Gurdial Singh Sohan Singh was illegal because it relied on undisclosed departmental material and inadmissible evidence without affording the assessee a fair opportunity to meet it; the sales having been supported by form S.T. XXII, the disallowance could not be sustained. Issues Involved:1. Deductibility of disputed sales from the petitioner's taxable turnover.2. Legality of the assessing authority's use of material collected behind the assessee's back.3. Compliance with Section 5(2)(a)(ii) and related rules by the assessee.Detailed Analysis:1. Deductibility of Disputed Sales:The core issue was whether the sales made to M/s. Gurdial Singh Sohan Singh, a registered dealer, amounting to Rs. 35,019-7-0, were deductible from the petitioner's taxable turnover under Section 5(2)(a)(ii) of the Punjab General Sales Tax Act. The assessing authority rejected these deductions, asserting that the sales were not genuine. The appellate authority upheld this decision, noting that the firm had ceased operations and the transactions were fictitious. The Financial Commissioner and the Tribunal also supported this view, citing evidence that the purchasing firm was non-operational during the relevant period.2. Legality of Material Collected Behind Assessee's Back:The assessee contended that the assessing authority used material collected behind its back without disclosing it, thus violating principles of natural justice. The court noted that the assessing authority had relied on confidential departmental enquiries and statements from third parties without giving the assessee an opportunity to rebut this evidence. Citing precedents from the Supreme Court and other High Courts, the judgment emphasized that any material used against the assessee must be disclosed and an opportunity to cross-examine witnesses must be provided. The court held that the use of undisclosed material was illegal and vitiated the finding of fact.3. Compliance with Section 5(2)(a)(ii) and Related Rules:The court examined whether the assessee had complied with Section 5(2)(a)(ii) and Rule 26 of the Punjab General Sales Tax Rules, which require that sales to a registered dealer must be supported by a declaration in Form S.T. XXII. The court found that the assessee had indeed complied with these provisions, as there was no finding that the required forms were not filled or that the goods remained with the assessee. The court further noted that the liability for any misuse of the declaration forms should fall on the purchasing dealer, not the seller, especially when the seller had followed all legal requirements.Conclusion:The court concluded that the assessing authority's decision to disallow the deductions was legally unjustified. The use of undisclosed material collected behind the assessee's back violated principles of natural justice. The assessee had complied with all statutory requirements for making sales to a registered dealer. Therefore, the answer to the referred question was in the affirmative, in favor of the assessee. The reference was answered in the affirmative, with no order as to costs.