Bogus purchasing dealers can raise a referable question of law on sales deduction disallowance and related penalty.

Where deduction is claimed for sales to registered dealers on ST-XXII forms, the later finding that the purchasers are bogus, fictitious, or untraceable can raise a referable question of law on whether the sales were rightly disallowed under the Punjab General Sales Tax Act. The text also notes that penalty based on the same alleged incorrect return and bogus claim may itself involve a referable legal issue, because its validity depends on the legality of the underlying disallowance. The reference was therefore treated as maintainable on both points, with both questions directed to be referred for opinion.

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Issues: (i) Whether the disallowance of sales made against ST-XXII forms to seven registered purchasing dealers gave rise to a referable question of law under the Punjab General Sales Tax Act, 1948. (ii) Whether the levy of penalty under section 10(7) of the Punjab General Sales Tax Act, 1948 also gave rise to a referable question of law.

Issue (i): Whether the disallowance of sales made against ST-XXII forms to seven registered purchasing dealers gave rise to a referable question of law under the Punjab General Sales Tax Act, 1948.

Analysis: The Tribunal had proceeded on the footing that the purchasing dealers were either fictitious, had denied the transactions, or could not be traced, and had treated the ST-XXII forms as only prima facie evidence. The governing principle applied was that where the assessee claims deduction on sales to registered dealers, the effect of the purchasers later being found bogus or fictitious raises a legal question, not merely a question of fact. On that basis, the Court held that the issue whether the sales were rightly disallowed under section 5(2)(a)(ii) required a reference.

Conclusion: The question on disallowance of deduction was a referable question of law and had to be sent for the Court's opinion, in favour of the assessee.

Issue (ii): Whether the levy of penalty under section 10(7) of the Punjab General Sales Tax Act, 1948 also gave rise to a referable question of law.

Analysis: The penalty had been sustained by the Tribunal on the premise that the assessee had filed incorrect returns and made a bogus claim in collusion with alleged buyers. Since the legality of the underlying disallowance itself was held to raise a question of law, the consequential liability to penalty also involved a referable legal issue arising from the Tribunal's order.

Conclusion: The question relating to penalty was also a referable question of law and had to be referred, in favour of the assessee.

Final Conclusion: The reference application succeeded, and the Tribunal was directed to state a case and refer both questions of law to the Court for opinion.

Ratio Decidendi: Where deductions are denied on the footing that the purchasing dealers are bogus or fictitious, and penalty is imposed on the same basis, the existence and effect of those findings can raise referable questions of law under the sales tax reference jurisdiction.

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