2015 (6) TMI 303 - HC - VAT and Sales Tax

Court rules in favor of appellant, allowing deduction for transaction. Selling dealer's duty clarified. Adverse inferences impermissible.

The court held in favor of the appellant, ruling that the deduction for the transaction represented by form ST-35 was wrongly disallowed. The court ... Deduction under Section 4(2)(a)(v) - form ST-35 declaration - burden of proof on the selling dealer - third proviso to Section 4(2)(a) - use of verification report concerning purchasing dealer - seller's duty limited to verifying purchaser's registration and specified goodsDeduction under Section 4(2)(a)(v) - form ST-35 declaration - third proviso to Section 4(2)(a) - Whether the selling dealer was rightly denied deduction for sales made against form ST-35 for AY 2000-01 - HELD THAT: - The court held that the deduction claimed under Section 4(2)(a)(v) on the basis of form ST-35 was wrongly disallowed. The ST-35 in the present case was issued by the sales tax department to the purchasing dealer and there was no allegation that the form was a fabrication. The third proviso to Section 4(2)(a) preserves the benefit to the selling dealer even if the purchasing dealer subsequently misutilises the goods; consequences for misutilisation fall on the purchasing dealer. The absence of a specific date on the form or the fact that an endorsement indicated the assessment year did not establish complicity by the selling dealer. Commercial features such as the duration of a purchase order standing for three and a half months do not, without more, justify treating the transaction as collusive. Applying the authorities cited, the court concluded that the deduction should have been allowed and set aside the disallowance. [Paras 25, 26]Deduction under Section 4(2)(a)(v) based on the ST-35 form was wrongly disallowed; the impugned order is set aside and the appeal is allowed.Burden of proof on the selling dealer - use of verification report concerning purchasing dealer - seller's duty limited to verifying purchaser's registration and specified goods - Whether adverse inferences could be drawn against the selling dealer from a verification report indicating 'doubtful activities' of the purchasing dealer, and what is the extent of the seller's burden - HELD THAT: - Relying on precedents, the court reaffirmed that the selling dealer's duty is confined to satisfying himself that the purchaser is a registered dealer and that the goods are specified in the purchaser's certificate; he is not obliged to investigate the purchasing dealer's subsequent use of the goods or the propriety of the issuing authority's actions. Absent material showing complicity between the two dealers, a verification report reflecting 'doubtful activities' of the purchasing dealer cannot be used to visit liability on the selling dealer. While the department may examine misutilisation and recover tax from the purchasing dealer, such inquiries do not justify rejecting the selling dealer's claim when the prescribed declaration form has been produced and there is no evidence of collusion. [Paras 21, 23, 24, 25]Adverse consequences arising from the purchasing dealer's doubtful activities cannot be imputed to the selling dealer in the absence of evidence of complicity; the burden on the seller is limited as stated.Final Conclusion: The Tribunal and lower authorities erred in disallowing the deduction claimed on the basis of form ST-35 and in relying upon the purchasing dealer's verification report to impose liability on the selling dealer; the impugned order is set aside and the appeal is allowed. Issues Involved:1. Validity and admissibility of form ST-35 for claiming deduction under Section 4(2)(a)(v) of the Delhi Sales Tax Act, 1975.2. Burden of proving the genuineness of the transaction and the ST-35 form.3. Relevance of the purchasing dealer's activities and submission of utilization certificate.4. Application of circulars and verification reports in assessing the transaction.Issue-wise Detailed Analysis:1. Validity and Admissibility of Form ST-35:The appellant contested the Tribunal's decision, arguing that the appellant had furnished a valid and genuine declaration form ST-35, which should entitle them to a deduction under Section 4(2)(a)(v) of the Delhi Sales Tax Act, 1975. The dispute revolves around sales transactions that occurred between 28.07.2000 and 09.10.2000, amounting to Rs. 1,53,50,908/-. The appellant claimed these sales were made to a registered dealer against a purchase order dated 27.06.2000 and supported by form ST-35. The assessing authority, however, disallowed the exemption claim, noting that the form ST-35 was issued for AY 1999-2000 and was improperly endorsed for AY 2000-01.2. Burden of Proving Genuineness:The appellant argued that the Tribunal and lower authorities wrongly placed the burden of proving the genuineness of the transaction and the ST-35 form on the selling dealer. The court referenced the Supreme Court's observations in the case of State of Madras v. M/s. Radio and Electricals Ltd. & Anr., emphasizing that the selling dealer's duty is to ensure the purchaser is a registered dealer and the goods are specified in the registration certificate. The selling dealer is not obligated to verify the purchaser's use of the goods. The court also cited Prince Plastics & Chemical Industries and Ors. v. Commissioner of Sales Tax and Ors., which supports that the selling dealer is not responsible for the purchasing dealer's misuse of the goods.3. Purchasing Dealer's Activities and Utilization Certificate:The assessing authority's decision was influenced by a verification report indicating 'doubtful' activities of the purchasing dealer and the absence of a proper utilization certificate. The court, however, ruled that the default by the purchasing dealer in submitting a utilization certificate should not affect the selling dealer's entitlement to the deduction. The third proviso to Section 4(2)(a) of the Delhi Sales Tax Act specifies that the selling dealer's deduction remains valid even if the purchasing dealer misuses the goods.4. Application of Circulars and Verification Reports:The Tribunal relied on a circular issued by the GNCTD to regulate the issuance of statutory forms, including form ST-35. The court did not find any impropriety in referencing the circular but disapproved of using the verification report to infer complicity of the selling dealer in the purchasing dealer's activities. The court emphasized that unless there is material evidence showing collusion between the dealers, adverse inferences against the selling dealer are impermissible.Conclusion:The court concluded that the deduction for the value of the transaction represented by the ST-35 form was wrongly disallowed by the Tribunal and the authorities below. The substantial question of law was answered in favor of the appellant, setting aside the impugned order and allowing the appeal. The court reiterated that the selling dealer's responsibility does not extend to verifying the purchasing dealer's use of the goods or the validity of the form beyond ensuring it is issued by the relevant authorities.