Unproved inter-State sale allegations cannot sustain assessment or penalty when third-party records lack corroborating evidence.

The Madras HC held that an assessment based on alleged inter-State sales could not stand where the Department failed to prove actual movement of goods outside the State or receipt of sale proceeds from out-of-State buyers. Third-party lorry booking records, without supporting evidence or recorded statements, were insufficient to sustain a best judgment assessment or draw adverse inference against the assessee. The penalty under Section 16(2) of the TNGST Act, 1959 also failed because the alleged suppression and underlying transaction were not established. The revision succeeded, the Tribunal's order was set aside, and the appellate order in favour of the assessee was restored.

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Issues: (i) Whether the assessment could be sustained on an alleged inter-State sale without evidence of actual movement of goods and corroborating material. (ii) Whether penalty under Section 16(2) of the TNGST Act, 1959 was justified on the facts.

Issue (i): Whether the assessment could be sustained on an alleged inter-State sale without evidence of actual movement of goods and corroborating material.

Analysis: The assessment was reopened on the basis of third-party lorry booking records, but the Department did not establish by evidence that the goods were actually transported outside the State or that sale proceeds were received from out-of-State buyers. The witnesses summoned for examination did not appear, and no statement was recorded from them. In such circumstances, the absence of the third parties could not justify an adverse inference against the assessee, nor could the assessment be sustained as a best judgment assessment on mere suspicion. The first appellate authority had already found that the assessment was unsupported by evidence and had been made without the required cross-examination.

Conclusion: The assessment on the alleged inter-State sales was unsustainable and the finding was in favour of the assessee.

Issue (ii): Whether penalty under Section 16(2) of the TNGST Act, 1959 was justified on the facts.

Analysis: Since the Department failed to adduce material proving suppression or the alleged transaction itself, and the Tribunal wrongly relied on the non-appearance of third parties to draw adverse inference, the foundation for penalty did not survive. The revision was therefore allowed and the Tribunal's order was set aside.

Conclusion: The penalty could not be sustained and the finding was in favour of the assessee.

Final Conclusion: The revision succeeded, the Tribunal's order was set aside, and the appellate order in favour of the assessee was restored.

Ratio Decidendi: A tax assessment cannot be sustained on unproved third-party material or adverse inference alone unless the Department first establishes a prima facie case with recorded evidence, and penalty cannot survive when the foundational allegation itself remains unproved.

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