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  • section 22(2) of the East Punjab General Sales Tax Act
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  • section 22(2) of the East Punjab General Sales Tax Act
Smart Summary

Structured Summary of the Opinion (Bench delivered by Shamsher Bahadur, J., with Mehar Singh, C.J. concurring)

Factual and Procedural Background

This opinion is delivered in continuation of a Bench judgment of 18 March 1963 that issued a mandamus directing the Financial Commissioner to refer to this Court the question whether there was any material or evidence on the record to justify the presumption that goods never passed to two registered dealers, Messrs A.K. Jain & Co. and Messrs D.N. Hosiery. The Financial Commissioner answered that direction by an order dated 2 August 1963. The present judgment disposes of two matters registered as General Sales Tax References Nos. 12 and 13 of 1963 after receipt of that answer.

The petitioner-assessee is Messrs Ram Pal Madan Gopal, a registered dealer who filed returns for the four quarters of the assessment years 1954–55 and 1955–56. For 1954–55 the gross turnover was shown as Rs. 9,12,341-6-6. Deductions were claimed: Rs. 9,03,090-3-0 for sales stated to have been made to registered dealers and Rs. 2,207-8-0 for exports, leaving a taxable turnover of Rs. 7,043-11-6.

The Assessing Authority disallowed deductions amounting to Rs. 2,30,356-1-6 on the ground that certain sales to registered dealers appeared not to be genuine (the vendees described as "men of straw"). The assessee's appeal to the Deputy Excise and Taxation Commissioner failed. In revision, the Excise and Taxation Commissioner allowed some further deductions but still rejected sales in favour of two registered firms (A.K. Jain & Co. and D.N. Hosiery). A petition to the Financial Commissioner also failed. A writ petition under section 22(2) of the East Punjab General Sales Tax Act succeeded and the Financial Commissioner was directed to determine whether any evidence justified the presumption that the goods never passed to the two named registered dealers.

Legal Issues Presented

  1. Whether there is any material or evidence on the record to justify the presumption that the goods sold did not pass to the registered dealers Messrs A.K. Jain & Co. and Messrs D.N. Hosiery.

Arguments of the Parties

Revenue / Assessing Authority / Financial Commissioner

  • The Assessing Authority concluded that the purchasing dealers were "men of straw" and thus the transactions were not genuine; this conclusion relied on the Assessing Authority's personal knowledge and reports of field staff.
  • The Financial Commissioner relied on three categories of material: (1) the Assessing Authority's conclusion (personal knowledge and field staff reports), (2) a statement of Shri Krishan Gopal (partner of the assessee) that no separate khatas were maintained for these dealers and that the transactions were in cash, and (3) an unreported earlier decision of this Court (Jhangi Mal Nathu Mal v. The Punjab State) indicating that mere filing of a declaration is not conclusive proof of entitlement to deduction.
  • The Financial Commissioner treated the absence of recorded entries and the predominance of cash transactions as casting doubt on the genuineness of the claimed sales.

Assessee (represented by Mr. C.L. Aggarwal)

  • Contended that sales were made to registered dealers whose certificates of registration once proved absolved the assessee from further liability of enquiry regarding genuineness of the transactions.
  • Relied on precedent authority to show that the law does not cast on the assessee responsibility to verify the correctness of the purchasing dealer's registration certificate and that registration declarations are prima facie evidence in favour of the assessee.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Sriniwas Jiwanram v. State of West Bengal [1952] 3 S.T.C. 301 (West Bengal Board of Revenue) Held that the Act requires sales be made to a registered dealer and that the goods be specified in the purchasing dealer's certificate; the seller is not responsible for the movements of the purchaser and inability to trace the purchasing dealer was irrelevant to conclude declarations were not genuine. The Court cited this decision to support the proposition that a seller who sells to a dealer holding a registration certificate is not automatically responsible for proving the subsequent movements of goods and that inability to trace a purchaser does not necessarily prove the seller's declarations were manufactured.
Nowranglal Agarwala v. State of Orissa (Narasimham, C.J., and G.K. Misra, J.) Held that the law does not cast on the assessee the duty to be satisfied about the correctness of the purchasing dealer's certificate of registration because such certificate is prima facie strong evidence in the assessee's favour; the assessee risks only losing the deduction if the department proves the purchaser was not a registered dealer in law. The Court relied on this principle to reject the idea that the assessee bore a duty to prove the purchasing dealer's registration beyond production of the certificate; in the instant case the department did not assert that the purchasers were not registered.
Madugula Papayya v. Province of Madras [1956] 7 S.T.C. 180 (Andhra Pradesh Court) Stated that mere suspicion that a return is incorrect is insufficient to proceed under rule 9; the assessing authority must have reason to believe the return is incorrect or incomplete based on some material or information, and any estimate must be based upon material gathered. The Court applied this principle to conclude that the Financial Commissioner's reliance on suspicion alone (absence of records and cash payments) did not amount to the material required to treat the transactions as fictitious.
Jhangi Mal Nathu Mal v. The Punjab State (Civil Writ No. 230 of 1958) — Unreported Noted (as relied on by the Financial Commissioner) that mere filing of a declaration is not conclusive evidence in support of a claim for deduction. The Court observed that this unreported decision was not, in itself, evidence and that it did not address the production of registration certificates; the Court treated the reliance on this unreported decision as insufficient to establish that the claimed sales were fictitious.

Court's Reasoning and Analysis

The Court examined the three categories of material relied on by the Financial Commissioner and analysed their evidentiary value as follows:

  1. Assessing Authority's personal knowledge and field staff reports: The Court held that the Assessing Authority's personal knowledge and reports of field staff "cannot be lightly ignored" but that such personal knowledge "does not provide any evidence of any probative value" and therefore had to be rejected as a basis for inferring that the transactions were fictitious.
  2. The assessee's statement about absence of separate khatas and cash transactions: The Financial Commissioner treated the partner's statement that no separate khatas were kept and that the large transactions were in cash as suspicious, on the ground that normal trade between two dealers in the same town of large frequency is generally conducted by cheques or hundis. The Court accepted that the absence of records and the use of cash are circumstances of suspicion, but emphasised that suspicion alone is not equivalent to proof. The Court noted that there was no direct proof that the sales did not take place and criticised the Financial Commissioner for effectively placing on the assessee the burden of adducing proof beyond the production of the registration certificates.
  3. Reliance on the unreported Jhangi Mal decision: The Court noted that the cited unreported decision only said that mere filing of a declaration is not conclusive evidence; the Court observed this is not itself evidence and that the question of production or effect of registration certificates was not considered in that unreported decision.
  4. Choice and effect of precedent: The Court applied the cited precedents (Sriniwas Jiwanram, Nowranglal Agarwala, Madugula Papayya) to the present facts to underline two propositions: (a) a seller who has sold to a purchaser holding a valid registration certificate is not required to further trace or account for the purchaser's subsequent movements to validate the deduction, and (b) mere suspicion without material is insufficient for the department to treat returns as incorrect and disallow deductions. The Financial Commissioner’s reliance chiefly on suspicion and absence of recorded entries was therefore held to be inadequate.

Holding and Implications

Holding: Reference answered in favour of the assessee. The Court concluded that "no evidence exists to justify the conclusion of the Assessing Authorities" that the sales to Messrs A.K. Jain & Co. and Messrs D.N. Hosiery were fictitious, and accordingly answered the reference for the assessee.

Implications:

  • Direct effect: The Court's decision requires that the earlier conclusion disallowing certain deductions on the ground that the sales were fictitious is not supported by evidence; the reference is therefore resolved in the assessee's favour. The Court made no order as to costs.
  • Broader implications: The opinion stresses evidentiary limits — personal knowledge and uncorroborated suspicion are insufficient to overturn claims supported by registration certificates — but the Court did not state or establish any new legal precedent beyond applying existing authorities. The opinion does not discuss additional broader consequences beyond the disposition of the references.

Disposition recorded: "Reference answered accordingly." Mehar Singh, C.J. concurred.

    Ram Pal Madan Gopal, Chaura Bazar, Ludhiana v. The Punjab State And Another

    Shamsher Bahadur, J.:— This has to be read in continuation of the judgment of the Bench delivered on 18th of March, 1963, issuing a mandamus to the Financial Commissioner to refer to this Court for decision whether there is any material or evidence on the record to justify the presumption that goods never passed to the registered dealers, M/s. A.K Jain & Co., and M/s. D.N Hosiery. The Financial Commissioner in the order passed on 2nd August, 1963, in pursuance of this direction has given answers to which I would shortly advert. The judgment which is now to be given by the Bench will dispose of two matters which have been registered as General Sales Tax References Nos. 12 and 13 of 1963, after the answer of the Financial Commissioner had been received on 2nd of August, 1963, with regard to the question which he was directed to refer for decision to this Court.

    2. The facts which are no longer in dispute may be narrated to appreciate the surviving point which calls for decision of this Court. The petitioner-assessee, Messrs Ram Pal Madan Gopal, is a registered dealer and had filed returns for all the four quarters of the assessment years 1954-55 and 1955-56, to which the two references relate. In respect of the assessment year 1954-55, the gross turnover was shown as Rs. 9,12,341-6-6.

    3. Out of the deductions, a sum of Rs. 9,03,090-3-0 was claimed in respect of sales stated to have been made to registered dealers. Another sum of Rs. 2,207-8-0 was claimed as deduction on account of exports. The assessee stated that a taxable turnover of Rs. 7,043-11-6 only remained out of the gross sales of Rs. 9,12,341-6-6.

    4. The Assessing Authority disallowed the deduction in respect of Rs. 2,30,356-1-6 for the reason that the transactions of sale, to which they related, though made to registered dealers, did not appear to be genuine as the vendees were men of straw. The appeal preferred by the assessee to the Deputy Excise and Taxation Commissioner failed, but in revision the Excise and Taxation Commissioner allowed some further deductions but rejected the sales made in favour of two registered firms namely A.K Jain and Company and D.N Hosiery, Ludhiana. A further petition to the Financial Commissioner also failed.

    5. A petition under section 22(2) of the East Punjab General Sales Tax Act for the issue of a mandamus resulted in success and Dua, J., with whom the learned Chief Justice (then Mehar Singh, J.) agreed, directed the Financial Commissioner to find out if there is “any evidence on the record to justify the presumption that the goods sold never passed to the registered dealers, Messrs A.K Jain & Co., and Messrs D.N Hosiery.” It is not necessary to give the facts of the other petition as the difference relates only to figures and not to the points in dispute.

    6. The learned Financial Commissioner has given three pieces of evidence which he considers to be sufficient to justify the conclusion which had been reached by the Assessing Authority. The first of these reasons is that the Assessing Authority came to the conclusion that the vendees were incapable of making purchases running into lacs, they being men of straw. The finding admittedly was based on personal knowledge of the Assessing Authority as well as on the reports of the field staff which could not be lightly ignored. This knowledge obviously does not provide any evidence of any probative value and has to be rejected.

    7. The second piece of evidence, in the words of the Financial Commissioner is:—

    “…. a statement of Shri Krishan Gopal son of Shri Bhagat Ram partner of Messrs Ram Gopal Madan Gopal that they have maintained no separate khatas for these dealers. He has further stated that all these alleged transactions (running into lacs) were for cash. This is obviously opposed to normal trade practice where frequent and large transactions between two dealers in the same town are generally made through cheques or hundis. The absence of any reliable record of these transactions casts doubt on their genuineness.”

    8. It is undoubtedly suspicious that transactions of sale of considerable magnitude should have been made in cash without any recorded entries in any books of account. It may perhaps be true that the payments for such sales are made either through bills of exchange or cheques and all that can be said is that there is no proof of the transactions in respect of which deductions had been claimed. The learned Financial Commissioner has assumed that it was for the assessee to adduce proof about the genuineness of the sales. Mr. C.L Aggarwal has contended that the sales were made to registered dealers whose certificates of registration having been proved absolved the assessee from any further liability of enquiry regarding the genuineness of the transactions. He has invited our attention to a decision of the West Bengal Board of Revenue in Sriniwas Jiwanram v. State of West Bengal [1952] 3 S.T.C 301., in which the petitioners' claim to exemption from sales tax in respect of sales to registered dealers to the tune of Rs. 24,150 was disallowed. The purchasing dealer in that case could not be traced and so the tax on the corresponding sales could not be realised. The declarations that the goods had been purchased by registered dealers could not, therefore, be verified. Considering the disallowance of the claim it was observed by the Member that the department's position embodied “rather a novel proposition of law. The Act only requires that sales should be made to a registered dealer and that the goods must be speficied in the purchasing dealer's certificate of registration as being intended for resale by him or for use by him in the manufacture of any goods for sale etc.” The seller, in that case, was not held responsible for the movements of a purchaser and if the purchasing dealer could not be traced this circumstance was wholly irrelevant and could not constitute any evidence to conclude that the declarations were not genuine or that they had been manufactured by the petitioners. Another decision, to which our attention has been invited, is of Narasimham, C.J, and G.K Misra, J., in Nowranglal Agarwala v. State of Orissa, where it was held that the law does not cast on the assessee any responsibility to be satisfied about the correctness of the certificate of registration, because it would prima facie be a strong piece of evidence in his favour. What an assessee stands to lose is his claim for deduction if the department succeeds in showing that the purchasing dealer was not in law a registered dealer. In the instant case it is not the case of the defendant that the persons to whom goods in question had been sold were not registered dealers. There is yet another decision of the Andhra Pradesh Court of Chandra Reddy and Bhimasankaram, JJ., in Madugula Papayya v. Province of Madras [1956] 7 S.T.C 180., where it was said that “a mere suspicion that the return is incorrect is not sufficient to enable the assessing authority to proceed under rule 9. He must have reason to believe that the return is incorrect or incomplete which in its turn should be based upon some material or information and the estimate of the turnover should be based upon the material gathered by him.” The Financial Commissioner, under the second head, relies only on the existence of suspicions in the transactions and no evidence can be said to exist that the transactions were really fictitious.

    9. There is yet another category of evidence to which the learned Financial Commissioner had adverted in his order of 2nd of August, 1963. He has relied on an unreported decision of this Court in Jhangi Mal Nathu Mal v. The Punjab State Civil Writ No. 230 of 1958., that merely filing of declaration is not conclusive evidence in support of the claim for deduction. This again is not evidence and the matter of production of registration certificates is not discussed at all.

    10. On the whole, we are, therefore, inclined to think that no evidence exists to justify the conclusion of the Assessing Authorities and the reference must be answered in favour of the assessee. We would make no order as to costs of this reference.

    Mehar Singh, C.J:— I agree.

    11. Reference answered accordingly.

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    Ram Pal Madan Gopal, Chaura Bazar, Ludhiana v. The Punjab State And Another
    (Mar 21, 1968)