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Petitioner: Commissioner Inland Revenue, Zone-I, Ltu, Karachi VS Respondent: Abu Dawood Trading Company (Pvt.) Ltd., Karachi
Court Name: Appellate Tribunal Inland Revenue Judge(s): Saif Ullah Khan, Ambreen Aslam Title:Commissioner Inland Revenue, Zone-I, Ltu, Karachi vs Abu Dawood Trading
Company (Pvt.) Ltd., Karachi Case No.: S.T.A. No.417/KB of 2015 Date of Judgment:2019-11-29 Reported As: 2023 PTD (Trib.) 1069 Result: Appeal dismissed Judgment ORDER MRS. AMBREEN ASLAM, JUDICIAL MEMBER.----Through this order we intend to dispose off the titled appeal filed by the department against the Order bearing . No. STA/152/LTU/2015 dated 12-06-2015, passed by the learned Commissioner Inland Revenue (Appeals-I), Karachi on the following grounds: 1. That the order of the learned Commissioner Inland Revenue (Appeals-I) is bad in law and on merits of the case. 2. That the learned Commissioner-IR (Appeals-I) was not justified under the law to hold that the stock valuing Rs.46,941,000/- shown in the Annual Accounts under the sub-heading of "obsolete stock" on which input tax of Rs.7,979,970/- claimed and adjusted is admissible under the law while the said stock is unfit and not salable. 3. That the learned Commissioner IR (Appeal-I) was not justified under. the law to hold that the input tax of Rs. 17,192,596/-claimed and adjusted in the supply of exempted goods is admissible. 4. That the appellant craves leave to add, alter or amend the grounds of appeal any time on or before at the time of hearing of the appeal. 2. Brief facts of the case are that during the course of audit proceedings of sales tax record/information i.e. sale invoices, purchase invoices and Annual Audit Account of the taxpayer for the period from July 2012 to June 2013 and Audit observation No.1 Commercial some discrepancies were observed therefore the taxpayer was issued observations vide letter dated 03.03.2015 to clarify the position regarding said discrepancies. The taxpayer submitted its reply vide letter dated 27-3-2015 which was found devoid of merit and the discrepancies remain un resolved.
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Therefore, show-cause notice under sections 11(2) and 11(4) of the Sales Tax Act, 1990 was issued to the taxpayer called upon to show as to why the sales tax as confronted in the notice along with default surcharge under section 34 (to be calculated at the time of payment) for violation of sections 6, 7, 8, 26 should not be recovered and why penalty as prescribed under section 33(1)(5) ibid, should not be imposed for violation of aforementioned provisions of law. 3. In response to the aforementioned show-cause notice, the taxpayer submitted its reply dated 22-04-2015. Not satisfied with the reply of the taxpayer, the DCIR had passed Order-in-Original bearing DC No.22/079 dated 28-04-2015. Against the said treatment meted out form the aforesaid order of DCIR, the taxpayer preferred appeal before learned CIR(A) who decided appeal of the taxpayer by passing Order bearing No. STA/152/LTU/2015 dated 12-06-2015 with following observations: OBSELETE STOCK; The observation was raised on the issue that in the annual accounts under the sub-heading of obsolete stock an amount of Rs.46,941,000/- has been declared but no amount of Sales tax has been deposited in the Sales tax return which is violation of section 8 of the Sales Tax Act, 1990. The registered persons contended that these goods were expired, unfit for consumption and could not fetch consumer attention and were not liable to be supplied. The contention of the taxpayer is not accepted as the registered person failed to submit any legal document to substantiate the claim. Therefore, input tax already adjusted of .Rs.7,979,970/- on obsolete Stock is recoverable for violation of sections 6, 7, 8 and 26 of the Sales Tax Act, 1990 along with default surcharge under section 34 (to be calculated at the time of payment) and penalty under section 33 of the Sales Tax Act, 1990. 2. INADMISSIBLE INPUT: The registered person has claimed input tax adjustment against the purchases which were not used in the taxable supplies. This is violation of the provisions of section 8 of the Sales Tax Act, 1990. The contention of the registered person has been examined. The input tax on goods which have not used for taxable supplies is inadmissible and amount of Rs.17,192,596/- is recoverable for the violation of section 8 of the Sales Tax Act, 1990 along with penalty and default surcharge as per sections 33 and 34 of the Sales Tax Act, 1990. Therefore, in exercise of powers conferred under section 11 read with sections 6, 7, 8, 26 of the Sales Tax Act, 1990, I hereby order M/s Abu Dawood Trading Company (Pvt.) Ltd. to pay the 'amount of Sales Tax of Rs.25,172,566/- along with default surcharge under section 34 of the Sales Tax Act, 1990 (to be calculated at the time of payment of principal amount) into Government treasury. I also imposed a penalty under Section 33(5) of the Sales Tax Act, 1990." 4. The appellant/department being dissatisfied with the aforementioned order passed by the learned CIR(A), preferred instant appeal before this Tribunal. 5. On the date of hearing, Mr. Muhammad Azam, DR appeared on behalf of the appellant/department while Mr. Adnan Mufti, FCA attended the court proceedings on behalf of the respondent/taxpayer. 6. Learned DR argued that the order of the learned Commissioner Inland Revenue (Appeals-I) not justified under the law to hold that the stock valuing Rs.46,941,000/- shown in the Annual Accounts under the sub-heading of "obsolete stock" on which input tax of Rs.7,979,970/- claimed and adjusted is admissible under the law while the said stock is unfit and not salable. He further argued that learned Commissioner IR (Appeal-I) also not justified under the law to hold that the input tax of Rs.17,192,596/- claimed and adjusted in the supply of exempted goods is admissible. He prayed for setting aside the impugned order passed by learned CIR(A). 7. On the other hand, learned counsel of the respondent vehemently opposed the stance/grounds filed by the appellant/department and argued that the order passed by the learned
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Commissioner-IR (Appeals) is well within the framework of law and carries no illegality and infirmity. In support of his arguments he referred Judgment passed by Hon'ble Lahore High Court in the matter of M/s Mafair Spinning Mills Ltd., Lahore v. Customs, Excise and Sales Tax Appellate Tribunal, Lahore and 2 others reported as 2002 PTCL 115. Lastly, he prayed for dismissal of titled appeal of the appellant/department. 10. We have heard learned representatives of both parties, perused the impugned order of the below authorities and have gone through the record. To decide the instant appeal question before us is whether impugned order requires interference? 11. Precisely department alleged against the taxpayer that has not deposited amount of sales tax on obsolete stock valuing Rs.46,941,000/- with the pretext the said stock is expired and unfit for consumption, so the department opine the said amount of sales tax is recoverable from the registered person along with default surcharge and penalty. The Department also alleged against the taxpayer that the taxpayer shown Rs.46,941,000/- in the annual accounts under the. sub- heading of obsolete stock on which input tax of Rs.79,79,970/- adjusted and input tax of Rs.17,192,596/- was claimed. 12. Keeping in mind above indictments we have taken in account record, record reveals that the taxpayer is a distributor of consumer goods and during audit of the period July, 2012 to June 2013 the assessee has produced available record including audited accounts. 13. It is matter of record that in previous tax periods claim was made by the taxpayer and the same was adjusted. Record also reveals that those goods are still in possession of the taxpayer and its inventory also maintain by the taxpayer. 14. We have also observed that the author of the order appeared before the Commissioner(A) as department representative on canvass he admitted that only a provision was booked in accounts instead of any expense mainly thereby the disputed goods were unsold, beside this learned counsel for the assessee has urged before us that the assessee made provision in accounts because it is the requirement of international accounting standard to write down of stock value to actual cost at the end of every financial year. 15. Keeping in mind above probe we have taken guidance from case law reported in 2002 PTCL 115, for the sake of convenience relevant excerpt is being reproduce as under: "Interpretation of Statutes - Machinery section has to be construed in a manner where by the realization of proper tax is made possible - Any construction otherwise defeating the intention of legislature and preventing the realization of the tax is to be avoided - The provisions regarding input as well as out put tax as defined in the definition clause of the Act read with section 7 and thereof are only the modalities prescribed to protect the interest of the exchequer against any pilferage, evasion of fraud. The input tax paid by the appellant goes to national exchequer as input tax, it is trust till the time it was to be adjust of refunded - The provisions of sections 7 and 8 of the Act are not charging provisions and that these are machinery provisions to crystalise the liability to pay the tax as contemplated in subsection (3) of section 3 of the Act - - The charging provisions of section 3 read with subsection (3) thereof are conditional that the levy would be subject to other provisions of the Act - The other provisions inter alia contemplate input tax and output tax and their adjustment in certain specific situations - If the appellant paying input tax on the supply of goods received by him was not entitled to its adjustment or refund then he was not covered by the charging provisions of section 3 inasmuch as he never made taxable supplies - The view that Sales Tax Act is not a tax on consumption is not well bound, subsection (1) and subsection (3) of section 3-B make it dear that the incidence of tax charged under section 3 has
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to pass on to the consumer ultimately - Sections 7 and 8 are not the charging sections and these pertains to the domain of payability - In order to avoid double taxation and ensure the proper levy of sale tax, mechanism of input tax and its adjusiment was provided under section 7 of the Act- A registered person is entitled to reclaim or deduct input tax paid inter alia where the goods on which input tax was paid by the registered person were subsequently destroyed and were not meant for use nor were intended to be used for any purpose other than taxable supplies - To withhold the amount paid as input tax in this situation amounts to confiscation which the state can not resort to accept in due process of law - The provision of sections 7 and 10 are a part of machinery section and are not the charging provision -- 16. Keeping in mind above excerpt we feel necessary to reproduce here specific interpretation made by the Hon'ble Supreme Court in above Judgment: - "6. The appellant raised as many as nine legal questions but we admitted the appeal to interpret the provision of sections 7 and 8 viz-a-viz the fact of the case. As according to us the material question were only questions Nos.1 and 2, remaining questions raised by the appellant were not of any substantive nature, therefore, we were not inclined to deal with them and hold that these question are not of any substantial importance. The main and crucial question of law on which, this appeal was admitted relate to the interpretation and application of provision of sections 7 and 8 of Sales Tax Act, 1990, in relation to the peculiar circumstances of case in hand. Provision of sections 7 and 8 are reproduced hereunder. Section - 7: --------------------- Determination of tax liability - For the purpose of determining his tax liability in respect of taxable supplies made during a tax period, registered person shall 1- (subject to the provisions of section 73), be entitled to deduct input tax paid during the tax period for the purpose of taxable supplies made, or to be made by him from the output tax that is due from him in respect of that tax period and to make such other adjustments as are specified in section 9. (2) A registered person shall not be entitled to deduct input tax from output tax unless:-- (i) In case of a claim for input tax in respect of a taxable supply made in Pakistan he holds a tax invoice in respect of such supply for which a return is furnished. (ii) In case of goods imported into Pakistan, he holds the bill of entry duly cleared by the customs under section 79 or section 104 of the Custom Act, 1969 (IV of 1969) Section -- 8: -------------------- (a) Tax credit not allowed. - - (I) Notwithstanding anything contained in this Act, a registered person shall not be entitled to reclaim or deduct input tax paid on -- (b) the goods used or to be used for any purpose other than for the manufacture' or production of taxable goods or for taxable supplies made or to be made by him; (c) any other goods which the Federal Government may, by a notification in the official Gazette, specify; and (c) on the goods which the Federal Government may, by a notification in the official Gazette, specify; and (2) If a registered person deals in taxable and non-taxable supplies, he can reclaim only such proportion of the input tax as is attributable to taxable supplies in such manner as may be specified by the Board.
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(3) No person other than a registered person shall make any deduction or reclaim input tax in respect of taxable supplies made or to be made by him. (4) No person engaged in taxable activity specified in 5 (section A) shall make any deduction or reclaim input tax, nor shall this tax be credible as input tax or the taxable activity of any other registered person. (5) Notwithstanding anything contained in any other law for the time being in force or any decision of any Court, for the purpose of this section no input tax credit shall be allowed to the persons who paid fixed tax under any provisions of this Act as it existed at any time prior to the first day of December, 1998. (6) Notwithstanding anything contained in any other law for the time being in force of any provision of this Act and the Federal Government may by notification in the official gazette, specify any goods of Class of goods which a registered or enrolled person cannot supply to any person who is not registered or enrolled under this Act. (7) Notwithstanding anything contained in any of the provision of this Act. The Federal Government may be notification in the official gazette, specify any goods or class of goods in respect of which the provisions of section 3A shall not apply. In the scheme of Sales Tax Act, 1990, the provision of sections 7 and 8 are not charging section. Both the sections pertains to the domain of payability. Section 7 enunciate the principle for determining the tax liability for particular tax period of a registered person in respect of taxable supplies and it is provided that such registered person shall be entitled to deduct input tax paid during the tax period for purpose of taxable supplies made or to be made by him from the output tax that is due from him in respect of a particular tax period. For appreciating the mechanism provided under section 7 reference to section 3 of the Act contemplating chargeability, section 2(14) defining input tax and section 2(41) defining taxable supply would be imperative and relevant which are reproduced as under; "Input tax" in relation to a registered person, means the tax-- (a) levied under this Act on the supply of goods received by that person; (b) levied under this Act on the goods import, enterted and cleared under section 29 or section 104 of the Customs Act by that person; (c) levied under the Sales Tax Act. 1990 of Pakistan as adopted in the State of Azad Jammu and Kashmir, on the supply of goods received by that person (and shall included duties of excise chargeable under section 3 of the Central Excise Act, 1944 (1 of 1944) on such excisable services as are notified by the Federal Government under the third provision to subsection (1) thereof and on which such duties are charged, levied and paid as if it were a tax payable under section 3 of this Act). 2(41) "taxable supply", means a supply of taxable goods made in Pakistan by an importer, manufacturer, wholesaler (including dealer, distributer or retailer) other than a supply of goods which is exempt under section 13 and includes a supply of goods chargeable to tax at the rate of zero per cent under section 4. 3. Scope of tax.--(1) Subject to the provisions of this Act, there shall be charged, levied and paid a tax known as sales tax at the rate of (fifteen) per cent of the value of- (a) taxable supplies made in Pakistan by a registered person in the course or furtherance of any (taxable activity) carried on by him; and (b) goods imported into Pakistan. (1A) Subject to the provision of subsection (6) of section 8 or any notification issued thereunder where taxable supplies are made in Pakistan, to a person other than a registered person there shall be charged, levied and paid a further tax at the rate of (three) per cent of the value in
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addition to the rate specified in subsection (1), clause(a) of the subsection (2) and subsection (4) and (5). ------------ ------------ ----------- ................. ................. ................. ................. ------------------ (2) ........................... (a) ........................... (b) ........................... (3) ------------------ (a) ...................... (b) ...................... (3A) -------------------------- (4) --------------------------- (5) --------------------------- (6) --------------------------- 8. Chargeability of sale tax is provided under section 3 of the Act which enunciate that there shall be charged levied and paid a tax known as sale tax at the rate 15% of the value of taxable supplies made in Pakistan by a registered person in the course or furtherance of any taxable activity carried on by him and goods imported into Pakistan. 9. The purchases of ginned cotton for manufacturing yarn is a taxable activity and it was based on a taxable supply. The appellant paid the sale tax on the taxable supply of ginned cotton. The payment of sales tax was taken to be as input tax because the appellant purchased the ginned cotton for utilizing the same in its manufacturing process. After going through the manufacturing, process, the same cotton, assuming the form of yarn would be subject to another taxable supply and inviting a further charge of sale tax at the higher value. In order to avoid double taxation and ensure the proper levy of sale tax, mechanism of input tax and its adjustment was provided under section 7 of the Act. 10. A registered person is entitled to deduct input tax paid during the tax period for the purpose of taxable supply made or to be made by him from the output tax, that was due from him in respect of tax period. The registered person was also provided such other adjustment as was specified in section 9 and under section 10 the registered person is allowed to carry forward the excess amount or seek the refund. 11. It was vehemently argued by the learned counsel for the appellant that the appellants were entitled to refund of the input tax paid by them at the time of purchase of ginned cotton for that portion consignment which was admittedly lost through the out break of fire. Relying on section 10 and section 7 of Sales Tax Act, the learned counsel claimed the accrual of right and argued that as after the purchase of goods, no taxable supply was possible from the cotton lost, therefore, the input tax paid by the appellant was refundable to them. Adding further the learned counsel submitted that the provision of section -10 and section 7 have to be interpreted in favour of the assessee and these being the provision related to the refund are to be construed liberally. 12. The expression taxable supply made or to be made used in sections 7 and 8 is of paramount significant because determination of tax liability, right to seek the adjustment of input tax depended on the taxable supply made or to: be made. In case, the taxable supply made or to be
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made is lacking or missing the contingency for accrual or right is not fulfilled, leading to non accrual of any right. Would it create any vacuum or any infirmity in the law. We have examined this question with great concern. Our conclusion is that the sale tax paid on a taxable supply would only be denominated as input tax subject to adjustment if same taxable supply is consumed for converting it into another kind of taxable supply. In case the taxable supply procured for a further taxable activity, but for one or the other reason the same is not consumed or the purchaser is prevented to consume the same, the tax paid on the goods in the first instance would be sales tax simpliciter and it would not be taken as input tax. The right to seek adjustment would only follow when the same goods are utilized in furtherance of taxable activity for making another taxable supply. In the instant case the ginned cotton was purchased by appellant with the object to use the same for manufacturing of yarn which in term was taxable supply but unfortunately due to the incident of fire, the purchased cotton was lost and no further taxable supply could be made out of it. Therefore, there could not be any output tax as such right to seek any adjustment of tax already paid could not accrue in favour of registered person. We therefore, hold that the claim of the appellant was misconceived. 13. We have examined the contention of learned counsel. The provision of sections 7 and 10 are a part of machinery section and are not the charging provision, but the correct principle of interpretations that machinery section has to be construed in a manner where by the realization of proper tax is made possible. Any construction otherwise defeating the intention of legislature and preventing the realization of the tax is to be avoided. Refer the cases of Lt. Col. Nawabzada Muhammad Amir Khan v. Collector of Estate Duty (PLD 1961 SC 19) and the case of Court of West Pakistan and others v. M/s. Jabees Ltd. MD 1991 SC 870). The doctrine of input and output tax is introduced in the sale tax act to avoid multiplicity of taxation because sale tax is one time tax and in large number of cases before a goods become a consumable item/goods, it is subject to taxable supplies at various intermediary stages. Therefore, the sale tax paid on the goods would be taken an input tax if the said goods travel to another stage of taxable supply. If the journey of goods to another taxable supply fails, the leviability of Sales Tax thereon would he defeated by construing sections 7 and 10 in isolation. We therefore, hold that the tax paid on the ginned cotton would remain a sales tax simpliciter because no further taxable supply was made or were to be made out of the said cotton. Section 8(a) of the Act further clarifies the provision of section 7. It lays down that a registered person shall not be entitled to reclaim or deduct input tax if the goods used or to be used for any purpose other than for the manufacture or production of taxable goods or for taxable supplies made or to be made by him. Section 8 is couched in the negative language providing that if taxable supplies made or to be made is not achieved or the goods are used for any purpose other than manufacture or production, the reclaim or deduction of input tax would not be available. In the instant case, no taxable supplies was made or was to be made, therefore, it negated the right of appellant to claim any refund of any tax paid. 14. In view of our findings recorded herein before, we do not find any substance in this appeal, the same is accordingly dismissed. [MR. JUSTICE NASIM SIKANDAR].----(15) having gone through the proposed order, with utmost respect, it is stated that I have not been able to persuade myself to agree with the opinion expressed therein by his Lordship. 16. "The facts of the case having already been re-counted with absolute clarity in paras 4 and 5 (ante), their re-counting is not needed. It will he noted that after remand me first appellate authority epitomized the view point of the department which is reproduced as under:-- "To my mind, there is no ambiguity in the words of section 7 ibid and no word of statute can be said as redundant. I have no hesitation to say that the very purpose of taxable supplies is achieved only if the taxable supplies have been made out of the goods purchased for the
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purpose. If no taxable supplies have been made or there is no possibility of making them the purpose for which the goods were purchased against payment of sales tax (input tax) is…
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