BURDEN OF PROOF ON THE DEPARTMENT: INADMISSIBILITY OF INPUT SALES TAX
Appellate Authority: Appellate Tribunal Inland Revenue (KB)
Appellants: Commissioner Inland Revenue
Section: 8 of the Sales Tax Act, 1990 (the Act)
Detailed judgment was issued on May, 13 2024.
Background: The department disputed the adjustment of input tax and held it admissible under section 8(1)(f) of Act read with SRO 490 of 2004. The taxpayer succeeded in the first appeal before the Commissioner (Appeal). The second appeal was filed by the Department before the Appellate Tribunal, which failed as the input tax adjustment was allowed.
Decision of the Court:
First Ruling of the Court:
INADMISSIBILITY OF INPUT TAX WITHOUT DISPUTING SPECIFICALLY:
The impugned order involves a table listing party-wise items purchased and the corresponding sales tax. The table indicates that all items purchased are relevant to the business activities of the appellant company. The officer did not dispute the genuineness of the transactions or the issuing parties but raised objections regarding the inadmissibility of input sales tax under section 8 and related SROs. This treatment was previously applied to Sui Northern Gas Pipeline Limited Lahore and confirmed by CIR(Appeals). However, the learned Tribunal in STA No. 55/LB/2009 overturned that decision on 28-08-2015.
Second Ruling of the Court:
DEFICIENCIES IN ACIR’s EVALUATION HIGHLIGHTED:
The ACIR admitted the receipt of invoices but disallowed the input tax without substantial reasoning. The order of CIR(A) highlights two major deficiencies: a lack of detailed scrutiny of records and a hasty decision by the ACIR. The CIR(A) provided specific instances where goods and services were directly used in taxable activities, which the ACIR failed to consider. Legally, the ACIR’s interpretation of section 8 was flawed, as it narrowly defined taxable supplies to include only direct components, overlooking the broader relevance of goods and services aiding taxable activities.
Third Ruling of the Court:
NON EXAMINATION OF EVIDENCE:
During the appeal, the learned DR could not refute CIR(A)'s findings that sufficient evidence was provided by the Registered Person but were not properly examined.
The ACIR’s case, based on clause (f) of sub-section (1) of section 8, lacked material evidence to justify his disallowances. The department must present persuasive evidence to prove that the Registered Person’s claims are improbable. The responsibility to establish facts with a balance of probability lies with the department, which it
failed to meet in this case.
Fourth Ruling of the Court:
NARROW INTERPRETATION OF SECTION 8 AND BURDEN OF PROOF:
The tribunal emphasized the negative phrasing of section 8, indicating a higher burden on the department. The taxpayer needs to establish a prima facie connection to taxable supplies, shifting the burden to the department to prove otherwise. The ACIR's rejection of the input tax claim did not meet this evidentiary standard. The phrase ‘related to’ implies a connection, association, or interconnection with taxable supplies. It is not necessary for goods to be integral components; once the connection is established, the taxpayer is entitled to input tax adjustment.
CONCLUSION:
In conclusion, the tribunal found significant shortcomings in the ACIR’s assessment, both in terms of factual scrutiny and legal interpretation. The ACIR's failure to adequately examine the provided evidence and its narrow understanding of section 8 led to an unjust disallowance of input tax. The tribunal underscored the broader interpretation of 'related to taxable supplies,' emphasizing that the department holds the burden of disproving the taxpayer's claims with substantial evidence. Given the insufficient reasoning and lack of material evidence in the ACIR’s order, the tribunal overturned the decision, affirming the appellant’s right to input tax adjustment.
DISCLAIMER:
This update has been prepared for KTBA members and carries a brief narrative on a detailed Judgment and does not contain an opinion of the Bar, in any manner or sort. It is therefore, suggested that the judgment alone should be relied upon. Any reliance on the summary in any proceedings would not be binding on KTBA.
CASE LAW UPDATE
July 26, 2024
04th OF 2024 KTBA ONE PAGER
Source: KBTA
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