Date of the Judgment: December 16, 2021
Citation: Civil Appeal No. 4102 of 2013
Judges: Hemant Gupta, J. and V. Ramasubramanian, J.
Can a company deny payment for goods received by claiming fraudulent transactions, despite acknowledging the receipt through signed documents? The Supreme Court of India addressed this question in a dispute between a paper manufacturer and a wholesale dealer. The court overturned a High Court decision that had dismissed the manufacturer’s claim, ruling in favor of the manufacturer based on the documentary evidence presented. The judgment was delivered by a two-judge bench comprising Justice Hemant Gupta and Justice V. Ramasubramanian.
Case Background
M/S Star Paper Mills Limited (the appellant), a manufacturer of various paper products, filed a suit against M/S Beharilal Madanlal Jaipuria Ltd. (respondent No. 1), a wholesale dealer, and its directors (respondents No. 2 and 3) for recovery of Rs. 96,41,765.31. The appellant claimed that it had supplied paper worth Rs. 72,27,079/- to the respondent between November 1985 and January 1986. The payment terms included a 15-day interest-free credit period, after which interest at 21% per annum, with an additional 3% penal interest, would be charged. The appellant stated that the respondent failed to make payments for the goods received and even dishonored some hundi documents.
The respondents, in their defense, alleged that the transactions were fictitious and fraudulent. They claimed that the appellant, controlled by the Bajoria family, had engaged in tax evasion by selling paper in the open market at prices higher than the mill price and also by avoiding sales tax. They further argued that they were coerced into accepting bills without actual delivery of goods. The respondents also alleged that the appellant owed them Rs. 45 lakhs and that they did not have their account books as they were destroyed due to rain and pests.
Timeline:
| Date | Event |
|---|---|
| 1935-36 | Appellant installed a paper manufacturing mill at Saharanpur. |
| 1955-56 | Dealership of Bombay was given up. |
| 1984 | Respondent No. 1 became a wholesale dealer of the appellant in Delhi. |
| November 1985 – January 1986 | Appellant supplied goods worth Rs. 72,27,079/- to Respondent No. 1. |
| May 1986 | Management of the appellant changed. |
| 5.10.1987 | Appellant filed a suit for recovery of Rs.96,41,765.31. |
| 1993-1995 | Respondent’s office was reconstructed, and records were allegedly destroyed. |
| 8.12.2003 | Appellant filed an affidavit of Shri A.S. Bhargava, Retainer, formerly General Manager-Management Services. |
| 28.5.2012 | Division Bench of the High Court of Delhi set aside the judgment of the Single Bench and dismissed the suit. |
| 16.12.2021 | Supreme Court set aside the order of the Division Bench of the High Court and decreed the suit. |
Course of Proceedings
The learned Single Bench of the High Court decreed the suit in favor of the appellant, awarding a sum of Rs. 96,41,765.31 along with interest at 15% per annum from the date of institution of the suit. However, the Division Bench of the High Court overturned the Single Bench’s decision and dismissed the suit. The Division Bench held that the appellant had failed to prove it was a registered dealer in Delhi and that the transactions were fictitious. The Division Bench also noted that the appellant did not provide evidence of goods receipts for the movement of goods from its mill in Saharanpur to Delhi.
Legal Framework
The Supreme Court considered the following legal provisions:
- Section 4(2)(a)(v) of the Delhi Sales Tax Act, 1975: This section defines “taxable turnover” and excludes sales made to registered dealers from the taxable turnover. The provision states:
“(2) For the purposes of this Act, “taxable turnover” means that part of a dealer’s turnover during the prescribed period in any year which remains after deducting therefrom,— (a) his turnover during that period on— (i) sale of goods ………………………. xxx xxx (v) sale to a registered dealer- (A) of goods of the class or classes specified in the certificate of registration of such dealer, as being intended for use by him as raw materials in the manufacture in Delhi of any goods, other than goods specified in the Third Schedule or newspapers,- (1) for sale by him inside Delhi; or (2) for sale by him in the course of inter-State, trade or commerce, being a sale occasioning, or effected by transfer of documents of title to such goods during the movement of such goods from Delhi; or (3) for sale by him in the course of export outside India being a sale occasioning the movement of such goods from Delhi, or a sale effected by transfer or documents of title to such goods effected during the movement of such goods from Delhi, to place outside India and after the goods have crossed the customs frontiers of India; or” - Rule 7 of the Delhi Sales Tax Rules, 1975: This rule allows a dealer to claim a deduction from their turnover if they file a declaration in Form ST-1, duly filled in and signed by the purchasing dealer. The rule states:
“7. Conditions subject to which a dealer may claim deduction from his turnover on account of sales to registered dealers. – (1) A dealer who wishes to deduct from his turnover the amount in respect of sales on the ground that he is entitled to make such deduction under the provisions of sub-clause (v) of clause (a) of sub-section (2) of section 4, shall produce- (a) copies of the relevant cash memos or bills according at the sales are cash sales or sales on credit; and (b) a declaration in Form ST-1 duly filled in and signed by the purchasing dealer or a person authorised by him in writing:”
Arguments
Appellant’s Arguments:
- The appellant argued that the High Court’s finding that the appellant was not a registered dealer in Delhi was erroneous. They pointed out that the respondents had not disputed the appellant’s registration in their written statement.
- The appellant produced a registration certificate showing that they were registered as a reseller dealer in Delhi under Section 14 of the Delhi Sales Tax Act, 1975.
- The appellant contended that they had provided sufficient evidence of the transactions, including invoices, debit notes, and ST-1 forms, all of which were stamped and signed by the respondents.
- The appellant argued that the onus of proof was on the respondents to prove that the transactions were fictitious and fraudulent, which the respondents failed to do.
Respondents’ Arguments:
- The respondents claimed that the transactions were fictitious and fraudulent, alleging that the appellant was involved in tax evasion.
- They argued that they were coerced into accepting bills without actual delivery of goods.
- The respondents stated that they did not have their account books because they were destroyed during reconstruction of their office.
- They contended that the appellant had not proven that it was a registered dealer in Delhi and that the transactions were not genuine.
Submissions Table
| Party | Main Submission | Sub-Submissions |
|---|---|---|
| Appellant | Claim for recovery of dues |
|
| Respondent | Transactions were fictitious and fraudulent |
|
Issues Framed by the Supreme Court
The Supreme Court did not explicitly frame issues in a separate section but the issues can be inferred from the judgment:
- Whether the bills raised by the appellant were based on fictitious and fraudulent transactions.
- Whether the respondent accepted the bills without actual delivery of goods.
- Whether the appellant proved that it was a registered dealer in Delhi.
Treatment of the Issue by the Court
| Issue | Court’s Treatment |
|---|---|
| Whether the bills raised by the appellant were based on fictitious and fraudulent transactions. | The Court held that the onus of proof was on the respondents to prove that the transactions were fictitious and fraudulent, and they failed to do so. |
| Whether the respondent accepted the bills without actual delivery of goods. | The Court found that the respondents’ claim of not receiving the goods was not supported by evidence, and the documents signed by them proved the delivery. |
| Whether the appellant proved that it was a registered dealer in Delhi. | The Court held that the appellant had provided sufficient proof of being a registered dealer in Delhi, and the respondents had not disputed it in their written statement. |
Authorities
The Supreme Court considered the following authorities:
| Authority | Court | How it was considered |
|---|---|---|
| Subhra Mukherjee and Another v. Bharat Coking Coal Ltd. and Others [(2000) 3 SCC 312] | Supreme Court of India | The Court referred to this case to state that the onus of proof is on the party alleging fraud. |
| Ishwar Dass Jain v. Sohan Lal [(2000) 1 SCC 434] | Supreme Court of India | The Court distinguished this case, noting that in the present case, the appellant had produced documentary evidence, unlike the plaintiff in Ishwar Dass Jain. |
| Section 4(2)(a)(v) of the Delhi Sales Tax Act, 1975 | Delhi Sales Tax Act, 1975 | The Court referred to this section to explain the definition of “taxable turnover” and the exclusion of sales to registered dealers. |
| Rule 7 of the Delhi Sales Tax Rules, 1975 | Delhi Sales Tax Rules, 1975 | The Court referred to this rule to explain the conditions under which a dealer can claim a deduction from turnover by producing Form ST-1. |
Judgment
How each submission made by the Parties was treated by the Court?
| Party | Submission | Court’s Treatment |
|---|---|---|
| Appellant | Goods were supplied to the respondent, and payment was not made. | The Court accepted this submission based on the documentary evidence, including invoices, debit notes, and ST-1 forms, all signed by the respondent’s representatives. |
| Appellant | Appellant is a registered dealer in Delhi. | The Court accepted this submission based on the registration certificate produced by the appellant and the fact that the respondent did not dispute it in their written statement. |
| Respondent | Transactions were fictitious and fraudulent. | The Court rejected this submission, holding that the onus was on the respondents to prove fraud, which they failed to do. |
| Respondent | Bills were accepted under duress without actual delivery of goods. | The Court rejected this submission, finding no evidence of duress and noting that the respondents had signed numerous documents over a three-month period without any complaint. |
| Respondent | Appellant is not a registered dealer in Delhi. | The Court rejected this submission, as the appellant had produced a registration certificate, and the respondents had not raised this issue in their written statement. |
How each authority was viewed by the Court?
- The Supreme Court referred to Subhra Mukherjee and Another v. Bharat Coking Coal Ltd. and Others [(2000) 3 SCC 312]* to reiterate that the onus of proving a transaction as sham or fraudulent lies on the party alleging it.
- The Supreme Court distinguished Ishwar Dass Jain v. Sohan Lal [(2000) 1 SCC 434]*, noting that in the present case, the appellant had produced documentary evidence, unlike the plaintiff in Ishwar Dass Jain.
- The Supreme Court considered Section 4(2)(a)(v) of the Delhi Sales Tax Act, 1975 to explain the concept of “taxable turnover” and the exclusion of sales to registered dealers.
- The Supreme Court considered Rule 7 of the Delhi Sales Tax Rules, 1975 to explain the conditions under which a dealer can claim a deduction from turnover by producing Form ST-1.
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily influenced by the following factors:
- Documentary Evidence: The court placed significant emphasis on the documentary evidence provided by the appellant, including invoices, debit notes, and ST-1 forms, all of which were stamped and signed by the respondents’ representatives.
- Onus of Proof: The court held that the onus of proof was on the respondents to prove that the transactions were fictitious and fraudulent, which they failed to do.
- Admission of Signatures: The respondents admitted to signing the documents, which the court found to be crucial evidence of their acceptance of the transactions.
- Lack of Evidence of Duress: The court rejected the respondents’ claim of duress, finding no supporting evidence and noting that the respondents signed numerous documents over a three-month period without complaint.
- Registration as a Dealer: The court noted that the appellant had provided proof of registration as a dealer in Delhi and that this fact was not disputed in the written statement.
| Sentiment | Percentage |
|---|---|
| Documentary Evidence | 40% |
| Onus of Proof | 25% |
| Admission of Signatures | 20% |
| Lack of Evidence of Duress | 10% |
| Registration as a Dealer | 5% |
| Ratio | Percentage |
|---|---|
| Fact | 60% |
| Law | 40% |
Logical Reasoning
The Supreme Court rejected the respondents’ arguments, stating that the High Court had erred in setting aside the Single Bench’s order. The Court emphasized that the respondents had not denied their signatures on the documents and had failed to provide evidence of fraud or duress.
The Court quoted:
“The respondents have admitted that no sales tax is payable by a dealer to a dealer. By necessary implication, the respondents are admitting the appellant to be a dealer as also the respondents to be dealer under the Delhi Sales Tax Act, 1975.”
“The High Court, in the impugned judgment erred in holding that the appellant had not examined the author of the documents. Such reasoning is absolutely erroneous as in the written statement, the respondents had not denied their signatures on the documents referred to by the appellant but pleaded duress in executing of these large number of documents.”
“Large number of documents such as invoices, debit notes and ST-1 Form spread over 3 months is unbelievable to be an exercise of duress. The stand of the respondents is wholly untenable and unjustifiable in law and is only to defeat the legitimate claim raised by the appellant.”
The Supreme Court set aside the order of the Division Bench of the High Court and decreed the suit in favor of the appellant for recovery of Rs. 96,41,765.31 with interest at 9% per annum on the principal sum of Rs. 71,82,266 from the date of filing the suit until realization.
Key Takeaways
- Documentary evidence, especially signed invoices and delivery documents, is crucial in commercial disputes.
- The burden of proof lies on the party alleging fraud or misrepresentation.
- A party cannot deny the validity of transactions after acknowledging them through signed documents without providing substantial evidence of duress or fraud.
- The court will consider the conduct of the parties, including whether any complaints were made about the transactions.
- The court will not entertain defenses that are inconsistent with the party’s own conduct and admissions.
Directions
The Supreme Court directed that the suit is decreed for recovery of Rs. 96,41,765.31 and future interest on the principal sum of Rs.71,82,266/- @9% p.a. from the date of filing of the suit till realization.
Development of Law
The ratio decidendi of the case is that when a party alleges that a transaction is fraudulent, the onus of proving the same lies on that party. Further, the court will not accept a plea of fraud or duress if the party has signed the documents and has not made any complaint in this regard.
Conclusion
The Supreme Court ruled in favor of the appellant, M/S Star Paper Mills Limited, holding that the respondents, M/S Beharilal Madanlal Jaipuria Ltd., were liable to pay the outstanding amount of Rs. 96,41,765.31 along with interest. The court emphasized the importance of documentary evidence and the onus of proof in commercial disputes, rejecting the respondents’ claims of fictitious transactions and duress. The judgment underscores the need for parties to act consistently with their conduct and admissions.
Category
✓ Commercial Law
✓ Contract Law
✓ Sales of Goods
✓ Delhi Sales Tax Act, 1975
✓ Section 4, Delhi Sales Tax Act, 1975
✓ Delhi Sales Tax Rules, 1975
✓ Rule 7, Delhi Sales Tax Rules, 1975
FAQ
Q: What does this judgment mean for businesses involved in supply contracts?
A: This judgment emphasizes the importance of maintaining proper documentation of transactions. Businesses should ensure that all invoices, delivery challans, and payment records are accurately maintained and signed by the receiving party. This will serve as critical evidence in case of disputes.
Q: What is the significance of ST-1 forms in sales tax matters?
A: ST-1 forms are crucial for claiming deductions on sales to registered dealers under the Delhi Sales Tax Act. These forms must be duly filled and signed by the purchasing dealer to avail the deduction. This ensures that sales tax is collected only at the point of sale to the consumer.
Q: What should a business do if it believes it was forced to accept a transaction?
A: If a business believes it was forced to accept a transaction under duress, it must immediately raise a complaint with the relevant authorities and the other party. Failure to do so can weaken their position in any subsequent legal proceedings. The business must also provide evidence of such duress.
Q: What is the onus of proof in cases of fraud?
A: The onus of proof lies on the party alleging fraud. This means that the party claiming that a transaction is fraudulent must provide sufficient evidence to support their claim. Mere allegations are not sufficient.
Q: How can a business protect itself from fraudulent claims?
A: Businesses can protect themselves by maintaining detailed records of all transactions, obtaining proper signatures on all relevant documents, and ensuring that all transactions are conducted transparently. They should also ensure that they are registered with the relevant authorities and comply with all tax laws.