Case Law Details
Malani Construction Company Through Manoj K Malani Vs State Of Gujarat & Anr. (Gujarat High Court)
In the case of Malani Construction Company Through Manoj K Malani Vs State Of Gujarat & Anr., the Gujarat High Court addressed a petition filed by Malani Construction, challenging an assessment order under the Gujarat Value Added Tax Act, 2003. The petitioner, a registered partnership firm engaged in government-approved civil contracts, contested the assessment period of 2014-15, where a significant tax demand and penalty were imposed. The petitioner had consistently used the cost-plus gross profit method for calculating taxable turnover of sales, which the respondent, the Assistant Commissioner of State Tax, rejected. The petitioner argued that the respondent did not provide a reasonable opportunity to justify the method used or the deductions claimed, and the assessment was conducted hastily without proper reasoning.
The petitioner had initially filed self-assessment returns for the period, reporting substantial sales and purchases, and adjusted the output tax against input tax credits. However, the respondent decided to recalibrate the taxable turnover using a different method under Section 2(30)(c) of the Gujarat Value Added Tax Act, rejecting the petitioner’s approach without adequate explanation. Additionally, a penalty notice was issued in a standard format, without specifying any valid reasons or instances justifying the substantial penalty. The petitioner argued that the hearing process conducted by the respondent was merely a formality and did not allow them to adequately present their case.
Upon reviewing the case, the Gujarat High Court had earlier remanded the matter for fresh assessment, emphasizing that the respondent must adhere to the principles of natural justice and provide a detailed reasoning for any tax assessment or penalty imposed. Despite this, the respondent issued another order, once again without offering proper reasoning or an opportunity for the petitioner to defend their method of accounting. The court found this approach unsatisfactory and in violation of the directions previously given, leading to the present petition.
In this petition, the Gujarat High Court quashed the VAT assessment order and penalty notice, reiterating the need for transparency and detailed justification in tax assessments. The court emphasized that the principles of natural justice must be upheld, and the respondent was directed to issue a fresh order with comprehensive reasoning.
FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT
Heard learned senior advocate Mr. M.R. Bhatt with learned advocate Mr. Vijay Patel for the petitioner and learned Assistant Government Pleader Ms. Shrunjal Shah for the respondents.
2. Rule, returnable forthwith. Learned Assistant Government Pleader waives service of notice of Rule on behalf of the respondents.
3. Having regard to the controversy narrow in compass, with the consent of learned advocates appearing for the parties, the matter is taken up for final consideration.
4. By this petition under Article 226 of the Constitution of India, the petitioner has prayed for the following reliefs.
“(B) YOUR LORDSHIPS may be pleased to issue a Writ of Mandamus or any other appropriate writ, order or direction quashing and setting aside the Assessment Order in Form No. 304 dated 14.11.2009 passed by the Ld. Respondent No. 2;
(C) YOUR LORDSHIPS may be pleased to issue a Writ of Mandamus or any other appropriate writ, order or direction quashing and setting aside the Notice for Amount Assessed in Form No. 305 dated 14.11.2009 issued by the Ld. Respondent No. 2.”
5. Brief facts of the case are as under.
5.1 The petitioner is a registered partnership firm in the business of executing civil and labour contracts which is a government approved contractor executing government and semi-government contracts. The petitioner is also a registered dealer under the provisions of the Act. The present Petition concerns the assessment period 2014-15.
5.2 The petitioner, during the period under consideration, had filed its annual self-assessment returns under Section 33 of the Gujarat Value Added Tax Act, 2003 (for short ‘the Act’) in the prescribed form. The petitioner had reported taxable turnover of sales to the tune of Rs.118,98,05,615 following the cost plus gross profit method. The petitioner had reported purchases of Rs.108,16,41,465. The output tax payable on sales was adjusted against the input tax credit available on purchases and excess credit balance was carried forward to the subsequent period.
5.3 The petitioner had, during the earlier assessment years, also filed annual self-assessment returns following cost plus gross profit method for arriving at taxable turnover of sales. The assessments of the previous periods were completed by the respondent authority either under audit assessment category or under deemed assessment category.
5.4 The scrutiny/audit assessment of the petitioner for period under consideration came up before the respondent No.2. The respondent authority was of the view that the method adopted by the petitioner for arriving at taxable turnover of sales is not in consonance with the provisions of Section 2(30)(c) of the Act and therefore, issued a communication dated 06th March, 2019 intimating the petitioner that he has decided to frame assessment by adopting method as provided in Section 2(30)(c) of the Act for arriving at taxable turnover of sales and had also decided that the method adopted by the petitioner for arriving at taxable turnover of sales is liable to be rejected.
5.5 The respondent No.2, along with such intimation, also issued a notice in Form No.309 dated 06th March, 2019 proposing to impose penalty under Sections 34(7) and 34(12) of Act which was in a cyclostyle format, which indicates 18 instances where penalty under the Act can be imposed. However, as per the case of the petitioner, the respondent authority clearly failed to indicate a single instance or reason to believe as to why huge penalty to the tune Rs.11,68,53,998/- was required to be imposed and that too without affording any opportunity given to the petitioner to explain for not imposing the penalty.
5.6 The petitioner appeared with its books of accounts along with supporting documents on 13th March, 2019 to respondent authority and during the course of hearing, the petitioner submitted calculation of taxable turnover of sales as per Section 2(30)(c) of the Act and had also filed detailed written submissions. Apart from the method of calculation of taxable turnover, no other queries were raised by the respondent authority and even no documents were asked from the petitioner.
5.7 The intimation dated 06th March, 2019 had not provided opportunity to explaining as to why cost plus gross profit method be not adopted or the deductions claimed and allowable as per Section 2(30)(c) of the Act be not disallowed while arriving at taxable turnover of sales nor the notice in Form No.309 provides reasons to believe for imposing the penalty on the petitioner.
5.8 The petitioner was represented by itslegal rep resentative at the hearing that took place on 13th March, 2019 along with all the supporting documents, which was just an empty formality by the respondent authority and no opportunity worth the name was given to the petitioner to explain as to why the method adopted or the deductions claimed for arriving at taxable turnover of sales be not disallowed.
5.9 The respondent authority passed the assessment order dated 24th March, 2019 making huge addition raising exorbitant dues of Rs.25,08,46,582/- inclusive of interest and penalty and that too without recording any reasons for making high- pitched assessment. The respondent authority has passed the assessment order in a very hasty, arbitrary and illegal manner, without following the due procedure of granting opportunity to the petitioner to explain the method followed or deductions claimed while arriving at taxable turnover of sales.
5.10 Being aggrieved, the petitioner preferred Special Civil Application No.13971 of 2019 before this Court challenging the legality and validity of the assessment order dated 24th March, 2019.
5.11 Coordinate Bench of this Court has allowed the said petition by judgment dated 23rd August, 2019 remanding the matter back to the respondent No.2 for fresh assessment.
5.12 Pursuant to the aforesaid directions of Coordinate Bench of this Court, the respondent No.2 issued notice dated 17th September, 2019 for audit assessment to the petitioner in Form No.302. The respondent No.2 also issued notice dated 06th November, 2019 in Form No.309 for imposing penalty under Section 34(12) of the Act which, as per the case of the petitioner, was in a cyclostyle format, which indicates 17 instances where penalty under the Act can be imposed, however the respondent No.2 failed to indicate a single instance or reason to believe as to why huge penalty of Rs.07,20,48,000/- was required to be imposed. The notice was issued on 06th November, 2019 and the date of hearing was fixed on the very next day i.e. on 07th November, 2019.
5.13 The respondent No.2–Assistant Commissioner of State Tax once again passed the impugned order dated 14th November, 2019 without affording proper opportunity of hearing and without following the principles of natural justice as well as without considering the binding decision of this Court vide judgment dated 23rd August, 2019 in Special Civil Application No.13971 of 2019.
6. Being aggrieved, the petitioner approaches this Hon’ble Court by way of present petition.
7. Learned senior advocate Mr. M. R. Bhatt for the petitioner submitted that while passing the fresh assessment order dated 14th November, 2019 challenged in this petition, the respondent No.2 has not taken into consideration the directions which were issued by this Court while disposing of Special Civil Application No.13971 of 2019. It was submitted that the respondent No.2 has not considered the contentions with regard to the consistent method of accounting on the basis of cost plus profit method despite the directions of this Court and no finding is recorded in this regard.
7.1 It was further submitted that assuming that pro vision of Section 2(30)(c) of the Gujarat Value Added Tax Act, 2003 applies, petitioner has not been put to notice as to why the audit report is not acceptable and only part amount is given as deduction.
7.2 Learned senior advocate for the petitioner submitted that even if the turnover was computed as per Section 2(30)(c) of the Act, labour and other incidental expenses are required to be deducted to arrive at a taxable turnover and the respondent No.2 allowed deduction only to the tune of Rs.86,70,45,999/- instead of Rs.119,25,44,538/- without assigning any reason for rejecting the deduction to the tune of Rs.32,54,98,539/- as claimed by the petitioner.
7.3 Learned senior advocate further submitted that the respondent ought to have taken into consideration the decision of the Apex Court in the case of Gannon Dunkerly & Co. v. State of Rajasthan reported in (1993) 1 SCC 364, which was directed to be followed by this Court while disposing of the earlier round of litigation in Special Civil Application No.13971 of 2019.
8. Learned Assistant Government Pleader submitted that the petitioner was granted sufficient opportunity of hearing and that there is no violation of principles of natural justice as alleged by the petitioner. The learned Assistant Government Pleader relied on the following averments made in the affidavit-in-reply filed on behalf of respondent No.2.
“8. It is submitted that the facts and circumstances in the case of the present Petitioner evidencing that sufficient opportunity of being heard has been granted and no principles of natural justice is violated is a below.
a. A notice u/s 34 (2) dated 17.09.2019 was issued to the petitioner in Form 302 requesting the petitioner remain present on 05.10.2019 with relevant documents for the purpose of assessment for the time period 01.04.2014 to 31.03.2015.
b. In response to the said notice the authorized representative of the petitioner’s Mr. Ketanbhai Bhalodiya and their Lax consultant Mr. Chandreshbhai Doshi remained present on 05.10.2019. On the said date they submitted the purchase statement, sublet work details, agreements and ledger copy. However, certain documents like the books of accounts, balance sheet and documents evidencing supporting the purchase statement were not produced therefore time was granted to produce the same till 10.10.2019.
c. On 10.10.2019, again the authorized representatives remained present before the answering Respondents and submitted the balance Sheet and a statement showing works contract details however, details of 4 work contract were not produced. Therefore, it is submitted that time was granted to submit such details along with details of Labour service commission, Rajkot Municipal Corpo work details, ΤΡΙ details, TDS Certificate details etc. on 14.10.2019.
d. It is submitted that again on 14.10.2019, details of sublet works from some parties were produced. However, since the details of other parties namely Gayatri Electronics, SP Builders Tourism Corporation of India, PIU Sola Ο.Τ., was not submitted for which additional time was sought which was granted. It is further submitted that various other additional details were also requested to be submitted by 17.09.2019.
e. It is submitted that no-one remained present on 17.09.2019 and on 21.09.2019, an adjournment application was filed requesting for time till 01.11.2019 which was granted.
f. Thereafter, on 04.11.2019 the Authorised Representative of the Petitioners submitted certain sublet works contract details but could not submit supporting document evidencing the expenses undertaken by of Works the Contract Petitioners themselves. It is further submitted that it was informed to the answering
Respondent herein that since the data is bulky the answering Respondents may visit the Place of business of the petitioners and access the relevant data.
g. Therefore, on 05.11.2019 only after visiting the place of business of the Petitioners and upon due verification of the necessary data, the deductions were made as per the judgment of the Hon’ble Supreme Court in the case Gannon Dunkerly (supera) to arrive at the taxable turnover. … … …”
8.1 It was submitted that the impugned order passed by the respondent No.2 raising demand of Rs.15,97,640/- is therefore justified and the arguments of the petitioner that hearing was not provided prior to passing of the impugned order is erroneous and incorrect.
8.2 It was further submitted that the impugned notice for penalty in Form No.309 was issued under Section 34(12) of the Act which provides that for levy of penalty when the amount of tax assessed or re-assessed exceeds the amount of tax already paid by more than 25%. It was submitted that in the facts of the case, tax was levied by holding that the petitioner had tried to avoid payment of tax and therefore, notice for penalty was in accordance with law. It was further submitted that the petitioner would be providing opportunity of hearing prior to passing the order for penalty.
8.3 Reliance on the decision of the Apex Court by the petitioner in case of Gannon Dunkerly & Co. (supra) is misconceived because in the said judgment, it is held that in case of works contract, value of goods cannot be determined on the basis of the cost of acquisition of the goods by the contractor and considering taxable event, value of the goods has to be determined solely on the basis of value of the goods at the time of incorporation of the goods in the works. It was, therefore, submitted that with regard to determining the value of the goods it was accepted that the convenient mode for such determination is to take value of the works contract as a whole and deduct therefrom the cost of labour and services rendered by the contractor during the execution of the works contract and the deduction that have to be made is also enumerated in the decision of the Apex Court. It was, therefore, submitted that the respondent has rightly denied the cost plus profit method for determining the value of goods being the taxable turnover as per the decision of the Apex Court.
8.4 Learned Assistant Government Pleader therefore submitted that the taxable turnover has been rightly determined as provided in Section 2(30)(c) of the Act and the directions issued by this Court in the order passed in Special Civil Application No.13971 of 2019 are followed.
9. Having heard learned advocates for the respective parties, it is not in dispute that the impugned order is passed without giving opportunity of hearing to the petitioner and without considering the directions issued by the coordinate Bench of this Court in order dated 23rd August, 2019 in Special Civil Application No.13971 of 2019 in case of the petitioner, which reads as under.
“6.1 It appears from the materials on record that the writ applicant is a Government approved works contractor since 1967. The writ applicant has so far undertaken the works contracts for various government, semi-government and other such entities. It appears that the writ applicant has been consistently following a method of accounting wherein the material used in the contract is marked-up with the gross profit to quantify the deemed sale and on the said deemed sale the tax is worked out at the applicable rate. As against this tax liability, the input tax credit which is available on the purchases and TDS under Section 59B would be reduced so as to work out the net tax liability. It appears from the materials on record that such method of accounting was accepted by the department till the recent past and the assessments for the earlier years were also framed accepting such method. The decision of the Supreme Court in the case of Gannon Dunkerly and Co. and Ors. vs. State of Rajasthan and Ors. Reported in (1993) 1 SCC 364 was also relied upon before the respondent No.2. Unfortunately, this decision has not been dealt with even remotely. According to the dictum as laid in the said decision, the allowable expenditure as the audited account as quantified in the statement needs to be reduced from the gross receipts.
6.2 It appears that the respondent No.2 has not considered the tax audit report containing the contract wise information alongwith the details of the allowable expenditure. The same is on record. It also appears prima facie that the figures of the total contract receipts, total purchases and allowable expenditure, though duly computed and quantified, have not been looked into or discussed. The respondent No.2 has observed in his impugned assessment order that the method adopted by the writ applicant is not in accordance with Section 2(30)(c) of the GVAT Act. We also take notice of the fact that as regards the penalty under Section 34(12) of the Act, only a cyclostyle penalty notice without indicating the nature of infraction has been issued.
6.3 In the overall view of the matter, we are convinced with the submissions canvassed on behalf of the writ applicant that the matter deserves to be remitted to the respondent No.2 for a fresh consideration with a direction to re-consider the matter, having regard to the materials on record and after hearing the writ applicant. We are not convinced with the method and the manner in which the impugned assessment order came to be passed by the respondent No.2. In such circumstances, we reject the preliminary contention canvassed on behalf of the respondents that the writ applicant should be asked to prefer the statutory appeal available in law. Mr. Hemani, the learned senior counsel is right in his submission that when the impugned order is bereft of the reasons then, the same could be said to be gross violation of the principles of natural justice and, if that be so, then the alternative remedy should not be a bar in entertaining the writ application.
7. For the foregoing reasons, we allow this writ application in part. The impugned assessment order dated 24.03.2019 in Form No.304 as well as the demand notice dated 24.03.2019 in Form No.305 is hereby quashed and set aside. The entire matter is remitted to the respondent No.2 for fresh consideration of all the issues as discussed in this Judgement. The respondent No.2 shall once again apply his mind to the method of accounting and also take into consideration the decision of the Supreme Court referred to above. If the respondent No.2 is of the view that the method of accounting is not in accordance with Section 2(30)(c) of the GVAT Act, then to substantiate such finding, appropriate, cogent reason shall be assigned.
7.1 The respondent No.2 shall once again hear the writ applicant and take into consideration all the relevant materials earlier adduced by the writ applicant and also the materials that may be once again adduced at the time of rehearing of the matter. Let this exercise be undertaken and completed within a period of eight weeks from the date of the receipt of this order. Rule made absolute to the aforesaid extent.”
9.1 On perusal of the impugned order also, it appears that no findings are recorded by the respondent No.2 in the impugned order for applying the provision of Section 2(30)(c) of the Act though learned Assistant Government Pleader has tried to explain the same during the course of hearing as well as relying upon the averments made in the affidavit-in-reply.
10. The show-cause notice for penalty also appears to be a cyclostyled show-cause notice. Therefore, without entering into the merits of the matter, the impugned order dated 14th November, 2019 and the notice for penalty dated 14th November, 2019 are hereby quashed and set aside and the matter is remanded back to respondent No.2, with a direction to give opportunity of hearing to the petitioner and pass fresh de novo order in accordance with law after complying with the directions issued by this Court in order dated 23rd August, 2019 passed in Special Civil Application No.13971 of 2019 reproduced hereinabove by applying mind to the method of accounting and also to take into consideration the decision of the Apex Court in the case of Gannon Dunkerly & Co. (supra), by giving detail reasons for coming to the conclusion if the respondent No.2 is of the view that the method adopted was in accordance with Section 2(30)(c) of the VAT Act.
10.1 It is clarified that this Court has not gone into the merits of the matter and the respondent No.2 is required to pass de novo order after giving opportunity of hearing to the petitioner and to follow the above directions.
10.2 Such exercise shall be completed within a period of 12 weeks from the date of receipt of copy of this order.
11. Rule is made absolute to the aforesaid extent. No order as to costs.
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