The Punjab & Haryana High Court has delivered a landmark judgement namely Gheru Lal Bal Chand Vs. State of Haryana and another on 23/09/2011 disposing off 26 writ petitions challenging the constitutional vires of section 8(3) of Haryana Value Added Tax Act, 2003 and Rule 20(1) and 20(4) of Haryana VAT Rules and the consequent assessment orders.
The Common issue involved in these writ petitions was with regard to denial of Input Tax Credit by the Assessing Authority on the ground that the dealers from whom the petitioners have purchased goods, have not deposited full tax in the State Treasury. The purchasers-petitioners have not been held entitled for deduction of Input Tax Credit in terms of the provisions of Section 8(3) of the Haryana Value Added Tax Act, 2003.
The Hon’ble High Court has held that no liability can be fastened on the purchasing registered dealer on account of non-payment of tax by the selling registered dealer in the treasury unless it is fraudulent, or collusion or connivance with the registered selling dealer or its predecessors with the purchasing registered dealer is established.
Statutory Provisions: Section 8(3) of Haryana VAT Act, 2003 and Rule 20(1) and 20(4) of Haryana VAT Rules are being produced herebelow:
Section 8. (Determination of input tax)
(1) … … …
(2) … … …
(3) Where any claim of input tax in respect of any goods sold to a dealer is called into question in any proceeding under this Act, the authority conducting such proceeding may require such dealer to produce before it in addition to the tax invoice issued to him by the selling dealer in respect of the sale of the goods, a certificate furnished to him in the prescribed form and manner by the selling dealer; and such authority shall allow the claim only if it is satisfied after making such inquiry as it may deem necessary that the particulars contained in the certificate produced before it are true and correct.”
Rule 20 [Form of certificate by a selling VAT dealer. Section 8(3)] :
(1)The certificate referred to in sub-section (3) of section 8 shall be in Form VAT-C4 and shall be furnished by the selling vat dealer to the purchasing VAT dealer in respect of sale of taxable goods made by him to the purchasing dealer on tax invoice when the tax payable under the Act on such sale has been paid by him in full.
(4) The liability of a selling VAT dealer to pay tax on sale of goods by him to other VAT dealer on tax invoice shall not abate if he fails to furnish or furnishes a false certificate referred to in the foregoing sub-rule to the purchasing VAT dealer and tax for this reason has been realised from the latter but if the selling VAT dealer later pays the tax due from him, the liability of the purchasing VAT dealer shall accordingly abate and he may, within three years of finalisation of his assessment, claim refund of tax paid by him.
In nut shell Section 8 of the Haryana VAT Act, 2003 read with Rule 20(1) and 20(4) of Haryana VAT Rules makes the purchasing dealer liable if the selling dealer has not paid tax with the Government treasury after collecting the same from the purchasing dealer.
Brief Facts of the case: The petitioner is a partnership firm under the name and style of M/s Gheru Lal Bal Chand, engaged in the business of sale and purchase of cotton. The petitioner procures material from different persons and sells the same in terms of the provisions of the relevant Act and the Rules and the tax which is paid by the dealer after deduction of Input Tax Credit is paid in the treasury. The firm is registered under the provisions of Act as well as the Central Sales Tax Act, 1956 (in short, the ‘Sales Tax Act’).
As per the petitioner, the scheme under the Act is that on the sale of goods, tax calculated would be treated as “output tax”. But if the purchases are made from within the State of Haryana, the tax paid on such purchases is to be set off from the out-put liability and resultant tax liability is paid by the selling dealer. The assessing authority observed that the petitioner was not entitled for deducting input tax credit as per provisions of Section 8 of the Act, because the Value Added Tax (VAT) dealers from whom the petitioner had purchased certain goods had not deposited the full tax in the State Treasury. The stand of the dealer, however, is that it made bona fide purchases from the selling dealers who were duly registered by the Assessing Authority under the Act and irrespective of the fact, whether they paid full tax or not, he should be allowed the necessary input Tax Credit. The said selling dealers discharged their tax liability and deposited the tax payable by them by deducting the input tax credit available to them.
Contention of the Petitioners: On behalf of the petitioners not only the assessment orders but also the constitutional validity of Section 8 of the Act read with Rule 20 of the Haryana VAT Rules have been challenged.
It was contended on behalf of the petitioners that Section 8(3) of the Act read with Rules 20(1) and 20(4) of the Rules are arbitrary and inequitable. It was argued that the registered selling dealer who collects tax from the purchasing dealer acts as an agent of the Government and, therefore, no liability could be fastened on the purchasing dealer for any default committed by the registered selling dealer in not depositing the tax so collected. To support this submission the following observations of the Apex Court in Corporation Bank v. Saraswati Abharansala and another, (2009) 19 VST 84 (SC) were relied upon:-
“Sales tax is leviable on sale of goods. It must be collected by the dealer as an agent of the State at such rate as may be specified. Neither the State nor the agent is entitled to collect tax at a rate higher than specified.”
The above contention was also supported with the observation of Supreme Court in State of Punjab and Others V Atul Fastners Ltd., (2007) 4 SCC 471.
Another contention raised on behalf of the petitioners was that no liability could be fastened on the petitioner on account of non-deposit of input tax received by the selling dealer from the purchasing dealer as the term “paid”[under Rule 20(1)] is to be interpreted to mean “ought to have been paid” as held by the Supreme Court in Sanjana, Assistant Collector of Central Excise, Bombay and others Vs. The Elphinstone Spinning and Weaving Mills Co. Ltd., AIR 1971 Supreme Court 2039.
Thus it was contended on behalf of petitioners that sub-rules (1) and (4) of Rule 20 of the Rules and Form VAT C-4 are arbitrary prescribing thereunder requiring the purchasing dealer to establish that the contents thereof are true. Meaning thereby, for the assessee to establish that the registered selling dealer has deposited the tax collected from the purchasing dealer is an onerous condition which is not capable of performance as the purchasing dealer has no control over the registered selling dealer or its predecessors. It was next urged that the State has all the machinery at its command to effect recovery from the real defaulter and no person other than the defaulting person can be penalised for somebody else’s lapses.
State can be held entitled to enforce recovery from the purchasing dealer in an eventuality when transaction is actuated with fraud or any connivance is established between the purchasing dealer and the registered selling dealer.
Contentions of the State Government: Section 8(3) of the Act was perfectly valid and did not violate Articles 14 and 19(1)(g) of the Constitution of India. It was specifically denied that the said provisions conferred any excessive power upon the State Government to frame the Rules. It further states that vires of the provisions of the above Section 8(3) of the Act and Rules 20(1) and 20(4) of the Rules framed under the Act have been challenged by the petitioner to bye-pass statutory remedies available to it which could legally be done by availing the remedy of appeal against the order of assessment as provided under Section 33 of the Act. It was further asserted that where a statute provided remedies against the orders of the assessment, the Court should refrain from entertaining writ petition against such orders.
The respondents further demonstrated that sub-section (3) of Section 8 of the Act did not declare certificate in Form VAT C-4 as a conclusive evidence for input tax and the said provision, however, permits the authority to allow the claim only if the authority was satisfied after making enquiry that the particulars contained in the certificate were true and correct.
It was further contended on behalf of the State that once the petitioner has come to know about the fact that the tax has not been paid by the selling dealers to the State, the petitioner could claim refund of tax from its selling dealers. As regards the averments of the petitioner that the scheme framed under the Act neither violated Section 19(1)(g) nor Article 14 of the Constitution of India and the allegation of the petitioner that Section 8(3) of the Act conferred excessive power upon the State Government to frame Rules was fallacious and misconceived as the Legislature in its wisdom had conferred under Section 60 of the Act, the power to make Rules for carrying out the purpose of the Act. Similarly, the power conferred under Rule 20 of the Rules by the State Government under Section 60 of the Act was also not excessive as it laid down the procedure for computation of input tax which the legislature defined under Section 2(w) and for reduction under Section 3 (5) of the Act which was the integral part of the scheme for carrying out the purpose of the Act.
Verdict: After considering the contentions of both the petitioners and respondent and various judgments it has been held by the Hon’ble High Court :
“In legal jurisprudence, the liability can be fastened on a person who either acts fraudulently or has been a party to the collusion or connivance with the offender. However, law nowhere envisages to impose any penalty either directly or vicariously where a person is not connected with any such event or an act. Law cannot envisage an almost impossible eventuality. The onus upon the assessee gets discharged on production of Form VAT C-4 which is required to be genuine and not thereafter to substantiate its truthfulness by running from pillar to post to collect the material for its authenticity. In the absence of any malafide intention, connivance or wrongful association of the assessee with the selling dealer or any dealer earlier thereto, no liability can be imposed on the principle of vicarious liability. Law cannot put such onerous responsibility on the assessee otherwise, it would be difficult to hold the law to be valid on the touchstone of articles 14 and 19 of the Constitution of India.”
“ The selling-registered dealer who had collected tax from the purchasing-registered dealer acts as an agent for the Government as held in Atul Fasteners Ltd.’s case (supra). Still further, paid would mean and embrace within it ought to have been paid as enunciated in Elphinstone Spinning and Weaving Mills Co.Ltd.’s case (supra). Moreover, the apex Court in B. R. Enterprises v. State of U.P., (1999)9 SCC 700, Calcutta Gujarathi Education Society v. Calcutta Municipal Corporation (2003) 10 SCC 533 and M.Nagraj v. Union of India (2006) 8 SCC 212 has interpreted the rule of reading down statutory provisions to mean that a statutory provision is generally read down so as to save the provision from being pronounced to be unconstitutional or ultra vires. The rule of reading down is to construe a provision harmoniously and to straighten crudities or ironing out creases to make a statute workable.
To conclude, no liability can be fastened on the purchasing registered dealer on account of non-payment of tax by the selling registered dealer in the treasury unless it is fraudulent, or collusion or connivance with the registered selling dealer or their predecessor with the purchasing registered dealer is established.
In view of the above, it cannot be held that the provisions of Section 8(3) of the Act and the sub-rules (1) and (4) of Rule 20 of the Rules are ultra-vires but the same shall be operative in the manner indicated above. Consequently, the writ petitions are partly allowed and assessment orders are set aside and cases are remanded to the assessing authority to pass fresh assessment order in accordance with law.”
Thus the High Court instead of declaring the statutory provisions in question as ultra vires of constitution held that the said provisions be interpreted in such manner that no liability can be fastened on the purchasing registered dealer on account of non-payment of tax by the selling registered dealer in the treasury unless it is fraudulent, or collusion or connivance with the registered selling dealer or its predecessors with the purchasing registered dealer is established.
Effects of this Judgement in Punjab and other States: The Judgment delivered has far reaching effects in settling down the issues relating to cases where purchasing dealers are disallowed ITC on the ground that the seller has not paid the tax collected by him from the purchaser. The Judgement makes it clear that the selling dealer collects tax as an agent of the Government and if he makes any default to deposit the same with the treasury then innocent purchasing dealer cannot be disallowed the claim of such tax as ITC. However, if the collusion between the purchasing dealer and selling dealer is being proved then the Purchaser can certainly be held liable.
There is no such provision as equivalent to Section 8(3) of Haryana VAT Act read with rule 20 of Haryana VAT Rules, but according to section 13(15) of Punjab VAT Act, 2005 the onus to prove that the VAT invoice on the basis of which, ITC is claimed, is bonafide and is issued by a taxable person, shall lie on the claimant.
The ratio descidendi of this judgment that innocent purchasing dealer cannot be disallowed ITC for the default of the selling dealer for non-deposit of tax shall also apply to the cases covered under Punjab VAT Act, 2005 and the provisions of section 13(15) of Punjab VAT Act should be interpreted in the light of the decision of Honourable High Court in this case.
This judgment will also act as guiding force for the other States as well where such issue has arisen but not been settled as yet.