Introduction :- Section 16(2)(c) of the Central Goods and Service Tax Act 2017 ( Act) states that subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply. Further Section 41 states that same shall be credited in the electronic credit ledger.

In the simple word, the law states that If defaults committed by the selling dealer, the purchasing dealer is expected to bear the consequence of being denied the ITC.

Analysis of this clause :-

Below question can be raised on the basis of this Section for the easy reference.

1. Whether this Section is violation of the Article 14 of the constitution?

2. Why purchasing dealer is not having any responsibility for the deposit of the dues?

3. What is the meaning of actually paid.?

4. How a purchasing dealer is responsible for the deposit of seller dealer?

5. What is the liability for the purchaser

Whether this Section is violation of the Article 14 of the constitution :-

Article 14 of the constitution guarantee the right to equality to every citizen of  India . It embodies the general principles of equality before law and prohibits unreasonable discrimination between persons.

Article 14 declares that ‘the State shall not deny to any person equality before the law or equal protection of law within the territory of India.’. thus article 14 uses the two expressions “equality before law” and “equal protection of law”.

EQUALITY BEFORE LAW

Its origin is from America. And somehow its negative concept. It aims at implying the absence of any special privilege  by reason of birth, sex, religion etc in favor of individuals and the equal subject of all the classes to the ordinary law. It is also called rule of law. Rule of law require that no person shall be subjected to harsh, uncivilized or discriminatory treatment even when the object is the securing of the paramount exigencies of law and order.

EQUAL PROTECTION OF LAW

Its origin is from British. And some how it is a positive concept. it aims at equality of treatment in equal circumstances. It means whether someone is P.M. or President he should be deal with same law as normal being deals with.

It does not mean that the same laws should apply to all persons. It does not attainment or circumstances in the same position. The varying needs of different classes of persons often requires separate treatment. In fact identical treatment in unequal circumstances would amount to inequality. So a reasonable classification is only not permitted but is necessary if society is to progress.. The classification however must not be “arbitrary ,artificial or evasive” but must be based on some real and substantial bearing a just and reasonable relation to the object sought to be achieved by the legislation. Article 14 applies where equals are treated differently without any reasonable basis. But where equals and unequals are treated differently, Article 14 does not apply.

Article 14 has been explained in the details in the case of In Budhan Chaudhary v. State of Bihar [1955] 1 SCR 1045, the Supreme Court had explained that while Article 14 forbids class legislation, it does not forbid reasonable classification for the purposes of legislation.

What, however, had to be fulfilled were the two tests: (i) “that the classification must be founded on an intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group” and;

(ii) “that differentia must have a rational relation to the object sought to be achieved by the statute in question.”

scope of Article 14 has been explained in the case of In Shri Ram Krishna Dalmia v. Shri Justice S. R. Tendolkar [1959] 1 SCR 279, the Supreme Court observed as under:

“A statute may not make any classification of the persons or things for the purpose of applying its provisions but may leave it to the discretion of the Government to select and classify persons or things to whom its provisions are to apply. In determining the question of the validity or otherwise of such a statute the Court will not strike down the law out of hand only because no classification appears on its face or because a discretion is given to the Government to make the selection or classification but will go on to examine and ascertain if the statute has laid down any principle or policy for the guidance of the exercise of discretion by the Government in the matter of the selection or classification. After such scrutiny the Court will strike down the statute if it does not lay down any principle or policy for guiding the exercise of discretion by the Government in the matter of selection or classification, on the ground that the statute provides for the delegation of arbitrary and uncontrolled power to the Government so as to enable it to discriminate between persons or things similarly situate and that, therefore, the discrimination is inherent in the statute itself.”

Hon’ble supreme court struck-down below Act on the basis of reasonable classification as below.

In State of Kerala v. Haji and Haji  the Kerala Building Tax Act, 1961 (KBT Act) was challenged. Section 4 of the KBT Act provided that every building, construction of which is completed on or after 2nd March 1961 and which has a building area of 1000 sq. ft. or more, would be liable for building tax payable by the owner of the building. The buildings having a total area of less than 1000 sq. ft. were not liable to pay tax. The Court found that no rational classification had been made by the legislature. It found that:

“the Legislature has not taken into consideration in imposing tax the class to which a building belongs, the nature of construction, the purpose for which it is used, its situation, its capacity for profitable user and other relevant circumstances which have a bearing on matters of taxation. They have adopted merely the floor area of the building as the basis of tax irrespective of all other considerations. Where objects, persons or transactions essentially dissimilar are treated by the imposition of a uniform tax, discrimination may result, for, in our view, refusal to make a. rational classification may itself in some cases operate as denial of equality.”

K.T. Moopil Nair v. State of Kerala Dated 9th Dec, 1960, constitutional bench of 5 judges, the Supreme Court concluded by a majority of 4:1 that the failure to make a classification between a productive and non-productive land for the purposes levy of such tax rendered the statute unconstitutional

Analysis of these decision of the Article 14 in simple meaning :-So this restriction doesn’t validated the reasonable classification for the disallow the ITC on the basis of honest and dishonest dealer, it takes all the dealer in the equal way, so same is violation of the Article 14 of the constitution and invalid in the law as per the ruling of the Hon’ble Supreme court.

As per the decision of the SC in the case of State of Kerla Vs Keshvanand Bharti, parliament doesn’t have power to alter the basic structure of the constitution. Further it is also held that every statues has to pass to test of basic structure and this court has to power the struck down the law.

It has been frequently said by supreme Court that the validity of a taxing Statute is open to question on the ground that it infringes fundamental rights. Article 265 imposes a limitation on the taxing power of the State in so far as it provides that the State shall not levy or collect a tax, except by authority of law, that is to say, a tax cannot be levied or collected by a mere executive fiat. It has to be done by authority of law, which must mean valid law. In order that the law may be valid, the tax proposed to be levied must be within the legislative competence of the Legislature imposing a tax and authorising the collection thereof and, secondly, the tax must be subject to the conditions laid down in Art. 13 of the Constitution. Conditions envisaged by Art. 13(2) is that the Legislature shall not make any law which takes away or abridges the equality clause in Art. 14, which enjoins the State not to deny to any person equality before the law or the equal protection of the laws of the country. It cannot be disputed that if the Act infringes the provisions of Art. 14 of the Constitution. it must be struck down as unconstitutional

2. Why purchasing dealer is not having any responsibility for the deposit of the dues :-

Purchasing dealer is being asked to do the impossible, i.e. to anticipate the selling dealer who will not deposit with the Government the tax collected by him from those purchasing dealer and therefore avoid transacting with such selling dealers.

Tax is collected by the seller as agent of the state, so state is responsible for the collection of this tax from the seller being principle of seller as observation from Corporation Bank v. Saraswati Abharansala and another, (2009) 19 VST 84 (SC)

Hon’ble Supreme Court in State of Punjab and others v. Atul Fasteners Ltd., (2007) 4 SCC 471 held that The tax was collected by the assessee from its customers as an agent for the Government

The liability to pay tax is that of the selling dealer –M/s. Mahalaxmi Cotton Ginning Pressing & Oil Industries v. State of Maharashtra paras 48 and 55

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 penalized for some body else’s lapses. Reliance was placed upon the following decisions of various Courts, viz., M/s. Chuni Lal Parshadi Lal vs. Commissioner of Sales Tax, U.P. Lucknow, AIR 1986 Supreme Court 1966, Vikas Pipe vs. Commissioner of C. Ex. Chandigarh-II, 2003 (158) E.L.T. 680 (P&H), Govindan and Co. vs. State of Tamil Nadu (1975) 35 STC 50 (Madras), Multi Metal Products vs. Commissioner of Sales Tax, M.P. (1999) 112 STC 605 (M.P.).

3. What is the meaning of actually paid :- the term “paid” is to be interpreted to mean “ought to have been paid”, the expression “paid” should not be read in a vacuum and it will not be right to construe the said word literally, which means actually paid.  That word will have to be understood and interpreted in the context in which it appears in order to discover its appropriate meaning. If this is appreciated and the context is considered it is apparent that there is an ambiguity in the meaning of the word “paid”.

Refer the case Law :-

Gheru Lal Bal Chand vs The State Of Haryana And Another on 23 September, 2011 (P&H HC)

What is the liability for the purchaser?

Purchasing dealer is responsible, if selling dealer and the purchasing dealer act in collusion with a view to defrauding the Revenue.

Supreme Court in Khazan Chand v. State of Jammu and Kashmir and Central Wines v. Special Commercial Tax Officer  was in the context of the liability to pay tax being essentially on the selling dealer. It was held there that a selling dealer cannot obviate his liability to pay tax on his „sale transaction‟ by claiming set off and placing the responsibility to recover tax on an earlier link in the chain on the Revenue. It proceeds on the basis that the State Legislature is not “bound to grant a set off”. It further states that the Legislature cannot be “compelled to grant a set-off, ignoring the conditions which it imposes”.

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.

Disclaimer: The contents of this article are for information purposes only and does not constitute an advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up.  The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.

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4 Comments

  1. CARam Bajaj says:

    Dear Sir
    Jayam & Company was decision of Madras high court and decision of the SC in the corporation bank case overruled this judgement, further in the case of Arise India Delhi HC didnt admit the plea of department for the same and decision was against the revenue. decision link of arise india is for your reference. your suggestion are welcomed.
    https://indiankanoon.org/doc/50881698/

  2. mg2104 says:

    How and from where Article 14 chips in. The cases quoted with regard to article 14 does not lead to any conclusion towards constitutionality of section 16.

    1. CA Ram Bajaj says:

      MG2014 – Article 14 is applicable as per the decision of Delhi HC in the case of Arise india Ltd and petition filled by revenue for the decision is rejected by the SC. further in the tax law, Article 14 and 19(1)(g) always applciable in the tax law. further various quoted decision of SC is there for the scope of article 14.

  3. CA Om Prakash Jain says:

    It is respectfully submitted that S.16(2)(c), CGST Act, 2017 stipulates that subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply.
    Imposition of condition for availment of credit is valid per decision in Jayam & Company (2016) 26 J.K.Jain’s Vat Reporter 147 (SC). It is settled proposition of law that taxing statutes are to be interpreted literally and nothing could be added to what is stated in the itself per SC case (2011) 16 J.K.Jain’s Vat Reporter 120 Eureka Forbes Limited v. State of Bihar and Ors.

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