Proceedings under Sec. 26 Co's Act held illegal, HC

Facts in Brief:

1. The petitioner, a public limited company incorporated under the Companies Act, while questioning correctness of the order dated 21.3.2014, passed by Commercial Taxes Officer, Anti Evasion Circle, Bhilwara, has also challenged constitutional validity of Sections 26 and 82(3) of the Value Added Tax Act, 2003.

2. The factual matrix deserve notice is that the Government of Rajasthan, exercising authority under sub- section (5) of Section 8 of the Central Sales Tax Act, 1956, with a view to increase inter-State sales and decrease the quantum of branch transfers in order to augment the State's revenue from inter-State sales, issued a partial exemption notification.

On appeal HC held as under,

3. To adjudicate the issue involve, it shall be necessary to determine nature and objects of notification dated 6.5.1986 and further its applicability by keeping in mind the law laid down by Hon'ble the Supreme Court in Amrit Banaspati Co. Ltd. & Anr. v. State of Punjab & Anr., (supra) and Kanthi Enterprises & Ors. v. State of Karnataka & Ors. (supra).

4. In these cases Hon'ble the Apex Court held that no law can be enacted or any order be issued by the Government to refund the tax realised by it from people in exercise of its sovereign powers, except when levy or realisation is contrary to a law validly enacted. A promise or agreement to refund tax which is due under the Act and realised in accordance with law would be fraud on the constitution and breach of faith of the people.

5. Taxes like sales tax are paid by the people irrespective of their savings with participation in growth of national economy and development, hence its refund to a private person and manufacturer would be breach of trust of the people amounting to deception under law. Hon'ble the Apex Court also made a distinction in 'refund of tax' and 'exemption from tax'. The Court observed that 'exemption from tax' to encourage industrialisation is a different concept than to 'refund of tax'.

6. An exemption is a concession allowed to a class or individual from general burden for valid and justifiable reason. If an industry is exempted from tax then the ultimate beneficiary of that is consumer, whereas in the event of a refund it shall be an unlawful enrichment or atleast a wind fall for the manufacturer or dealer, though such dealer or manufacturer did not contribute a single penny against tax.

7. Any agreement for refund of tax shall be contrary to public policy, contrary to the constitutional provisions and shall also be void under Section 23 of the Indian Contract Act. The constitutional requirement for levy ot tax is welfare of the society and not for a specific individual, hence any scheme for refund of sales tax shall be incapable of being enforced in court of law.

8. The notification dated 6.5.1986 is a statutory notification being notified by the State of Rajasthan exercising powers conferred by Section 8(5) of the Central Sales Tax Act, 1956. It is applicable for the dealers having their place of business and manufacturing goods in the State of Rajasthan. Such dealers are entitled to claim partial exemption from the tax payable in respect of the sales of manufactured goods by them in the course of inter State trade or commerce by reduction @ 50% of the tax so payable or increased sales upto 50% and @ 75% of the tax so payable on increased sales made over and above aforesaid 50%. The exemption as aforesaid is subject to certain conditions referred in paras 1 to 4 of the notification.

9. A threadbare reading of the notification makes it clear that to have benefit of partial exemption the dealer must have accurate determination of quantum of goods sold during whole accounting year and that can be settled by taking into consideration the quantum of goods sold within the State during accounting year; inter State sales i.e. goods sold in the course of inter State trade or commerce during the accounting year; and dispatches to other units like branch offices, depots or agents outside the State during the accounting year. This kind of dispatch is usually termed as 'branch transfers'.

10. By having the facts noticed above, a percentage of inter State sales is required to be worked out as per the formulate prescribed. An important aspect for such determination is that percentage of increase in inter State sales is to be assessed by keeping in mind the inter State sales available in the base year i.e. 1984-85 and that is to be compared with simultaneous decrease in branch transfers. The benefit of partial exemption under the notification dated 6.5.1986 can be availed only if there is decrease in the percentage of branch transfers with simultaneous increase in inter State sales.

11. A analytical consideration of the notification makes it clear that partial exemption is allowed to the dealers concerned to enhance State revenue by promotion of inter State sales with simultaneous decrease in branch transfers. Suffice to mention that in the event of transfers of goods from one State to other State without effecting sale i.e. by way of branch transfer, shall not earn any revenue for originating State i.e. State of Rajasthan in the instant matter.

12. On the other hand, if, the manufactured goods are transferred from State of Rajasthan to any other State by way of inter State sale, then that shall generate revenue for the State. The State Government allowed an incentive to the dealers on promotion of inter State sales by proportionate decrease in branch transfers with the object to have higher State revenue. It is also apparent that the inter State sale of the goods and the branch transfers of goods is absolutely within the domain of dealers and looking to this aspect partial exemption was allowed to get the dealers shifted towards inter State sales from the branch transfers and for this purpose they are supposed to change their mode of transaction of goods.

13. The dealers by shifting to inter State sales with proportionate decrease in branch transfer assist the government to achieve the object of the notification dated 6.5.1986, the incentive in the form of partial exemption, therefore, is given to the dealers.

14. An important aspect of the matter is that all the facts necessary to determine quantum of inter State sales, the branch transfers and the sale in the State of Rajasthan can be collected only at the end of the assessment year and not at its inception. The partial exemption which is to be given cannot be known at the beginning of the assessment year being based on several factors, a dealer, therefore, cannot proceed for sale with less rate of tax with assumption to have partial exemption at the end of the year. If the actual quantum of concession is not known to the dealer then in no case that can be applied with reduced tax liability.

15. The stand taken by the respondents that the dealer should charge tax with reduced rates virtually amount to insist for doing something that cannot be done without having relevant facts which shall be coming on surface only at the end of assessment year. It is well settled that no one can be compelled to do something that is not possible to do.

16. Much emphasis is given by the respondents about the law laid down by the Apex Court in the cases of Amrit Banaspati Co. Ltd. & Anr. v. State of Punjab & Anr., (supra) and Kanthi Enterprises & Ors. v. State of Karnataka & Ors. (supra). In these cases the Apex Court held that no law or order can be made for refund of a tax validly levied and further that exemption from tax can be made, if, the ultimate beneficiary is the consumer.

17. True it is, in the instant matter the benefit of exemption given is retained by the petitioner and that has not been transferred to the consumer and in first glance it appears contrary to the concept of extending benefit of exemption to the consumer, but a little deep observation compels us to conclude otherwise. As already stated, under the notification dated 6.5.1986 incentive is given with a view to enhance inter State sales with a view to enhance State revenue in the form of sales tax and that object can be served with the cooperation of dealers only.

18. The purpose of the notification can very well be failed, if the dealers do not act as desired by the State by increasing inter State sales and reducing branch transfers. The State Government only to have support of the dealers extended partial exemption to them. This incentive is given to the dealers by the State from its own revenue in the form of exemption to have a positive action by the dealers for shifting to inter State sale from branch transfers, as such, the notification dated 6.5.1986 though uses the term "partial exemption" but in fact is a "partial disbursement of State revenue" earned due to the efforts made by the dealers for its enhancement.

19. In view of whatever stated above, these petitions for writ deserve acceptance, accordingly, the same are allowed. The initiation of impugned proceedings against the petitioner as per Section 26 of the VAT Act is declared illegal and the notices issued thereunder and orders made thereon are also declared illegal, hence are quashed.

Case Reference - Mr. Dinesh Mehta vs Dr. P.S.Bhati.