2010 (7) TMI 897 - AT - VAT and Sales Tax

Summary

Issues Involved:
1. Demand for security under Section 26 of the VAT Act.
2. Validity of grounds for demanding security.
3. Procedural fairness in issuing the notice for security.
4. Judicial precedents on demanding security.

Issue-wise Detailed Analysis:

1. Demand for Security under Section 26 of the VAT Act:
The petitioner, Tea Promoters Exports Private Limited, registered under the West Bengal Value Added Tax Act, 2003 (VAT Act) and the Central Sales Tax Act, 1956 (CST Act), was directed by the Deputy Commissioner of Commercial Taxes to show cause why a security of Rs. 5 lakhs should not be demanded under Section 26 of the VAT Act for proper and timely payment of tax. The petitioner argued that as a unit located in the Falta Special Economic Zone (FSEZ), its sales were exempt from tax under Section 5(1) of the CST Act, and thus no tax was payable. Despite this, an order was passed on January 8, 2010, demanding a security of Rs. 2.50 lakhs, which was later reduced to Rs. 2 lakhs by the Additional Commissioner of Commercial Taxes.

2. Validity of Grounds for Demanding Security:
The grounds for demanding security included the absence of immovable property in West Bengal, unsound financial position, considerable potential tax liability, and an alleged agreement by the dealer to pay the security. The petitioner vehemently opposed these grounds, stating that they were not raised in the initial notice and thus no opportunity was given to rebut them. The petitioner also argued that there was no misuse or loss of way-bills/declaration forms, and hence, no valid reason for demanding security existed.

3. Procedural Fairness in Issuing the Notice for Security:
The petitioner contended that the notice issued on October 23, 2008, only mentioned the need for security for proper and timely payment of tax, which was not applicable as no tax was payable. The authorities did not provide sufficient reasons for demanding security, and the grounds mentioned in the subsequent orders were not part of the original notice, thus violating procedural fairness. The Tribunal noted that the discretionary power to demand security must be exercised with good and sufficient reasons, which were lacking in this case.

4. Judicial Precedents on Demanding Security:
The Tribunal referred to several judicial precedents, including the cases of Bidhu Bhusan Deb v. Assistant Commissioner of Commercial Taxes and Surja Mohan Chakraborty v. State of West Bengal, which emphasized that the power to demand security must be exercised with a rational basis and sufficient reasons. In the case of Lallamookh Tea Company (P) Ltd. v. Commissioner of Taxes, the Gauhati High Court held that notices demanding security must disclose reasons and grounds with material facts. The Rajasthan High Court in Delhi Cloth & General Mills Co. Ltd. v. State of Rajasthan also observed that security cannot be demanded as a matter of routine without specifying the reasons.

Conclusion:
The Tribunal concluded that there were no valid reasons for demanding security from the petitioner, as the grounds mentioned were not supported by facts and circumstances. The orders demanding security were set aside, and the petition succeeded in full. No order as to costs was made.