2019 (3) TMI 1762 - HC - VAT and Sales Tax

Deemed assessment - audit objection by the CAG - Levy of penalty u/s 31(2) of VAT Act - excess amount claimed by the petitioner towards Input Tax Credit - whether this assessment of tax for the financial year 2017-18 by deeming fiction as per section 26 of the VAT Act invites an audit objection by the CAG and even if it does whether the Assessing Authority has proceeded for re-assessment in the manner prescribed? HELD THAT - The detail procedure prescribed under rule 22 of the Rules for proceeding on a departmental audit objection under the orders of the Commissioner under section 26(3) leading to assessment under section 31 of the VAT Act is clearly distinct to the procedure based on a audit objection by the CAG for even though the legislature has empowered the Commissioner to hold audit on deemed assessment and initiate an exercise for the purpose of assessment under section 31, no such privilege is given to the CAG to exercise jurisdiction on a deemed assessment. The complete non-application of mind with which the issue has been handled is manifest from the audit report itself available at Annexure 5 which after recording the alleged excess Input Tax Credit claimed by the petitioner relegates him to a proceeding under section 31(2) of the VAT Act completely oblivious of the fact that while it is under the statutory prescriptions of section 33 that the power was being exercised by the CAG , section 31(2) of the VAT Act is a penalty exercise in circumstances where an assessment/re-assessment is conducted on the basis of an audit conducted under the orders of the Commissioner under section 26(3) of the VAT Act and not on the basis of audit objection by the CAG under section 33 of the VAT Act . Thus, neither the discharge by the CAG to record their audit objection at Annexure 5 is in tune with the statutory prescriptions because the provision underlying the VAT Act does not vest jurisdiction in the CAG to hold audit on the basis of deemed assessment and thus the audit report is held illegal and without statutory support and consequentially the assessment proceeding based thereon are rendered illegal because not only the prescribed authority has proceeded on an illegal audit objection rather he has also failed to record his satisfaction as to the lawfulness of the audit objection and has mechanically proceeded to draw the proceeding under section 33 of the VAT Act completely unmindful of the obligation cast on him under rule 25(1) and (2) of the Rules . The entire proceeding culminating in the assessment order impugned at Annexure 8 together with the demand notice impugned at Annexure 8/1 are quashed and set aside - Petition allowed.

Summary

Issues Involved:
1. Legality of the audit objection by the Comptroller and Auditor-General (CAG).
2. Validity of the assessment order based on the CAG's audit objection.
3. Compliance with procedural requirements under the Bihar Value Added Tax Act, 2005 (VAT Act) and Bihar Value Added Tax Rules, 2005 (Rules).
4. Opportunity of hearing to the petitioner.
5. Jurisdiction of the CAG to audit deemed assessments.

Issue-wise Detailed Analysis:

1. Legality of the Audit Objection by the Comptroller and Auditor-General (CAG):
The petitioner challenged the audit objection raised by the CAG, arguing that the audit could not have preceded the due date for filing returns. The court noted that the returns filed by the petitioner for the financial year 2017-18 were deemed assessed as per Section 26(1) of the VAT Act, as they were not scrutinized by the due date. The court held that the VAT Act does not vest jurisdiction in the CAG to hold audits on deemed assessments. The audit objection by the CAG was found to be illegal and without statutory support.

2. Validity of the Assessment Order Based on the CAG's Audit Objection:
The court examined whether the assessment order passed by the Joint Commissioner, Commercial Taxes, based on the CAG's audit objection, was valid. It was found that the assessment order was issued without the necessary jurisdiction as the CAG's audit objection itself was illegal. Furthermore, the assessing authority failed to record satisfaction on the lawfulness of the audit objection, as required under Rule 25 of the Rules. Consequently, the assessment order and the demand notice were quashed.

3. Compliance with Procedural Requirements under the VAT Act and Rules:
The court analyzed the procedural requirements for reassessment based on audit objections under Section 33 of the VAT Act and Rule 25 of the Rules. It was found that the assessing authority did not comply with the procedural mandate of recording satisfaction on the lawfulness of the audit objection before proceeding with the reassessment. The court emphasized that the statutory provisions must be strictly construed and followed, and any deviation renders the proceedings illegal.

4. Opportunity of Hearing to the Petitioner:
The petitioner argued that the assessment order was passed ex-parte without providing an opportunity for a hearing. The court observed that while the petitioner did respond to the initial notice and sought time to produce records, the assessment order was issued without giving due consideration to the petitioner's submissions. However, the court did not fully subscribe to the petitioner's argument of ex-parte assessment, noting that the petitioner failed to adequately respond to the notice.

5. Jurisdiction of the CAG to Audit Deemed Assessments:
The court clarified that the CAG does not have jurisdiction to audit deemed assessments under Section 33 of the VAT Act. The legislative intent was clear in distinguishing the powers of the Commissioner to hold audits even in cases of deemed assessments, but no such power was conferred on the CAG. The court refrained from interpreting the statute to extend such powers to the CAG, emphasizing the need for strict adherence to the statutory language.

Conclusion:
The court quashed the entire proceeding culminating in the assessment order and the demand notice, as they were based on an illegal audit objection by the CAG and were procedurally flawed. The writ petition was allowed, and the interlocutory applications seeking additional reliefs were not entertained as they raised separate causes of action.