2022 (2) TMI 789 - HC - VAT and Sales Tax

Violation of principles of natural justice - assessment order disallowing a huge amount of Input Tax Credit on the ground of unreconciled input tax credit is passed, without issuing any SCN - HELD THAT - The writ applicant, being dissatisfied and aggrieved by such assessment order, preferred an appeal under Section 73 of the VAT Act before the first Appellate Authority. It appears that the first Appellate Authority, having regard to a strong prima facie case, admitted the appeal and also granted stay against the recovery pursuant to the assessment order subject to pre-deposit of an amount of ₹ 1 Lakh - It is the case of the firm that the first Appellate Authority intended to allow the appeal and in such circumstances, the file of the firm was sent to the G.R. Cell in accordance with the procedure prescribed by the circular dated 30th July 2016. It appears that based on the suggestions by the G.R. Cell, again, a notice 23rd October 2019 came to be issued to the firm calling upon the firm to produce evidences in respect of the claim of Input Tax Credit. Ultimately, the first Appellate Authority dismissed the first appeal. It is the case of the firm that the first Appellate Authority dismissed the first appeal on the ground which never formed part of the assessment order - the firm, thereafter, preferred a Second Appeal before the Tribunal. The Tribunal passed an order asking the writ applicant firm for a pre-deposit of ₹ 10 Lakh. The appellant is hereby directed to deposit ₹ 10,00,000/- (20% of tax amount of ₹ 49,78,555/-) as a pre-deposit within the period of one month from the date of this order - Amount the appellant has paid as a pre-deposit at the stage of first appeal is adjusted against pre-deposit - application disposed off.

Issues Involved:
1. Legality of the pre-deposit requirement for hearing the Second Appeal.
2. Justification for the dismissal of the Second Appeal due to non-compliance with the pre-deposit order.
3. Consideration of prima facie case by the Tribunal before ordering pre-deposit.
4. Judicial discretion in granting stay pending appeal.

Issue-wise Detailed Analysis:

1. Legality of the Pre-deposit Requirement for Hearing the Second Appeal:
The primary issue addressed in the judgment is whether the Tribunal was justified in directing the writ applicant to make a pre-deposit of ?10 Lakh as a condition to hear the Second Appeal on merits. Section 73(4) of the VAT Act, 2003, stipulates that no appeal against an order of assessment shall ordinarily be entertained unless accompanied by satisfactory proof of payment of the tax in respect of which an appeal is preferred. However, the proviso to clause 4 confers discretion upon the Appellate Authority to entertain the appeal without the payment of tax with penalty or on proof of payment of a smaller sum deemed reasonable by the Appellate Authority. The Tribunal's order for a pre-deposit of ?10 Lakh was challenged on the grounds that it did not consider the prima facie case of the writ applicant.

2. Justification for the Dismissal of the Second Appeal Due to Non-compliance with the Pre-deposit Order:
The writ applicant's Second Appeal was dismissed by the Tribunal due to non-compliance with the pre-deposit order dated 17th June 2021. The dismissal was challenged on the basis that the pre-deposit order itself was unjustified and did not take into account the prima facie case of the writ applicant. The High Court noted that dismissing a meritorious appeal solely on the ground of non-payment of the pre-deposit amount could lead to injustice.

3. Consideration of Prima Facie Case by the Tribunal Before Ordering Pre-deposit:
The High Court emphasized that before passing an order of pre-deposit, the Tribunal is obliged to consider the prima facie case presented by the appellant. In the present case, the Tribunal's order lacked any discussion on the prima facie case put forth by the writ applicant, which was a critical oversight. The Supreme Court in Hindustan Steels Limited Rourkela vs. A. K. Roy [AIR 1970 SC 1401] held that the Tribunal must exercise its discretion judicially and consider all pertinent facts and circumstances.

4. Judicial Discretion in Granting Stay Pending Appeal:
The High Court referred to the Bombay High Court's decision in Bhupendra Murji Shah v. Deputy Commissioner of Income Tax, which highlighted the importance of not rendering the right of appeal illusory by enforcing tax demands during the pendency of an appeal. The issue of granting stay pending appeal is governed by circulars issued by the CBDT, which provide guidelines for the quantum of lump-sum payment required for stay of demand. The circulars allow for discretion to either decrease or increase the percentage of the disputed tax demand to be deposited. The High Court concluded that the Tribunal should have exercised its discretion judiciously and not insisted on the pre-deposit if a strong prima facie case was made out by the appellant.

Conclusion:
The High Court quashed and set aside both the impugned orders of the Tribunal, directing it to hear the Second Appeal on its merits without insisting on the pre-deposit. The Tribunal was instructed to complete the hearing within eight weeks and was prohibited from enforcing any recovery pursuant to the impugned assessment order until the Second Appeal was decided. The judgment underscores the necessity for judicial discretion and consideration of prima facie cases in matters of pre-deposit and stay of demand pending appeal.

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