2025 (4) TMI 952 - SC - VAT / Sales Tax

Challenge to validity of subrule (20) of rule 17 of the Central Sales Tax (Rajasthan) Rules 1957 - misrepresentation of fact or by fraud or in contravention of the provisions of the Central Sales Tax Act 1956 - HELD THAT - Coming back to sub-sections (3) and (4) of Section 13 the rule-making power conferred on the State Government under sub-section (4) is for any or all of the specific purposes laid down in clauses (a) to (j). As stated earlier none of these clauses provide for making a rule to enable the authorities to cancel a declaration in Form C. It is true that under sub-section (3) of Section 13 the State Government has power to frame rules to carry out purposes of the CST Act. However power of sub-section (3) is circumscribed by its first part which provides that the rules made to carry out the purposes of the CST Act should not be inconsistent with the provisions of the CST Act and the rules made by the Central Government in exercise of powers under Section 13(1) of the CST Act. The Central Registration Rules do not vest power in any authority to cancel the declaration in Form C. Therefore if the State Government exercises the rulemaking power under sub-section (3) of Section 13 by making rules providing for cancellation of a declaration in Form C as provided in Central Registration Rules the State Rules will be inconsistent with the Central Registration Rules framed by the Central Government in exercise of power under Section 13(1)(d) of the CST Act. The State Government cannot frame rules in exercise of power under Section 13(3) which will be inconsistent with the rules framed by the Central Government in exercise of powers under Section 13(1) of the CST Act. Conclusion - It is not possible to find fault with the view taken by the High Court that sub-rule (20) of Rule 17 of the Rajasthan Rules is inconsistent with the Central Registration Rules framed in exercise of power under clause (d) of sub-section (1) of Section 13 of the CST Act. Appeal dismissed.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court were:

(a) Whether sub-rule (20) of Rule 17 of the Central Sales Tax (Rajasthan) Rules, 1957, which empowers the cancellation of declaration forms or certificates issued under the Central Sales Tax Act, 1956, is intra vires the rule-making powers conferred on the State Government under Sections 8(4), 13(1)(d), 13(3), and 13(4)(e) of the CST Act.

(b) Whether the State Government had the authority to enact a rule enabling cancellation of validly issued declarations/forms, especially given that the Central Government had prescribed the form and particulars of such declarations.

(c) Whether the cancellation of Form C declarations issued to certain dealers on the ground of bogus business premises and non-functioning commercial activities was legally valid.

(d) The extent and limits of the rule-making powers under Section 13 of the CST Act, particularly the interplay between the Central Government's rule-making power under Section 13(1) and the State Government's power under Sections 13(3) and (4).

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Validity of sub-rule (20) of Rule 17 of the Rajasthan Rules and the scope of State rule-making power under the CST Act

The relevant legal framework includes Sections 8 and 13 of the CST Act. Section 8(1) sets the tax liability on dealers selling goods in the course of inter-State trade, subject to the condition in Section 8(4) that the dealer furnishes a declaration in a prescribed form. The term "prescribed" refers to rules made under Section 13.

Section 13(1)(d) confers rule-making power exclusively on the Central Government to prescribe the form and particulars of declarations or certificates under the CST Act. The Central Government exercised this power and framed the Central Registration Rules, 1957, prescribing Form C as the declaration under Section 8(4).

Section 13(3) empowers the State Government to make rules "not inconsistent" with the CST Act and rules made by the Central Government, to carry out the purposes of the Act. Section 13(4) enumerates specific purposes for which the State Government may make rules, none of which explicitly include cancellation of declarations or certificates.

The Court interpreted these provisions to establish that the Central Government alone has the authority to prescribe the form and contents of declarations under Section 8(4), and that the State Government's rule-making power is subordinate and must not conflict with rules made by the Central Government.

The Court found that the Central Registration Rules do not provide any authority to cancel Form C declarations. Therefore, any State rule purporting to enable cancellation of such declarations is inconsistent with the Central Rules and hence ultra vires.

The Court relied on precedents, particularly the decision in R. Nand Lal & Co., which held that the State Government cannot enact rules inconsistent with the Central Government's rules under Section 13(1), especially regarding declarations.

The appellant's argument that sub-rule (20) was enacted to prevent fraud and evasion was acknowledged, but the Court held that such objectives cannot override the statutory limitations on rule-making powers and the requirement of consistency with Central Government rules.

Issue (c): Legality of cancellation of Form C declarations on grounds of bogus business premises

The facts showed that the revenue authorities inspected the business premises of two dealers to whom the respondent had sold goods against Form C declarations. The inspections revealed no business activity, and the registrations of these dealers were found to be bogus. Consequently, the declarations were cancelled under sub-rule (20) of Rule 17 of the Rajasthan Rules.

The Court observed that while the cancellation orders were based on findings of fraud and non-functioning businesses, the power to cancel declarations was derived from a rule that was ultra vires the CST Act. Since the rule enabling cancellation was invalid, the cancellation orders made under it were also invalid.

The Court noted that the CST Act provides specific provisions for cancellation of registration certificates (Section 7(5)) but does not provide for cancellation of declarations such as Form C. Hence, cancellation of declarations must be governed strictly by the rules framed by the Central Government, which do not authorize such cancellation.

Issue (d): Interplay between Central and State rule-making powers under Section 13 of the CST Act

The Court analyzed the scheme of Section 13, emphasizing that the Central Government has exclusive power under sub-section (1) to make rules prescribing forms and particulars of declarations and certificates. The State Government's power under sub-section (3) is to make rules to carry out the purposes of the Act but must not be inconsistent with Central Government rules.

Further, sub-section (4) of Section 13 enumerates specific areas for State rules, none of which include cancellation of declarations. The Court held that the State cannot, under the guise of sub-section (3), enact rules inconsistent with the Central Government's rules, such as sub-rule (20) of Rule 17.

The Court found that the Rajasthan Rules providing for cancellation of declarations conflicted with the Central Registration Rules and thus were ultra vires.

3. SIGNIFICANT HOLDINGS

The Court held:

"The State Government cannot frame rules under Section 13(3) of the CST Act which are inconsistent with the rules framed by the Central Government under Section 13(1) of the CST Act."

"The Central Registration Rules framed by the Central Government prescribe the form of declaration (Form C) under Section 8(4) of the CST Act and do not confer any power on any authority to cancel such declaration forms."

"Sub-rule (20) of Rule 17 of the Central Sales Tax (Rajasthan) Rules, 1957, which provides for cancellation of declaration forms or certificates, is ultra vires Sections 8(4), 13(1)(d), 13(3), and 13(4)(e) of the CST Act."

"The cancellation of declaration forms of M/s. H.G. International and M/s. Saraswati Enterprises made under the impugned sub-rule (20) is invalid as the rule itself is inconsistent with the Central Government's rules and beyond the State Government's legislative competence."

Core principles established include the primacy of Central Government rule-making powers under the CST Act regarding declarations and certificates, and the requirement that State Government rules must be consistent with those Central rules. The State cannot enact standalone rules enabling cancellation of declarations where no such power is conferred by the CST Act or Central Government rules.

Accordingly, the appeal was dismissed, affirming the High Court's judgment that sub-rule (20) of Rule 17 of the Rajasthan Rules is ultra vires and invalid.

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