1996 (2) TMI 451 - SC - VAT and Sales Tax

Whether the sales tax authorities were justified in treating the purchases of the applicants made from Sulekha Enterprises as from an unregistered dealer on the ground that even though the registration certificate of Sulekha Enterprises was cancelled on August 25, 1967, the cancellation thereof was operative with effect from January, 1967 in so far as the purchases of the applicants effected from the said party prior to August 25, 1967 were concerned? Held that - Appeal dismissed. The High Court was right in answering the question in favour of the respondents. A purchasing dealer is entitled by law to rely upon the certificate of registration of the selling dealer and to act upon it. Whatever may be the effect of a retrospective cancellation upon the selling dealer, it can have no effect upon any person who has acted upon the strength of a registration certificate when the registration was current. Also the learned Advocate-General, appearing for the department before the High Court, stated that the genuineness of the transactions between the registered dealer and the respondents was not in doubt and not disputed. This being so, it is difficult to see how there could have been a cancellation of registration with effect from a date that preceded the dates of the transactions and how, accordingly, the respondents could be made liable to pay tax.

Summary

Issues:
1. Disallowance of deduction for resale of goods purchased from a registered dealer.
2. Imposition of penalty by Sales Tax Officer.
3. Interpretation of cancellation of registration of selling dealer with retrospective effect.
4. Tax liability on resale transactions due to cancellation of registration.

Analysis:

The judgment involves a case where the respondents, registered dealers under the Bombay Sales Tax Act, purchased goods from another registered dealer, Sulekha Enterprises, and resold them within Maharashtra. The Sales Tax Officer disallowed the respondents' deduction claim for resale, citing the cancellation of Sulekha Enterprises' registration with retrospective effect. A penalty was also imposed on the respondents, leading to appeals and subsequent legal proceedings.

The core issue revolved around the validity of disallowing the deduction claimed by the respondents for resale transactions. The Maharashtra Sales Tax Tribunal upheld the disallowance but ordered the deletion of the penalty. The High Court was approached with the question of law regarding the treatment of purchases made from Sulekha Enterprises as from an unregistered dealer due to the cancellation of its registration. The High Court ruled in favor of the respondents, emphasizing the right of a purchasing dealer to rely on the registration certificate of the selling dealer at the time of purchase.

The High Court's decision was based on the principle that a purchasing dealer is entitled to act upon the strength of a valid registration certificate of the selling dealer. The court rejected the argument that it was the duty of persons dealing with registered dealers to verify the ongoing validity of the registration. The judgment highlighted that retrospective cancellation of registration should not impact transactions conducted in good faith based on valid registration certificates.

Furthermore, the Advocate-General for the department confirmed the genuineness of the transactions between the parties, indicating no dispute regarding the transactions' legitimacy. This aspect raised doubts about the retrospective cancellation of registration and the consequent tax liability imposed on the respondents. The court emphasized that imposing tax on resale transactions retroactively would undermine the statutory provisions allowing transactions with registered dealers to be tax-free.

Ultimately, the Supreme Court dismissed the appeal, affirming the High Court's decision in favor of the respondents. The judgment also dismissed related appeals, emphasizing the importance of upholding the rights of purchasing dealers to rely on valid registration certificates and conducting transactions in good faith without retrospective tax implications.