2020 (6) TMI 547 - HC - VAT and Sales Tax

Rate of Tax - Instrument Cooling Fan - whether taxed under the heading Schedule-II(B)-3 taking it to be a part of larger equipment for communication, or under the residuary clause, taking it to be an electrical equipment - justification of the reassessment proceedings by the Revenue Authorities and the orders passed therein. HELD THAT - The powers which have been given to the Commissioner for opening a reassessment even beyond a period of three years under sub-section 4 of Section 29 of the Act, where the Commissioner can initiate reassessment proceedings on his own or when he is satisfied with the reasons recorded by the Assessing Authority. In the present case the reassessment proceeding has been initiated on the basis of the reasons recorded by the Assessing Authority. The Assessing Authority had to assign reasons under sub-section (1) of Section 29 of the Act, which is grounded on the basic foundation of reasons to believe - the net result would be that even if the reassessment proceedings under the VAT Act can be initiated on the basis of a change of opinion of the Revenue Authorities, this must first satisfy the jurisprudence foundation contained in sub-section (1) of Section 29 of the Act, which is that the Authority must have reasons to believe , that such an reassessment should be done. This can only be done when he gives a clear cut finding and reasons as to why reassessment is being done. If he has reason to believe then he can change his opinion. But reasons must come first. There is no rebuttal of the petitioner s claim at any level that the product which he is selling is only a part of telecommunication system and although it is a cooling fan, it cannot be used in any other way but for cooling a telecommunication system. It is hence a part of telecommunication system, though independently it may still be classified for other purposes as an electric good - The provision which the petitioner relies upon is Sl. No. 3 of Schedule II (B) of the Uttarakhand Value Added Tax Act, 2005, which relates to a telecommunication system and then it gives a break up of the same and finally adds and parts thereof . Being a part of a telecommunication system an instrument cooling fan has to be taxed under this clause at 4.5%. It is a settled principle of law that if an item or entry clearly comes under one of the Schedules given in the fiscal law, where the rate of tax is to be determined, then it should not be relegated to the residuary clause. In this case the goods in question is categorically a part of telecommunication equipment and therefore it could have been charged only under entry no. 3 of Schedule II and not under the residuary clause. Petition allowed.

Summary

Issues Involved:
1. Classification of the product "Instrument Cooling Fan" under the VAT Act.
2. Justification of the reassessment proceedings initiated by the Revenue Authorities.

Issue-Wise Detailed Analysis:

1. Classification of the Product "Instrument Cooling Fan":

The petitioner, a manufacturer of electrical goods including "Instrument Cooling Fan," contended that the product should be taxed under Entry No. 3 of Schedule II (B) of the Uttarakhand Value Added Tax Act, 2005, which pertains to "All equipments for communications such as Private Branch Exchange (P.B.X.) and Electronic Private Automatic Branch Exchange (E.P.A.B.X.) teleprinters, wireless equipments and parts thereof" with a tax rate of 4.5%. The petitioner argued that the "Instrument Cooling Fan" is a specialized cooling fan used exclusively in telecommunication towers, making it a part of telecommunication equipment.

The Revenue Authorities, however, classified the product under the residuary clause with a tax rate of 13.5%, reasoning that the excise code 84145990 indicated it as an electrical good. The court found this reasoning insufficient, emphasizing that if an item clearly falls under a specific schedule, it should not be relegated to the residuary clause. The court noted that the "Instrument Cooling Fan" is indeed a part of telecommunication equipment and should be taxed at 4.5%.

2. Justification of the Reassessment Proceedings:

The reassessment proceedings were initiated under Section 29 of the VAT Act, which allows reassessment if the Assessing Authority has "reason to believe" that the turnover has escaped assessment, been under-assessed, or assessed at a lower rate. The court scrutinized whether the reassessment proceedings were justified and whether the "reason to believe" was adequately substantiated.

The court observed that the reassessment proceedings were initiated beyond the permissible three-year period, but with the approval of the Commissioner, as allowed under subsection (4) of Section 29. However, the court emphasized that even with the Commissioner's approval, the reassessment must be grounded on a "reason to believe," which must be based on relevant and material reasons, not arbitrary or vague.

The court found that the reasons provided for the reassessment were merely a reiteration of earlier reasons without any substantial elaboration. The court referred to several judgments, including those from the Allahabad High Court and the Supreme Court, which stressed that the belief for reassessment must be held in good faith and must have a rational connection to the formation of the belief.

The court concluded that the reassessment proceedings lacked sufficient justification, as the reasons provided did not establish a clear nexus or rationale for the reassessment. Consequently, the court set aside the reassessment order dated 26.10.2018, deeming it unjustified.

Conclusion:

The court allowed the writ petition, setting aside the reassessment order and holding that the "Instrument Cooling Fan" should be taxed under Entry No. 3 of Schedule II (B) at 4.5%, as it is a part of telecommunication equipment. The reassessment proceedings were found to be unjustified due to the lack of substantial reasons to support the "reason to believe" required for initiating such proceedings.