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TMI Blog2017 (10) TMI 1020X X X X Extracts X X X X X X X X Extracts X X X X ..... be expected to do the impossible. It is trite that a law that is not capable of honest compliance will fail in achieving its objective. If it seeks to visit disobedience with disproportionate consequences to a bona fide purchasing dealer, it will become vulnerable to invalidation on the touchstone of Article 14 of the Constitution. The purchasing dealer is being asked to do the impossible, i.e. to anticipate the selling dealer who will not deposit with the Government the tax collected by him from those purchasing dealer and therefore avoid transacting with such selling dealers. Alternatively, what Section 9 (2) (g) of the DVAT Act requires the purchasing dealer to do is that after transacting with the selling dealer, somehow ensure that the selling dealer does in fact deposit the tax collected from the purchasing dealer and if the selling dealer fails to do so, undergo the risk of being denied the ITC. Indeed Section 9 (2) (g) of the DVAT Act places an onerous burden on a bonafide purchasing dealer - All this points to a failure to make a correct classification on a rational basis so that the denial of ITC is not visited upon a bonafide purchasing dealer. This failure to make a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te Tribunal insofar as they create and affirm demands created against the Petitioner purchasing dealers by invoking Section 9 (2) (g) of the DVAT Act for the default of the selling dealer, and which have been challenged in each of the petitions, are hereby set aside. Petition allowed. - W.P.(C) 6093/2017 & CM No.25293/2017, W.P.(C) 4086/2013 & CM No.9620/2013, W.P.(C) 2106/2015, W.P.(C) 2383/2015, W.P.(C) 4904/2015, W.P.(C) 10708/2015, W.P.(C) 4573/2016, W.P.(C) 4574/2016, W.P.(C) 4704/2016, W.P.(C) 4709/2016, W.P.(C) 4710/2016, - - - Dated:- 26-10-2017 - S. MURALIDHAR CHANDER SHEKHAR JJ. Petitioner Through: Mr. Rajesh Mahana, Advocate, Mr. Puneet Agrawal, Mr. Deepak Anand and Mr. Abhishek Boob, Advocates, Mr. Ruchir Bhatia, Mr. Gaurav Khetrapal, Advocates., Mr. Rajesh Jain, Mr. Virag Tiwari, Mr. V.K. Jain, Advocates, Mr. Raj K. Batra, Advocate, Mr. Puneet Rai, Advocate, Mr. Vasdev Lalwani, Mr. Rohit Gautam, Mr. Rahul Gupta, Advocates., Respondents Through: Mr. Anuj Aggarwal, ASC for GNCTD with Ms. Deboshree Mukherjee, Advocate. Mr. Satyakam, ASC for GNCTD, Mr. Varun Nischal, Advocate. W.P.(C) 4713/2016 CM No.19649/2016, W.P.(C) 4714/2016, W.P.(C) 4788/201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... March 2013. These orders have also been challenged in W.P. (C) No. 4086 of 2013. Facts concerning Arun Jain (HUF) 7. Arun Jain (HUF) ( AJ ) deals in the sale and purchase of Foreign Trade Licenses ( FTLs ) issued under Section 5 of Foreign Trade (Development Regulation) Act, 1992. It is stated that the FTL is valid for 18 months from the date of issuance. FTLs are transferable and are covered under the definition of goods' and their sales are exigible to VAT under the DVAT ct. 8. AJ states that during the Assessment Years ( AY ) 2013-14 and 2014-15, it made intra-state purchases from registered selling dealers and paid VAT on such purchases. AJ made sure that the selling dealer had a valid Tax Identification Number ( TIN ) at the time of entering into the transaction. Later, AJ claimed ITC of the VAT so paid. 80% of the FTLs are sold to customers who actually utilize them to discharge the burden of import duty. The purchase and sale of FTLs are duly recorded in the books of accounts and payments. It is stated that the payments made against purchases and payment received against sales are only through banking channels and are duly accounted for. 9. Under Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the local areas to the National Capital Territory of Delhi. The DVAT Act came into effect with effect from 1st April 2005 by notification on 30th March 2005. 12. Under Section 40 (1) of the DVAT Act, only a registered dealer can collect any amount by way of tax under the DVAT Act. The further mandatory stipulation is that the said registered dealer can make such collection of the tax under the DVAT Act only in accordance with the DVAT Act and the DVAT Rules and on the rates specified under the DVAT Act. Section 40 (2) makes it clear that Tax collected by a person who is not a registered dealer shall not be refunded and shall stand forfeited. 13. Further, under Section 50 (1) of the DVAT Act, it is only a registered dealer who can issue a tax invoice to the purchaser containing the particulars specified in sub-section (2) of Section 50 and retain a copy thereof. The Explanation to Section 50 (1) of the DVAT Act states that registered dealer shall be authorized to issue tax invoices only after a certificate of registration is issued by the Commissioner. It is, therefore, clear that it is only a registered dealer who can collect the DVAT under the DVAT Act and only such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age obtained by that dealer from or under the arrangement. (2) For the purposes of this section- (a) arrangement includes any contract, agreement, plan or understanding whether enforceable in law or not, and all steps and transactions by which the arrangement is sought to be carried into effect; (b) tax advantage includes, - (i) any reduction in the liability of any dealer to pay tax, (ii) any increase in the entitlement of any dealer to claim input tax credit or refund, (iii) any reduction in the sale price or purchase price receivable or payable by any dealer. 16. Now turning to the provisions concerning ITC which are relevant for the purposes of the present petitions, Section 2 (1) (r) of the DVAT Act defines input tax thus: (r) input tax in relation to the purchase of goods, means the proportion of the price paid by the buyer for the goods which represents tax for which the selling dealer is liable under this Act. 17. Section 9 (1) of the DVAT Act permits ITC, to a dealer who is registered, in respect of the turnover of purchases occurring during the tax period where the purchase arises in the course of his activities as a d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the selling dealers are examined, it is found that negligible or no tax is deposited by the selling dealers. In such cases, it is difficult for the department to allow ITC/refund on the ground that no tax claimed to have been charged/collected by the selling dealers has actually been deposited with the department nor has it been lawfully adjusted. However, the purchasing dealer in such a case contends that purchases have been made from a dealer who is registered with the department and ITC is being claimed on the basis of tax invoices which fulfil the requirements of section 50 of the Act read with Rule 44 of the Delhi Value Added Tax Rules, 2005 (herein after referred to as the Rules ). In several cases, the objections have been filed by such dealers against the orders of the assessing authority and consequent upon the dismissal of the objections, further appeals have been filed with the Appellate Tribunal. If more and more dealers resort to such practices, then, not only the government revenue is going to be affected adversely in a big way but the department will also have to contest plethora of litigation. For the purpose of protecting the interest of revenue and discouraging d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... furnished with the returns, including the documents enclosed therewith, are to be treated as confidential in terms of Section 98 (1) of the DVAT Act. The exceptions to this are specified in Section 98 (3) of the DVAT Act. Submissions on behalf of the Petitioners 24. On behalf of the Petitioners, the following submissions were made by Mr. N. Venkatraman, the learned Senior Counsel and Mr. Puneet Agrawal, Mr. Rajesh Jain and Mr. Rajesh Mahana, the learned counsel appearing for the Petitioners: (i) The objective of the DVAT Act is to charge tax only on value additions and to avoid a cascading effect of taxes. Section 9 (2) (g), however, treats both the guilty purchasers and the innocent purchasers at par whereas they constitute two different classes. Where the guilty purchasers in collusion with the guilty seller enter into a tacit agreement or understanding or arrangement to falsely claim ITC and cause loss of revenue, it is not as if the government is powerless to check such frauds. Section 40A of the DVAT Act has been specifically enacted for that purpose. Nevertheless, irrespective of whether the purchasing dealer is innocent, on account of subsequent con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elling dealer fails to discharge his obligation under the DVAT Act. From the point of view of the Petitioners in the present case, all of them as purchasing dealers have complied with the requirement of DVAT Act and all of them have ensured that the purchases made by them are in compliance with the requirements of the DVAT Act for claiming ITC. Reliance is placed on the decisions in Corporation Bank v. Saraswati Abharansala (2009) 19 VST 84 (SC); State of Punjab v. AtuI Fasteners Ltd. (2007) 7 VST 278 (SC) and Gheru Lal Bal Chand v. State of Haryana (2011) 45 VST 195 (P H). (v) The condition under Section 9 (2) (g) of the DVAT Act that the selling dealer has actually deposited should be read as selling dealer ought to have deposited tax. Alternatively, the expression dealer occurring therein should be read down to exclude a purchasing dealer who, on his part, has duly complied with the requirements under the DVAT Act. Reliance is placed on the decisions in Assistant Collector of Central Excise, Bombay v. The Elphinstone Spinning Weaving Mills Company AIR 1971 SC 2039 and Gurshai Saigal v. CIT AIR 1963 SC 1062. (vi) Reliance is also placed on the decisions in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ha Cotton and Ginning Factory [2013] 359 ITR 565 (Kar.) and Amrit Foods v. Commissioner (2005) 13 SCC 419. Submissions on behalf of the Department 25. In reply, Mr. Satyakam, the learned Additional Standing Counsel for the Department, first referred to the decisions in Rajbala v. State of Haryana (2016) 2 SCC 445 and Municipal Committee v State of Punjab (1969) 1 SCC 75 to urge that arbitrariness cannot be a ground for challenging the statute as being violative of Article 14 of the Constitution. He further submitted that mere hardship caused by the impossibility of compliance of the provisions cannot be a ground for striking down a statute. 26. Reliance was also placed on the decisions in State of Madhya Pradesh v. Kohli Brothers (2012) 6 SCC 312 and R.K. Garg v. Union of India (1981) 4 SCC 675 to urge that where a fiscal statute was being challenged, a greater leeway had to be given to the legislature and there had to be a presumption of soundness of the legislative policy. It was argued, therefore, that the Court is not to question legislative wisdom in such matters. He referred to the note prepared for consideration of the Cabinet prior to the insertion of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rse, ascertain if there is any mismatch of Annexures 2A and 2B but, assuming it is on account of the seller s default, there is little he can do about it. 30. Another difficulty that the purchasing dealer would face is that he would have no access to the return filed by the selling dealer particularly since under Section 98 (1) of the DVAT Act those particulars are meant to be confidential. Under Section 98 (3) (j) of the DVAT Act, it is possible for the Commissioner, where he considers it desirable in the public interest, to publish such information. That hinges on the Commissioner placing those details in public domain. If the Commissioner has not placed such information in the public domain, then it is next to impossible for the purchasing dealer to ascertain the failure of the selling dealer to make a correct disclosure of the sales made in his return. 31. Again, it is not as if the Department is helpless if the selling dealer commits a default in either depositing or lawfully adjusting the VAT collected from the purchasing dealer. There are provisions in the DVAT Act, referred to hereinbefore, which empower the Department to proceed to recover the tax in arrears from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtaining if the selling dealer is a registered dealer having a valid registration, denial of ITC to a purchasing dealer who has taken all the necessary precautions fails to distinguish such a diligent purchasing dealer from the one that has not acted bonafide. This failure to distinguish bona fide purchasing dealers from those that are not results in Section 9 (2) (g) applying equally to both the classes of purchasing dealers. This would certainly be hit by Article 14 of the Constitution as explained in several decisions which will be discussed hereinafter. 35. In Shri Ram Krishna Dalmia v. Shri Justice S. R. Tendolkar [1959] 1 SCR 279, the Supreme Court observed as under: A statute may not make any classification of the persons or things for the purpose of applying its provisions but may leave it to the discretion of the Government to select and classify persons or things to whom its provisions are to apply. In determining the question of the validity or otherwise of such a statute the Court will not strike down the law out of hand only because no classification appears on its face or because a discretion is given to the Government to make the selection or classificati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erala v. Haji and Haji (supra) the Kerala Building Tax Act, 1961 ( KBT Act ) was challenged. Section 4 of the KBT Act provided that every building, construction of which is completed on or after 2nd March 1961 and which has a building area of 1000 sq. ft. or more, would be liable for building tax payable by the owner of the building. The buildings having a total area of less than 1000 sq. ft. were not liable to pay tax. The Court found that no rational classification had been made by the legislature. It found that: the Legislature has not taken into consideration in imposing tax the class to which a building belongs, the nature of construction, the purpose for which it is used, its situation, its capacity for profitable user and other relevant circumstances which have a bearing on matters of taxation. They have adopted merely the floor area of the building as the basis of tax irrespective of all other considerations. Where objects, persons or transactions essentially dissimilar are treated by the imposition of a uniform tax, discrimination may result, for, in our view, refusal to make a. rational classification may itself in some cases operate as denial of equality. 39. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be done wherever possible without doing any violence to the language of the provision. A statute has to be read in such a manner so as to do justice to the parties. If it is held that the person who does not deposit or is required to deposit the tax would be put in an advantageous position and whereas the person who has paid the tax would be worse, the interpretation would give result to an absurdity. Such a construction has to be avoided. In other words, the genuineness of the certificate and declaration may be examined by the taxing authority, but onus cannot be put on the assessee to establish the correctness or the truthfulness of the statements recorded therein. The authorities can examine whether the Form VAT C-4 was bogus and was procured by the dealer in collusion with the selling dealer. The department is required to allow the claim once proper declaration is furnished and in the event of its falsity, the department can proceed against the defaulter when the genuineness of the declaration is not in question. However, an exception is carved out in. The event where fraud, collusion or connivance is established between the registered purchasing dealers or the immediate p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... methodology by which the purchasing dealer can monitor the selling dealers behaviour, 'vis-a-vis the latter's VAT returns. Indeed, Section 28 stipulates confidentiality in such matters. Nor is this Court in agreement with the Tribunal's opinion that insertion of clause (g) to section 9 (2) is clarificatory. As observed earlier, Section 9 (2) is an exception to the general rule granting input-tax credit to dealers who qualify .for the benefit. The conditions for operation of the exception are well defined. The absence of any condition such as the one spelt out in clause (g) and its addition in 2010, rules out legislative intention of its being a mere clarification of the law which always existed. 43. The Petitioners have argued that Section 9 (2) (g) also suffers from the vice of arbitrariness and is, on that ground, hit by Article 14 of the Constitution. There is some uncertainty as of today on whether a law can be struck down only on the ground of arbitrariness thereby attracting Article 14 of the Constitution. This doubt has been created by the decision of the Supreme Court in Rajbala v. State of Haryana (supra) and Binoy Viswam v. Union of India (2017) 7 SCC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 9 (2) (g) of the DVAT Act to make a rational classification between purchasing dealers who are bona fide and those that are not renders it vulnerable to invalidation under Article 14 of the Constitution. 46.1 What remains is the discussion of the decisions relied upon by the Department to defend the validity of Section 9 (2) (g) of the DVAT Act as it stands. In M/s. Mahalaxmi Cotton Ginning Pressing Oil Industries v. State of Maharashtra (supra) the Bombay High Court was concerned with interpreting Section 48 (5) of the MVAT Act, which reads as under: (5) For the removal of doubt it is hereby declared that, in no case the amount of set off or refund on any purchase of goods shall exceed the amount of tax in respect of the same goods, actually paid, if any, under this Act or any earlier law, into the Government Treasury except to the extent where purchase tax is payable by the Claimant dealer on the purchase of the said goods effected by him: Provided that, where tax levied or leviable under this Act or in earlier law is deferred or is deferrable under any Package Scheme of Incentives implemented by the State Government, then the tax shall be deemed to have be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verall statutory scheme of Section 48; sub-section (5) has a rational basis and foundation. The liability to pay tax is that of the selling dealer. As the Constitution Bench held in Tata Iron Steel Co. Limited v. State of Bihar (1958) 9 STC 267 (SC); AIR 1958 SC 452 and in George Oakes (Private) Limited v . State of Madras (1962) 13 STC 98 (SWC); AIR 1962 SC 1037 , whether the tax is passed on by the selling dealer to the purchasing dealer is a matter of their contractual understanding. Once that is the position that has held the field in our jurisprudence for over fifty years and has been reiterated in Khazan Chand v. State of Jammu and Kashmir (1984) 56 STC 214 (SC); AIR 1984 SC 762 and Central Wines v. Special Commercial Tax Officer (1987) 65 STC 48 (SC); (1987) 2 SCC 371, by the Supreme Court, a dealer cannot obviate his liability to pay tax on his sale transaction, by claiming a set off and placing the responsibility to recover tax on an earlier link in the chain on the Revenue. To test the constitutionality of Section 48(5) one must ask oneself whether the legislature has acted discriminatorily or whether the provision is facially or ex facie discriminatory. Neither i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e shall a set off exceed the tax actually paid in the government treasury did not fall for consideration. 46.5 The reference, in para 48 above, to the decisions of the Supreme Court in Khazan Chand v. State of Jammu and Kashmir (supra) and Central Wines v. Special Commercial Tax Officer (supra), was in the context of the liability to pay tax being essentially on the selling dealer. It was held there that a selling dealer cannot obviate his liability to pay tax on his sale transaction by claiming set off and placing the responsibility to recover tax on an earlier link in the chain on the Revenue. It proceeds on the basis that the State Legislature is not bound to grant a set off . It further states that the Legislature cannot be compelled to grant a set-off, ignoring the conditions which it imposes . 46.6 In the present case, the conditions imposed for the grant of ITC are spelt out in Sections 9 (1) and (2) of the DVAT Act and have been adverted to earlier. The claim of the purchasing dealer in the present case is not that it should be granted that ITC de hors the conditions. Their positive case is that each of them, as a purchasing dealer, has complied the condi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that, insofar as the Tamil Nadu Value Added Tax ( TNVAT ) was concerned, the dealer had to produce a tax invoice evidencing the amount of input tax. It was further held that discount passed on through credit notes could not be considered for determination of price and that the tax invoice alone ought to be considered for determining the tax liability. 47.2 The provision under challenge in Jayam Co. v. Assistant Commissioner (supra) was Section 19 (20) of the TNVAT Act which reads as under: (20) Notwithstanding anything contained in this section, where any registered dealer has sold goods at a price lesser than the price of the goods purchased by him, the amount of the input tax credit over and above the output tax of those goods shall be reversed. 47.3 Here again, it can be seen that Section 9 (2) (g) of the DVAT Act is differently worded. Three conditions that were mandated by the above provision as noted by the Supreme Court were as under: (a) ITC is a form of concession provided by the Legislature. It is not admissible to all kinds of sales and certain specified sales are specifically excluded. (b) Concession of ITC is available on certain co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons are possible--one rendering it constitutional and the other making it constitutional the former should be preferred. The unconstitutionality may spring from either the incompetence of the legislature to enact the statute or from its violation of any of the provisions of the Constitution. The second situation which summons its aid is where the provisions of the statute are vague and ambiguous and it is possible to gather the intention of the legislature from the object of the statute, the context in which the provision occurs and the purpose for which it is made. However, when the provision is cast in a definite and unambiguous language and its intention is clear, it is not permissible either to mend or bend it even if such recasting is in accord with good reason and conscience. In such circumstances, it is not possible for the Court to remake the statute. Its only duty is to strike it down and leave it to the legislature if it so desires, to amend it. If the remaking of the statute by the courts is to lead to its distortion that course is to be scrupulously avoided. The doctrine can never be called into play where the statute requires extensive additions and deletions. 52. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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