2003 (11) TMI 565 - HC - VAT and Sales Tax

Assessment Orders Quashed Due to Unworkable Provisions and Inadequate Deductions; Recovery Barred Pending New Rules.

The HC quashed the assessment orders against the petitioner, ruling them invalid due to the unworkability of Section 21(1) of the Bihar Finance Act and ... Applicability and workability of Section 21(1) of the Bihar Finance Act - turnover of the goods used in execution of the works contract - petitioner argued that the demand of additional tax and penalty was confiscatory and bad due to the absence of follow-up legislation to Section 21(1) of the Bihar Finance Act, making it unworkable - HELD THAT:- the present matter, sub-clause (i) of clause (a) of section 21(1) clearly provides two distinct and defined items-one is labour charges while the other is any other charges. The labour charges would not include other charges in view of the specific entry relating to labour charges. The entry/words 'other charges' would not include labour charges in its sweep. A fair understanding of sub-clause (1) should be to read it that the deductions should be made from the gross turnover in case of a works contract relating to the amount of labour charges in the manner and to the extent prescribed 'and' deductions in case of works contract in relation to any other charges in the manner and to the extent prescribed. When the law requires that the extent and the manner is to be prescribed in relation to the labour charges then it must be provided in relation to the labour charges. When the law says that the manner and extent must also be prescribed in relation to any other charges then it must be so prescribed under the Rules or must be provided under the body of the Act itself. We have already observed that section 21 does not provide the manner and the extent of the amount required to be deducted in relation to any other charges. Similarly, rule 13A does not prescribe the deductions in relation to any other charges nor the manner and the extent. The word 'and' has not been used as a disjunctive, it has been used as a conjunctive. The State under these circumstances is required to provide or prescribe the manner and the extent of deduction of the amount relating to labour charges and also of the other charges. If that is not done then the provisions become unworkable. When the Supreme Court said that particular articles, items and expenses are to be deducted then all such articles, amount, etc., are to be prescribed and provided. The Supreme Court simply said that the provisions would become workable and would be valid and in accordance with the Act and the Constitution, if particular things are provided. If those things are not provided then the law of interpretation must act against the State Government. The right of the State Government to recover the tax remains intact but in absence of a workable provision it would not be possible for the State to assess any dealer. In our considered opinion sub-clause (i) of clause (a) of section 21(1) read with rule 13A of the Rules did not make subclause (1) fully workable because the manner and extent of deduction relating to any other charges has not been provided/prescribed by the State. The assessment orders in view of the discussions aforesaid cannot be allowed to stand. The same deserve to and are accordingly quashed. Consequently neither recovery proceedings can be initiated against the petitioners nor any coercive action can be taken against them. It is, however, made clear that the liability of the dealer shall survive and continue and he would be liable to be taxed after the provisions are made workable. We cannot approve the manner in which the two assessment orders were passed. When the petitioner/petitioners was/were saying before the assessing officer that particular items were tax-paid items, particular goods were tax-paid goods, particular items were obtained in interState sale then proper opportunity ought to have been given to the petitioner/petitioners to prove his/their case. The manner in which the ex parte orders of assessment were passed was also bad. On that short count, these assessment orders could also be quashed and the matter could be remitted to the authority for reassessment. In any case, the matters are not required to be remitted to the assessing officer in view of the decision on the larger question. Both the petitions are allowed. There shall be no order as to costs. Petitions allowed. Issues Involved:1. Legality of the demand notice and assessment order.2. Applicability and workability of Section 21(1) of the Bihar Finance Act.3. Proper deductions in a works contract under the Bihar Finance Act and Rules.4. Conduct of the assessing officer during the assessment process.Summary:1. Legality of the Demand Notice and Assessment Order:The petitioner, M/s. Larsen & Toubro Ltd., challenged the demand notice dated January 28, 2002, and the assessment order dated January 7, 2002, claiming they were illegal, contrary to law, and Supreme Court judgments. The petitioner argued that the demand of additional tax and penalty was confiscatory and bad due to the absence of follow-up legislation to Section 21(1) of the Bihar Finance Act, making it unworkable. The respondents contended that the assessment was done on sound principles of law after affording full opportunity to the petitioners.2. Applicability and Workability of Section 21(1) of the Bihar Finance Act:The core issue was the applicability and workability of Section 21(1) of the Bihar Finance Act, which prescribes the 'manner and extent of deduction' for labor and other charges in a works contract. The petitioners argued that without follow-up legislation, Section 21(1) was unworkable. The court noted that Rule 13A of the Bihar Sales Tax Rules, 1983, did not prescribe deductions for 'any other charges,' making the provision unworkable and constitutionally invalid.3. Proper Deductions in a Works Contract:The court referred to the Supreme Court judgment in Gannon Dunkerley & Co. v. State of Rajasthan [1993] 88 STC 204, which outlined specific deductions for labor and services in a works contract. The court emphasized that deductions must be prescribed for both labor charges and other charges to make Section 21(1) workable. Since Rule 13A did not provide for deductions related to 'any other charges,' the assessment orders were deemed invalid.4. Conduct of the Assessing Officer:The court criticized the assessing officer for acting in haste and not providing adequate time for the petitioners to produce records. The officer's conduct was deemed unfair, especially given the high stakes involved in the assessment. The court noted that the officer proceeded ex parte despite the petitioners' request for deferral due to pending legal questions, leading to an artificial liability.Conclusion:The court quashed the assessment orders and barred any recovery or coercive action against the petitioners until the provisions are made workable. The liability of the dealer would continue, but proper provisions must be prescribed for deductions. The petitions were allowed without costs.