2011 (9) TMI 492 - HC - VAT / Sales Tax

Dealer Not Liable Without Evidence of Fraud: Tax Case Update

The court held that the purchasing dealer cannot be held liable for the non-payment of tax by the selling dealer unless there is evidence of fraud, ... Determination of input tax under VAT - Requirement of certificate (Form VAT C4) for claiming input tax credit - Liability of purchasing dealer for tax collected but not deposited by selling dealer - Fraud, collusion or connivance exception to input tax credit - Interpretation of 'paid' to include 'ought to have been paid' - Reading down to save constitutionality Determination of input tax under VAT - Requirement of certificate (Form VAT C4) for claiming input tax credit - Liability of purchasing dealer for tax collected but not deposited by selling dealer - Fraud, collusion or connivance exception to input tax credit - Interpretation of 'paid' to include 'ought to have been paid' - Reading down to save constitutionality - Validity and scope of section 8(3) of the Haryana Value Added Tax Act, 2003 and sub rules (1) and (4) of rule 20 of the Haryana Value Added Tax Rules, 2003, and whether a purchasing dealer can be held liable for input tax not deposited by the selling dealer. - HELD THAT: - The Court construed section 8(3) and rule 20 so as to preserve their constitutionality while giving effect to the scheme of the Act. Sub section (3) permits an authority, when a claim of input tax is questioned, to require production of the tax invoice and a prescribed certificate (Form VAT C4) from the selling dealer, and to allow the claim only after being satisfied of the certificate's veracity. Rule 20(1) prescribes Form VAT C4 where the selling dealer has 'paid' the tax; rule 20(4) provides that liability of a purchasing dealer does not abate if the selling dealer fails to furnish or furnishes a false certificate, but if the selling dealer later pays the tax the purchasing dealer's liability abates and he may claim refund within three years. Applying established principles, the Court held that 'paid' must be read to include what 'ought to have been paid' and that the assessing authority may examine genuineness of the certificate but cannot, in ordinary cases, saddle the purchasing dealer with liability for the selling dealer's failure to deposit tax. Liability of the purchasing dealer can be imposed only where fraud, collusion or connivance between the purchasing dealer and the selling (or predecessor) dealer is established. This reading avoids an oppressive or arbitrary result, places the onus of verifying the certificate's authenticity on the Department (so it can investigate if suspicion arises), and limits the exception to cases of mala fides, thereby keeping the provisions within articles 14 and 19(1)(g) of the Constitution. Section 8(3) and rule 20(1) and (4) are not ultra vires when read to permit input tax credit on production of genuine Form VAT C4 and to impose liability on the purchasing dealer only if fraud, collusion or connivance is established. Remand for fresh assessment in accordance with law - Validity of the assessment orders challenged in the petitions and the appropriate remedial direction. - HELD THAT: - Having held that the statutory provisions operate in the manner indicated-i.e., allowing credit on genuine certificates and permitting departmental inquiry where suspicion of falsity, fraud or collusion exists-the Court found that the impugned assessment orders could not be sustained. The assessments were set aside and the matters remanded to the assessing authority with directions to pass fresh assessment orders in accordance with law, applying the interpretative principles laid down by the Court. Assessment orders set aside and matters remanded to the assessing authority for fresh assessment in accordance with law. Final Conclusion: The writ petitions are partly allowed: section 8(3) of the Act and rule 20(1) and (4) of the Rules are sustained when read to permit input tax credit on production of a genuine Form VAT C4 and to fasten liability on the purchasing dealer only upon proof of fraud, collusion or connivance; the impugned assessment orders are set aside and the matters remitted for fresh assessment in accordance with this judgment. Issues Involved:1. Denial of input-tax credit due to non-deposit of tax by selling dealers.2. Constitutionality of Section 8(3) of the Haryana Value Added Tax Act, 2003.3. Constitutionality of Rules 20(1) and 20(4) of the Haryana Value Added Tax Rules, 2003.4. Validity of the assessment order dated March 15, 2007.Issue-wise Detailed Analysis:1. Denial of Input-Tax Credit Due to Non-Deposit of Tax by Selling Dealers:The primary issue in these writ petitions revolves around the denial of input-tax credit to the petitioners because the dealers from whom they purchased goods did not deposit the full tax in the State treasury. The petitioners argued that they made bona fide purchases from registered dealers and should be entitled to input-tax credit irrespective of whether the selling dealers deposited the tax. The court noted that the scheme under the Haryana Value Added Tax Act, 2003 ('the Act') allows for input-tax credit if the purchases are made within the state, provided the tax paid on such purchases is set off against the output tax liability. The court emphasized that the purchasing dealer should not be penalized for the selling dealer's failure to deposit the tax unless there is evidence of fraud, collusion, or connivance.2. Constitutionality of Section 8(3) of the Haryana Value Added Tax Act, 2003:The petitioners challenged Section 8(3) of the Act as ultra vires, arguing that it was arbitrary and violated Articles 14 and 19(1)(g) of the Constitution. The court analyzed Section 8(3), which requires the purchasing dealer to produce a certificate from the selling dealer to claim input-tax credit. The court held that the provision is not unconstitutional but emphasized that the purchasing dealer should not be held liable for the selling dealer's default unless there is evidence of fraud or collusion.3. Constitutionality of Rules 20(1) and 20(4) of the Haryana Value Added Tax Rules, 2003:The petitioners also challenged Rules 20(1) and 20(4) of the Haryana Value Added Tax Rules, 2003, arguing that they were arbitrary and unreasonable. Rule 20(1) requires the selling dealer to furnish a certificate in Form VAT C4, and Rule 20(4) stipulates that the purchasing dealer's liability does not abate if the selling dealer fails to furnish or furnishes a false certificate. The court held that these rules are not unconstitutional but clarified that the purchasing dealer's liability should be limited to cases where fraud, collusion, or connivance is established.4. Validity of the Assessment Order Dated March 15, 2007:The petitioners sought to quash the assessment order dated March 15, 2007, issued by the Excise and Taxation Officer-cum-Assessing Authority, Sirsa, which raised a demand of Rs. 2,12,720. The court found that the assessment order was passed without proper inquiry and with a pre-determined mind. The court set aside the assessment order and remanded the cases to the assessing authority to pass fresh assessment orders in accordance with the law, taking into account the principles laid down in the judgment.Conclusion:The court concluded that no liability can be fastened on the purchasing registered dealer for the non-payment of tax by the selling registered dealer unless there is evidence of fraud, collusion, or connivance. The provisions of Section 8(3) of the Act and Rules 20(1) and 20(4) of the Rules are not ultra vires but should be applied in a manner that does not unfairly penalize the purchasing dealer. The writ petitions were partly allowed, and the assessment orders were set aside, with directions for fresh assessment in accordance with the law.