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

Dealer Not Liable Without Evidence of Fraud: Tax Case Update

Gheru Lal Bal Chand Versus State of Haryana and Anr.

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, ... Denial of Input credit on the ground that dealers from whom materials have been purchased failed to deposit full tax in the State treasury - Held that:- Once the law defines the registered dealer and tax-paid goods, the assessee, i.e., purchasing dealer, produced the bill issued by the registered dealer then his burden is discharged and he cannot be held responsible or he cannot be forced to go around from pillar to post to collect the material in order to get the rebate. To conclude, no liability can be fastened on the purchasing registered dealer on account of non-payment of tax by the selling registered unless it is fraudulent, or collusion or connivance with the registered selling dealer or its predecessors with the purchasing registered dealer is established. 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.