2014 (12) TMI 870 - HC - VAT and Sales Tax

Court upholds validity of U.P. VAT Act Section 34 & notification. Dismisses challenge on Article 14.

Smt. Sushila Devi Chhabil Dass Charitable Trust Versus State of UP And Anoter

Smt. Sushila Devi Chhabil Dass Charitable Trust Versus State of UP And Anoter - [2015] 83 VST 326 (All) Issues Involved:1. Validity of Section 34 of the U.P. Value Added Tax Act, 2008.2. Legality of the notification dated 7 October 2013 issued under Section 34(1) of the VAT Act.3. Alleged violation of Article 14 of the Constitution.Detailed Analysis:1. Validity of Section 34 of the U.P. Value Added Tax Act, 2008:The petitioners challenged Section 34 of the VAT Act, which deals with the deduction of tax at source, on the grounds of violating Article 14 of the Constitution and arbitrariness. They argued that Section 34(1) confers unfettered and unguided power upon the executive to classify specified persons, cases, and circumstances for deducting tax at source, thereby giving the executive unguided discretion to include or exclude entities.The court held that Section 34 is not a charging provision but a machinery provision aimed at facilitating the recovery, payment, or collection of tax. The court emphasized that the charging provision of a fiscal legislation must be construed strictly, whereas provisions for machinery and collection should be construed to achieve the purpose of the fiscal levy. The court found that Section 34(1) allows the State Government to issue notifications specifying the circumstances and conditions under which tax should be deducted at source. The court noted that several safeguards are built into Section 34, including provisions for the selling dealer to apply for directions from the assessing authority regarding the deduction amount.2. Legality of the Notification Dated 7 October 2013:The notification dated 7 October 2013 imposed a liability to deduct tax equivalent to 4% of the value of goods at source on specified entities, including universities, educational institutions, and training centers. The petitioners argued that there was no justification for including private educational institutions within the ambit of this notification.The court found that the notification was issued under the statutory power conferred by Section 34(1) and aimed at preventing tax evasion. The court held that the legislature and the executive have a wide degree of latitude in matters of fiscal legislation and classification. It was noted that the legislature is not bound to include every conceivable transaction within the provision for the deduction of tax at source. The court upheld the notification, stating that it did not transgress the parameters set out in Section 34(1) or the norms of Article 14.3. Alleged Violation of Article 14 of the Constitution:The petitioners contended that the provisions of Section 34 and the notification dated 7 October 2013 violated Article 14 of the Constitution by creating arbitrary classifications without justification. They argued that private educational institutions should be excluded from the notification's purview or be read as ejusdem generis to include only state-aided institutions.The court reiterated the presumption of constitutionality that attaches to legislation and emphasized that classification in fiscal legislation does not require scientific exclusion or inclusion of persons or things. The court referred to several Supreme Court judgments, including R.K. Garg Vs. Union of India, to highlight that the legislature enjoys a wide latitude in matters of economic regulation and classification. The court concluded that the classification made by the notification was not palpably arbitrary and was justified in the context of preventing tax evasion.Conclusion:The court dismissed the petitions, upholding the validity of Section 34 of the U.P. Value Added Tax Act, 2008, and the notification dated 7 October 2013. The court found no merit in the challenge based on the alleged violation of Article 14, stating that the statutory provision and the notification were within the legislative and executive discretion to target specific transactions for tax deduction at source.