2016 (4) TMI 273 - HC - VAT and Sales Tax

Court quashes tax assessments, citing time limit, broad monitor classification, and procedural violations

The Court quashed the impugned notices of assessment and penalty, finding the reopening of assessments for most months of the assessment year barred by ... Period of limitation - Demand notices of default assessment of tax and interest - Section 32 of the DVAT Act, 2004 - Petitioner sold IT related TFT/LCD/LED Monitors by charging VAT at 4% or 5% although the said item is not covered under the Third Schedule to the DVAT Act. Pursuant to the receipt of the assessment and penalty notices, the Petitioner sent a letter dated 24th April 2014 to the VATO stating, that no show cause notice was issued to them asking why LCD/LED/TFT Monitors should not be treated as unclassified and charged VAT at 12.5%, that they were not confronted with the determination in the case of M/s. NEC India Pvt. Ltd. Where the a dealer has not furnished returns as envisaged under Section 32 (1) (a) of the DVAT Act, then the Commissioner, for reasons to be recorded in writing, can ‘assess’ the taxable turnover using his 'best judgment' . Where in terms of Section 32 (1)(b), (c) or (d) of the DVAT Act, the dealer has furnished incomplete returns that do not satisfy the requirements of the Act or for any reason the return filed is not satisfactory then the Commissioner will ‘reassess’ to the best of his judgment the amount of net tax due for the tax period. Section 34 of the DVAT Act spells out the maximum period within either an assessment or, where the circumstances so warrant, a reassessment under Section 32 of the DVAT Act can be made. The outer limit for either is four years from “the end of the year comprising of one or more tax period for which the person furnished a return under Section 26 or 28 of the Act or the date on which the Commissioner made an assessment of the tax for the tax period whichever is earlier”. In the present case, the Assessee was filing monthly returns and, therefore, the limitation for the purposes of Section 34 of the DVAT Act would have to be reckoned from the date of the filing of the return by way of self assessment. The notices for reopening of the assessment for the months comprising the Assessment Year 2009-10 ought to have been issued before the expiry of the respective dates as shown in the above table. Barring the reopening of the assessments for February and March 2010, where the dates of the notices of default assessment were prior to the completion of four years, i.e., 26th March and 23rd April 2014, in respect of all other returns by way of self-assessment made by the Petitioner from April 2009 to January 2010, the re-opening of the assessment was sought to be done on a date after the expiry of the four-year period. Here, since the first proviso to Section 34 of the DVAT Act has not even been invoked, there was no possibility of invoking the extended period of limitation, i.e., beyond the expiry of four years. The phrase ‘whichever is earlier’ occurring in Section 34 (1) of the DVAT Act is an indication that the date on which the Petitioner makes an assessment in terms of Section 31(1)(a) of the DVAT Act is crucial for determining the expiry of the limitation of four years for completion of the reassessment. Therefore, the Court is satisfied that barring the default notices of assessment pertaining to the months of February and March 2010, all the other notices of default assessment issued for the remaining months of AY 2009-10 by the impugned notices dated 31st March 2014 are barred by limitation and deserve to be set aside. Another ground on which the default notices of assessment require to be quashed is the photocopy of the original signed order issued by the VATO was perused by the Court. It showed that none of the above alternatives were specifically tick marked by the VATO. It is, therefore, unclear as to the precise ground on which the VATO was proceeding to exercise its powers under Section 32(1) of the DVAT Act. Classification of 'Monitors' - Whether the monitors sold by the petitioner fall within the entry ‘Monitors’ in terms of Item 3 below Entry 41A of the Third Schedule - Held that:- the Court would like to observe that the determination by the Commissioner in the case of NEC under Section 84 of the DVAT Act was not binding on the present Petitioner as it was not a party to those proceedings. In the present case the DT&T has not been able to persuade the Court that LCD/LED/TFT monitors sold by the petitioner during the period under consideration is not classifiable as ‘Monitors’ under Item 3 below Entry 41A of the Third Schedule to the DVAT Act. Violation of principles of natural justice - Default notice of assessment - Held that:- the notices under Section 59(2) of the DVAT Act issued to the Petitioner asked for additional information in respect of the LCD/LED/TFT Monitors. There was no indication in the said notices regarding any erroneous classification of the monitors as forming the basis for reopening the assessments. There was also no whisper of the determination under Section 84 of the DVAT Act in the case of NEC which, as it transpired, was one of the reasons for reopening the assessments. In other words, the Assessee was not put on notice as to the grounds on which the assessments were sought to be reopened. Existence of Alternative Remedy - Held that:- in the present case the entire proceedings for the months of AY 2009-10 (barring February and March 2010) are barred by limitation. There has also been an obvious violation of the principles of natural justice. Therefore, the impugned notices of assessment dated 31st March 2014 issued to the Petitioner as well as notices of default assessment of penalty of the same date are hereby quashed. - Decided in favour of petitioner Issues Involved:1. Limitation for reopening assessments.2. Classification of 'Monitors' under the DVAT Act.3. Compliance with Section 32 of the DVAT Act.4. Violation of principles of natural justice.5. Existence of an alternative remedy.Detailed Analysis:1. Limitation for reopening assessments:The first issue addressed was whether the demands raised against the Petitioner by means of the impugned notices of default assessments were barred by limitation. The Court examined the scheme of the DVAT Act, particularly Sections 31, 32, and 34. Section 31(1) deems a return furnished by a dealer as an assessment by the Commissioner on the day the return is furnished. Section 32 covers default assessment in cases where returns are not furnished or are incomplete or incorrect. Section 34 sets a four-year limitation period for assessments or reassessments under Section 32. The Court concluded that the limitation period should be reckoned from the date of filing the return. Consequently, except for the months of February and March 2010, the reopening of assessments for the remaining months of AY 2009-10 was barred by limitation.2. Classification of 'Monitors' under the DVAT Act:The Court then examined whether the monitors sold by the Petitioner fell within the entry 'Monitors' under Item 3 below Entry 41A of the Third Schedule. The DT&T argued that LCD/LED/TFT Monitors were distinct and should be taxed at 12.5%. However, the Court referred to precedents emphasizing that the residuary entry should not be lightly resorted to and that general terms in fiscal legislation should cover all forms and varieties of an item. The Court concluded that LCD/LED/TFT Monitors fell within the broad classification of 'Monitors' and should be taxed at 5%.3. Compliance with Section 32 of the DVAT Act:The Court scrutinized the impugned notices and found that the VATO used a standard format without specifying the precise ground for exercising powers under Section 32(1). This non-specificity rendered the notices unclear and defective. The Court cited the Supreme Court's observation that reliance on irrelevant material vitiates a finding, leading to the quashing of the default notices of assessment.4. Violation of principles of natural justice:The Petitioner contended that the impugned notices violated the principles of natural justice as they were not informed about the erroneous classification of monitors or the determination under Section 84 in the case of NEC. The Court noted that the Petitioner was not put on notice regarding the grounds for reopening the assessments, which constituted a violation of natural justice. The Court cited the Supreme Court's stance that principles of natural justice must be followed when statutory actions result in civil or evil consequences.5. Existence of an alternative remedy:The Respondents argued that the Petitioner had an alternative remedy of filing objections before the OHA and an appeal before the AT. However, the Court observed that the proceedings were time-barred and violated principles of natural justice. Citing precedents, the Court held that the existence of an alternative remedy does not bar the High Court's jurisdiction, especially in cases involving violation of natural justice or jurisdictional errors.Conclusion:The Court quashed the impugned notices of assessment dated 31st March 2014 and the notices of default assessment of penalty of the same date. The writ petition was allowed with costs of Rs. 20,000 to be paid by the Respondents to the Petitioner within four weeks.