2016 (11) TMI 215 - HC - VAT and Sales Tax

Court upholds constitutionality of tax law provision on interest refunds; grants compensatory interest for delayed refunds.

Indian Farmers Fertiliser Co Operative Ltd. Versus State of Gujarat

The court upheld the constitutionality of Section 54(1)(aa) of the Gujarat Sales Tax Act, ruling that the provision's cut-off date for interest on refunds ... Interest on refund - Article 14 of the Constitution of India - Writ of mandamus - Period of limitation - Held that: - Clause (aa) to sub section (1) of Section 54 of the GST Act was inserted by the Gujarat Act 11 of 1993 - under the said provision a dealer entitled to refund by virtue of an order of assessment would receive in addition to such amount, simple interest at the specified rate to be calculated from the date immediately following the date of closure of the accounting year to which such amount relates till the date of order of the assessment - Combined reading of this explanation would show that the interest in terms of Section 54(1)(aa) would be available wherever the refund arises out of an assessment for the financial year commencing from 01.04.1993 or onwards - For classification, however, to be reasonable and to pass the test of Article 14, twin conditions must be satisfied viz. that the same distinguishes persons or things from those which are left out of such class and that the same is based on rational relation to the object sought to be achieved by the law - When the legislature frames a new provision which either creates or extinguishes existing rights, there is invariable requirement of making such a provision applicable from a certain date. Regarding Interest - When the Assessing Officer wanted to tax the petitioner by denying the set off on tax paid on purchase of raw materials for manufacture of goods which are sold outside the State, the petitioner relied on the decision of the Tribunal in case of Wood Polymers Ltd [1982 (3) TMI 231 - GUJARAT HIGH COURT] - Held that: - Till such appeal is decided, the Revenue would have to keep such an issue alive whenever it arises in case of other assesses - The fact, that the Revenue had carried the judgement of the Tribunal in appeal before the High Court and such appeal was pending, did not permit the Assessing Officer to ignore judgement of the Tribunal and compel the assessee to go in appeal. The Tribunal in view of the fact that the first appellate authority had proceeded ex parte merely remanded the proceedings before the first appellate authority for fresh consideration and disposal - Not on the ground that interest, as a matter of course, must be paid on the principal of compensatory basis, in the present case, we are inclined to grant such interest on the ground that the department had unauthorizedly and illegally for nearly three decades withheld the amount which legally belonged to the petitioner. we have noticed that the claim of interest can arise out of a statutory provision providing for such interest or contractual relations, nothing prevents a constitutional court from granting such interest in extraordinary circumstances where the money has been withheld by the State for a long period of time without any authority in law - Decided in favor of the petitioner. Issues Involved:1. Constitutionality of the phrase 'for the specified year' in Section 54(1)(aa) of the Gujarat Sales Tax Act.2. Entitlement to interest on delayed tax refunds for the years 1974-75 to 1979-80.Issue-wise Detailed Analysis:1. Constitutionality of Section 54(1)(aa) of the Gujarat Sales Tax Act:The petitioner argued that the phrase 'for the specified year' in Section 54(1)(aa) of the GST Act is discriminatory and violates Article 14 of the Constitution of India. The petitioner contended that the provision arbitrarily sets a cut-off date of 01.04.1993 for granting interest on refunds, which lacks a rational basis and thus is unconstitutional. The counsel for the petitioner cited several Supreme Court decisions to support the argument that laws must not create arbitrary classifications and must ensure equal protection under the law.The court, however, upheld the constitutionality of Section 54(1)(aa). It noted that the provision was introduced with effect from 01.04.1993, and the choice of this date was not arbitrary but a legislative decision to apply the new provision prospectively. The court emphasized that the legislature is presumed to understand the needs of its people and has the discretion to choose a cut-off date for the applicability of laws. The court concluded that the classification based on the specified year was reasonable and had a rational relation to the object sought to be achieved by the law, thus not violating Article 14.2. Entitlement to Interest on Delayed Refunds:The petitioner sought interest on delayed refunds for the years 1974-75 to 1979-80, arguing that the delay in refunding the tax amounts was unjust and that interest should be paid as compensation for the wrongful withholding of funds. The petitioner relied on several judicial precedents to argue that interest should be granted even in the absence of a specific statutory provision.The court examined the factual background, noting that the petitioner's claim for set-off on tax paid on raw materials for goods sold outside the state was initially denied by the Sales Tax authorities, despite a favorable judgment from the Gujarat Sales Tax Tribunal in a similar case. The petitioner’s appeals remained pending for years, and the first appellate authority dismissed the appeals without proper notice. It was only after the Tribunal remanded the case for fresh consideration that the petitioner received a refund, but without interest.The court acknowledged the significant delay and the improper handling of the petitioner’s appeals. It held that while interest on delayed refunds is typically governed by statutory provisions, in this extraordinary case, the prolonged and unauthorized withholding of the petitioner’s funds warranted compensatory interest. The court directed the respondents to pay simple interest at the rate of 8% per annum on the refund amount from 01.07.1982 to 25.02.2013, recognizing the undue delay and the resulting prejudice to the petitioner.Conclusion:The court upheld the constitutionality of Section 54(1)(aa) of the GST Act and granted the petitioner interest on the delayed refund due to the extraordinary circumstances and the prolonged unauthorized withholding of funds. The judgment underscores the importance of judicial discipline in tax matters and the court's power to grant equitable relief in cases of prolonged injustice.