2016 (11) TMI 751 - HC - VAT and Sales Tax

Court Validates Amended Tax Law but Invalidates Rule, Quashes Penalties

The court upheld the validity of the amended Section 42(4) and (5) of the U.P. Value Added Tax Act, 2008, finding them neither illegal nor arbitrary. ... Constitutionality of statutory amendment - prescribed manner for deposit and refund under tax statute - doctrine lex non cogit ad impossibilia / impotentia excusat legem - retrospective compliance impossible to perform - irrationality and arbitrariness under Article 14 - delegated legislation and rule-making to prescribe procedureConstitutionality of statutory amendment - prescribed manner for deposit and refund under tax statute - Validity of Section 42(4) and 42(5) of the U.P. Value Added Tax Act, 2008 as substituted by the Amendment Act, 2008 - HELD THAT: - The Court upheld Section 42(4) and (5) as a valid exercise of legislative power and not per se arbitrary or violative of constitutional provisions. The amendment altering the scheme so that exemption/benefit would be given by refund of net tax paid with the return is within the competence of the legislature and the amended statutory scheme cannot be struck down on the ground of change of policy alone. The Court nevertheless proceeded to examine practical enforceability of delegated rules made to effectuate the amended statute. [Paras 29]Section 42(4) and 42(5) as amended are valid and not ultra vires.Delegated legislation and rule-making to prescribe procedure - retrospective compliance impossible to perform - irrationality and arbitrariness under Article 14 - doctrine lex non cogit ad impossibilia / impotentia excusat legem - Validity of substituted Rule 70(5) of the U.P. VAT Rules, 2008 insofar as it prescribed retrospective dates for deposit of net tax for the period January 2008 to June 2008 - HELD THAT: - Rule 70(5) (as substituted by U.P. VAT (First Amendment) Rules, 2009) for the first time prescribed the detailed schedule and required deposit of net tax for tax periods January 2008 to June 2008 on dates falling between August and December 2008. The Rule-framing authority issued that prescription on 30.01.2009 after the dates for compliance had already expired, making retrospective compliance practically impossible. Applying the established maxim that law does not compel the impossible (lex non cogit ad impossibilia / impotentia excusat legem) and the principle that delegated legislation must be workable, the Court found the retrospective requirement irrational, arbitrary and violative of Article 14 and struck down sub-rule (5) insofar as it purported to require compliance for January-June 2008. [Paras 31, 32, 33, 47]Substituted Rule 70(5) is invalid and struck down to the extent it prescribed retrospective deposit dates for January 2008 to June 2008.Consequences of invalid delegated legislation - inoperative provisions pending valid rule-making - Effect of striking down Rule 70(5) on related sub-rules (7) to (11) of Rule 70 for the period January 2008 to June 2008 - HELD THAT: - Because sub-rule (5) - the operative prescription of time and manner for deposit for January-June 2008 - was held invalid, the consequential provisions that impose interest and penalty (sub-rule (7)) and other linked consequences (sub-rules (8) to (11)) cannot be made operative for that period. Those sub-rules depend on a valid sub-rule (5) and therefore remain inoperative insofar as they would be triggered by the invalid retrospective requirement. [Paras 48]Sub-rules (7) to (11) of Rule 70 are rendered inoperative for the January 2008 to June 2008 period until a valid procedural provision is prescribed.Quashing of administrative notices - equitable compliance direction - Validity of impugned notices/orders demanding interest and penalty and the relief to be granted to petitioners - HELD THAT: - In consequence of the invalidity of the retrospective prescription, the notices and orders issued by tax authorities for failure to deposit net tax for January-June 2008 and imposing interest/penalty were without valid rule support and are quashed. As a mitigatory and pragmatic measure, petitioners are permitted to deposit the requisite net tax along with the return within two months from the date of the order (if not already deposited); such deposit and filing shall be treated as timely compliance with Section 42(4)(d) for the purpose of refund under Section 42(5). If petitioners fail to comply within two months, they will be treated as non-compliant and the relevant provisions (including those rendered inoperative earlier) shall then become operative with their consequences. [Paras 49, 50, 51]Impugned notices and orders are quashed; petitioners granted two months to deposit tax and file returns to be treated as compliance, failing which normal consequences will follow.Final Conclusion: Section 42(4) and (5) of the U.P. VAT Act, 2008 are constitutionally valid; however the substituted Rule 70(5) (U.P. VAT (First Amendment) Rules, 2009) insofar as it prescribes retrospective deposit dates for January 2008 to June 2008 is irrational and struck down. Consequential sub-rules (7)-(11) are inoperative for that period; impugned notices/orders are quashed and petitioners are permitted two months to deposit net tax with returns, which will be treated as timely compliance for refund purposes, failing which normal liabilities will ensue. Issues Involved:1. Vires of Section 42(4) and 42(5) of U.P. Value Added Tax Act, 2008.2. Validity of Rule 70(5) of U.P. Value Added Tax Rules, 2008.3. Imposition of penalty and interest for delayed tax payments.4. Practicality and reasonableness of compliance with amended provisions.Detailed Analysis:1. Vires of Section 42(4) and 42(5) of U.P. Value Added Tax Act, 2008:The petitioners challenged the constitutionality of Section 42(4) and 42(5) of the U.P. VAT Act, 2008, arguing that the amended provisions were irrational and arbitrary. The court held that the amended scheme of deposit of net amount of tax along with the return is neither illegal nor arbitrary. The legislature has the competence to amend the statute and change its policy. Therefore, Section 42(4) and (5) as enacted by the Amendment Act, 2008, cannot be said to be ultra-vires and are upheld as valid.2. Validity of Rule 70(5) of U.P. Value Added Tax Rules, 2008:The court examined Rule 70(5) as substituted by U.P. VAT (First Amendment) Rules, 2009, which required industrial units to deposit tax payable for the period January 2008 to June 2008 by specific dates in 2008. The court found this requirement to be irrational and unreasonable because the rule was framed and enforced on 30.01.2009, making it impossible for the petitioners to comply retroactively. The court held that Rule 70(5) is invalid, irrational, and unreasonable, thus violative of Article 14 of the Constitution, and struck it down.3. Imposition of Penalty and Interest for Delayed Tax Payments:The court noted that due to the impracticality of complying with the amended provisions within the prescribed time, the imposition of penalty and interest under Section 54 and Section 33(2) of the Act was unjust. The court quashed the impugned notices and orders issued by the taxing authorities for the period of January 2008 to June 2008, as the petitioners could not have complied with the amended provisions that were enacted later.4. Practicality and Reasonableness of Compliance with Amended Provisions:The court emphasized that the law does not compel a person to perform an impossible task. It cited several legal maxims and precedents, such as 'Lex Non Cogit ad impossibilia' (the law does not compel the doing of impossibilities), to support its decision. The court held that compliance with the amended Section 42(4)(d) and Rule 70(5) was practically impossible for the petitioners, as the time for compliance had already expired before the rules were framed.Conclusion:The court concluded that the amended Section 42(4) and (5) are valid, but Rule 70(5) as substituted by U.P. VAT (First Amendment) Rules, 2009, is invalid and struck it down. The court quashed the impugned notices and orders for penalty and interest. It provided the petitioners with a two-month period to deposit the requisite amount of tax along with the return, treating it as due compliance with Section 42(4)(d) of the Act. If the petitioners comply, the tax authorities shall proceed accordingly for the refund. If not, the petitioners will be deemed guilty of non-compliance, and the relevant provisions will become operative with due consequences. The writ petitions were partly allowed, with no order as to cost.