2017 (10) TMI 1020 - HC - VAT and Sales Tax

Court protects rights of bona fide dealers under DVAT Act

On Quest Merchandising India Pvt. Ltd., Suvasini Charitable Trust, Arise India Limited, Vinayak Trexim, K.R. Anand, Aparici Ceramica, Arun Jain (HUF), Damson Technologies Pvt. Ltd., Solvochem, M/s. Meenu Trading Co., & Mahan Polymers Versus Government of NCT of Delhi & Ors. & Commissioner of Trade & Taxes, Delhi And Ors.

On Quest Merchandising India Pvt. Ltd., Suvasini Charitable Trust, Arise India Limited, Vinayak Trexim, K.R. Anand, Aparici Ceramica, Arun Jain (HUF), ... Issues Involved:1. Constitutional validity of Section 9(2)(g) of the Delhi Value Added Tax, 2004 (DVAT Act) as being violative of Articles 14 and 19(1)(g) of the Constitution of India.2. The impact of Section 9(2)(g) on bona fide purchasing dealers.3. The Department's ability to recover tax from defaulting selling dealers.4. The differentiation between bona fide and non-bona fide purchasing dealers.5. The applicability of penalties under Section 86(10) of the DVAT Act.6. The interpretation and reading down of Section 9(2)(g) to save its constitutionality.Detailed Analysis:1. Constitutional Validity of Section 9(2)(g) of the DVAT Act:The petitioners challenged the constitutional validity of Section 9(2)(g) of the DVAT Act, arguing that it treats both 'guilty purchasers' and 'innocent purchasers' alike, violating Article 14 of the Constitution. The court noted that Section 9(2)(g) fails to distinguish between bona fide purchasing dealers and those who are not, leading to arbitrary treatment. This lack of rational classification between different classes of purchasing dealers renders the provision unconstitutional under Article 14.2. Impact on Bona Fide Purchasing Dealers:The court observed that bona fide purchasing dealers, who comply with all requirements under the DVAT Act, including ensuring that the selling dealer is registered and has issued a valid tax invoice, should not be penalized for the default of the selling dealer. The purchasing dealer cannot control whether the selling dealer deposits the tax collected with the government. Therefore, denying ITC to such bona fide purchasing dealers is arbitrary and unjust.3. Department's Ability to Recover Tax:The court highlighted that the DVAT Act provides mechanisms for the Department to recover tax from defaulting selling dealers, such as through recovery certificates and attachment of property. The Department is not helpless and has sufficient statutory avenues to ensure compliance by the selling dealers without penalizing bona fide purchasing dealers.4. Differentiation Between Bona Fide and Non-Bona Fide Purchasing Dealers:The court emphasized the need for the law to distinguish between honest and dishonest dealers. It cited the Punjab and Haryana High Court's decision in Gheru Lal Bal Chand v. State of Haryana, which held that liability should not be imposed on a purchasing dealer who has acted in good faith and complied with all legal requirements. The failure to make such a distinction in Section 9(2)(g) of the DVAT Act results in unconstitutional discrimination.5. Applicability of Penalties Under Section 86(10) of the DVAT Act:The court noted that penalties under Section 86(10) should not be imposed unless it is shown that the return filed by the purchasing dealer is misleading or deceptive. The purchasing dealer should not be penalized for the non-deposit of tax by the selling dealer, which is beyond their control. The court relied on precedents to argue that penalties must be preceded by proper notice and an opportunity to be heard.6. Interpretation and Reading Down of Section 9(2)(g):To save Section 9(2)(g) from being struck down as unconstitutional, the court read down the provision. It held that the expression 'dealer or class of dealers' should be interpreted as not including a bona fide purchasing dealer who has complied with all legal requirements. The Department should proceed against the defaulting selling dealer to recover the tax and not deny ITC to the bona fide purchasing dealer.Conclusion:The court concluded that Section 9(2)(g) of the DVAT Act, as it stands, is violative of Article 14 of the Constitution due to its failure to distinguish between bona fide and non-bona fide purchasing dealers. The court read down the provision to exclude bona fide purchasing dealers from its scope, thereby protecting their right to claim ITC. The default assessment orders of tax, interest, and penalty against the petitioners were set aside, and the Department was directed to proceed against defaulting selling dealers instead. The writ petitions were disposed of with no orders as to costs.