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

Court protects rights of bona fide dealers under DVAT Act

The court held that Section 9(2)(g) of the DVAT Act violated Article 14 by treating bona fide and non-bona fide purchasing dealers alike. It read down the ... Denial of input tax credit to bona fide purchasers - Reasonable classification under Article 14 of the Constitution - Reading down to save constitutionality - Section 9(2)(g) of the Delhi Value Added Tax Act - scope and interpretation - Section 40A - collusion, connivance and departmental remedy - Departmental power to recover tax from defaulting selling dealerSection 9(2)(g) of the Delhi Value Added Tax Act - scope and interpretation - Denial of input tax credit to bona fide purchasers - Reasonable classification under Article 14 of the Constitution - Whether Section 9(2)(g) is constitutionally infirm for failing to distinguish bona fide purchasing dealers from dealers acting in collusion, thereby violating Article 14, and if so whether it can be read down to save it. - HELD THAT: - The provision as enacted used the expression 'dealer or class of dealers' which, on its face, makes no distinction between selling and purchasing dealers nor between bona fide purchasing dealers and those who collude to defraud revenue. The purchasing dealer, having complied with conditions in Section 9(1) (registration of seller and production of tax invoice) and where Annexures 2A and 2B show no mismatch, cannot be expected to monitor whether the selling dealer thereafter deposits or lawfully adjusts the tax. A classification that subjects diligent purchasers to denial of ITC because of the seller's default is not rationally related to the legislative object and fails the intelligible differentia test under Article 14. The Court examined relevant precedents and noted that statutory safeguards (including Section 40A and recovery provisions) exist to deal with collusion or default by selling dealers. Applying the doctrine of reading down as authorised in Delhi Transport Corporation v. DTC Mazdoor Congress, the offending language must, if possible, be confined so as to preserve the statute's constitutionality; where the provision can reasonably be confined to avoid invalid discrimination, reading down is permissible. The Court therefore construed the phrase 'dealer or class of dealers' in Section 9(2)(g) as excluding a purchasing dealer who has bona fide entered into purchase transactions with validly registered selling dealers who have issued tax invoices in accordance with Section 50 and where there is no mismatch in Annexures 2A and 2B. Where collusion is established, the Department may proceed under Section 40A. [Paras 29, 33, 34, 41, 53]Section 9(2)(g) is read down: it does not apply to bona fide purchasing dealers who have transacted with validly registered selling dealers issuing tax invoices and where no mismatch of Annexures 2A and 2B exists; denial of ITC in such cases would violate Article 14.Departmental power to recover tax from defaulting selling dealer - Section 40A - collusion, connivance and departmental remedy - Setting aside of assessments and related orders - Whether the default assessment orders, and appellate orders creating demands against purchasing dealers by invoking Section 9(2)(g) for the selling dealer's default, should be set aside in the light of the reading down. - HELD THAT: - Given the interpretative limitation placed on Section 9(2)(g), the Department is precluded from denying ITC to purchasing dealers who qualify under the read-down test. Where the Department seeks tax recovery for non-deposit by a selling dealer, it must proceed against the defaulting selling dealer (including by using recovery provisions or invoking Section 40A where collusion exists) rather than deny ITC to a bona fide purchaser. Consequently, assessments, interest and penalties levied on purchasing dealers by invoking Section 9(2)(g) in circumstances covered by the read-down are without basis. [Paras 54, 55]Default assessment orders, and orders of the OHA and Appellate Tribunal that created demands against petitioner purchasing dealers by invoking Section 9(2)(g) for defaults of selling dealers, are set aside.Final Conclusion: The expression 'dealer or class of dealers' in Section 9(2)(g) of the DVAT Act is read down to exclude bona fide purchasing dealers who have transacted with validly registered selling dealers issuing tax invoices and where Annexures 2A and 2B show no mismatch; assessments and appellate orders invoking Section 9(2)(g) to deny ITC to such purchasers are set aside, while the Department may pursue recovery or action against defaulting selling dealers (including under Section 40A) where collusion is established. 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.