2025 (9) TMI 808 - HC - VAT / Sales Tax

Reassessment and related orders quashed for natural justice breach; circular invalid, 2.5% tax on interstate electronics overturned, no surcharge allowed

HC held impugned reassessment and orders unsustainable, quashed and revisions allowed. Court found violation of principles of natural justice as no ... Violation of principles of natural justice - upholding the proceeding u/s 21(2) of the U.P. trade Tax Act without considering the fact that no opportunity of hearing has been afforded to the applicant by the Additional Commissioner before granting permission - levy of tax @ 2.5% on electronic goods sold by the applicant in the course of inter-state-trade instead of 2% as notified under the N/N. 25473 dated 10.10.95 - no surcharge could be levied on the turnover of inter-state-sales - HELD THAT:- The records shows that the re-assessment proceedings were initiated against the revisionist on the basis of the circular dated 18.03.2002; wherein, it was provided that the notification no. 2473 dated 10.10.1995 is not applicable on the sale of inter-State electronic goods, where, rate is to be calculated at 2% with or without any declaration in Forms C or D. The said circular is, admittedly, quashed by this Court in M/s Canon India Private Limited [2002 (12) TMI 577 - ALLAHABAD HIGH COURT]. Once the very basis for initiation of reassessment proceedings holding the notification dated 10.10.1995 is not applicable, the said notification is of no aid to the revisionist on its inter-State sale of electronic goods. The impugned orders passed in these revisions cannot be sustained in the eyes of law - revision allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether reassessment proceedings under the U.P. Trade Tax Act (s.21(2)), read with the Central Sales Tax Act, were legally maintainable when initiated without affording an opportunity of hearing before the Additional Commissioner. 2. Whether inter-state sales of electronic goods were taxable at 2.5% instead of 2% under notification dated 10.10.1995 (notification under s.8(5) of the Central Sales Tax Act), and whether the Assessing Authority and appellate fora were justified in treating the 2% benefit as inapplicable. 3. Whether a surcharge could be levied on turnover of inter-state sales of such goods. 4. Whether the Tribunal was justified in rejecting the assessee's submissions and judicial authorities relied upon by the assessee (including the effect of a circular dated 18.03.2002 and the Court's prior decision quashing that circular). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Maintainability of reassessment proceedings and opportunity of hearing Legal framework: Reassessment under s.21(2) of the U.P. Trade Tax Act (read with s.9 of the Central Sales Tax Act) permits reassessment where returns or assessments are found to be erroneous or incomplete; principles of natural justice require that opportunity of hearing be afforded before adverse action. Precedent treatment: The record shows reassessment was initiated following a departmental circular; the Court relied on its prior treatment of that circular in earlier proceedings (see Issue 4 cross-reference). Interpretation and reasoning: The reassessment in the present matter proceeded on the basis of a departmental circular which had been judicially quashed by the Court in earlier proceedings. Because the reassessment trigger (the circular) was invalidated, the foundation for reopening the assessment was vitiated. The Court further notes the absence of cogent or reasoned material to deny a benefit expressly provided by the notification when regular assessment had accepted the books and admitted tax at the notified rate. Ratio vs. Obiter: Ratio - where reassessment is founded solely on a departmental instrument subsequently quashed by the Court, the reassessment cannot sustain; absence of a valid foundation renders subsequent proceedings invalid. Obiter - general observations on the need for an opportunity of hearing are consistent with established natural justice but were not the dispositive ground here. Conclusion: Reassessment proceedings are unsustainable when initiated on the basis of a circular that has been quashed; accordingly the impugned reassessment is set aside. Issue 2 - Applicable tax rate on inter-state sale of electronic goods (2% v. 2.5%) Legal framework: Notification issued under s.8(5) of the Central Sales Tax Act fixed a concessional rate (2%) for certain inter-state transactions of electronic goods effective from 10.10.1995; the proper application of such notification governs tax liability on inter-state sales when declaration forms (Forms C/D) or the absence thereof are relevant to computation. Precedent treatment: The departmental circular purported to deny application of the notification to inter-state electronic goods; that circular was quashed by this Court in prior litigation. The Tribunal relied on an earlier departmental/tribunal precedent to compute tax at 2.5% but the Court found that precedent inapplicable in facts. Interpretation and reasoning: Where a statutory notification grants a specific concessional rate and regular assessment had accepted books and admitted tax at that rate, the State cannot, without cogent and reasoned material, deny the benefit by later administrative fiat (circular). Since the circular purporting to exclude the notification was quashed, the notification remains operative for the inter-state sales in question. The Court found no valid basis to reclassify the rate to 2.5% after acceptance in the original assessment and in the absence of independent material justifying reassessment. Ratio vs. Obiter: Ratio - a judicially quashed circular cannot be used to defeat a statuory notification's benefit; accepted assessment at notified rate cannot be reopened on such basis. Obiter - remarks on the inapplicability of particular tribunal precedents to distinguish facts are explanatory. Conclusion: The Tribunal and revenue were not justified in levying tax at 2.5% on inter-state sales of electronic goods; the notification at 2% applies and the orders imposing the higher rate are set aside. Issue 3 - Levy of surcharge on turnover of inter-state sales Legal framework: Surcharge provisions must be applicable to the taxable turnover by statutory provision; levy on inter-state turnover is permissible only if the statute or notification authorizes such surcharge on inter-state sales. Precedent treatment: The Tribunal levied surcharge at 5% in the impugned order; no persuasive statutory or factual basis was shown on the record to justify surcharge on inter-state turnover of the goods in question. Interpretation and reasoning: The Court observed that surcharge could not be lawfully levied on turnover of inter-state sales where no statutory authorization for such levy on the inter-state component is demonstrated. Given that the reassessment basis (circular) was quashed and the notification conferred a concessional rate, the imposition of surcharge was unsupported. Ratio vs. Obiter: Ratio - surcharge cannot be levied on inter-state turnover absent express statutory authorization; removal of the reassessment foundation strengthens that conclusion. Obiter - none beyond the immediate applicability. Conclusion: The levy of surcharge at 5% on the inter-state sales turnover was not justified and is set aside. Issue 4 - Treatment of the departmental circular dated 18.03.2002 and the assessee's relied authorities Legal framework: Administrative circulars operate subordinate to law and are liable to be quashed if inconsistent with statute or previously decided by a court; where a court quashes a circular, actions taken solely on its basis lack legal validity. Precedent treatment: The circular dated 18.03.2002, which sought to displace the notification, had been quashed by this Court in prior litigation. The Tribunal relied on earlier decisions (including a deputy commissioner/tribunal decision), but those were distinguishable on facts or were in conflict with the Court's earlier ruling on the circular. Interpretation and reasoning: The Court held that initiation of reassessment and denial of the notification's benefit were premised on the quashed circular. As the circular has been judicially eliminated, the Tribunal erred in ignoring that legal position and in disregarding the submissions and authorities relied upon by the assessee that demonstrated the circular's invalidity. The Court emphasized that where regular assessment explicitly accepted tax at the notified rate, the State required cogent material to reopen or displace that conclusion; reliance on an invalid circular cannot supply such material. Ratio vs. Obiter: Ratio - actions founded on an administrative circular subsequently quashed are invalid; tribunals must give effect to prior judicial decisions quashing departmental instruments and consider parties' submissions and authorities accordingly. Obiter - commentary that departmental circulars cannot be used to create substantive tax liabilities contrary to statutory notifications. Conclusion: The Tribunal erred in ignoring the quashing of the circular and the submissions/authorities relied on by the assessee; the orders based on that circular are unsustainable. Final Disposition The impugned orders founded on the reassessment initiated pursuant to the quashed circular, the uplift to a 2.5% rate, and the surcharge were set aside. The questions of law were answered in favour of the assessee and against the revenue; the revisions were allowed.