2025 (11) TMI 1018 - HC - VAT / Sales Tax

Section 42 audit assessment quashed as AVR filed after Section 41(4) period; Section 43 choice barred Section 49(2) cure

M/s. Indian Oil Adani Ventures Limited (Formerly known as IOT Infrastructure and Energy Services Limited) Versus State of Odisha, Joint Commissioner of Sales Tax CT and GST Circle, Jagatsinghpur, Sales Tax Officer, Commissioner of Commercial Taxes and GST Finance Department, Government of Odisha.

The HC quashed the notice in Form VAT-306 dated 01.05.2024 and the Audit Assessment Order dated 21.03.2025 under Section 42 of the OVAT Act, holding the ... Escaped turnover - Revival of time barred assessment based on Audit Visit Report (AVR) - Legality, propriety and jurisdiction of the Joint Commissioner of Sales Tax in framing assessment u/s 42 of the Odisha Value Added Tax Act, 2004 - conclusion of Audit Assessment u/s 42 of the OVAT Act raising a demand comprising tax and penalty. Whether the Assessing Authority has rightly invoked jurisdiction to proceed with Audit Assessment under Section 42 by issue of statutory notice in Form VAT-306 on the basis of AVR submitted under Section 41 beyond the period stipulated therein? HELD THAT:- The mandatory requirement contemplated under Section 41(4), as it existed prior to enforcement of the Odisha Value Added Tax (Amendment) Act, 2015, was not complied with. Therefore, in order to obviate the situation that the assessment under Section 42 could not be proceeded with on the basis of such invalid AVR in terms of ratio laid down in Jindal Stainless Ltd. Vrs. State of Odisha, [2014 (9) TMI 372 - ORISSA HIGH COURT], the Assessing Authority proceeded to consider such AVR while proceeding with assessment under Section 43. In such view of the matter, after the limitation had already set in for the purpose of initiation of proceeding under Section 42, by way of subterfuge stemming on provisions of Section 49(2) the Assessing Authority is not competent to initiate assessment proceeding under Section 42. The notice dated 01.05.2024 in Form VAT-306 was issued on being directed by the Appellate Authority for proceeding with “Audit Assessment” under Section 42. Said section is triggered on detection of suppression of purchases or sales or both, erroneous claims of deductions including input tax credit, evasion of tax or contravention of any provision of the OVAT Act affecting the tax liability of the dealer. For such purpose, the Assessing Authority is required to serve on such dealer a notice in the form and manner prescribed along with a copy of the AVR. Rule 49 of the OVAT Rules prescribes modality to serve notice. The Assessing Authority on receipt of the AVR chose not to initiate proceeding under Section 42, but issued notice in Form VAT-307 prescribed under Rule 50 for the purpose of assessment under Section 43. Such conduct of the Assessing Authority indicates that he could not ignore the delay in submission of AVR beyond period stipulated in Section 41(4) for the purpose of undertaking Audit Assessment under Section 42. On the specious plea of compliance of the order of the first Appellate Authority such a course of initiation of proceeding for Audit Assessment under Section 42, without verifying his own jurisdiction, is untenable when the AVR was itself invalid. It is trite that notice in prescribed statutory form cannot be regarded as a mere formality or procedural requirement. This case does not proceed as if the Assessing Authority had quoted wrong provision to proceed with assessment, but it rests on error of exercise of power and jurisdiction to initiate proceeding. Regard may be had to Indure Ltd. Vrs. Commissioner of Sales Tax [2006 (7) TMI 572 - ORISSA HIGH COURT] wherein it has been observed that statutory forms form part of statute as the Rules being framed in exercise of powers conferred under the Act. Conjoint reading of Section 42 read with Rule 49 and Section 43 read with Rule 50 ex facie posits that the exercise of power for initiating both the proceedings is discernible and said sections operate in different and distinct fields. Thus, blindly or mechanically issuing notice in Form VAT-306 for the purpose of Audit Assessment under Section 42 on the basis of AVR dated 31.03.2016 merely because the Appellate Authority directed to do so would not revive the initial infirmity. To reiterate, the Assessing Authority with eyes wide open after receipt of AVR dated 31.03.2016 with recommendation to initiate proceeding under Section 42 having chosen not to proceed with such Audit Assessment, but initiated proceeding under Section 43 by completing self-assessment under Section 39 taking cognizance of said AVR, his action is tainted with illegality inasmuch as the AVR submitted under Section 41 is treated to be invalid. It can, therefore, be said that the initiation of action for undertaking Audit Assessment under Section 42 as a result of AVR. A minute scrutiny of Section 49(2) would indicate that the assessment or reassessment of tax can be permissible when a Court or a Tribunal determines that tax was initially assessed under the wrong law. To amplify it can be stated that transactions amenable to the Central Sales Tax Act has been fastened with liability under the OVAT Act. This provision aims to ensure that the correct tax is ultimately levied, even if the initial assessment was flawed in its legal basis. But said provision does not engulf a contingency when intra-State transactions are assessed in exercise of power under a wrong provision, i.e., Section 43. To clarify further, it is apposite to say that at a later point of time on being pointed out that Section 42 should have been initiated for the purpose of Audit Assessment read with Rule 49, the provisions of Section 49(2) could not be activated. There is no explicit provision contained in the OVAT Act to suggest that the exercise of power under Section 42 and Section 43 are inter-changeable. The notice in Form VAT-306 prescribed under Rule 49 issued for undertaking Audit Assessment under Section 42 based on the AVR is considered to be barred by limitation provided under Section 41(4). Since notice is invalid, the Assessment Order, therefore, is insupportable. The maxim “sublato fundamento cedit opus”, meaning thereby in case foundation is removed, the superstructure falls would be applicable in the present fact-situation of the case warranting indulgence in the Audit Assessment order dated 21.03.2025. Once the basis of a proceeding is gone, all consequential acts, action, orders would fall to the ground automatically and this principle of consequential order which is applicable to judicial and quasi-judicial proceedings is equally applicable to the administrative orders. Sub-section (2) of Section 49 of the OVAT Act can be made operational if a Court or a Tribunal determines that a particular transaction or turnover was assessed under wrong statute, say, assessed under the OVAT Act, but it should have been made under the Central Sales Tax Act, or vice versa, then the Assessing Authority would have, under such circumstance, exercised the power to rectify such jurisdictional error and assess the tax under the correct law. However, such a power is not vested for correction of jurisdictional error in invocation of power while undertaking assessment under wrong provisions within the same statute, viz., power under Section 43 of the OVAT Act is exercised instead of Section 42 of the OVAT Act. Adhering to provisions of Section 49(2) of the OVAT Act issue of notice dated 01.05.2024 in Form VAT-306 prescribed under Rule 49 purportedly to comply with the appellate order, the Audit Assessment initiated under Section 42 as a result of circumstances enumerated in the AVR dated 31.03.2016 required to be submitted in terms of Section 41 cannot be countenanced being unsustainable in the eye of law. In consequence thereof, the Audit Assessment Order dated 21.03.2025, sans legal sanctity, is liable to be quashed, and this Court hereby does so. Having found serious flaw in application of statutory provisions to the facts of the present case, the notice dated 01.05.2024 in Form VAT-306 and the Audit Assessment Order dated 21.03.2025 passed under Section 42 are quashed. Petition allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether an Assessing Authority validly invokes Section 42 (Audit Assessment) by issuing a statutory notice based on an Audit Visit Report (AVR) that was submitted beyond the time-limit prescribed in Section 41(4) of the Act. 2. Whether subsection (2) of Section 49 (the saving/reassessment provision) can be invoked to revive or validate an otherwise time-barred AVR or to permit framing of an Audit Assessment under Section 42 where earlier assessment proceedings under Section 43 (escaped turnover assessment) had been completed. 3. Whether an order of the first appellate authority (the departmental Appellate Authority) can be treated as an order of a 'Court or Tribunal' for the purposes of activating Section 49(2), thereby enabling reassessment outside ordinary limitation periods. 4. Whether the High Court should entertain writ relief under constitutional jurisdiction to test the jurisdictional validity of an assessment commenced under Section 42 on the facts (i.e., where the AVR is alleged to be invalid by reason of delayed submission), notwithstanding the existence of statutory appellate remedies. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of Audit Assessment under Section 42 based on a time-barred AVR Legal framework: Section 41(4) requires the officer who completes a tax audit to submit the AVR to the Assessing Authority within seven days from completion of the audit. Section 42 prescribes that Audit Assessment may be initiated on detection of suppression/erroneous claims etc., by serving notice along with the AVR; it further prescribes time-limits for completion and a bar after one year from receipt of AVR. Rule 49 prescribes the form and manner for serving the notice (Form VAT-306). Precedent treatment: The Court adhered to prior decisions that interpret the seven-day submission requirement as mandatory such that an AVR submitted beyond that period lacks validity for initiating Section 42 proceedings. Those authorities were treated as binding precedents on the legal effect of non-compliance with Section 41(4). Interpretation and reasoning: The Court applied textual and contextual interpretation: the statutory scheme links initiation of Audit Assessment to receipt of a valid AVR within the prescribed time. The AVR in the record showed audit visit on a date years earlier but the AVR was signed much later and received months before the escaped-turnover assessment; no evidence showed compliance with Section 41(4). The Assessing Authority's own conduct (choosing Section 43 proceedings when the AVR was known to be out of time) established awareness of the AVR's infirmity. The Court emphasized that statutory forms/rules are integral and mandatory; an authority cannot circumvent prescribed modes and time-limits. The maxim that what cannot be done directly cannot be done indirectly was invoked: reviving time-barred AVR via other devices is impermissible. Ratio vs. Obiter: Ratio - Where AVR was not submitted within Section 41(4) time, it is invalid for initiating Audit Assessment under Section 42 and any assessment founded on such AVR is unsustainable. Obiter - Emphasis on principles of statutory construction and the consequences of authority's procedural choices. Conclusion: The Audit Assessment initiated under Section 42 on the basis of the time-barred AVR is invalid; the resulting assessment order must be quashed. Issue 2 - Applicability of Section 49(2) to validate or revive time-barred Audit Assessment under Section 42 Legal framework: Section 49(2) allows reassessment within five years where a Court or Tribunal in appeal or revision holds that tax assessed under this Act or the Central Sales Tax Act should have been assessed under another law; it is a special saving/reassessment provision overriding ordinary limitation when the legal regime (i.e., OVAT vs CST) was wrongly applied. Precedent treatment: The Court relied on interpretive principles and prior case law holding that Section 49(2) operates to correct cross-statute jurisdictional errors (OVAT vs CST) identified by higher fora, and is not a general power to cure intra-Act procedural lapses or to resuscitate invalid AVRs. Interpretation and reasoning: The Court parsed the language of Section 49(2): its trigger is an order by a Court or Tribunal in appeal or revision that a tax assessed under one statute should have been assessed under a different law. The formulation 'any Court or Tribunal' read with 'in appeal or revision' and with the Act's definitions indicates the Legislature's intent to confine Section 49(2) to errors of choice-of-law between OVAT and CST and to orders of the Tribunal (second appeal) or High Court in revision. The statute's structure (definitions of Appellate Authority and Tribunal, separate appellate/second appeal/revision provisions) and principles of statutory interpretation preclude using Section 49(2) to validate an AVR that was invalid under Section 41(4) or to allow a Section 42 assessment after a concluded Section 43 assessment for the same tax periods. Ratio vs. Obiter: Ratio - Section 49(2) does not authorize reassessment to correct intra-Act errors where an AVR was invalid by reason of non-compliance with Section 41(4); its operation is limited to inter-statutory corrections (OVAT vs CST) following orders of the Tribunal or High Court in revision. Obiter - Observations on the limited ambit of 'order' and why departmental appellate orders do not qualify. Conclusion: Section 49(2) could not be invoked to validate or revive an Audit Assessment under Section 42 founded on an AVR that had been time-barred; the Assessing Authority erred in relying on Section 49(2) to initiate a fresh Section 42 assessment in these circumstances. Issue 3 - Whether the departmental Appellate Authority's order counts as an order of a 'Court or Tribunal' for Section 49(2) Legal framework: Definitions in the Act distinguish 'Appellate Authority' (first appeal forum) from 'Tribunal' (Sales Tax Tribunal/second appeal forum). Section 49(2) refers expressly to orders by 'any Court or Tribunal' in appeal or revision. Precedent treatment: The Court surveyed authorities on the distinction between Courts and Tribunals and on when statutory quasi-judicial authorities may be equated to a 'Court' for limited purposes. It treated earlier decisions that equate certain appellate statutory authorities with 'Courts' in other statutory contexts with caution, stressing context and statutory scheme. Interpretation and reasoning: The Court examined the Act's structure and definitions: the Legislature deliberately defined Appellate Authority and Tribunal separately; appeal routes and revision powers are allocated distinctly (first appeal to Appellate Authority, second appeal to Tribunal, revision to High Court). The text and context indicate Section 49(2) contemplates orders by the Tribunal in second appeal or by a Court in revision - not departmental first appellate orders. The Court rejected an expansive reading that would treat the first appellate authority as a 'Court' for Section 49(2), holding that such an interpretation would be repugnant to the Act's context and definitions and would improperly broaden the saving provision. Ratio vs. Obiter: Ratio - An order of the first Appellate Authority is not an order of a 'Court or Tribunal' for the purposes of Section 49(2); therefore such an appellate direction cannot trigger the five-year reassessment window under Section 49(2). Obiter - Discussion of tests for 'Court' and 'Tribunal' and the inapplicability of precedents from different statutory contexts without contextual fit. Conclusion: The departmental Appellate Authority's remand/direction does not bring Section 49(2) into operation; reliance on that provision to resurrect or validate a time-barred AVR or to permit Section 42 reassessment was misplaced. Issue 4 - Appropriateness of High Court entertaining writ jurisdiction to test jurisdictional validity of the assessment Legal framework: The High Court's writ jurisdiction is discretionary; doctrine recognizes that alternative statutory remedies do not invariably oust constitutional writ relief. Writs may be entertained where pure questions of law arise, there is violation of natural justice, proceedings are wholly without jurisdiction, or fundamental rights are involved. Precedent treatment: The Court followed established principles that High Court may entertain writs when the controversy is primarily a question of law (not mixed facts), and where the legality and jurisdiction of a public authority's action is in issue. Interpretation and reasoning: The contention that statutory appellate/tribunal remedies should be exhausted was considered but rejected as a bar: the present dispute raised a pure legal issue - whether a statutory provision (Section 41(4)) had been complied with and whether Section 49(2) could cure the non-compliance. The Court found that the question affected jurisdiction and legal validity and therefore fell squarely within writ jurisdiction. The Court also distinguished between declining to entertain writs for disputed facts and exercising discretion where a question of law on jurisdiction arises. Ratio vs. Obiter: Ratio - Writ jurisdiction was appropriately exercised because the issue was a pure/legal jurisdictional question (validity of assessment in light of statutory time-limit and Section 49(2)), not an instance primarily requiring factual resolution by statutory fora. Obiter - General observations on the limits and purpose of Article 226/227 discretion. Conclusion: The High Court rightly entertained the writ petition to adjudicate the jurisdictional and legal question concerning the validity of the Section 42 assessment initiated on the basis of a time-barred AVR. Final Conclusions and Disposition 1. The AVR that was not submitted within the seven-day period mandated by Section 41(4) was invalid for purposes of initiating an Audit Assessment under Section 42. 2. The Assessing Authority could not legitimately invoke Section 49(2) to validate or revive the time-barred AVR or to convert/remake the earlier Section 43 proceedings into a valid Section 42 Audit Assessment; Section 49(2) is confined to correcting inter-statute jurisdictional errors identified by a Tribunal or Court. 3. The first Appellate Authority's direction/remand does not qualify as an order of a 'Court or Tribunal' for the purpose of activating Section 49(2). 4. Consequently, the Audit Assessment order founded on the invalid AVR and the notice issued thereunder were legally unsustainable and were quashed on jurisdictional grounds; the High Court's exercise of writ jurisdiction to decide this pure question of law was appropriate.