TaxTMI 
TaxTMI 
2017 (10) TMI 1020
X X X X Extracts X X X X
X X X X Extracts X X X X
....ni, Mr. Rohit Gautam, Mr. Rahul Gupta, Advocates., Respondents Through: Mr. Anuj Aggarwal, ASC for GNCTD with Ms. Deboshree Mukherjee, Advocate. Mr. Satyakam, ASC for GNCTD, Mr. Varun Nischal, Advocate. W.P.(C) 4713/2016 & CM No.19649/2016, W.P.(C) 4714/2016, W.P.(C) 4788/2016, W.P.(C) 6583/2016 & CM No.26973/2016, W.P.(C) 11846/2016 & CM 46676/2016, W.P.(C) 6804/2017, W.P.(C) 7388/2017, JUDGMENT Dr. S. Muralidhar: 1.These writ petitions raise a challenge to the 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. Illustratively, the facts relating to two of the writ petitioners, i.e. Suvasini Charitable Trust ("SCT") in W.P. (C) No. 4086/2013 and Arun Jain (HUF) in W.P. (C) Nos. 4573, 4574, 4704, 4709, 4710, 4713, 4714 and 4788/2016, are discussed. Facts concerning Suvasini Charitable Trust 3. SCT is a charitable trust organization registered under the DVAT Act. It is engaged in the activity of providing food items in the Akshardham Temple complex. It states that it has paid Value Added Tax ("VAT") on its purchases. It avails Input Tax C....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... import duty. The purchase and sale of FTLs are duly recorded in the books of accounts and payments. It is stated that the payments made against purchases and payment received against sales are only through banking channels and are duly accounted for. 9. Under Section 26 of the DVAT Act read with Rule 28 of the Delhi Value Added Tax Rules, 2005 (DVAT Rules), a registered dealer is required to submit a return for each tax period. Along with the return, the dealer has to submit information regarding the summary of purchases and sales made and the VAT paid thereon in Annexures 2A and 2B respectively. It is pointed out that in case the selling dealer does not reflect the sales made to a particular purchasing dealer, a mismatch report gets generated on the website of the Department of Trade and Taxes ("Department"). Conversely, where the selling dealer correctly reflects the sales made, no mismatch will show up on the login ID of the purchasing dealer on the website. 10. AJ states that the selling dealers had duly filed their returns in DVAT-16 enclosing therewith the details of the purchases (Annexure 2A) and the details of sales (Annexure 2B). For the purposes of the ITC claimed....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... states that registered dealer shall be authorized to issue tax invoices "only after a certificate of registration is issued by the Commissioner." It is, therefore, clear that it is only a registered dealer who can collect the DVAT under the DVAT Act and only such registered dealer can issue a tax invoice to the purchaser. 14. Section 50 (2) of the DVAT Act further states that the tax invoice issued in terms of Section 50 (1) of the DVAT Act shall contain the following particulars: "(a) the words "tax invoice" in a prominent place; (b) the name, address and registration number of the selling registered dealer; (c) the name and address of the purchaser and his registration number, where the purchaser is a registered dealer; (d) an individual pre-printed serialised number and the date on which the tax invoice is issued. Provided that a dealer may maintain separate numerical series, with distinct codes either, as a prefix or suffix, for each place of business in case the dealer has more than one place of business in Delhi or for each product in case he deals in more than one product or both; Provided further that such numerical series may be granted by the Commiss....
X X X X Extracts X X X X
X X X X Extracts X X X X
....this Act." 17. Section 9 (1) of the DVAT Act permits ITC, to a dealer who is registered, "in respect of the turnover of purchases occurring during the tax period where the purchase arises in the course of his activities as a dealer and the goods are to be used by him directly or indirectly for the purpose of making sales which are liable to tax under section 3 of this Act or sales which are not liable to tax under section 7 of the DVAT Act." The latter sales are those which involve export from Delhi either to other States or Union territories or to foreign countries. 18. Section 9 (2) of the DVAT Act sets out the conditions under which such tax credit or ITC would not be allowed. Sub-Clauses (a) to (f) specify certain kinds of purchases which would not be eligible for the claim of such ITC and they read as under: "(a) in the case of the purchase of goods for goods purchased from a person who is not a registered dealer; (b) for the purchase of non-creditable goods; (c) for the purchase of goods which are to be incorporated into the structure of a building owned or occupied by the person; Explanation.- This sub-section does not prevent a tax credit arising for goods....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... government revenue is going to be affected adversely in a big way but the department will also have to contest plethora of litigation. For the purpose of protecting the interest of revenue and discouraging dealers from making purchases from bogus dealers, it is necessary to incorporate an appropriate provision in this regard by inserting a new clause after sub-section 2(f) of Section 9." 21. The Government of National Capital Territory of Delhi ("GNCTD") held consultations with the traders" associations. The minutes of one such meeting held on 26th November 2009 has been placed on the record. As regards Section 9 (2) (g), it states: "this was also discussed with the representatives and they agreed to the suggestion." In the attendance sheet of that date i.e. 26th November 2009, the presence of a sampling of the traders" associations is reflected. Of course, this by itself will not decide the constitutional validity of the provision. 22. It may be noted that there is a distinction between those categories specified in Section 9 (2) (a) to (f) of the DVAT Act which disentitle to the grant of ITC and the one under Section 9 (2) (g). Whereas the conditions specified in Section 9....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ss to check such frauds. Section 40A of the DVAT Act has been specifically enacted for that purpose. Nevertheless, irrespective of whether the purchasing dealer is innocent, on account of subsequent conduct of the selling dealer, who has collected the VAT from the purchasing dealer and has failed to deposit it with the government or has failed to lawfully adjust it against his output tax liability, the purchasing dealer is made to suffer. This is violative of Article 14 of the Constitution inasmuch as it treats both the innocent purchasers and the guilty purchasers alike. In other words, it is submitted that by treating unequals equally the legislative measure is violative of Article 14 of the Constitution. Reliance is placed on the decision in K.T. Moopil Nair v. State of Kerala AIR 1961 SC 552 and State of Kerala v. Haji and Haji AIR 1969 SC 378. (ii) Section 9 (2) (g) of the DVAT Act denies to a bona fide purchaser, the benefit of the ITC only because of the default of the selling dealer over whom such purchasing dealer has not control. This measure qua the purchasing dealer is arbitrary, irrational and unduly harsh and, therefore, violative of Article 14 of the Constitution.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al Excise, Bombay v. The Elphinstone Spinning & Weaving Mills Company AIR 1971 SC 2039 and Gurshai Saigal v. CIT AIR 1963 SC 1062. (vi) Reliance is also placed on the decisions in Bajaj Tempo Ltd. v. CIT (1992) 3 SCC 78, Aidek Tourism Services Pvt. Ltd. v. Commissioner of Customs (2015) 7 SCC 429 and Union of India v. Ranbaxy Lab. Ltd. (2008) 7 SCC 502 to urge that the interpretation of Section 9 (2) (g) of the DVAT Act has to be in consonance with the object and purpose of the DVAT Act. It is argued that a pragmatic view must be taken and practical aspects considered before enforcing compliance. It is further urged that the ground realities of marketing and sales have to be considered while interpreting an exemption provision. It is pointed out that even if it is assumed that subsequent to the purchases made by the purchasing dealer, the registration of the selling dealer is cancelled, such cancellation cannot be given retrospective effect so as to deny the purchasing dealer the ITC in respect of the VAT paid by him. (vii) Reliance is placed on the decisions in Mahadev Enterprise v. State of Gujarat 2016 (92) VST 360 (Gujarat), Jinsasan Distributors v. CTO (2013) 59 VST 256 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Court is not to question legislative wisdom in such matters. He referred to the note prepared for consideration of the Cabinet prior to the insertion of Section 9 (2) (g) of the DVAT Act and submitted that it was for sound reasons that the said provision was introduced since it was found that there were a large number of instances where selling dealers, after collecting tax, failed to deposit it with the Government. 27. Mr Satyakam placed extensive reliance on the decision of the Bombay High Court in Mahalaxmi Cotton Ginning Pressing and Oil Industries v. State of Maharashtra (2012) 51 VST 1 (Bom.) where a similar provision under the Maharashtra Value Added Tax Act ("MVAT Act") was upheld. He also referred to the fact that the Special Leave Petition filed against the aforesaid decision of the Bombay High Court was dismissed by the Supreme Court. He pointed out that the said decision was upheld by the Supreme Court in Jayam & Co. v. Assistant Commissioner (2016) 96 VST 1 (SC). Mr. Satyakam also similarly relied on similar provisions of the Rajasthan VAT Act and the Gujarat VAT Act. Analysis and reasons 28. At the outset, it requires to be understood that Section 2 (1)....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r. There are provisions in the DVAT Act, referred to hereinbefore, which empower the Department to proceed to recover the tax in arrears from the selling dealer. There is also Section 40A, in terms of which, a purchasing dealer acting in connivance with a selling dealer can be proceeded against. 32. It is indeed strange that the note prepared for the Cabinet at the time of insertion of Section 9 (2) (g) in the DVAT Act did not mention Section 40A which had already been inserted by the DVAT Second Amendment Act, 2005 with effect from 16th November 2005. The note also did not take note of the practical difficulty that would be faced by the purchasing dealer in anticipating, even before entering into the transaction with the registered selling dealer holding a valid registration, that such selling dealer after collecting the tax from him was either not going to deposit it with the Government or lawfully adjust it against his output tax liability. This is a major omission of important factors which had a bearing on the ITC being claimed by a dealer. 33. Indeed, what Section 9 (2) (g) of the DVAT does is give the Department a free hand in deciding to proceed either against the pur....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... only because no classification appears on its face or because a discretion is given to the Government to make the selection or classification but will go on to examine and ascertain if the statute has laid down any principle or policy for the guidance of the exercise of discretion by the Government in the matter of the selection or classification. After such scrutiny the Court will strike down the statute if it does not lay down any principle or policy for guiding the exercise of discretion by the Government in the matter of selection or classification, on the ground that the statute provides for the delegation of arbitrary and uncontrolled power to the Government so as to enable it to discriminate between persons or things similarly situate and that, therefore, the discrimination is inherent in the statute itself." 36. In K.T. Moopil Nair v. State of Kerala (supra), the Supreme Court was faced with a situation where an absence of classification led to a violation of Article 14 of the Constitution. The statute under challenge was the Travancore Cochin Land Tax Act, 1955 ("TCLT Act"). Section 4 of the TCLT Act laid down that a uniform rate of tax would be levied on all lands in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t, for, in our view, refusal to make a. rational classification may itself in some cases operate as denial of equality." 39. Applying the law explained in the above decisions, it can be safely concluded in the present case that there is a singular failure by the legislature to make a distinction between purchasing dealers who have bona fide transacted with the selling dealer by taking all precautions as required by the DVAT Act and those that have not. Therefore, there was need to restrict the denial of ITC only to the selling dealers who had failed to deposit the tax collected by them and not punish bona fide purchasing dealers. The latter cannot be expected to do the impossible. It is trite that a law that is not capable of honest compliance will fail in achieving its objective. If it seeks to visit disobedience with disproportionate consequences to a bona fide purchasing dealer, it will become vulnerable to invalidation on the touchstone of Article 14 of the Constitution. 40. The need for the law to distinguish between honest and dishonest dealers was acknowledged by the Punjab and Haryana High Court in Gheru Lal Bal Chand v. State of Haryana (supra) where the constitution....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e event where fraud, collusion or connivance is established between the registered purchasing dealers or the immediate preceding selling registered dealer or any of the predecessors selling registered dealer, the benefit contained in Form VAT C-4 would not be available to the registered purchasing dealer. The aforesaid interpretation would result in achieving the purpose of the rule which is to make the object of the provisions of the Act workable, i.e., realization of tax by the revenue by legitimate methods." 41. The Court respectfully concurs with the above analysis and holds that in the present case, the purchasing dealer is being asked to do the impossible, i.e. to anticipate the selling dealer who will not deposit with the Government the tax collected by him from those purchasing dealer and therefore avoid transacting with such selling dealers. Alternatively, what Section 9 (2) (g) of the DVAT Act requires the purchasing dealer to do is that after transacting with the selling dealer, somehow ensure that the selling dealer does in fact deposit the tax collected from the purchasing dealer and if the selling dealer fails to do so, undergo the risk of being denied the ITC. Ind....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cision of the Supreme Court in Rajbala v. State of Haryana (supra) and Binoy Viswam v. Union of India (2017) 7 SCC 59 the correctness of both of which has been doubted by the Supreme Court in its recent 3:2 decision in Shayara Bano v. Union of India 2017 (9) SCALE 178, invalidating triple talaq where, in the majority opinion of Justice R. F. Nariman, after noting that the decision in State of Andhra Pradesh v. McDowell & Co. (1996) 3 SCC 709 was on this point per incuriam, observed as under: "53. However, in State of Bihar v. Bihar Distillery Ltd., (1997) 2 SCC 453 at paragraph 22, in State of M.P. v. Rakesh Kohli, (2012) 6 SCC 312 at paragraphs 17 to 19, in Rajbala v. State of Haryana & Ors., (2016) 2 SCC 445 at paragraphs 53 to 65 and 387 Binoy Viswam v. Union of India (2017) 7 SCC 59 at paragraphs 80 to 82, McDowell (supra) was read as being an absolute bar to the use of "arbitrariness" as a tool to strike down legislation under Article 14. As has been noted by us earlier in this judgment, Mcdowell (supra) itself is per incuriam, not having noticed several judgments of Benches of equal or higher strength, its reasoning even otherwise being flawed. The judgments, following McD....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tives implemented by the State Government, then the tax shall be deemed to have been received in the government treasury for the purposes of this sub-section." 46.2 It can straightway be seen that Section 48 (5) of the MVAT Act is not an exact replica of Section 9 (2) (g) of the DVAT Act. For instance, Section 48 (5) of the MVAT Act requires the selling dealer to have "actually paid" the tax collected by him with the Government for the purposes of the purchasing dealer availing ITC, whereas Section 9 (2) (g) of the DVAT Act requires the selling dealer to either "deposit" the tax collected or lawfully adjust it against his output tax apart from correctly reflecting the sale in his returns. While interpreting those words "actually paid", the Bombay High Court relied on the decisions in State of Madhya Pradesh v. Indore Iron and Steel Mills Private Limited (1999) 111 STC 261 (SC), N.B. Sanjana v. Elphinstone Spinning & Weaving Mills Co. Ltd. (1971) 1 SCC 337 (SC), Sulekh Ram & Sons v. Union of India (1978) 2 ELT J 525 (Del), which were confirmed by the Supreme Court in CCE v. Decent Dyeing Co. (1990) 45 ELT 201 (SC). 46.3 It also requires to be noted that the Bombay High Court w....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... provision is facially or ex facie discriminatory. Neither is the object or effect of Section 48(5) discriminatory. The State legislature was not bound to grant a set off. If the legislature had not granted a set off, that would not have a bearing on its competence or on constitutionality, since a tax on the sale of goods falls within the purview of Entry 54. In granting a set off, the legislature can impose conditions and that imposed in Section 48(5) is not lacking in rationality. Moreover, the scheme for set off in Section 48 has to be read in its entirety and as one cohesive whole. The legislature cannot be compelled to grant a set off, ignoring the conditions which it imposes. The conditions are not severable and are part of one integrated scheme." xxx xxx xxx 55. The Punjab and Haryana High Court held that while the genuineness of a certificate and a declaration may be examined by the taxing authority, the onus cannot be placed on the assessee to establish the correctness or the truthfulness....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the purchasing dealer in the present case is not that it should be granted that ITC de hors the conditions. Their positive case is that each of them, as a purchasing dealer, has complied the conditions as stipulated in Section 9 and therefore, cannot be denied ITC because only selling dealer had failed to fulfil the conditions thereunder. More importantly, the Court finds that there is no provision in the MVAT Act similar to Section 40A of the DVAT Act. Section 40A of the DVAT Act takes care of a situation where the selling dealer and the purchasing dealer act in collusion with a view to defrauding the Revenue. In fact, the operative directions in Mahalaxmi Cotton Ginning Pressing and Oil Industries (supra) indicate that such a measure was suggested by the State Government itself to go after defaulters, i.e. selling dealers failing to actually pay the tax. The Department there undertook to upload on its website the details of the defaulting dealers. It was further undertaken that once there was a final recovery of the tax from the selling dealer, refund would be granted to the purchasing dealer. 46.7 Mr. Satyakam has placed extensively reliance on para 55 of the decision of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....provided by the Legislature. It is not admissible to all kinds of sales and certain specified sales are specifically excluded. (b) Concession of ITC is available on certain conditions mentioned in this Section. (c) One of the most important condition is that in order to enable the dealer to claim ITC it has to produce original tax invoice, completed in all respect evidencing the amount of input tax." 47.4 The Court in Jayam & Co. went strictly by the wording of the above provision to determine what would form the subject matter of the tax liability and concluded that it was only the price indicated in the tax invoice and not price as reduced by the credit note. The Court fails to appreciate how the aforementioned decision can be of any assistance to the Department in the present case since the provision which the Court is concerned with herein is in a different context and, therefore, differently worded as well. 48. The decision of the Supreme Court in Corporation Bank (supra) applies to the present case on all fronts. The Court explained there that the selling dealer collects tax as an agent of the Government. Therefore, the bona fide buyer cannot be put in jeopardy wh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....istortion that course is to be scrupulously avoided. The doctrine can never be called into play where the statute requires extensive additions and deletions." 52. It was further explained in the same decision as under: "The Courts, though, have no power to amend the law by process of interpretation, but do have power to mend it so as to be in conformity with the intendment of the legislature. Doctrine of reading down is one of the principles of interpretation of statute in that process. But when the offending language used by the legislature is clear, precise and unambiguous, violating the relevant provisions in the constitution, resort cannot be had to the doctrine of reading down to blow life into the void law to save it from unconstitutionality or to confer jurisdiction on the legislature." Conclusions 53. In light of the above legal position, the Court hereby holds that the expression "dealer or class of dealers" occurring in Section 9 (2) (g) of the DVAT Act should be interpreted as not including 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....