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Gujarat HC declares Section 84A of the Gujarat VAT Act as Ultra Vires and Unconstitutional

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The High Court of Gujarat on Thursday disposed of writ applications filed by Reliance Industries declaring Section 84A of the Gujarat VAT Act as ultra vires and violative of Article 14 of the Constitution of India on the ground of being manifestly arbitrary, unreasonable and oppressive.

On 16th April, 2020, the Gujarat High Court bench comprised of Justice J.B. Pardiwala and Justice A.C. Rao heard analogously writ applications filed by Reliance Industries Limited, a Public Limited Company, engaged in the manufacture and sale of Petrochemicals seeking declaration of Section 84A of the Gujarat VAT Act as being ultra-vires and beyond the legislative competence of the State of Gujarat under Entry 54 of List II of the Seventh Schedule to the Constitution of India. The Advocate General “Kamal Trivedi” was present on the behalf of respondent “State of Gujarat”.

The Deputy Commissioner of Commercial Tax, Ahmedabad passed an assessment order for the Financial Year 2006-07 against the writ applicant company by reversing the Input Tax Credit to the extent of 8% i.e. 4% under each of the provisions of Sections 11(3)(b)(ii) and 11(3)(b)(iii) of the GVAT Act. Later the appeal was filed by the applicant company before the Joint Commissioner being the First Appellate Authority, Baroda and got dismissed by the same Appellate Authority. Thereafter, the Gujarat Vat Tribunal passed an order allowing the Second Appeal of the Petitioner Company, by quashing and setting aside both the above orders of the Sales Tax Authorities by holding, inter alia, that the First Appellate Authority had erred in confirming the Assessment Order for branch transfer and consignment adjustments wherein admissible Input Tax Credit was reduced twice, while applying both clauses (ii) as well as (iii) of Section 11(3)(b) of the VAT Act, resulting into reduction of the Input Tax Credit to the extent of 8% for purchases of furnace oil, natural gas and light diesel oil, as sub-clause (iii) of Section 11(3)(b) of the VAT Act is not applicable to consignment of branch transfer transactions.

The Gujarat High Court further dismissed the appeal filed by the State Government against the aforesaid order of the VAT Tribunal and held that the reduction of Input Tax Credit under Section 11(3)(b) would, in no case, exceed 4% on the ground that the limitation of availing of the tax credit as provided under Section 11(3)((b) could be applied only once irrespective of the fact as to whether particular commodity purchased falls in more than one sub-clauses of Section 11(3)(b) of the VAT Act.

Subsequently, an Assessment Order came to be passed by the Deputy Commissioner of Commercial Tax, Ahmedabad for the F.Y. 2008-09 in the case of the petitioner Company, deciding the assessment proceedings for the said period as under in respect of the aforesaid decision of the Gujarat High Court, rendered in the case of the petitioner Company with respect to the reduction of Input Tax Credit on natural gas used as raw material, the competent authority reduced the ITC of the Petitioner Company at the rate of 4%, instead of 8%, under the provisions of Section 11(3)(b) of the Act.

Later, the provisions of the Constitution (One Hundred and First Amendment) Act, 2016, came to be enacted, which came into force w.e.f. 01.07.2017. and the Additional Commissioner of Commercial Tax further passed an order and reduced the sales tax incentive, in case of the Petitioner Company, while considering the tax paid on the purchase of taxable goods used in the manufacture of taxable goods, exported outside the country.

On 1st July, 2017, the legislations, i.e, the Gujarat Goods and Services Tax Act, 2017 and the Central Goods & Services Tax Act, 2017 came into force to levy tax on all the intra-state suppliers of goods or services or both.

In the view of aforesaid Constitution amendment, the Gujarat Value Added Tax Act, 2003 came to be substantially amended by way of substitution and deletion of many provisions thereof by virtue of the Gujarat Value Added Tax (Amendment) Act, 2017, which came into force w.e.f. 01.07.2017.

Meanwhile, the Supreme Court passed an order in an appeal filed by the State, setting aside the aforesaid judgment of Gujarat High Court by holding, inter alia, that the Input Tax Credit is required to be reduced twice. i.e, to the extent of total 8%, under sub clauses (ii) and (iii) of Section 11(3)(b) of the VAT Act, in such a way that the reduction should not exceed the amount of the Input Tax credit claimed.

In view of the aforesaid judgment of the Supreme Court, the Additional Commissioner of Commercial Tax issued a revision notice in Form 503 under Sections 75 of the Act to revise the Assessment Order for F.Y. 2008-09 for reducing the Input Tax Credit to the extent of 8% under the provisions of Section 11(3)(b)(ii) and 11(3)(b)(iii) of the VAT Act in light of the judgment of the Supreme Court.

The Gujarat High court, while allowing the Special Civil Application filed by the petitioner, quashed and set aside the aforesaid revision notice issued by the department under Section 75 of the VAT Act on the ground that the said revision notice cannot be sustained being beyond the period of limitation provided under Section 75 of the VAT Act.

By virtue of the VAT Amendment Act, 2018, Section 84A came to be added in the VAT Act to be operative retrospectively w.e.f 01.04.2006, inter alia, providing for the exclusion of the period spent between the date of the decision of the appellate tribunal and that of the High Court as well as the Supreme Court in computing the period of limitation, referred to in Section 75 of the VAT Act.

In view of the addition of Section 84A in the VAT Act fresh notice for revision issued by the Addl. Commissioner of Commercial Tax to the Petitioner on the basis of the above referred newly added Section 84A, for revising the assessment for the F.Y.2008-09 made for reducing the Input Tax Credit to the extent of 8% under the provisions of Section 11(3)(b)(ii) and 11(3)(b)(iii) of the VAT Act in light of the judgment dated 22.09.2017 of the Supreme Court.

The writ applicant seeks to challenge the constitutional validity of Section 84A of the GVAT Act as well as the revision notice on the circumstances that the original period of limitation as provided under Section 75 of the VAT Act for issuing notice is of 3 years from the date of the assessment order which had lapsed. However, by virtue of the newly enacted Section 84A, the period spent from the date of the decision of the High Court upto the date of the decision of the Supreme Court is to be excluded in computing the aforesaid period of three years, referred to under Section 75 of the Act.

The Senior Counsel for writ applicant said that Section 84A of the VAT Act is not saved under Article 246A of the Constitution and Article 246A of the Constitution was inserted by the 101st Constitution Amendment Act with the prime object of subsuming multiple indirect taxes and to confirm concurrent power upon the Parliament and State Legislature to impose “Goods & Services Tax’ in accordance with the recommendations of the Goods & Services Tax Council constituted under Article 279A of the Constitution and further submitted that Section 84A of the VAT Act is manifestly arbitrary and violative of Articles 14 and 19(1)(g) of the Constitution of India and when the assessment for a particular year attains finality, the same creates a vested right in favour of the dealer.

Thereafter he mentioned before the court that any legislation which is found to be manifestly arbitrary can be struck down as violative of Article 14 of the Constitution and the retrospective insertion of Section 84A with effect from 01.04.2006 makes the provision exhaustively arbitrary and unreasonable.

On behalf of the State Government, the Additional Advocate General Kamal Trivedi said that the State Legislature is empowered to enact taxation laws relating to the intra-state supply with respect to only six items and not with any other items. Prior to the enactment of Constitution (101“ Amendment) Act, 2016, in terms of Article 246 of the Constitution of India, the Union and the State Governments were empowered to make laws relating to the matters covered under List I (Union List), List ll (State List) and List Ill (concurrent List). In other words, there used to be a clear demarcation of legislative powers between the Union and the States by confining themselves within the field entrusted upon them. 

The High court held that the Gujarat Value Added Tax (amendment) Act, 2018 Section 84A has been inserted in the Gujarat Value Added Tax Act, 2003 with retrospective effect. However, the amending Act does not provide for any validation of various acts of the revenue authorities namely the assessment, re-assessment, collection etc. Accordingly, the said Act cannot be treated as a “validating Act”.

Section 84A (as inserted by 2017 amendment Act), provides for exclusion of certain period spent by the revenue authorities in the appellate proceedings for the purpose of calculating time limit for (i) audit assessment (ii) turnover escaping assessment (iii) appeal and (iv) revision. All these provisions provide for outer time limit of the order to be made. In case where the orders are already made by the revenue authorities and matter is closed, the retrospectives amendment without validation may not validate such orders

It is equally well settled that wherever the parliament has the power to frame a statute it also includes the power to make the law retrospective. In other words, the parliament also has wide powers to frame the laws including taxing statutes with retrospective effect. However, the Courts have recognized certain inherent limitations in framing retrospective tax legislations.

Therefore, the court while allowing the writ applications, quashed the impugned notices in each of the writ applications issued under Section 75 of the Gujarat VAT Act and held that Section 84A of the Gujarat VAT Act is declared as ultra vires and beyond the legislative competence of the State Legislature under Entry 54 of List II of the Seventh Schedule to the Constitution of India and is also declared to be violative of Article 14 of the Constitution of India on the ground of being manifestly arbitrary, unreasonable and oppressive

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