M/S H M Industries vs Commissioner Of Value Addes Tax
2014 Latest Caselaw 4843 Del

$~27
* IN THE HIGH COURT OF DELHI AT NEW DELHI

                                Date of decision: September 26, 2014

+       ST.APPL. 32/2013

        M/S H M INDUSTRIES                          ..... Petitioner
                      Through:          Mr.Rajesh Jain, Advocate
                                        with Mr.Virag Tiwari,
                                        Advocate

                           versus

    COMMISSIONER OF VALUE ADDES TAX
                                      ..... Respondent

Through: Mr.V.K.Tandon, Advocate with Mr.Yogesh Saini, Advocate CORAM:

HON'BLE MR. JUSTICE SANJIV KHANNA HON'BLE MR. JUSTICE V. KAMESWAR RAO

SANJIV KHANNA, J (ORAL)

This appeal under Section 81 of Delhi Value Added Tax

Act,2004 („DVAT Act‟, for short), read with Section 9(2) of the

Central Sales Tax Act, 1956 („CST Act‟ for short) pertains to the 4th

quarter return for the tax period 2006-07.

2. The substantial question of law admitted for hearing vide

order dated 14.08.2013 reads as under:-

"Whether VAT Tribunal was right in holding that proviso to Section 34(1) is applicable to the facts of

the present case?"

3. By the impugned order dated 14.06.2013 the Appellate

Tribunal, Value Added Tax (Tribunal, for short), Delhi has held that

the default assessment under Section 32 of the DVAT Act was

within limitation as extended period of six years in terms of proviso

to Section 34(1) of the DVAT Act would be applicable.

4. Section 34 of the DVAT Act, prescribes limitation period for

completing assessment and re-assessment. Section 34(1) of the

DVAT Act is reproduced below:-

"Section 34:

(1) No assessment or re-assessment under section 32 of this Act shall be made by the Commissioner after the expiry of four years from -

(a) the date on which the person furnished a return under section 26 or sub-section (1) of section 28 of this Act; or

(b) the date on which the Commissioner made an assessment of tax for the tax period, whichever is the earlier:

PROVIDED that where the Commissioner has reason to believe that tax was not paid by reason of concealment, omission or failure to disclose full material particulars on the part of the person, the said period shall stand extended to six years."

5. Section 34(1) of the DVAT Act, simply stated stipulates that

no assessment or re-assessment under Section 32 should be made

by the Commissioner after expiry of four years from the date on

which the person has furnished return under Section 26 or under

Section 28(1) of the DVAT Act. Sub Clause (b) to Section 34 (1) is

not relevant and applicable. The proviso extends the period of

limitation to six years but only when the Commissioner has reasons

to believe that tax was not paid by the reason of concealment,

omission or failure to disclose material particulars on the part of the

person i.e. the assessee. In such specified circumstances, the

extended period of six years is applicable. The proviso noticeably

mandates satisfaction of two conditions. It refers to the formation of

„reasons to believe‟ by the Commissioner. The said "reasons to

believe", have to be formed by the Commissioner. Secondly, the

said expression "reasons to believe" must have nexus and live link

with failure to pay tax because of concealment, omission or failure

to disclose material particulars by the assessee. Thus, the

Commissioner is required to form an opinion in the nature of

"reasons to believe" that there was failure, omission or concealment

to disclose material particulars which had the effect of short

payment or non-payment of tax. The "reasons to believe" and

satisfaction of any of the three stipulations are a jurisdiction

precondition and a mandatory requirement which must be met to

apply and seek benefit of extended period of six years.

6. Section 34(1) refers to orders of assessment or reassessment

under Section 32 of the DVAT Act. Therefore, the reason to

believe must be formed before or at the time when the order of

assessment or reassessment under Section 32 of the DVAT Act is

passed. The said orders are different from the adjudication by the

objection hearing authority under Section 74 of the DVAT Act. The

objection hearing authority does not pass an assessment or

reassessment order under Section 32 of the DVAT Act. It would be,

therefore, relevant to refer to Section 32 of the DVAT Act, which

reads:-

"Section 32 - Default assessment of tax payable (1) If any person

(a) has not furnished returns required under this Act by the prescribed date; or

(b) has furnished incomplete or incorrect returns; or

(c) has furnished a return which does not comply with the requirements of this Act; or

(d) for any other reason the Commissioner is not satisfied with the return furnished by a person;

the Commissioner may for reasons to be recorded in writing assess or re-assess to the best of his judgment the amount of net tax due for a tax period 1[or more than one tax

period by a single order so long as all such tax periods are comprised in one year.] XXXXXXXXX (2) Where the Commissioner has made an assessment under this section, the Commissioner shall forthwith serve on that person a notice of assessment of the amount of any additional tax due for that tax period.

XXXXXXXXXXX Explanation.- A person may, if he disagrees with the notice of assessment, file an objection under section 74 of this Act."

Sub section 1 to Section 32 states that default assessment can

be made when the return is not furnished by the prescribed date; or

incorrect or incomplete return has been furnished or the return

furnished does not comply with the requirements of the said Act or

for any other reason the Commissioner is not satisfied with the

return furnished by the person. Unless the conditions of section

32(1) of DVAT Act are satisfied, default assessment cannot be

made and if made will be liable to be struck down/set aside. Sub

Section 1 to Section 32 permits and authorises the Commissioner

for recording of reasons in writing, assess or re-assess to the best of

his judgment the amount of net tax due for a tax period. Sub Section

2 to Section 32 stipulates that the Commissioner, after making

default assessment under the Section, shall forthwith serve on that

person a notice of assessment of the amount of any additional tax

due for that tax period. Satisfaction of the conditions set out in

Section 32(1) would not on its own amount to satisfaction of the

condition stated in the proviso to Section 34(1) to claim benefit of

the extended period of limitation. The two provisions operate

independently in their own fields and have a distinct and different

purpose to serve. In a given case satisfaction of conditions stated in

the proviso to Section 34(1) might justify invocation of Section 32

and visa-versa, but despite every chance of overlap, satisfaction of

the individual requirements of the two sections should be examined

independently. The default assessment has to be made within the

period of limitation prescribed under Section 34 of the DVAT Act;

four years in normal circumstances or six years if the specified

conditions laid down in the proviso are satisfied.

7. Whether conditions stated in Section 32(1) have been

satisfied or not, is a matter relating to merits and therefore would

relate to confines or four corners of jurisdiction in a different way.

The default assessment can be challenged by way of filling

objections, consequent adjudication and appeals. But, the proviso to

Section 34(1) of the DVAT Act, for the purpose of extended period

of limitation of six years does not postulate formation of believe or

opinion by the Objection Hearing Authority or the appellate forums.

Formation and recording of the reasons to believe has to be by the

competent authority before or at the time of passing the default

assessment order.

8. The reasoning given by the tribunal to uphold the default

assessment order, which was passed after four years but within six

years from the date on which return for the 4 th quarter of assessment

year 2006-07 was furnished, reads :-

"Section 34(1)(a), as quoted above, states that no assessment or re-assessment shall be made after the expiry of four years from the date of furnishing of a return. However, proviso to Section 34(1) stipulates that where the Commissioner has reason to believe that tax was not paid by reason of concealment, omission or failure to disclose full material particulars on the part of the person, the said period shall stand extended to six years. Since the appellant has failed to submit the 'C' form quarter-wise, as required under second proviso to sub-rule (11) of Rule 12 of the Central Sales Tax (R&T) Rules, 1957, there was an omission on the part of the appellant in this case. Hence, as per proviso to Section 34(1) of the Act, the period of limitation stands extended to six years. We are, therefore, of the considered view that the assessment is not barred by limitation in view of the above provision."

9. The error made by the Tribunal in the impugned order is that

they examined and formed the belief that there was „omission‟ on

the part of the appellant assessee and, therefore, extended period of

six years would apply. But, the mandate of the DVAT Act is that it

is the Commissioner, who should have formed the said

opinion/belief by recording „reason to believe‟ regarding

concealment, omission or failure on the part of the assessee,

resulting in non-payment or short payment of tax. It is stated that in

exercise of powers under Section 68 of the DVAT Act, the

Commissioner, by issue of a notification, has delegated his powers

under Section 32 and 34 of the DVAT Act to the Value Added Tax

Officer and Joint Commissioners. We are not required to examine

the validity of the said delegation in this appeal as no such question

has been raised. We will therefore proceed with the assumption that

the Value Added Tax Officer was the competent authority,

authorized under the proviso to Section 34(1) of the DVAT Act.

10. It is true that proviso to Section 34(1) does not specifically

mention that reasons to believe have to be recorded in writing

However, the said requirement has to be read and treated as part and

parcel of Section 34(1) of the DVAT Act. The normal period of

limitation as prescribed for passing of a default assessment order is

four years. No reason or ground is required to be stated under

Section 34(1) if assessment/default assessment is made within the

said period. However, when the extended period of six years is

invoked, preconditions stipulated in the proviso to Section 34(1) of

the DVAT Act must be satisfied. Want of satisfaction of the

preconditions would be in realm of absence of jurisdiction. The only

way, the Commissioner/competent authority can show that he had

applied his mind and had formed requisite "reason to believe" is by

recording in writing that the case falls within the proviso to Section

34(1) of the DVAT Act. This may be indicated and stated so in the

default assessment order or even in the record. In case, reasons to

believe are not recorded or so indicated/mentioned in the default

assessment order or in the record, it would lead to an anomalous and

aberrant situation. It would be a virtually impossible task for the

appellate authorities to first find and decipher the unknown and

unrecorded reason to believe and thereupon decide whether the

requisite conditions for invoking proviso to Section 34(1) of the

DVAT Act were actually satisfied or not. The issue or question

raised would be answered on guess work or mere probabilities as to

the "reason to believe". Invoking proviso to section 34(1) of DVAT

Act certainly imposes civil liability and has adverse consequences,

so an assessee must have the right to question and challenge

formation of the belief. An effective, decisive and erudite decision

would be possible only when there would be no uncertainty and

misgiving as to the "reasons to believe". This could be easily and

without any discern and difficulty avoided by making a note in

writing. The „written belief‟ would be in consonance with the

principle and mandate of good governance, fairness, transparency

and would curtail arbitrariness and prejudice. Importantly, we

would steer clear from the needless debate on whether and what was

the "reason to believe".

11. The expression „reason to believe‟ finds reference in Section

147 of the Income Tax Act, 1961, a provision related to opening of

an assessment already made under section 143(3) or regular

assessment for the first time where notice u/s 143(2) of the said Act

was not issued. The aforesaid expression in DVAT Act is,

therefore, pari materia and enacted keeping in mind the similar

provision under the Income Tax Act. The Supreme Court in S.

Ganga Saran and Sons Ltd vs. ITO (1981) 3 SCC 143, observed

that expression „reasons to believe‟ is stronger than the words „if the

Assessing Officer is satisfied‟. A belief must be honest and tested

on the ground whether a reasonable person, based upon reasonable

grounds, would have formed the said belief. „Reasons to believe‟ is

not the same as mere suspicion, gossip or rumour. „Reasons to

believe‟ are not a reason to suspect. Fishing or roving inquiry under

the proviso is not permissible. The words „material facts‟ was

earlier elucidated by the Supreme Court in Calcutta Discount Co.

vs. ITO (1961) 41 ITR 191, as an expression which refers to

primary facts, the duty of which is upon the assessee to disclose but

does not refer to factual or legal inferences which could be drawn

from the primary facts. Once the assessee had disclosed the primary

facts then he cannot be faulted on the ground that he has not

indicated further factual and legal inference. The duty cast upon the

assessee is to disclose fully and truly all material primary facts,

which he should not have suppressed, misrepresented or falsified

i.e. the assessee should not have concealed, failed or omitted to

mention the full material facts.

12. Thus, the extended period of limitation under proviso to

Section 34(1) of the VAT Act confers wide but not plenary power.

The precondition for exercise if power under the proviso should be

shown to be satisfied by recording of reasons in writing and reasons

should be intelligible and legibly demonstrated and testify. The

objectiveness in the subjective satisfaction of the competent

authority in the "reason to believe" can be subjected to challenge,

verified and tested. The Supreme Court in ITO vs. Lakshmani

Mewal Das (1976) 103 ITR 437, has held that the „reasons to

believe‟ must show live link or nexus between the material which

was not disclosed by the assessee and the formation of belief that

there was concealment, omission or failure on the part of the

assessee.

13. Pertinently, in the proviso to Section 34(1), the language of

the Section postulates that there should be failure, omission or

concealment to disclose full material facts. Once, material

particulars have been stated or disclosed and were in the knowledge

of the authorities but action under Section 32 of the VAT Act is not

taken within four years, extended period of limitation of six years

under the proviso to Section 34(1) of the DVAT Act would not be

available. This would be a reasonable and correct way to read

Section 34(1) and the proviso. Normal and prescribed period of

limitation for passing of a default assessment order is 4 years. This

is a reasonable and judicious period for the competent authority to

act under section 32 of the DVAT Act. Abnormal delay and time

gap, between the assessment periods and the date of default

assessment orders, can cause prejudice to the assessee, who may not

be able to procure and produce evidence and material. With the

passage of time, relevant material and evidence tend to

disappearance and dissipate. Limitation of four years is by no

stretch or consideration, as an exiguous or minimal period. Thus, in

cases where there are mistakes, errors or wrong claims have been

made, but the full material facts have been disclosed, extended

period of limitation for six years would not be applicable. The

default assessment in such cases where material facts are disclosed

should be made within four years. Once material facts are duly

disclosed, conditions stipulated in the proviso to Section 34 (1) of

the DVAT Act that there should be concealment, omission or failure

to disclose full particulars, would be missing and absent. The

extended period of limitation of six years would only apply if there

is omission, concealment or failure to disclose material particulars

and the said reasons should be recorded in writing to constitute

"reasons to believe". Thus and in this manner Sections 32 and 34

(1) operate independently and in their own fields.

14. In the present case, the undisputed position is that the

appellant assessee for the 4th quarter relating to tax period 2006-07

had filed his return on 30.04.2007, so the default assessment as per

Section 34 of the DVAT Act should have been completed on or

before 01.05.2011. However, the default assessment was made on

11.05.2011, which is after four years but within six years.

15. We have read the default assessment order dated 11.05.2011.

We are reproducing the entire order itself:-

"Notice of default assessment of tax and interest under section 9(2) of the CST Act.

Whereas I am satisfied that the dealer has furnished incomplete return or incorrect return or furnished a return does not comply with the requirements of CST Act, 1956 read with Delhi Value Added Tax Act, 2004 for the following reasons:

Present Sh. H.K. Sharma, Advocate and Mr. Oberoi, Prop. for reconciliation of sale 2006-07, Sale Summary, DVAT-30, detail of C forms filed. The GTO of the firm is Rs.5820011/-, Inter State sale against C form for Rs.938815/-, sale @ 10% for Rs.20535/- and sale @ 12.5% for Rs.13860/-, Return filed. DVAT-51 filed. Hence form value of Rs.300465/- (consolidated in above form) disallowed, sale form filed lInd and 3rd qtr. So tax @ 6% on Rs.300465/- is the demand in CST. Pending C form Rs.50 175/-. So tax @ 6% on Rs.50175/- is the demand in CST. Audited balance sheet is filed.

The dealer is hereby directed to pay tax of an amount of Rs.21038 (Twenty one thousand thirty eight only) and furnish details of such payment in Form DVAT-27Aalong with proof of payment to the undersigned on or before 08-06-2011 for the following tax period(s)-

        Tax                 Amount (Rs)
        Period
                            Tax             Interest          Total


        FOURTH              21038           0                 21038
        QUARTER
        2006-2007

Worksheet and Assessment Summary are enclosed for reference."

16. A reading of the default assessment order dated 11 th May,

2011, would indicate that the assessing authority has recorded that

the return furnished was incomplete or incorrect and did not comply

with the requirements of CST Act read with DVAT Act. In the first

paragraph, the authority mechanically used the expressions in

Section 32 of the DVAT ACT i.e. "furnished incomplete return"

"incorrect return" and "furnished a return which does not comply

with the requirements of DVAT and CST Act", rather than

specifying a "precise default". Thereafter, in the next paragraph it

stands recorded that there was reconciliation of sale summary,

DVAT 30, details of „C‟ form filed, Interstate sales as declared

against „C‟ form was Rs.9,38,815/-, and DVAT 51 was also filed

(Date of DVAT 51, is not indicated). The authority, thereafter

observed that form value of Rs.3,00,465/- was consolidated in one

form and, therefore, disallowed from the sale in the second and third

quarter. Tax demand stood created. Amazingly, the tax demand

was created and the default assessment passed was for the fourth

quarter. It is not clear from the above reasons, why and for what

account, any opinion or belief was formed that there was

concealment, omission or failure on the part of the assessee to

disclose material facts. What is apparent from the aforesaid is that

the full details were filed by the assessee in form DVAT 30 and 51

etc. but on legal interpretation, consolidated „C‟ form was not

acceptable. This fact has been also noticed by the Tribunal in the

impugned reasoning. The fact that the appellant had filed

consolidated form was not concealed or omitted. The position that

the appellant has relied upon consolidated „C‟ form was known to

the authority. It was neither concealed nor omitted nor was there

any failure. Facts were on record and available. The reasoning/order

proceeds as if there was no difference between the limitation

periods of four or six years; and even more the limitation period of

six years would inevitably apply as a matter of routine. No attempt

stands made to invoke the proviso to Section 34(1) by referring to

the pre-requisites stipulated therein and to justify as to why the

extended period should apply. It is devoid and bereft of "reason to

believe".

17. Thus, on reading of the default assessment order, we do not

find that there is any averment or assertion that there was

concealment, omission or failure on the part of the appellant

assessee to furnish material particulars. The default assessment

order dated 11.05.2011, therefore, will falter and not meet the

statutory requirements. It is not the case of the respondent-revenue

nor has it been asserted that there is another document or note,

recording "reason to believe" by the Commissioner/authority.

18. As observed earlier, every error or mistake in the return

which leads to short payment or non-payment of tax, would not be

covered by the proviso to Section 34(1) of the DVAT Act. The said

proviso will only apply when the preconditions stipulated therein

i.e. (1) the Commissioner records reasons to believe that the tax has

not been paid; (2) the reason for non-payment of tax should be

concealment, omission or failure to disclose full material particulars

on the part of the assessee. It is only when the two conditions are

cumulatively satisfied and the reasons to believe show a live link or

nexus with the concealment, omission or failure to disclose material

facts resulting in short payment of tax or non levy of tax, that the

proviso to Section 34(1) of DVAT Act can be invoked.

19. The appellant assessee had filed objections under Section 74

of the Act before the Objection Hearing Authority and had

specifically pleaded that the default assessment was barred by

limitation. The Objection Hearing Authority observed that the

reconciliation return in Form DVAT-51 under the Delhi Value

Added Tax Rules, 2005 had to be filed within 3 months from the

end of the each quarter but in exercise of power conferred under

Rule 49A of the Delhi Value Added Tax Rules, 2005 read with

provisions of CST Act and the rules framed therein, the

Commissioner, Value Added Tax had extended the time for

furnishing of the reconciliation return in Form DVAT-51. Further,

the statutory forms in the instant case deposited on 09.05.2011, did

not conform to Rule 12(1) of the Central Sales Tax (Registration &

Turnover) Rules, 1957. Reference was to the requirement that the

appellant assessee should have furnished separate „C‟ forms for

each quarter of the financial year and not a single form for all the

quarters of a financial year. The matter was remanded by the

Objection Hearing Authority to the Assessing Officer. It is

noticeable that the Objection Hearing Authority did not deal with

the contention/challenge to the exercise of jurisdiction after four

years, being barred by limitation for want of recording "reasons to

believe". The Objection Hearing Authority, cannot record "reason

to believe". These, as per the statute, should be recorded by the

Commissioner/competent authority and that too, before or at the

time of passing of the default assessment order under section 32 of

the DVAT Act. The reason is simple that the power conferred must

be exercised in the manner prescribed and mandated, especially

when it is a jurisdictional pre-condition and requirement. Section

34(1) postulates and prescribes upper time limit for passing of the

default assessment order as four years, but extends the said period to

six years on satisfaction of pre-conditions laid down in the proviso.

This extended period is an exception and not the rule. So pre-

conditions in the proviso must be satisfied before or with the

passing of an order under Section 32 and not afterwards or by the

Objection Hearing Authority. The power must be exercised by the

Commissioner or the competent authority, before or at the time of

passing of the default assessment order. The Objection Hearing

authority cannot write or formulate the "reason to believe". The

statutory mandate is that the reason should be recorded by the

competent authority/Commissioner and should be before or at the

time of passing of the default assessment order. If and had the

authority, passing the default assessment order, recorded the

"reasons to believe" on the same lines as the Objection Hearing

authority, the outcome and decision possibly would have been

different.

20. It was in these circumstances that the appellant assessee had

approached the Tribunal, who, without adverting and examining

whether the "reasons to believe" should have been recorded by the

Commissioner/competent authority as per the requirement of

Section 34(1) of the DVAT Act, themselves examined and decided

the question whether the proviso to section 34(1) would be

applicable or not. The default assessment order as recorded does not

disclose and states as to why and for what reason the

Commissioner/competent authority had formed the belief that there

was concealment, omission or failure to disclose full material

particulars. In the absence of satisfaction of the said condition and

requirement, the extended period of six years cannot be invoked to

pass the default assessment order.

21. The question of law is, accordingly, answered in favour of the

appellant and against the revenue.

The appeal is disposed of. No Cost.

SANJIV KHANNA, J

V. KAMESWAR RAO, J SEPTEMBER 26, 2014/km