Partly allowed

Malani Construction Company v. State of Gujarat

Gujarat HC23 Aug 2019SCA/13971/2019

Case brief

AI extract

What is this about?

The High Court quashed a tax assessment order and demand notice for violation of natural justice. The court held that the authority ignored consistent accounting methods and failed to record reasons, rejecting the argument that a statutory appeal barred the writ petition.

What did the court decide?

Petition allowed in part. Assessment order dated 24.03.2019 (Form No.304) and demand notice (Form No.305) quashed and remitted to the authority for fresh consideration within eight weeks.

Malani Construction Company Vs State… — Constitutional and Fundamental Rights | Gujarat HC (2019)

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C/SCA/13971/2019 JUDGMENT

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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

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R/SPECIAL CIVIL APPLICATION NO. 13971 of 2019

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FOR APPROVAL AND SIGNATURE:

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HONOURABLE MR.JUSTICE J.B.PARDIWALA

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and

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HONOURABLE MR.JUSTICE A.C. RAO

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=============================================

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1 Whether Reporters of Local Papers may be allowed to see the judgment ?

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2 To be referred to the Reporter or not ?

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3 Whether their Lordships wish to see the fair copy of the judgment ?

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4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India or any order made thereunder ?

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============================================= MALANI CONSTRUCTION COMPANY

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Versus

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STATE OF GUJARAT

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============================================= Appearance:

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MR. APURVA N MEHTA(7202) for the Petitioner(s) No. 1 VIJAY H PATEL(7361) for the Petitioner(s) No. 1

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MS MAITHILI D MEHTA, ASST. GOVERNMENT PLEADER for the Respondent(s) No. 1,2

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=============================================

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CORAM: HONOURABLE MR.JUSTICE J.B.PARDIWALA

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and

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HONOURABLE MR.JUSTICE A.C. RAO

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Date : 23/08/2019

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ORAL JUDGMENT

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(PER : HONOURABLE MR.JUSTICE J.B.PARDIWALA)

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Rule returnable forthwith. Ms.Maithili D. Mehta, the

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learned Assistant Government Pleader waives service of notice of rule for and on behalf of the respondents.

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By this writ application under Article 226 of the Constitution of India, the writ applicant, a registered partnership firm engaged in the business of executing civil and labour contracts, has prayed for the following reliefs :

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“(A) YOUR LORDSHIPS may be pleased to admit and allow this Petition.

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(B) YOUR LORDSHIPS may be pleased to issue writ of Mandamus or any other appropriate writ, order or direction quashing and setting aside the assessment order in Form No.304 dated 24.03.2019 passed by the Ld. Assistant State Tax Commissioner, Unit-89, Division – 2, Rajkot for the period F.Y. 2014-15;

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(C) YOUR LORDSHIPS may be pleased ti issue writ of Mandamus or any other appropriate writ, order or direction quashing and setting aside the notice for amount assessed in Form No.305 dated 24.03.2019 issued by the Ld. Assistant State Tax Commissioner, Unit-89, Division – 2, Rajkot for the assessment period F.Y. 2014-15.

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(D) Pending admission and final disposal of this Petition, this Hon’ble Court be pleased to stay the recovery of dues on the basis of the Notice annexed at Annexure A (Collectively);

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(E) Ex-parte ad interim relief in term of Para (D) may kindly be granted;

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(F) Such other and further relief/s as may be deemed just in the facts and circumstances of the present case may kindly be granted;”

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2.1 It appears from the materials on record that the writ applicant seeks to challenge the assessment order dated 24.03.2019 passed in the Form No.304 as well as the demand notice dated 24.03.2019 issued in the Form No.305 by the Assistant State Tax commissioner, Unit - 89, Division - 2, Rajkot under Section 34(2) of the Gujarat Value Added Tax Act, 2003 (for short “the Act, 2003”).

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2.2 The challenge to the impugned assessment order as well as the demand notice referred to above is on the ground that the same is illegal and contrary to the law and has been passed without affording adequate opportunity of hearing. In short, the writ applicant has complained of breach of the principles of natural justice and fair play. The facts, as pleaded by the writ applicant in his own words, are as follows :

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“2.1 The Petitioner herein is a registered partnership firm having its office mentioned in the cause title. The Petitioner is into the business of executing civil and labour contracts. The Petitioner is a government approved contractor executing government and semi-government contracts. The

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majority of the partners of the Petitioner firm are citizens of India and therefore, entitled to protection of fundamental rights guaranteed under Part-III of the Constitution of India, 1950. The Petitioner is also a registered dealer under the provisions of the Act. The present Petition concerns the assessment period 2014-15.

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2.2 The Respondent No.1 is the State while the Respondent No.2 is the Officer of the State Tax Department of the State of Gujarat entrusted with the task of assessment and collection of tax from the dealers under the Act and their functions and powers are as laid down under the Act. The Respondents are thereby “State” within the meaning of of Article 12 of the Constitution of India and hence, amenable to the writ jurisdiction of this Hon’ble Court.

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2.3 The Petitioner, during the period under consideration, had filed its annual self assessment returns under Section 33 of the Act in the prescribed form. The Petitioner had reported taxable turnover of sales to the tune of Rs.118,98,05,615 following the cost plus gross profit method. The Petitioner had reported purchases of Rs.108,16,41,465. The output tax payable on sales was adjusted against the input tax credit available on purchases and excess credit balance was carried forward to the subsequent period.

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2.4 The Petitioner had, during the earlier assessment years, also filed annual self assessment returns following cost plus gross profit method for arriving at taxable turnover of sales. The assessments of the previous periods were completed by the Respondent authority either under audit assessment category or under deemed assessment category.

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2.5 The scrutiny / audit assessment of the Petitioner for the period under consideration came up before Respondent

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No.2. The Respondent authority being of the view that the method adopted by the Petitioner for arriving at taxable turnover of sales not being in consonance with the provisions of Section 2(30)(c) of the Act, issued a communication dated 06.03.2019 intimating the Petitioner that he has decided to frame assessment by adopting method as provided in Sec.2(30)(c) of the Act for arriving at taxable turnover of sales. The Respondent authority had also decided, which is reflected in the intimation, that the method adopted by the Petitioner for arriving at taxable turnover of sales is liable to be rejected.

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2.6 The Respondent authority along with such intimation also issued Notice in Form No.309 dated 06.03.2019 for imposing penalty under Sec. 34(7) and 34(12) of the Act. The said notice is in a cyclostyle format which indicates 18 instances where penalty under the Act can be imposed. The Respondent authority has clearly failed to indicate a single instance or reason to believe why a huge penalty to the tune of Rs.11,68,53,998 was required to be imposed. Believing it to be true without accepting that there are reasons to believe for imposing penalty on the Petitioner, no opportunity worth the name was given to the Petitioner to explain for not imposing the penalty.

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2.7 The Petitioner appeared with its books of accounts along with supporting documents on 13.03.2019 at the office of the Respondent authority. The Petitioner during the hearing submitted calculation of taxable turnover of sales as per Section 2(30)(c) of the Act and filed detailed written submissions. Apart from the method of calculation of taxable turnover, no other queries were raised by the Respondent authority nor did he ask for any documents from the Petitioner.

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2.8 The Petitioner submits that neither the intimation

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dated 06.03.2019 provide opportunity of explaining as to why the cost plus gross profit method adopted or deductions claimed be not disallowed while arriving at taxable turnover of sales nor the notice in Form No.309 provide reasons to believe for imposing the penalty on the Petitioner. The hearing on 13.03.2019 was just a formality by the Respondent authority and no opportunity worth the name was given to the Petitioner to explain as to why the method adopted or the deduction claimed for arriving at taxable turnover of sales be not disallowed.

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2.9 The Petitioner was represented by its legal representative at the hearing on 13.03.2019 along with all the supporting documents. The Respondent authority passed the assessment order dated 24.03.2019 making huge additions thereby raising exorbitant dues of Rs.25,08,46,582 inclusive of interest and penalty. The Respondent authority did not ask for a single document before making huge additions. This itself goes on to show that the hearing that took place on 13.03.2019 was a mere formality and no proper opportunity of hearing was provided to the Petitioner.

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2.10 The Petitioner submits that even the impugned assessment order dated 24.03.2019 does not record any reasons for making the high pitched assessment raising dues to the tune of Rs.25,08,46,582 inclusive of interest and penalty. The Respondent authority has framed the assessment in a very hasty, arbitrary and illegal manner without following the due procedure of granting opportunity to the Petitioner to explain the method followed or deductions claimed while arriving at taxable turnover of sales. The above instances itself goes on to show that the impugned order is blatantly arbitrary, illegal and the same is passed without adhering to the principles of natural justice.”

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Mr. Tushar Hemani, the learned senior counsel appearing for the writ applicant submitted as follows :

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(1) The impugned assessment order is in gross violation of the principles of natural justice and not in accordance with law;

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(2) The assessing authority has not at all dealt with the submissions canvassed on behalf of the writ applicant and has grossly erred in passing the impugned order without any semblance of reasons;

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(3) The assessing officer issued show-cause notice which only indicated his proposed action without giving any valid reason as to why such an action was contemplated or warranted in the first place and without indicating as to what was wrong or incorrect with the method of accounting consistently followed by the writ applicant;

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(4) The writ applicant, in details, explained the method of accounting consistently followed by it and also placed on record the details of expenditure to be allowed even if the proposed method is to be followed.

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3.1 Mr. Hemani placed strong reliance on the following decisions in support of his submissions :

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(i) Messrs N.K. Fire & Safety vs. Union of India (SCA

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No.10934 of 2019, dated 26/06/2019);

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(ii) Calcutta Discount Co. vs. ITO [41 ITR 191 (SC) @ 207-208, para 26-27-28];

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(iii) Whirlpool Corporation vs. Registrar of Trade Marks (1998) 8 SCC 1, para 14 & 15;

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(iv) Vithalani Exports vs. Asst. Commissioner of Commercial Tax (SCA No.8882 of 2015, dated 29/7/15); (v) Vadilal Gas Ltd. vs. Union of India (2016) 332 ELT 625 (Guj.).

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On the other hand, this writ application has been vehemently opposed by Ms.Maithili D. Mehta, the learned AGP appearing for the respondents. Ms.Mehta submitted that this writ application may not be entertained only on the ground that the writ applicant has an alternative efficacious remedy of preferring an appeal before the Commissioner. Ms.Mehta submitted that no error not to speak of any error of law could be said to have been committed by the Assistant State Tax Commissioner in passing the impugned assessment order in the Form No.304 as well as the demand notice in the Form No.305.

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4.1 Ms.Mehta invited the attention of this Court to the

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reasonings assigned by the respondent No.2, wherein the respondent No.2 has stated as under :

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“Submission of the trader has not been accepted considering Section 2(30)(C) of the Value Added Tax. Further, the trader states in written submission that,

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“As per the judgment of the Supreme Court in the case of Genan Dankarli & Co. Vs. High Court of Andhra Pradesh, expenses occurred before deciding deemed sell as per contract income are admissible.”

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A show cause notice has been issued to the trader wherein after deduction of necessary expenses towards labour and implementation of works contract, tax liability was fixed.

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Sublet amount of Rs.46,47,56,881/- mentioned in the calculation sheet attached with written submission is demanded to be deducted. But, no supporting document has been produced. Therefore, the submission of the trader to deduct Sublet amount has not been accepted.

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Thus, submission of the trader and aforementioned facts were verified and out of the income of Rs.265,47,44,186/-, expenses mentioned in balance sheet towards labour and implementation of works contract amounting to Rs.48,46,40,343/- and necessary direct expenses namely M.T. Testing, Architect Fees, Machinery Expense amounting to Rs.1,80,95,930/- were deducted and taxable turnover amounts to Rs.215,20,07,913/- upon which output tax of Rs.17,64,48,509/- assessed after deciding taxable sale as per the percentage of purchase mentioned in the sheet. Rs.108,16,41,465/- has been accepted as per total purchase sheet, on which Rs.8,82,68,529/- tax credit is demanded. Out of the same, amount of Rs.46,34,677/- has been rejected due to mismatch. Setting off remaining Rs.8,36,33,852/against output tax, amount of Rs.9,28,14,657/- is due. No tax

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has been paid. Deducting TDS (as per form-703) amount of Rs.1,49,11,992/-, amount of Rs.7,79,02,665/- is due. Interest amount of Rs.5,60,89,919/- and 150% fine as per Section34(12) amounting to Rs.11,68,53,998/-, thus, total amount Rs.25,08,46,852/- is due. Issue demand notice.”

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4.2 Ms.Mehta submitted that the respondent No.2 has clearly observed in the impugned assessment order that although the writ applicant claimed exemption of the amount of Rs.46,47,56,881/- on the ground of subletting but, the writ applicant has failed to adduce any evidence in that regard.

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4.3 In such circumstances referred to above, Ms.Mehta prays that there being an alternative efficacious remedy available to the writ applicant, he must be relegated to exhaust the same and even otherwise, on merits, the writ applicant has no case.

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Mr.Tushar Hemani, the learned senior counsel, in rejoinder, submitted that it is not just sufficient for a quasi judicial authority to pass an order without dealing with the submissions canvassed by the litigant. He would submit that if the impugned order is in gross violation of the principles of natural justice, then an efficacious alternative remedy is no bar to entertain the writ application under Article 226 of the

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Constitution of India. Mr.Hemani submitted that one of the principles of natural justice is fairness. Fairness embraces in itself the duty to deal with the submissions canvassed by an authority before a quasi judicial authority. The consideration should be meaningful and not just an empty formality or an eye-wash.

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Having heard the learned counsel appearing for the parties and having gone through the materials on record, the only question that falls for our consideration is whether the respondent No.2 committed any error in passing the impugned assessment order.

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6.1 It appears from the materials on record that the writ applicant is a Government approved works contractor since 1967. The writ applicant has so far undertaken the works contracts for various government, semi-government and other such entities. It appears that the writ applicant has been consistently following a method of accounting wherein the material used in the contract is marked-up with the gross profit to quantify the deemed sale and on the said deemed sale the tax is worked out at the applicable rate. As against this tax liability, the input tax credit which is available on the

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purchases and TDS under Section 59B would be reduced so as to work out the net tax liability. It appears from the materials on record that such method of accounting was accepted by the department till the recent past and the assessments for the earlier years were also framed accepting such method. The decision of the Supreme Court in the case of Gannon Dunkerly and Co. and Ors. vs. State of Rajasthan and Ors. Reported in (1993) 1 SCC 364 was also relied upon before the respondent No.2. Unfortunately, this decision has not been dealt with even remotely. According to the dictum as laid in the said decision, the allowable expenditure as the audited account as quantified in the statement needs to be reduced from the gross receipts.

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6.2 It appears that the respondent No.2 has not considered the tax audit report containing the contract wise information alongwith the details of the allowable expenditure. The same is on record. It also appears prima facie that the figures of the total contract receipts, total purchases and allowable expenditure, though duly computed and quantified, have not been looked into or discussed. The respondent No.2 has observed in his impugned assessment order that the method adopted by the writ applicant is not in accordance with Section 2(30)(c) of the GVAT Act. We also

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take notice of the fact that as regards the penalty under Section 34(12) of the Act, only a cyclostyle penalty notice without indicating the nature of infraction has been issued.

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6.3 In the overall view of the matter, we are convinced with the submissions canvassed on behalf of the writ applicant that the matter deserves to be remitted to the respondent No.2 for a fresh consideration with a direction to re-consider the matter, having regard to the materials on record and after hearing the writ applicant. We are not convinced with the method and the manner in which the impugned assessment order came to be passed by the respondent No.2. In such circumstances, we reject the preliminary contention canvassed on behalf of the respondents that the writ applicant should be asked to prefer the statutory appeal available in law. Mr. Hemani, the learned senior counsel is right in his submission that when the impugned order is bereft of the reasons then, the same could be said to be gross violation of the principles of natural justice and, if that be so, then the alternative remedy should not be a bar in entertaining the writ application.

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For the foregoing reasons, we allow this writ application in part . The impugned assessment order dated 24.03.2019 in

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Form No.304 as well as the demand notice dated 24.03.2019 in Form No.305 is hereby quashed and set aside. The entire matter is remitted to the respondent No.2 for fresh consideration of all the issues as discussed in this Judgement. The respondent No.2 shall once again apply his mind to the method of accounting and also take into consideration the decision of the Supreme Court referred to above. If the respondent No.2 is of the view that the method of accounting is not in accordance with Section 2(30)(c) of the GVAT Act, then to substantiate such finding, appropriate, cogent reason shall be assigned.

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7.1 The respondent No.2 shall once again hear the writ applicant and take into consideration all the relevant materials earlier adduced by the writ applicant and also the materials that may be once again adduced at the time of rehearing of the matter. Let this exercise be undertaken and completed within a period of eight weeks from the date of the receipt of this order. Rule made absolute to the aforesaid extent.

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Dolly

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Malani Construction Company v. State of Gujarat

Case brief

What is this about?

What did the court decide?

Malani Construction Company v. State of Gujarat

Case brief

What is this about?

What did the court decide?

What the court decided

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