2010 (9) TMI 994 - HC - VAT and Sales Tax

Whether the order of assessment passed by the first respondent dated October 30 2009 is arbitrary and illegal? Held that - Both in the order of assessment and in the counter-affidavit the first respondent admits that there is no specific rule providing for the manner in which he had assessed the petitioner to tax. Under article 265 of the Constitution of India no tax can be levied or collected except by authority of law and in the absence of a procedure similar to the one adopted by him being prescribed by law it is not open to the assessing authority to contend that a particular mode should be adopted or that the procedure adopted by the assessee is not rational. It is the petitioner s case that the method of adjustment of input tax against the output tax payable adopted by them would enable them to avail of the benefit of the balance tax deferment in its entirety which they would otherwise not be in a position to utilize as the period of availment of tax deferment expired by March 2007. The assessing authority cannot insist on the assessee adopting a particular method which would deny them the benefit of utilization of the balance available tax deferment in its entirety and instead pay tax. The impugned order of assessment to the extent the assessing authority adjusted the input tax credit first against the manufacturing activity of the petitioner and the balance against their trading activity is neither a method authorized by law nor can such a method be forced on the assessee as it is to their detriment. The assessment order must to this limited extent be set aside.

Summary

Issues:
Challenge to assessment order as arbitrary and illegal, adjustment of input-tax credit against output tax payable, rationality of assessment method, interpretation of tax legislation, authority of assessing officer, constitutional validity of assessment method.

Detailed Analysis:
The judgment in question revolves around the challenge to an assessment order dated October 30, 2009, as being arbitrary and illegal. The petitioner, a private limited company engaged in manufacturing and trading activities, had availed tax deferment benefits under government incentives. The State Government had extended these benefits through eligibility certificates, and the petitioner had claimed the balance incentive for specific assessment years. The key contention arose regarding the adjustment of input-tax credit against the output tax payable by the petitioner. The assessing authority proposed a different method of adjustment, leading to a dispute on the rationality and legality of the assessment method adopted.

The petitioner argued that their chosen method of adjusting input tax against output tax would allow them to utilize the tax deferment benefits fully, which would otherwise remain unutilized due to the expiration of the deferment period. On the contrary, the assessing authority insisted on a different adjustment method, emphasizing the connection between input tax related to manufacturing and output tax on sale of manufactured products. The absence of a specific rule prescribing the assessment method led to a constitutional challenge under Article 265 of the Indian Constitution, which prohibits levying taxes without authority of law.

The court analyzed the competing arguments and held that the assessing authority's method of adjustment, which prioritized input tax credit against manufacturing activity before trading activity, was neither authorized by law nor beneficial to the petitioner. The court emphasized that the assessing officer cannot impose a method that denies the assessee the full benefit of available tax deferment. Consequently, the court set aside the assessment order to the extent that it adjusted input tax credit against manufacturing activity first, thereby ruling in favor of the petitioner's preferred adjustment method to avail the tax deferment benefits fully.

In conclusion, the judgment delves into the interpretation of tax legislation, the authority of the assessing officer, and the constitutional validity of the assessment method. By emphasizing the need for a rational and beneficial approach to tax assessment, the court provided clarity on the permissible methods of adjusting input tax credits against output tax payable, ensuring that the assessee can avail of entitled benefits without undue detriment.