2025 (5) TMI 1817 - HC - VAT / Sales Tax

Liability of petitioner for payment of tax on the supply of foodstuff and other items to the students within its premises even though it has been held that petitioner is predominately existing for education - bifurcation of turnover into exempted and non-exempted goods even though it has been categorically found that the petitioner is not a dealer in view of the law laid down by various courts - justification in remanding the case back even though the entire proceedings were void ab-initio - liability to pay the tax on supply of goods to the students in the course of academic activities even though the same is not in the course of business - entitlement to Input Tax Credit for the tax paid on the purchase of goods which have been allegedly sold and held to be taxable by the tribunal. HELD THAT - A perusal of the Assessment Order would go to show that the same has been passed by the Assessing Authority without even caring or bothering to issue mandatory notice in the prescribed format VAT 29 as required under Rules 67 and 78 of the Act. It needs to be noticed that in the present case there is no material to establish that the ancillary activities of providing canteen facilities to the children is being conducted by the petitioner(s) with an independent intention to conduct business with such activities. Therefore in the present case the ancillary activities of providing canteen facilities to the inmates of the University would not amount to business as defined by the Act. Once that be so obviously the petitioner was not liable to pay any tax on the said activities. After all before imposing any tax the authorities at the first place are required to see whether the Act is applicable or not and in such like cases there cannot be a deemed sale so as to attract the levy of tax. The burden to prove such intention rests upon the Department. It is otherwise more than settled that in the absence of profit making the activity is not trade commerce or business within the meaning of Section 2 (15) of the Income Tax Act 1961. When the main dominant activity of the University is to impart education it cannot be termed as business activity. In coming to such conclusion we are duly supported by the Judgment of the Hon ble Supreme Court in Commissioner of Sales Tax vs. Sai Publication Fund 2002 (3) TMI 45 - SUPREME COURT wherein the Hon ble Supreme Court categorically held that where the main activity is not business then any incidental or ancillary transactions would normally amount business out if an independent intention to carry on the business in the incidental or ancillary transaction is established. It was further held that the burden to prove such intention rests on the department. In the facts of the case it was held that the main and dominant activity of the assessee trust was to spread the message of Sai Baba bringing out Publication and sales thereof by the assessee trust to its devotees at costs price did not amount to business and did not make the assessee trust a dealer . The petitioner(s)-University has reported in the Income and Expenditure Account Schedule and Sub-Schedule have been listed and the instant demand has been made without establishing that how these incomes would be liable to VAT - What is still worse is that even the goods for which VAT is being demanded have not been spelt out in the impugned demand extracted. Be that as it may the petitioner(s)-University has already given the details of the income which are listed for tax and also provided the reasons why such income cannot be subjected to tax. Learned counsel for the petitioner(s)-University is fully justified in contending that once the canteen is not main activity of the University then any incidental or ancillary transaction held would normally amount to business only if an independent intention to carry on the business in the incidental and ancillary transaction is established. Conclusion - i) The learned Tribunal erred in holding that the petitioner is liable to payment of taxes on supply of food stuff and other items to the students within its premises even though it has been held that petitioner is predominately existing for education. ii) The learned Tribunal erred in artificially bifurcating the turnover into exempted and non13 exempted goods even though it has been categorically found that the petitioner is not a dealer in view of the law laid down by various courts. iii) There was no occasion for the learned Tribunal to have remanded the case back particularly when the entire proceedings were void ab initio and all the orders ought to have been set aside. iv) The learned Tribunal not at all justified in holding that the petitioner would be liable to pay the tax on supply of goods to the students in the course of academic activities even though the same is not in the course of business. Petition allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The Court considered the following core legal questions arising from the revision petitions:

(i) Whether the petitioner university is liable to pay tax on the supply of foodstuff and other items to students within its premises, despite the petitioner being predominantly established for educational purposes.

(ii) Whether the Tribunal was justified in bifurcating the turnover into exempted and non-exempted goods, given that the petitioner was found not to be a dealer under the relevant law.

(iii) Whether the Tribunal was justified in remanding the case back despite the entire proceedings being void ab initio, warranting setting aside of the orders in toto.

(iv) Whether the petitioner is liable to pay tax on the supply of goods to students in the course of academic activities, even though such supply is not in the course of business.

(v) Whether the petitioner is entitled to Input Tax Credit for tax paid on purchases allegedly sold and held taxable by the Tribunal.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Liability to pay tax on supply of foodstuff and other items to students

The petitioner university was established as a State Government University under a specific Act and operates on a not-for-profit basis with the primary object of imparting technical education. The supply of food and related items occurs within the university premises through mess facilities (Annapoorna wings) exclusively for students, with no access to outsiders.

The relevant legal framework includes the Himachal Pradesh Value Added Tax Act, 2005 (HPVAT Act), particularly Section 21(7) under which VAT was imposed. The Court also referred to Section 2(15) of the Income Tax Act, 1961, which defines "business," and various precedents clarifying the scope of business activities and taxation of incidental or ancillary transactions.

The Court noted that the ancillary activity of providing canteen facilities lacked any independent intention to carry on business or profit-making. The petitioner's main and dominant activity is education, which is not a business activity. The Court relied on authoritative precedents, including the Supreme Court's decision in Commissioner of Sales Tax vs. Sai Publication Fund, which held that incidental transactions do not amount to business unless an independent business intention is established.

Evidence showed that the petitioner operated the mess facilities solely for the benefit of students, in a remote location lacking accessible markets, and that the income was accounted for in the Income and Expenditure Account without evidence of profit-making or business intent.

The Court concluded that the petitioner was not liable to pay VAT on the supply of foodstuff and other items to students, as these were ancillary to the educational purpose and not commercial transactions.

Issue (ii): Justification of bifurcation of turnover into exempted and non-exempted goods

The Tribunal bifurcated the petitioner's turnover into exempted and non-exempted goods to compute VAT liability. However, the Court found this bifurcation artificial and unjustified because the petitioner was not a dealer under the law, and the main activity was educational, not commercial.

The Court emphasized that the burden lies on the Department to prove that the petitioner engaged in business activities subject to VAT. Since the petitioner was not a dealer and the supply of goods was incidental to education, the bifurcation of turnover was unwarranted.

The Court also noted that the goods for which VAT was demanded were not clearly specified in the impugned demand, further undermining the Department's case.

Issue (iii): Validity of remanding the case despite void proceedings

The Tribunal remanded the case back for further proceedings despite the entire assessment proceedings being void ab initio due to procedural irregularities.

The Court observed that the assessment order was passed without issuance of mandatory notices as required under Rules 67 and 78 of the HPVAT Act, which rendered the proceedings void. The Assessing Officer acted unprofessionally and illegally by fixing tax liability on the spot, without affording the petitioner an opportunity to be heard.

Given these fundamental procedural defects, the Court held that remanding the case was improper. Instead, the entire proceedings and orders should have been set aside in toto to uphold principles of natural justice and legality.

Issue (iv): Liability to pay tax on supply of goods in the course of academic activities

The Tribunal held that the petitioner was liable to pay tax on goods supplied to students during academic activities, asserting these were taxable transactions.

The Court rejected this reasoning, holding that the supply of goods in the course of academic activities, when not conducted as a business, does not attract VAT. The supply was incidental to the university's educational purpose and not in the course of business or trade.

The Court reiterated that without an independent intention to carry on business, such supplies do not amount to taxable sales under the HPVAT Act.

Issue (v): Entitlement to Input Tax Credit

Since the Court found no liability to pay tax on the supply of goods, the question of entitlement to Input Tax Credit did not arise for consideration.

3. SIGNIFICANT HOLDINGS

The Court made the following crucial legal determinations and established core principles:

"The ancillary activities of providing canteen facilities to the inmates of the University would not amount to business as defined by the Act. Once that be so, obviously, the petitioner was not liable to pay any tax on the said activities."

"Where the main activity is not business, then any incidental or ancillary transactions would normally amount business only if an independent intention to carry on the business in the incidental or ancillary transaction is established. The burden to prove such intention rests on the Department."

"The Assessing Officer took the law into his own hand and played as a Prosecutor, Judge and Executor at the same time."

"The entire proceedings were void ab initio for want of issuance of mandatory notice and hence all the orders ought to have been set aside."

"The learned Tribunal erred in holding that the petitioner is liable to payment of taxes on supply of food stuff and other items to the students within its premises even though it has been held that petitioner is predominately existing for education."

"The learned Tribunal erred in artificially bifurcating the turnover into exempted and non-exempted goods even though it has been categorically found that the petitioner is not a dealer in view of the law laid down by various courts."

"There was no occasion for the learned Tribunal to have remanded the case back particularly, when the entire proceedings were void ab initio and all the orders ought to have been set aside."

"The learned Tribunal not at all justified in holding that the petitioner would be liable to pay the tax on supply of goods to the students in the course of academic activities even though the same is not in the course of business."