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Article by Mr. Hemant Desai – Advocate VAT – SURAT | www: hddesai.com 1 | P a g e
THE FLOOD, ‘ACT OF GOD’ & INPUT TAX CREDIT
Article by Mr. HEMANT DESAI Advocate – VAT – SURAT
E-mail: [email protected]
1. A massive flood extremely hit Surat City between the periods from
7th to 12th August 2006. Majority of the population remained in
floodwater with constant high of above men’s height. Government
authority conveyed the message through SMS on August 7, 2006 at
20.57 p.m. stating “current situation in Surat is much serious than 1998 –
citizens are requested to shelter in minimum height of 20 feet – sender District
Administration Surat”. Prior to the said message people witnessed that
flood water under heavy speed entered in City area at about 20.00
p.m. and within 3 hours time it crossed water level of 6 feet and
increased further. Difficult task has been experienced by common
men and business community. It became very difficult to take care of
business related books of accounts, its allied records and goods
rather than to take care of human personal life. Incidentally this is
the beginning year for the Gujarat Value Added Tax Act, 2003 (for
short as ‘Act, 2003’) in which by a new concept upon purchase of
goods by tax invoice the registered dealer becomes eligible for tax
credit, in statutory parlance it is regarded as INPUT TAX CREDIT (for
short as ‘ITC’). In some cases such goods lying in stock have either
been lost or damaged and hence destroyed.
2. With regard to Act, 2003 for destroy of goods two views are found.
One school of thought has expressed views that ITC is eligible, in
other words do not requires reversal, while as second school of
thought has expressed negative views, in other words ITC claimed
requires to be reversed. The former is the views expressed by legal
experts and latter is the views expressed by learned revenue
authorities. However to confirm the net amount of Value Added Tax
(for short as ‘VAT’) for tax period is to be determined by considering
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the provisions of the Act, 2003. Refer to the scheme of the Act it
provides two methods for discharging the onus to make the payment
of VAT. First is composition scheme, it is optional, which is in lieu of
VAT. Under the said scheme dealer is neither permissible to collect
composition amount or VAT nor entitled to avail credit of tax amount
paid to vendor. Second is general scheme, in which dealer can collect
VAT amount or can keep the VAT amount inclusive and is entitled to
avail credit of tax which they have paid to vendor and discharge the
onus by net off. For ITC the accounting standard guide line states
those dealers who desire to avail it are obliged to open separate
ledger account. Hence for cases pertaining to second category needs
specific answer.
3. In pursuance of above facts and circumstances, the affected
registered dealers did not find above approach satisfactorily, feeling
aggrieved, for just and fair decision they approached the commercial
tax authority concerned and also made representation to the State
Government that the principles on which Act is formulated is
beneficial legislation of the State that needs to be interpreted
precisely in liberal manner and with an intention to see that purpose
for Act is fulfilled and the beneficiary is helped. The prayer has also
been made that the interpretation should not lead to see that it
would frustrate the object of Law and welfare State should not
become harsh and deny the benefits available to them when they
have acted in good faith. It has been specifically urged that any
contrary decision would lead them into unfair act, and that would
not befit a welfare State, which is expected to act in fair and equitable
manner. Despite the fact, after considerably long period it appears
that the representation made to State Government on the aforesaid
subject matter and decision in that behalf is still pending on even
date. Empathetically the enactment states that registered dealers are
statutorily required to file annual return, which is self assessment,
Article by Mr. Hemant Desai – Advocate VAT – SURAT | www: hddesai.com 3 | P a g e
has also to get books of accounts audited and that has created doubt
that:
Whether dealer can legitimately claim the full amount of ITC when
such goods have been destroyed on account of flood?
When dealer has acted in good faith and situation becomes beyond
the control, for the destroyed goods amount of ITC be reversed?
What is the legal position of law, remedy and defence? Is there any
case law which supports the claim of ITC?
Circumstances of earthquake, cyclone, riots, fire, accident etc. are
similar to flood or they are different?
Whether the denial of ITC by Commercial Tax authority would be
legitimate within four corners of Act, 2003?
4. To answer the above queries it is necessary to refer the relevant
provisions under the Act, 2003 and Gujarat Value Added Rules, 2006
(for short as ‘Rules, 2006’). Under the Act, 2003 it is necessary to
refer Chapter II, relevant is section 11 and under the Rules, 2006
Chapter IV, relevant is Rule 15 it defines calculation of ITC. At
relevant time they reads as follows:
Sec. 11 Tax Credit.
(1) (a) A registered dealer who has purchased the taxable goods (hereinafter
referred to as the “purchasing dealer”) shall be entitled to claim tax credit equal
to the amount of,–
(i) tax collected from the purchasing dealer by a registered dealer from whom he
has purchased such goods or the tax payable by the purchasing dealer to a
registered dealer who has sold such goods to him during the tax period, or]
(ii) tax paid by him during the tax period under sub-section (1) or (2) of section
9, or
(iii) tax paid by the purchasing dealer under the Gujarat Tax on Entry of
Specified Goods into Local Areas Act, 2001.
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(b) The tax credit to be so claimed under this sub-section shall be subject to the
provisions of sub-sections (2) to (12); and the tax credit shall be calculated in
such manner as may be prescribed.
(2) The registered dealer who intends to claim the tax credit shall maintain the
register and the books of accounts in such manner as may be prescribed.
(3) (a) Subject to the provisions of this section, tax credit to be claimed under sub-
section (1) shall be allowed to a purchasing dealer on his purchase of taxable
goods made in the State, which are intended for the purpose of –
(i) sale or re-sale by him in the State;
(ii) sale in the course of inter-State trade and commerce;
(iii) branch transfer or consignment of taxable goods to other States (subject to
the provision of Sub-clause (b) below);
(iv) sales in the course of export out of the territory of India;
(v) sales to export oriented units of the units in Special Economic Zones for
sale in the in the course of export out of the territory of India;
(vi) Use as raw material in the manufacture of taxable goods intended for (i) to
(v) above or in the packing of the goods so manufactured.
(vii) use as capital goods meant for use in manufacturer of taxable goods
intended for (i) to (vi) above subject to the condition that such capital goods
are purchased after the appointed day:
Provided that if purchases are used partially for the purposes specified in this
sub-section, the tax credit shall be allowed proportionate to the extent they are
used for the purposes specified in this sub-section”.
(b) Notwithstanding anything contained in this section, the amount of tax credit in
respect of a dealer shall be reduced by the amount of tax calculated at the rate
of four per cent. on the turnover of purchases –
(i) of taxable goods consigned or dispatched for branch transfer or to his agent
outside the State, or
(ii) of goods taxable which are used as raw materials in the manufacture, or in
the packing of goods which are dispatched outside the State in the course of
branch transfer or consignment or to his agent outside the State.
(iii) of fuels used for the manufacture of goods.
(4) The tax credit shall not be claimed by the purchasing dealer until the tax period
in which he receives from a registered dealer from whom he has purchased
Article by Mr. Hemant Desai – Advocate VAT – SURAT | www: hddesai.com 5 | P a g e
taxable goods, a tax invoice (in original) Containing Particulars as may be
prescribed under Sub-section (1) of Section 60 evidencing the amount of tax.
(5) Notwithstanding anything contained in this Act, tax credit shall not be
allowed for purchases –
(a) to (e) not relevant hence not reproduced.
(f) of the goods (not being taxable goods dispatched outside the State in the
course of branch transfer or consignment) which are disposed of otherwise
than in sale, resale or manufacture;
(g) to (p) are not relevant hence not reproduce.
Notwithstanding anything contained in clause (a) or (b) in this sub-section and
subject to conditions as may be prescribed, a registered dealer shall be allowed to
claim tax credit in respect of purchase tax paid by him under sub-section (1) or (2)
of section 9.
(6) and (7) not relevant hence not reproduced.
(8) (a) If the goods purchased were intended for the purposes specified under sub-
section (3) and are subsequently used fully or partly for purposes other than
those specified under the said sub-section or are used fully or partly in the
circumstances described in sub-section (5), the tax credit, if availed of, shall be
reduced on account of such use, from the tax credit being claimed for the tax
period during which such use has taken place; and such reduction shall be
done in the manner as may be prescribed.
(b) Where the capital goods referred to in sub-clause (vii) of clause (a) of sub-section
(3) are not used continuously for a full period of five years in the State, the
amount of tax credit shall be reduced proportionately having regard to the
period falling short of the period of five years.
(9) The registered dealer may claim the amount of net tax credit, which shall be
determined in the manner as may be prescribed.
(10) not relevant hence not reproduced.
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(11) A registered dealer shall apply fair and reasonable method to determine, for the
purpose of this section, the extent to which the goods are sold, used, consumed
or supplied, or intended to be sold, used, consumed or supplied. The
Commissioner may, after giving the dealer an opportunity of being heard and
for the reasons to be recorded in writing, reject the method adopted by the
dealer and calculate the amount of tax credit as he deems fit.
(12) not relevant hence not reproduced.
Explanation: For the purposes of this section, amount of tax credit on any
purchase of goods shall be the same as the amount of tax paid or
payable under this Act or the amount of tax calculated on the fare
market price of their purchase, whichever is lower.
R. 15 - Calculation of Tax Credit under section 11.
(1) A registered dealer shall maintain the registers of purchases of goods and
mention therein the name and place of the selling dealer, his registration
number, serial number and date of tax invoice, description of goods along with
HSN, quantity of goods, value of goods and the tax charged.
(2) A registered dealer shall claim tax credit under section 11 in a tax period in
which he records, in his books of accounts, the tax invoice in respect of his
purchases of taxable goods.
(3) A registered dealer shall calculate tax credit as per Form-201 and such
calculation shall be made separately for each tax period.
(4) The amount involved in purchases specified in sub-section (5) of section 11
shall be excluded from the calculation of tax credit.
(5) The amount of tax paid under sub-section (1) or (2) of section 9 of the Act and
the amount of tax paid under the Gujarat Tax on Entry of Specified Goods into
Local Areas Act, 2001 shall be claimed in the tax period in which such amount
has been paid.
Explanation: For the purpose of calculating the tax credit, the amount of tax under sub-
section (1) of section 9 of the Act or the amount of tax under the Gujarat
Entry Tax on Specified Goods into Local Areas Act, 2001 is shown payable
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by dealer in his return for tax period, then such amount shall be
considered to have been paid in such tax period.
(6) Where the tax credit (other than tax credit on capital goods) admissible in the
year remains unadjusted against the output tax as per section 11, such amount
shall be refunded not later than expiry of two years from the end of the year in
which such tax credit had become admissible:
Provided that the dealer claiming such refund shall have to prove to the
satisfaction of the assessing authority that the purchases of the goods on which
such tax credit had been calculated have been disposed off in the manner
referred to in sub-section (3) of section 11 within the period by which refund
under this sub-rule becomes admissible.
(7) In case of sales made in the course of export outside the territory of India and the
amount of carried forward tax credit admissible under items (iv) and (v) of clause
(a) of sub-section (3) of section 11 remains unadjusted, such amount of tax credit
shall be refunded within the period of three months next following the end of the
month in which such purchases were made.
(7A) not relevant hence not reproduced.
(8) The refund under this rule or the refund under section 37 or 40 shall not be
admissible unless the dealer furnishes the copies of tax invoices of the purchases
for which tax credit and refund thereof is claimed:
Provided that the assessing authority granting the refund is satisfied that the
selling dealer has shown such transactions in his return and accounted for in his
books of accounts as taxable sales for which tax credit and refund under this rule
is claimed.
(9) A registered dealer may claim such net tax credit in the returns to be furnished
under sub-rule (1) of rule 19.
5. Above provisions are to be interpreted, for which the well settled
principle is that the scheme and spirit of the Act need to be
understood first, taxing statue has a fiscal philosophy without a feel
of which a correct perspective to gather the intent and effect of
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various clauses cannot be gained. This view is fortified by the apex
court decision in Controller of Estate Duty v. Kantilal Trikamlal
(1974) 4 SCC 643 at 649 - 650. It is further well settled that in order
to ascertain the true meaning of the terms and phrases employed, it
will be legitimate to call in aid other well-recognised rules of
construction. Such as legislative history, the basic scheme and
framework of the statute as a whole, each portion throwing light on
the rest, the purpose of the legislation, the object sought to be
achieved, and the consequences that may flow from the adoption of
one in preference to the other possible interpretation. It is settled
principle of law that wherever the inference arises for the purpose of
interpretation of a statute the entire statute is to be read in its
entirety. The purport and object of the Act must be given its full effect
and in case of this nature, principles of purposive construction must
come into play. The fundamental principle in the construction of
statutes is that the whole and every part of the statute must be
considered in the determination of the meaning of any of its parts. In
construing a statute as a whole two principle results to clear up
obscurities and ambiguities in the law and to make the whole of the
law and every part of it harmonious and effective. It is presumed that
the Legislature intended that the whole of the statute should be
significant and effective. Different sections, amendments and
provisions relating to the same subject must be construed together
and read in the light of each other. Every statute must be construed
ex vigoenibus actus, that is, within the four corners of the Act. When
the taxing authority is called upon to construe the term of any
provision found as a statute, they should not confine its attention
only to the particular provision, which falls for consideration. But the
authority should also consider other parts of the statute, which
throw light on the intention of the Legislature and serve to show that
the particular provision ought not to be construed as if it stood alone
and apart from the rest of the statute. Every clause of a statute
should be construed with reference to the context and other clauses
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of the statute so as, as far as possible, to make a consistent
enactment of the whole statute. This is the settled position of law in
CIT v. Amin (1972) ITJ 300, 307 SC (Bhagwati, C.J.); also in
Vaddeboyina Tulasamma v. Vaddeboyina Sesha Reddi, AIR 1977 SC
1977 at p. 1948: (1977) 3 SCC 99. Warren, C.J. observed in Richards
v United States, 7L Ed 2d 492, 499: 359 US 1.
"We believe it is fundamental that a section of a statute should not be read in
isolation from the context of the whole Act, and that in fulfilling our responsibility
in interpreting legislation we must not be guided by a single sentence or a number
of sentence, but should look to the provisions of the whole law and do its object
and policy".
6. At the outset of the above, the reason for VAT law, it has been
introduced in order to bring uniformity throughout the country with
regards to taxation on sales, and also introduced in the State of
Gujarat from 01.04.2006. Salient feature is, ITC of tax paid on
purchase is to be given against the tax liability incurred on the sale.
Briefly the effective tax shall be leviable on value addition at every
stage of sale transactions. Thus, the ITC is available at the point of
purchase of goods itself, if the purchased goods are intended for the
specified purposes stated in section 11(3)(a) of the Act, 2003. Thus it
shall transpire that the ITC available in relation to purchases of
taxable goods purchased for the intended purposes is neither
dependant nor related either to sale of very goods purchased or to the
sale of manufactured from the goods purchased. On bare perusal of
section 11(3)(a) of the Act, 2003 one will find that the ITC is available
only to registered dealer on his sales of any taxable goods. Therefore
precisely, there is no pyramiding effect of tax in trade and commerce.
However in order to give full meaning and to determine a correct
legislative intent of ITC, section 11 needs analysis.
7. Section 11 specifies the circumstances, the conditions and extent to
which the ITC shall be available. On perusal of it, the foremost
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condition as per sub clause (1)(a) is that, claimant of ITC for taxable
goods requires registration under the Act, 2003. Only such dealer
shall become eligible for ITC, it can be claimed for ‘tax actually’
collected by vendor, ‘purchase tax’ shown payable for purchases
effected from un-registered dealer, and ‘Entry Tax’ shown payable for
specified goods covered under the Gujarat Tax on Entry of specified
goods into local area Act, 2001. Sub clause (2) refers that registered
dealers who intend to claim ITC shall maintain the register as
provided in rule 15 of the Rules, 2006. Sub clause (3)(a) refers the
purpose for which ITC is available. Therein expression used by
Legislature ‘intended for the purpose of’ is significant and of much
importance. It envisages that for availing ITC primarily dealer should
have intention to sale or resale or manufacture the goods. Various
purposes are defined in this sub clause. The proviso there to refer
‘proportionate credit’ means if purchases are used partially for the
purpose stated in sub clause (3)(a), the ITC shall be allowed
proportionally to the extent purpose of purchases meets. Proviso
thereto refers to reduction in ITC. It means if the goods purchased for
intended purposes, for which ITC has been claimed, are used fully or
partially for purpose other than so specified than ITC has to be
reversed to the extent on account of such use. Sub clause (3)(b)
specify that reduction has to be made if the goods purchased are
consigned out of State, purchased taxable goods used as raw
materials or packing materials and manufactured goods consigned
out State, purchases of fuel used in the manufacture of taxable goods
then 4% amount of the turnover of purchases are required to be
reduced. Sub clause (4) refers that to avail the ITC the original tax
invoice is mandatory to be received in the tax period in which claim is
made. Sub clause (5) refers to negative list it specifies certain
purchases that shall not be allowed for ITC. In which relevant sub
clause is 11(5)(f), therein expressions are used ‘disposed of otherwise’
the meaning thereof signifies with section 11(3)(a) requires that the
goods must be sold to some person otherwise than by way of
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compliments or gift. ‘Disposal’ means transfer of title in the goods to
any other person. The expression ‘disposed’ means to transfers or
alienate. Expression ‘disposed’ in the provision takes colour from and
must be read in the light of the words that are neighbours, namely,
‘sale’, ‘resale’, or ‘manufacture’. So reading makes it clear that the
word ‘disposal’ therein refers to transfers only by way of sale or resale
or manufacture but not by complimentary or gift or like manners.
Sub clause (8)(a) refers that once the ITC is claimed by intending to
meet the object of sub section (3) are subsequently used partially or
fully for other purposes as described in sub section (5), the ITC if
availed shall require to be reduced on account of such use, during
tax period when such use has taken place. Sub clause (b) refers to
capital goods that if the asset is not used continuously for period of
five years in the State, than the ITC is required to be reduced
proportionately falling period short.
8. For availing ITC the documents or formalities to be complied are
provided in rule 15 of the Rules, 2006, it speaks that claimant shall
maintain register with column, name – place – TIN - Inv. no. – date –
description – HSN – quantity – value - TAX. Sub rule (2) of it speaks
that ITC shall be claimed only in Tax Period in which Tax invoice is
recorded. Sub rule (3) refers that dealer shall calculate ITC as per
Form 201 for each Tax Period. Sub rule (4) abundantly states that for
the instances enumerated in sub section (5) of section 11, ITC shall
be excluded from total claim. Sub rule (5) refer to URD purchases,
ITC can be claimed of purchase tax provided dealer shows such tax
as payable in his return of tax period in that respect. Similarly ITC
for Entry Tax also can be claimed. Sub rule (6) is formulated for ITC
found if excess other than ITC on capital goods, shall be refunded on
expiry of 2 years. Sub rule (7) refers to Export, ITC claim shall be
refunded in 3 months from month of Purchases. Sub rule (8) states
that refund shall be admissible subject to furnishes of copies of Tax
Invoices subject to if CTO is satisfied, that such transactions are
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incorporated in return and accounted in books. Sub rule (9) states
that net ITC claim shall be claimed in return.
9. From above it transpires that there is no cascading effect of tax
element. There is complete opportunity for claiming credit for the
amount of VAT paid by the previous business in the supply chain.
Hence the primary objective of VAT is to enhance competitiveness
and removes the cascading effect of taxes and levies. Where there is
no sale, in other words intended for the purpose otherwise than
specified in sub clause (3)(a) of section11, the ITC shall be allowed
proportionally. Sub clause (5) of the Act, 2003 categorically state
that, ITC shall required be reversed if the goods purchased for
intended purposes under sub section (3) of section 11, are
subsequently used completely or partially for the purposes other
than the specified in said sub section, then it shall be reversed on
account of such use. Section 11(8)(a) is the relevant one for reversal
of ITC. Sub clause (5) of section 11 of the Act, 2003 provides negative
list. It states tax credit shall not be allowed for the purchases of
goods not being taxable goods dispatched outside the State in the
course of branch transfer or consignment, which are disposed of
otherwise than in sale, resale or manufacture. As discussed above in
para 7, in sub clause 11(5)(f), the expressions are used ‘disposed of
otherwise’ the meaning of it signifies with sub clause (3)(a) of the Act,
2003. Section 11(3)(a), which provides tax credit is absolute, with
exception, namely that it can be immediately availed upon purchase,
they are for sale, branch transfer or consignment in out of State,
export including EOU and SEZ, used as raw material in manufacture
of taxable goods. The essence is after the purchase it needs to be sold
to some one. In other words price must realize, means the act should
be otherwise than of compliments or donation or gift. The expression
‘disposal’ means transfer of title in the goods to another person has
significance with the next immediate words in the sentence are ‘sale’,
‘resale’, or ‘manufacture’. These words are to be read with word
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‘disposal’ which means the transfers only by way of sale or resale or
manufacture is permitted to avail ITC, however if it is otherwise
means complimentary or donation or gift or like manners than ITC
obviously to be reversed. The incidents of flood in which goods
purchased by tax invoice have been compelled to destroy do not fall
into said provision. The reason is when goods were purchased the
intention was to sale or resale or use in manufacture, which normally
any prudent businessmen do. But due to destruction of flood the
purchased goods got damaged, that pathetic situation prevented
them to play the bonafide role of sale or resale or use in manufacture
cannot be regarded that they acted unfairly. There is not even
allegation on them, or name either of vendor or vendee appears in
unscrupulous taxpayers list. It is not even disputed that the flood is
not act of god, a vis major. The intention of legislature in framing sub
clause (5) is very transparent that, every one hold the registration
shall become eligible for tax credit that will hamper the progress of
the welfare of State. To keep the revenue safe and to use it in welfare
of the State the enactment of clause was necessary which stipulate
the condition. Act, 2003 is framed on concept to bring uniformity
through out the country with regard to sale. In which tax becomes
payable only on value addition, this is beneficial legislation it needs
to be interpreted liberally. Contrary interpretation shall lead them to
see that it would frustrate the object of Law and welfare of State.
State expects that dealers should act in fair and equitable manner,
than duty is to help such dealers in mitigating the sufferings instead
of pushing them into more pitiable condition.
10. Like the situation of flood, just years ago cyclone disturbed the tax
holiday policy. The issue went before the Hon’ble Gujarat High Court,
in the matter of ROLCON ENGINEERING CO LTD. v. STATE OF
GUJARAT – S.C.A. No. 2033 of 2004 decided on 02.03.2006. In
succinct facts, under the perennial shortage of electricity, the State
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Government framed scheme named The Sales Tax Incentive Scheme
for Wind Power Generation, 1993 (for short as 'the scheme'). Under
the said scheme upon the investment for erection of windmill and to
generate electricity, the sales tax incentives were offered. In the
scheme one of the condition was that entrepreneur had to run the
wind farm satisfactorily at least for six years from the date of
commissioning, and if do not run than the tax benefits availed would
become recoverable. In pursuance of it, the petitioner had set up a
wind farm for generation of electricity and started operation, thereby
the Government granted benefit in respect of payment of sales tax.
11. After setting up the wind farm, they regularly supplied electricity to
Gujarat Energy Development Agency (GEDA) and availed the benefit
in respect of payment of sales tax. As per scheme after the period
become over they had to make payment to the government in six
equal annual installments. Before the period become over, a
devastating cyclone hit the coastal areas of Saurashtra in June 1998,
which destroyed the wind farm set up by petitioner. In the said
circumstances, they informed GEDA about the destruction. The
authority got the damage assessed, submitted report to concerned
authority and then issued a notice calling upon the petitioner to
show-cause as to why the Eligibility Certificate issued to them should
not be cancelled as they had committed breach of clause of the
scheme by not keeping the wind farm, windmills in operation for a
continuous period of six years after commissioning the same.
12. Petitioner responded that in pursuance of the scheme they had paid
four installments out of six which had become due. They submitted
that the benefit given under the scheme should not be withdrawn as
the windmills erected by them had been completely destroyed on
account of cyclone, which was a natural calamity, for which they
were in no way responsible. They submitted that looking to the extent
of damage caused on account of natural calamity, the government
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should have offered some sort of help, relief to them, rather than
calling upon it to show cause as to why the benefit given should not
be withdrawn because, normally, the Union and State governments
give relief to those who are adversely affected due to natural
calamities, but, instead of giving any help, if they are asked to pay
then they will put to more difficulties by impugned action. Thereafter,
sales tax authority called upon them to pay tax, interest and penalty
a sum of Rs. 1,05,82,588/-, as a result of withdrawal of the benefit
which already had been granted to them. According to authority as
the wind farm did not run satisfactorily till January 2001, the
petitioner had committed breach of the condition and, therefore, they
were not entitled to any benefit.
13. For the alleged reason the petitioner filed special civil application,
submitted that till the windmills had been destroyed due to the
cyclone, electricity generated was regularly supplied to GEDA and no
default was committed by them in respect of supply of electricity
generated. Such default occurred because of the windmills had been
completely destroyed due to the cyclone. There was no intention on
the part of them to discontinue generation of electricity but only on
account of a natural calamity ‘vis majore’ the generation and supply
of electricity had been discontinued. Petitioner urged that its an Act
of God, hence action be withdrawn.
14. Strengthening the argument they submitted that the scheme had
been framed by the State Government with a laudable object of
encouraging generation of electricity and to help who ventures into
the generation of electricity; this helps the nation, which is in short
supply. These facts are required to be compared with beneficial
legislation. The State Government formulates policy to give some
benefit; it should be interpreted in a way so as to give some benefit to
the beneficiary of the scheme. If they are not allowed to avail the
benefit because of destroyed only on account of an ‘Act of God’ and
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they could not continue to generate electricity continuously for a
period of six years after commissioning the windmills then the
circumstances, they should not be deprived of the benefit already
given.
15. The Lordship examined the fact that, its undisputed that the
petitioner had no intention to discontinue generation of electricity
and the disruption was caused due to the damage caused to the
windmills and transmission lines of GEDA as a result of a
devastating cyclone that hit the coastal area of Saurashtra. It cannot
be disputed that the said cyclone was an Act of God, a vis majore.
The intention behind incorporating particular clause in the scheme
was to see that the taxpayer industrial undertaking does not
discontinue generation of electricity after availing benefit under the
scheme. The Court stated the fact that very often unscrupulous
persons take undue advantage of a scheme or policy framed for a
noble cause. In the beginning they will fulfill the conditions and
thereafter they commit breach of the conditions and as a result of
which the laudable purpose with which the scheme is framed, is
frustrated. If such a dishonest taxpayer commits breach of any of the
conditions incorporated in the scheme, the State should not give any
tax benefit to such an unscrupulous taxpayer. Under the facts of
case after erection of windmills, an industrial undertaking availing
benefit does not stop generation of electricity; the particular clause
had been incorporated in the scheme and not otherwise.
16. The Court categorically held that the language employed in the
clause in question, observed that it is clear that so as to retain the
benefit already granted, an industrial undertaking should keep the
wind farm running satisfactorily at least for six years from the date of
commissioning the same. The language used in the clause cannot be
interpreted to read that even if due to factors beyond control of the
industrial undertaking, if the wind farm cannot be kept in a running
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condition, there would be breach of the said condition. The condition
incorporated in the said clause deals with a voluntary action on the
part of the industrial undertaking. The said clause can be invoked for
withdrawal of the benefits if it is found that either deliberately or due
to gross negligence on the part of the industrial undertaking, the
wind farm was not kept in running condition. In opinion of the Court,
if the act of discontinuing generation of electricity is deliberate or
voluntary, then only the concerned industrial undertaking should be
deprived of the benefit availed under the scheme.
17. In the instant case the facts are quite similar, the goods purchased
prior to flood incident by tax invoices are obviously meant for sale or
resale or manufacture and not to be disposed of otherwise. Such
bona-fides can be proved that from beginning of the year, goods
whenever purchased they were sold by respective dealers and by
calculating tax liability paid the tax and filed returns. No deliberate
intention have been observed, the only on account of situation
beyond controlled the flood effected dealers could not sale or resale or
manufacture. They cannot be deprived of benefit availed under the
Act, whatever happened it is not the purposeful creation, it was
natural calamity, is an Act of God, that has kept the honest prudent
businessmen away from their activity. The commercial tax authority
has never observed or made report or found that it is deliberately or
due to gross negligence on the part of the dealer, the goods have been
destroyed. There is not even report by any authority of carelessness
on part of dealers. This is undisputed facts that situation is vis
majore. Hence the principle laid down in case supra equally applies
with due respect and therefore ITC is not required to be reversed.
18. In case supra the Lordship held that, the principles on which a
beneficial legislation or a benevolent policy of the State is to be
interpreted, it is undisputed that when the State is inclined to give
some benefit to a taxpayer, the terms or provisions of the policy
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should be interpreted in a liberal manner and with an intention to
see that the purpose for which the policy is framed is fulfilled and the
beneficiary is helped. The interpretation must not be such which
would frustrate the objective of the policy. Reaching to it Lordship
humbly relied on very well established principle and has been also
accepted by our Apex Court.
“a person cannot be constrained to do something which is impossible. There is a
well known legal maxim Lex non cogit ad impossibilia, which means that law cannot
compel a man to do what he cannot possibly do. If there is impossibility on the part
of a person to perform an obligation, law would not expect the person to do that
impossible thing. The said maxim, which has been accepted by our judicial
system, has been very well explained in 'Broom's Legal Maxims' (10th Edition) as
under:
“...It is then, a general rule which admits of ample practical illustration, that
impotentia excusat legem; where the law creates a duty or charge, and the party is
disabled to perform it, without any default in him, and has no remedy over, there
the law will in general excuse him (t): and though impossibility of performance is in
general no excuse for not performing an obligation which a party has expressly
undertaken by contract, yet when the obligation is one implied by law, impossibility
of performance is a good excuse.........”
The aforesaid maxim has also been explained in 'Craies on Statute
Law' (7th Edition):
“Under certain circumstances compliance with the provisions of statutes which
prescribe how something is to be done will be excused. Thus, in accordance with
the maxim of law, Lex non cogit ad impossiblia, if it appears that the performance
of the formalities prescribed by a statute has been rendered impossible by
circumstances over which the persons interested had no control, like the act of God
or the King's enemies, these circumstances will be taken as a valid excuse”
The Hon'ble Supreme Court has approved the aforestated meaning of
maxim lex non cogit ad impossibilia in the case of I.F.C.I. Ltd Vs.
Cannanore Spinning and Weaving Mills Ltd, AIR 2002 SC 1841”.
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19. So far as the case in hand is concerned, impossibility of performing
the condition was on account of vis-majore, an Act of God. The
condition laid in sub clause (5) of section 11 of the Act, 2003 is
impossible in situation like of flood, when the water level was
witnessed above men’s height. It rushed with heavy speed and
became beyond the control situation to take care or safeguard the
goods so purchased. It is not the case of the commercial tax
authorities that the condition incorporated in clause 11(8)(a) of the
scheme was violated by the flood effected dealer deliberately. It
cannot be disputed that the flood was an Act of God, which
completely destroyed the goods purchased by them, which made it
impossible for them to fulfill one of the conditions incorporated in the
scheme. As stated hereinabove, till the flood had hit the area of
business, the dealers had continuously operated business structure
by compliance of the law. Not a single default had been committed by
the dealers and only on account of natural calamity, vis-majore, it
became impossible for them to sale, resale or manufacture of the
goods. Facts remains that upon getting insurance claim by some
dealers the fact reveals that they had no dishonest intention to
commit breach of any of the conditions on which the benefit had
been availed by it under the provision and starred business early.
Therefore, it is to be held that the dealers cannot be deprived of the
benefit, which had been given to it under the Act only because it
could not fulfill the condition due to an Act of God or because of
impossibility on its part to perform the same.
20. Apt on the subject there is case of Supreme Court, Ganesh Prasad
Dixit v. CST (1969) 24 STC 343 (SC), wherein the Court dealing with
the provisions of the M.P.G.S.T. Act, 1959 examined the expression
used ‘either consumes such goods in the manufacture of the goods
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for sale or otherwise’. The observation made by the Court at page 348
is as under:
"Mr. Chagla for the appellants urged that the expression 'or otherwise' is intended
to denote a conjunctive introducing a specific alternative to the words 'for sale'
immediately preceding. The clause in which it occurs means, says Mr. Chagla, that
by section 7 the price paid for buying goods consumed in the manufacture of other
goods, intended to be sold or otherwise disposed of, alone is taxable. We do not
think that that is a reasonable interpretation of the expression 'either consumes
such goods in the manufacture of other goods for sale or otherwise'. It is intended
by the legislature that consumption of goods renders the price paid for their
purchase taxable, if the goods are used in the manufacture of other goods for sale
or if the goods are consumed otherwise."
21. The above observation has relevance with the matter in hand. The
expression consumption otherwise must in the context mean
consumption of other goods for purpose other than sale. However in
DCST, Erankulam, v. THOMAS STEPHEN & CO. LTD. 69 STC 320 at
page 324, it is held that disposal means transfer of title in the goods
to any other person. The expression ‘dispose’ means to transfer.
Reaching to conclusion Court observed that it was formerly an
essential word in any conveyance of land. The Dictionary of English
Law and also Webster Comprehensive Dictionary (International Edn.)
- Vol. 1, page 368. Clause (b) of the section requires that the goods in
question should be transferred to some person otherwise than by way
of sale. In the matter of flood affected dealers, there was no evidence
of any transfer at all, therefore, there was no ‘disposal’ of the goods
as known to law. The conjunctive words are ‘sale, resale or
manufacture’. The clause in which it has been enacted precisely
denotes reference with ‘disposed of’ which do not suggest disposal of
goods otherwise than in destroy of goods on account of natural
calamity. The expression ‘otherwise’ cannot be read as ‘in any other
manner’. The clause, truly read, speaks of goods disposed of
otherwise than in sale, resale or manufacture. These employed words
are amicable, are within the four corners of law, meaning destroyed
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does means not transferred. Therefore ITC claimed is not to be
reverse, it would be totally incorrect if it is to be reversed. Well-settled
rule of construction states that ‘no Legislature or rulemaking
authority uses any word, term or expression for nothing. Every
word, term or expression used in an enactment has a role to play
or meaning to render’ - refer 128 STC 189 page 201 para 13.. It is
duty of the Court that full effect to the legislative intent must be
given without scanning the wisdom or policy or without engrafting
and adding or implying anything which is not congenial or consistent
with such express intent of the law giver; more so if the statute is a
taxing statue. The statement of Rowlatt J. in cap Brandy Syndicate v.
Inland Revenue Commissioners (1921) 1 KB 64 at 71 is important it
holds the filed reads as under:
“In a taxing statute, one has to look merely at what is clearly state. There is no
reason for any intendment. There is no equity about a tax. There is no presumption
as to a tax. Nothing has to be read in, nothing has to be implied. One can only look
fairly at the language used”.
22. Keeping the settled principle in mind since there is no evidence of
transfer at all, there is no disposal of the goods observed and hence
section 11(5)(f) is not applicable. ‘Disposed of’ as contemplated in
said section envisage must involve transfer, not disposing of goods do
not fall for contravention of the provision, therefore ITC is not to be
reversed.
23. There is another case of Hon’ble Gujarat High Court, in the case of
Harji Vithaldas v. State of Gujarat reported in 1973 GSTB 265,
wherein the appellant was holding licensed, they purchased goods
cotton from unregistered dealer. Section 12(1)(c) of the BST Act, 1959
provides purchase of such goods against declaration in Form 16,
which certify the intention to resell. The cotton so purchased was
destroyed as result authority levied purchase tax under section 14.
The Lordship analyzed the section in question 12(1)(c) and Form 16
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and observed that words ‘intended for resell’ are common. Then
looked at the phraseology and stated that golden rule of the
interpretation is that the words in section must be given its natural
meaning. The Legislature used the word ‘resold’ in section 12(1)(a)
and (b) and the certificate issued there under. But different
connotation are observed in section 12(1)(c) as ‘intended for resell’.
And that is the same connotation in certificate in Form 16. The
Legislature used different phraseology purposefully. The Legislature
knows the meaning of the words it uses. When the words used by
Legislature are clear, they must be given their true meaning
irrespective of consequences. In obvious meaning words ‘intended for
resell’ cannot mean ‘resold’. The Court made it clear that section 14
provided two conditions are satisfied, namely, (1) that the dealer or
commission agent has purchased goods under certificate given under
section 11 or 12; and (2) the contrary to such certificate, the goods
are used for another purpose or are not resold in the manner and
within the period certified. As per the legislative intent as reflected by
the scheme of taxation and in particular by section 12 and 14, it is
clear that if a licensed dealer who issues certificate under section
12(1)(c) declaring his intention to resale the goods subsequently
changes the said intention, then he would be held liable for purchase
tax otherwise not. The fire which took place at dealer’s business
place has destroyed the goods. This act is beyond the control of any
one. It cannot be said dealer has changed the intention to resell the
goods so purchased. The Court categorically observed concern
section emphasis important undertaking of dealer. The dealer
committed breach of said undertaking cannot be said that their acts
contrary to the certificate and therefore, liable to pay purchase tax
under section 14. The dealer intended to sell but became unable to
fulfill the intention because of the destruction caused by the fire. So
held finally is not liable to purchase tax.
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24. Lastly on the subject matter for similar incident which happened
some time ago in late July and early August 2005 in the Mumbai and
district of Maharashtra on account of disturbance caused by the
unprecedented flood and rain the Commissioner of Sales Tax,
Maharashtra State by way of administrative relief issued trade
circular vide reference no. VAT- 2005/Act/VD- 1 Trade cir –30T of
2005 dated 23.09.2005. In this circular the guide line for the problem
faced by the trade and industry in complying with administrative
requirement under the Maharashtra Value Added Act, 2002 it has
been clarified that credit (setoff) would be available on goods which
had been earlier purchased and were subsequently destroyed in
flood. The said authority only desired that claimant shall obtain
duplicate purchase invoices from suppliers. In the said circular it is
further clarified that those dealers who have filed their returns before
flood and books of accounts and supporting thereof if destroyed than
in that case such returns will be accepted. However upon information
from the sources suggest that such returns are incorrect, then an
independent inquiry be made. With regard to the incident of Surat to
avoid the further debate, controversy, litigation and expressing
sympathy on the effected dealers based upon the said trade circular,
the Commissioner of Commercial Tax, Gujarat State should also
issue public circular clarifying the position in similar way.
Conclusion: The flood affected dealers had every bonafide intention
to sell the goods but situation beyond the control had put them
behind hence such dealers are not required to reverse the ITC. The
language used in the section 11(5)(f) of the Act, 2003 cannot be
interpreted to read that even if due to factors beyond control of the
trade and industry, if the purchased goods could not be sold, resold,
manufactured, there would be breach of the said condition. The
condition incorporated in the said clause deals with a voluntary
action on the part of the trade and industry. Dealers engaged in trade
and industry cannot be constrained to do something which is
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impossible. By following the well known legal maxim Lex non cogit ad
impossibilia, means that law cannot compel them to do what they
cannot possibly do. There was absolutely impossibility on the part of
them to perform an obligation during massive flood which affected
large number of common men, such law can not expect from them to
do that impossible thing. The dealers became disabled to perform
their faithful duty which the law has cast upon them. Under the
circumstances of natural calamity, compliance with one of the
provisions of statutes which prescribe how something is to be done
should be governed as good excused. For the default, the law should
treat them in general good excuse, the performance of the formalities
prescribed by a statute has been rendered impossible by
circumstances over which though they were interested but had no
control, like the act of God, the said circumstances is valid excuse.
All other incidents like cyclone, earthquake, riots and fire are akin.
Hence they would fall into the same path. Any contrary decision
would not be proper for a welfare State to become further harsh and
withdraw the benefits available to them to the dealers who had acted
in good faith for availing benefits under a particular Law of the State.
From the detailed discussions herein above the readers will certainly
agree with the views expressed by me, that in the situation of flood no ITC
is to be revered. However, finding it contrary, the subject is open for
comments and/or debate. It will be welcomed.