* THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN WRIT PETITION Nos.855, 6495, 7450, 10453, 13279, 16316, 20198, 24487 and 24535 of 2008, 1704, 7660, 7716, 7719, 9652, 9694, 9695, 10207, 11402, 13015, 13019, 13147, 13151, 13410, 14289, 14829, 15146, 16062, 16573, 18552, 18598 and 20284 of 2009 % Dated: 30.12.2010 Between: M/s.Sri Balaji Flour Mills …. Petitioners AND The Commercial Tax Officer-II, Chittoor, Chittoor District And others. …Respondents ! Counsel for the Petitioners: M/s. M.V.J.K.Kumar, Shaik Jilani Basha, V.Bhaskar Reddy, G.Narendra Chetty and P.Girish Kumar ^Counsel for the Respondents: Sri A.V.Krishna Kaundinya Special Counsel for Commercial Taxes <Gist: >Head Note: ? Citations: 1. AIR 1968 SC 822 2. 55 STC 292 (1983) 3. AIR 1997 SC 628 4. (2000) 3 SCC 40 5. (2001) 4 SCC 713 6. (2002) 5 SCC 466 7. (2006) 4 SCC 327 8. [2007] 9 VST 482 (Orissa) 9. (2009) 15 SCC 570 10. (2010) 9 SCC 536 11. [2010] 29 VST 494 (Karn) 12. (2007) 13 SCC 673 : (2008) 297 ITR 176 13. (1985) 1 SCC 641 : AIR 1986 SC 515 14. (2000) 3 SCC 40 : AIR 2000 SC 1069 15. (2006) 4 SCC 327 : AIR 2006 SC 3480 16. (2009) 15 SCC 570 : AIR 2009 SC 3194 17. (1984) 4 SCC 27 : AIR 1984 SC 1543 18. 1995 (2) ALD 234 (DB). AP High Court was reversed in Samatha v State of Andhra Pradesh, AIR 1997 SC 3297. 19. (2004) 10 SCC 201 20. (1926) AC 37 21. AIR 1940 PC 124 22. AIR 1981 SC 1887 : (1981) 4 SCC 578 (Though this is overturned in J.K.Synthetics Ltd v CTO (1994) 94 STC 4222 (SC), principle of interpretation remains unchanged) 23. AIR 1967 SC 856 (para 4) 24. (2003) 2 SCC 101 (para 13) 25. AIR 1966 SSC 1404 26. (2005) 2 SCC 334 (para 8) 27. AIR 1985 SC 167 28. (1996) 3 SCC 709 : AIR 1996 SC 1627 29. (2007) 2 SCC 1 : AIR 2007 SC 861 30. AIR 1976 SC 2538 THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN WRIT PETITION Nos.855, 6495, 7450, 10453, 13279, 16316, 20198, 24487 and 24535 of 2008, 1704, 7660, 7716, 7719, 9652, 9694, 9695, 10207, 11402, 13015, 13019, 13147, 13151, 13410, 14289, 14829, 15146, 16062, 16573, 18552, 18598 and 20284 of 2009 30.12.2010 Between: M/s.Sri Balaji Flour Mills … Petitioner And The Commercial Tax Officer-II, Chittoor, Chittoor District And others. ... Respondents THE HON'BLE SRI JUSTICE V.V.S.RAO AND THE HON'BLE SRI JUSTICE RAMESH RANGANATHAN WRIT PETITION Nos.855, 6495, 7450, 10453, 13279, 16316, 20198, 24487 and 24535 of 2008, 1704, 7660, 7716, 7719, 9652, 9694, 9695, 10207, 11402, 13015, 13019, 13147, 13151, 13410, 14289, 14829, 15146, 16062, 16573, 18552, 18598 and 20284 of 2009 COMMON ORDER: (Per Hon’ble Sri Justice V.V.S.Rao) In this group of writ petitions, filed by registered VAT dealers from various places in the State of Andhra Pradesh, the challenge is to the validity of Rule 59(1) of Andhra Pradesh Value Added Tax Rules, 2005 (VAT Rules) in so far as it confers the power of assessment of Value Added Tax, when it appears that the VAT return filed by the dealer is incorrect or incomplete on (i) the Commercial Tax Officer (CTO) or the Deputy Commercial Tax Officer (DCTO) in case of dealers in the territorial jurisdiction of the circle; and (ii) on any officer not below the rank of DCTO of the division as authorized by the Deputy Commissioner of the Division. The challenge is based on the petitioners’ perception that the impugned rule does not satisfy the statutory essentials and is ultra vires the Andhra Pradesh Value Added Tax Act, 2005 (VAT Act). In W.P.Nos.13015 and 13019 of 2009, Section 17(3) and (4) are impeached as being ultra vires Section 17(2) of the VAT Act. In addition, the petitioners also impeach the assessment orders in Form VAT 305 for different periods passed by the authorized authority on various grounds. FACTS As a first step to resolve the controversy in these cases, we may refer to the affidavit accompanying W.P.No.18598 of 2009 to notice the background. The petitioner - a firm of contractors and engineers engaged in infrastructure development is a registered VAT dealer on the rolls of the second respondent. They filed monthly VAT returns for 2005-2006 and 2006-2007. There was, however, audit by the DCTO, Hydernagar, on 11.05.2007. By a notice dated 07.06.2008, the first respondent informed of another audit. Such audit by the first respondent took place on 21.08.2008. Proposing best of judgment assessment in terms of Rule 59 of the VAT Rules, a notice dated 15.09.2008 was issued to the petitioner. They filed objections on 30.10.2008 along with the books of accounts. The earlier assessment was withdrawn. A proposal was made to tax the estimated turnover at 12.5 % which was the cost of light diesel oil not covered by tax invoices. There were objections again, inter alia that, as the second respondent was the territorial assessing authority under Section 20(1) of the VAT Act, the first respondent had no jurisdiction to take up assessment. By assessment order, dated 05.01.2009, the first respondent demanded a sum of Rs.15,74,663/-. The petitioner unsuccessfully filed an appeal before the appellate Deputy Commissioner. They then filed an appeal before Sales Tax Appellate Tribunal (STAT). Even while the same was pending, the dealer filed the instant writ petition seeking invalidation of Rule 59(4) of the VAT Rules. They contend that, under substantive provision being Section 2(4) of the VAT Act, the Commissioner had authorized the second respondent alone to take up assessment. By reason of authorization to audit under Rule 59(1)(7), the first respondent was precluded to take up assessment for the period for which assessments stood concluded. Rule 59(4) is therefore, ultra vires Section 2(4). The Government issued the notification under Section 3-A of the Act being G.O.Ms.No.1163, dated 14.08.2006. It was clarified therein that, if the officer authorized by Commissioner takes up assessment, the territorial officer shall not assess for that year. It is the case of the petitioner that the assessment was already made and, therefore, the first respondent acted without jurisdiction. It is also contended that, under Section 3-A, all the CTOs have been assigned with territorial areas for the purpose of assessment. The Commissioner, therefore, has to specifically authorize any other official to take up assessment. Rule 59(4) does not override Section 2(4) and 2(8), and is therefore ultra vires. The writ petition indeed impugns Rule 59(4). Curiously, the Government of Andhra Pradesh which derives rule making power under Section 78 of the VAT Act is not arrayed as a party respondent. Leaving this aside for a while, we may summarise the position of the respondents from the counter affidavit filed by the first respondent. The writ petition is not maintainable as the second appeal before STAT is pending, and for non-joinder of proper and necessary parties. Section 2(4) is a dictionary clause. It is neither a substantive provision nor does it confers power on the Commissioner. As authorities created under the statute, they cannot answer the allegations with regard to vires of Rule 59(4). The counter does not seriously dispute other allegations regarding pre and post audit action taken by the first respondent leading to the impugned assessment order. SCOPE, SUBMISSIONS AND ISSUES There is no dispute that all the petitioners filed VAT returns under Section 20(1) for the respective periods in the circle offices under the CTOs. The jurisdictional Deputy Commissioners issued authorization for audit in Form ADM1B presumably in accordance with the VAT Audit Manual of Commercial Taxes. Audit was done after issuing notice of audit in Form VAT 304 by the authorized officer of the Department, namely, Assistant Commissioner or CTO or DCTO, as the case may be. Pursuant to such audit, the petitioners were served with the notice of assessment of VAT in Form VAT 305A. In some cases, objections were raised. Considering this, the officer authorized to audit passed the assessment order also in Form VAT 305. In cases where objections were not filed in response to VAT Form 305A, the audit officer made a best Judgment assessment purportedly under Section 21(3) of the VAT Act. Assailing the assessment orders, mainly on the ground that there is violation of principles of natural justice, the writ petitions are filed. In addition, Rule 59(4), as stated supra, is also assailed as being ultra vires Sections 2(4) and (8) of the VAT Act. M/s.M.V.J.K.Kumar, Shaik Jilani Basha, V.Bhaskar Reddy, G.Narendra Chetty and P.Girish Kumar argued for the petitioners. The summary of their arguments is as follows. The impugned assessment by an authority, not designated as the assessing authority under Section 2(4) of the VAT Act, is bad in law and such authority cannot, therefore, levy tax. Alternatively, if Rule 59(1)(4)(b) and (d) of the VAT Rules are construed as conferring power on the officer who passed the impugned order, the said Rule is ultra vires Section 2(4) of the VAT Act. Section 2(4) of the VAT Act confers power only on the Commissioner of Commercial Taxes to prescribe and authorize an authority to make an assessment of VAT. The Government could not, therefore, have validly made Rule 59(1)(4) of the VAT Rules in exercise of its powers under Section 78(1) and (2) of the VAT Act. The impugned Rule is in violation of the notification issued by the Government under the APGST Act which has been saved under Section 80 of the VAT Act. If the DCTO, as authorized by the Deputy Commissioner, audits and assesses the VAT dealer who is within the pecuniary jurisdictional limits of another CTO/Assistant Commissioner, the very spirit of the purpose of assessment under VAT Act is defeated. Reliance is also placed on the following judicial decisions. Mangulal Chunilal v Manilal Manganlal[1], Sri Balaji Rice Company v Commercial Tax Officer[2], K.V.Muthu v Angamuthu Ammal[3], Kunj Behari Lal Butail v State of H.P.,[4], Syndicate Bank v Prabha D. Naik[5], Nagrik Upbhokta M.Manch v Union of India[6], Kerala Samsthana Chethu Thozhilali Union v State of Kerala[7], Dash Agency v Sales Tax Officer[8], Global Energy Limited v Central Electricity Regulatory Commission[9], Nahalchand Laloochand Private Limited v Panchali Cooperative Housing Society Limited[10] and R.C.India v State of Karnataka[11]. Mr.A.V.Krishna Kaundinya, Special Counsel for CT argued the Government’s case as follows. All the definitions in Section 2 are not conclusive. The words in dictionary clause can have meaning if the context so requires. Therefore, Section 2(4) which is only a definition clause, has to be interpreted without ignoring the rule making power of the Government under Section 78 read with Section 3-A of the VAT Act. The Government having exercised its power under Section 3-A read with Section 78, the exercise of power by the Commissioner if any cannot override the rules. The Rules empower the Deputy Commissioner of the Division to authorize AC/CTO/DCTO to conduct audit of the accounts of the VAT dealer. The impugned orders do not suffer from any illegality. The power to audit includes the power to assess and, therefore, the impugned orders are in accordance with Section 21(3) of the VAT Act. Sections 20(1), 21(1) and 21(3) empowered the authority prescribed to receive VAT return and pass order by taking up best Judgment assessment. The assessment orders made in accordance with Rule 59(1) are valid. Lastly, he submits that Section 3-A empowers the Government to empower the Commissioner to confer functions of different officers. When the donor of the power has exercised power under the Rules, the delegate of the power cannot be permitted to exercise power in a different manner. The paramount owner is not divested of the power even after delegation to the delegate. The Senior Counsel relies on K.V.Muthu, and the VAT Audit Manual of the Department. VALIDITY OF RULE 59(1) So as to be intra vires the Rules made by delegate should be confined to the policy guidelines of the Statute (J.K. Industries Limited v Union of India[12]). The question whether the Rules are ultra vires is required to be answered with reference to the legislative intent and the executive policy in promulgating the Rules. If the legislature has clear by demarcated the various aspects to be tackled by the delegate, the Courts scrutiny must go no further. If the legislature is not precise, the Court has to look to the object, policy and width of the legislative operation in testing whether the executive has ignored discernible statutory essentials. In either event, one should keep in mind that the delegation is a constituent element of legislative power and the Rules must receive broad interpretation with reference to the legislative policy. Unless the Rules are ex facie contra to the Act, they must receive the Court’s imprimatur. The twin tests for determining the vires are (a) whether the Rules conform to the statute (conformation test); and (b) whether the Rules are manifestly arbitrary and irrational (rationality test). If there is compliance with these two, any further judicial review is barred. I n Indian Express Newspapers Bombay (Private) Limited v Union of India[13], it was held that subordinate legislation does not carry the same degree of immunity which is enjoyed by a statute and that it can be questioned on any of the grounds on which plenary legislation may be questioned. In addition it may also be questioned on the ground that it does not conform to the statute under which it is made as well as on the ground that it is manifestly arbitrary and unreasonable. It is also settled that the expression, “for carrying out the purpose of the Act” is not construed as to bring something in the statute which has been excluded by the Act itself (see Kunj Behari Lal Butail, Kerala Samsthana Chethu Thozhilali Union a n d Global Energy Ltd). To be able to succeed on the ground that subordinate legislation lacks statutory essentials, it must be demonstrated that the Rules are not in accordance with the legislation or it included something which was excluded by the Act itself. Vague allegations of general hardship cannot render the rules ultra vires. One must look to the entire Act to determine the intention and purpose of the legislation in giving power to the agency to make rules for the purpose of implementing the Act. Looking to the illustrative subjects in the enabling provision, or the long title of the enactment, itself may not be pivotal nor can it be ignored. The entire Act has to be churned before coming to the conclusion that it did not empower the agency to make such policy which found echo in the Rules. The ratio decidendi in Maharashtra S.B.O.S. & H.S. Education v Paritosh[14], is that the validity of the rule has “to be determined with reference only to the specific provisions contained in the relevant statute conferring the power to make the rule, regulation, etc., and also the object and purpose of the Act as can be gathered from the various provisions of the enactment. It would be wholly wrong for the court to substitute its own opinion for that of the legislature or its delegate as to what principle or policy would best serve the objects and purposes of the Act, to sit in judgment over the wisdom and effectiveness or otherwise of the policy laid down by the regulation-making body, and declare a regulation to be ultra vires merely on the ground that, in the view of the Court, the impugned provisions will not help to serve the object and purpose of the Act.” As long as the body, entrusted with the task of framing the VAT Rules or regulations, acts within the scope of the authority conferred on it, in the sense that Rules made by it have a rational nexus with the object and purpose of the Statute, the court should not concern itself with the wisdom or efficacy of such Rules. It is exclusively within the province of the legislature and its delegate to determine, as a matter of policy, how the provisions of the Statute can best be implemented and that measures, substantive as well as procedural, would have to be incorporated in the VAT Rules or regulations for the achievement of the objects and purposes of the Act. It is not for the Court to examine the merits or demerits of such a policy because its scrutiny has to be limited to the question as to whether the impugned Rules fall within the scope of the donated power. Herein the impugned Rule is assailed only on the ground that it is ultra vires. For the reasons discussed supra, and some more to follow infra, we cannot countenance the submission. At the outset, we may briefly mention about sales tax administration before shift to VAT. This is necessary because, while repealing Andhra Pradesh General Sales Tax Act, 1957 (APGST Act) by Section 80(1) of the VAT Act, the legislature has expressed its intention to continue to enforce all notifications, rules and regulations etc., as if those instruments had been made under the VAT Act. There is no gain saying that unless and until the rules, regulations, notifications etc., made under the APGST Act are replaced by similar instruments under the VAT Act, they continue to govern. This is not disputed by the parties. Section 4 of the APGST Act conferred power on the State Government to appoint the Commissioner of Commercial Taxes (the Commissioner) and various other officers in the hierarchy upto the level of DCTOs and assign functions and empower such officers to perform various functions. The Commissioner so appointed is empowered to entrust duties to all the officers named therein. The State Government was also empowered to authorize any officer to make any assessment in such area or areas or the whole of State of Andhra Pradesh as per Section 2(b) of the APGST Act. In exercise of its powers under Section 4, the Government of Andhra Pradesh delegated to the Board of Revenue the power to notify the local limits within which Deputy Commissioners, CTOs or DCTOs may perform the functions respectively conferred on them by or under the said Act. Before doing so, the Government also issued notification vide G.O.Ms.No.1091, dated 10.06.1957. Under this, the Government empowered various officers to exercise various functions like assessment, audit etc., as may be entrusted to them within the local limits. This G.O., was subsequently amended from time to time by issuing various notifications. Indisputably, the broad pattern of such exercise of taxing powers is that the commercial tax officer, who is the head of a circle, is subordinate to the head of the Division, namely Deputy Commissioner. The assessment is made by the CTO or, having regard to pecuniary limits, either by the DCTO or the CTO as the case may be. If the taxable turnover exceeds certain limit, the Assistant Commissioner is required to assess the sales tax. Be it also noted that Section 4 of the APGST Act empowered the State Government to appoint a Commissioner, and as many Additional/Joint Commissioners of Commercial Taxes, Deputy Commissioners/Additional Deputy Commissioners, Assistant Commissioners, CTOs, DCTOs as are required to perform the functions conferred on them by the State Government within the specified territorial areas. The power of authorization can also be exercised by any authority empowered by the State under the said provision. Section 4A clarifies that the powers conferred on the officers by the APGST Act, or under the Rules, can also be exercised by any of the officer superior to the empowered officers subject to instructions issued by the Commissioner. Section 2(b) of the APGST Act defines ‘assessing authority’. It means any person authorized by the State Government, or by any other authority empowered by them in this behalf, to make any assessment in such area or areas or the whole of the State of Andhra Pradesh under the said Act. The Commissioner, Additional Commissioner, Assistant Commissioner, Appellate Deputy Commissioner, Deputy Commissioner, CTO and DCTO are also defined to mean any person appointed as such under Section 4. Section 4, as noticed supra, empowers the Government to appoint these officers who shall perform such functions as conferred on them by the Government or any authority or officer empowered by them. There is no dispute that by reason of the notification issued by the Government under Section 4 read with Section 2(b) of the APGST Act, the Deputy Commissioners heading the division and CTOs incharge of Circles exercised the powers, functions and jurisdiction as conferred by the notification in such areas in the respective divisions/circles. The situation remains the same even under the VAT Act. For ready reference, we will quote relevant provisions from it. 2. Definitions.- In this Act unless the context otherwise requires:- (1) ‘Additional Commissioner’ means any person appointed to be an Additional Commissioner of Commercial Taxes under Section 3-A; (2) ‘Appellate Deputy Commissioner’ means any person appointed under Section 3-A to be an Appellate Deputy Commissioner or any other officer not below the rank of Deputy Commissioner authorized by the Commissioner to be an Appellate Deputy Commissioner; (4) ‘Assessing authority’ means any officer of the Commercial Taxes Department authorized by the Commissioner to make any assessment in such area or areas or the whole of the State of Andhra Pradesh; (5) ‘Assistant Commissioner’ means any person appointed to be an Assistant Commissioner of Commercial Taxes under Section 3-A; (8) ‘Commissioner’ means any person appointed by the Government to be the Commissioner of Commercial Taxes under Section 3-A; (9) ‘Commercial Tax Officer’ means any person appointed to be Commercial Tax Officer under Section 3-A; (11) ‘Deputy Commercial Tax Officer’ means any person appointed to be a Deputy Commercial Tax Officer under Section 3-A; (12) ‘Deputy Commissioner’ means any person appointed to be a Deputy Commissioner of Commercial Taxes under Section 3-A; (18) ‘Government’ means the State Government of Andhra Pradesh.; (20) ‘Joint Commissioner’ means any person appointed to be a Joint Commissioner of Commercial Taxes under Section 3-A; (24) ‘Prescribed’ means prescribed by the Rules made under the Act; Various officers are those appointed under Section 3-A of the VAT Act. Section 3-A reads as under. 3-A. Appointment of Officers.- The State Government, may, appoint a Commissioner of Commercial Taxes and as many Additional Commissioners of Commercial Taxes, Joint Commissioners of Commercial Taxes, Appellate Deputy Commissioners of Commercial Taxes, Deputy Commissioners of Commercial Taxes, Assistant Commissioners of Commercial Taxes, Commercial Tax Officers and Deputy Commercial Tax Officers as they think fit, for the purpose of performing the functions respectively conferred on them by or under the Act. Such officers shall perform the said functions within such area or areas or the whole of the State of Andhra Pradesh as the Government or any authority or officer empowered by them in this behalf may assign to them. After coming into force of the VAT Act, Section 3-A empowered the State Government to appoint different categories of officers who shall perform the functions conferred on them within such area or areas as the Government or any authority empowered by them may assign to officers. In exercise of the power of delegation under Section 3-A, the Government of Andhra Pradesh issued the notification vide G.O.Ms.No.1163, dated 14.08.2006 empowering the Commissioner to empower any officer working under his control to exercise any powers under the VAT Act within such area or areas or the whole of the State of Andhra Pradesh. This is however subject to the condition that where an officer in exercise of powers delegated to him by the Commissioner undertakes the assessment of any dealer, the assessing authority of the area having jurisdiction to assess such dealer shall not exercise such jurisdiction for the relevant period. The VAT Rules made under Section 78 read with Section 2(21) of the Act constitute a piece of delegated legislation. The challenge that Rule 59(1)(4)(ii)(b) and (d) is ultra vires can only be successful when it is shown on a sustainable basis