Exemption from Sales Tax – not eligible if conditions are not

Exemption from Sales Tax – not eligible if conditions are not fulfilled – when eligibility certificate is withdrawn, exemption or entitlement certificate is also deemed to have been withdrawn from first day: Supreme Court NEW DELHI, AUG 21, 2008 : UNDER Rule 28A of the Haryana General Sales Tax Rules, appearing in Chapter IVA, certain class of industrial units are entitled to exemption/deferment from payment of tax for a specified period and subject to fulfillment of certain conditions. The benefit of sales tax exemption was granted for the period from 13.12.1994 to 12.12.2003. Necessary eligibility certificate entitling the respondent to avail the sales tax exemption for a period of nine years was granted. On the basis of the eligibility certificate, unit was granted exemption certification for the period ending 30th June, 1995, The same was renewed at the first instance till 30.6.1996 and thereafter till 30.6.1997. An application for further renewal of the exemption certificate was filed on 31.7.1997. This was rejected by order dated 15.12.1997 on the ground that the same was not complete in certain respects and despite grant of opportunities the respondent failed to furnish the necessary documents. While processing the application for renewal, the DETC noticed that the unit of the respondent was out of production since January, 1997 and as such the exemption certificate was also liable to be cancelled under sub rule 9(1) of Rule 28A of the Rules. Therefore, a show cause notice was issued on 5.12.1997 fixing the date for submission of explanation on 15.12.1997. Respondent neither appeared nor furnished any explanation. Therefore, the DETC cancelled the exemption certificate by order dated 14.1.1998. In appeal the matter was remanded to the Prohibition Excise and Transport Commissioner, Haryana. During assessment proceedings, it was again found that the Industrial unit was non-functional since January, 1997 and almost the entire plant and machinery had been removed from the factory premises and taken to some other places out of Haryana without any information to the Department. Even the factory shed and other structures were found to be dismantled and business was totally closed. By order dated 30.6.1998, again an application for renewal was rejected and the exemption certificate already granted was cancelled by invoking sub rule 9(i) of Rule 28(A). The respondent was directed to deposit the tax in respect of the exemption as has already been availed and also to pay the interest. Stand of the present respondent in the writ petition before the High Court was that since the unit had remained closed on account of non- availability of coal which was a factor beyond its control there was no question of any non-renewal. It was contended that even if the cancellation of the exemption certificate was to be upheld under sub- rule 9(i) of Rule 28 (A) the same cannot operate retrospectively and the respondent cannot be asked to deposit the amount. This amount pertains to the period when the industrial unit was in production. Stand of the State, which is the appellant in this appeal, was that since there is no production since January, 1997 the exemption certificate was liable to be cancelled in terms of sub rule ((i) of Rule 28(A). There were no exceptional circumstances provided under which consequence could be availed. It was pointed out that after the eligibility certificate is granted, the dealer is required to obtain an exemption certificate which is valid up to a certain date. Thereafter the exemption certificate is required to be renewed on year to year basis as per the procedure provided in sub-rule (7) of Rule 28A. The High Court was of the view that the exemption certificate has rightly been cancelled under sub-rule (9) of Rule 28A of the Rules. It, however, did not accept the Revenue's stand that there was provision for consequential action. Reference was made to sub rule 10 (v) of Rule 28A. On a comparative reading of sub rules (8) & (9) it was held that if a unit discontinues its business or closes it down for a period of six months, action can be taken under both the provisions. Under sub-rule (8) the eligibility certificate can be withdrawn whereas under sub rule (9) the exemption/entitlement certificate can be cancelled. It was observed that there are no exceptions provided in sub-rule 9(1)(i) which is the position in clause (ii) of sub rule 8(a). Accordingly it was held that the cancellation of exemption/entitlement certificate can relate only to the year in respect of which the said certificate is still to expire and it is only the benefit of tax exemption availed by the dealer, for that year alone which becomes payable in lump sum. It was held that if after the expiry of an exemption/entitlement certificate it is found that unit had discontinued its business or closed it down for a period of exceeding six months, the department is not without remedy. It can always take action for withdrawal of the eligibility certificate as provided in sub-rule (8) of the Rule 28(A) of the Rules. The High Court held that once the eligibility certificate has been withdrawn, without there being any recourse to the procedure laid down under Rule (8) of Rule 28A of the Rules, the same is impermissible. It was however held that if the authorities have a case for withdrawal of the liability certificate under sub-rule (8) of Rule 28A of the Rules they shall be free to proceed in accordance with law and nothing observed in the judgment of the High Court shall prejudice their rights under that provision. The State is in appeal before the Supreme Court, which noted:- As the scheme of Rule 28A shows that there are two certificates provided for. One is the eligibility certificate and the other is the exemption certificate. Clause 4(a) deals with the benefit of tax exemption or deferment to an eligible industrial unit holding exemption or entitlement certificate. In Clauses 2 (j), (k) & (l) the certificates are defined: "(j) "eligibility certificate" means a certificate granted in Form S.T. 72 by the appropriate Screening Committee to an eligible industrial unit for the purpose of grant of exemption/deferment. (k) "exemption certificate" means a certificate granted in Form S.T. 73 by the Deputy Excise and Taxation Commissioner of the District to the eligible industrial unit holding eligibility certificate which entitles the unit to avail of exemption from the payment of sales or purchase tax or both, as the case may be; (l) "entitlement certificate" a certificate granted in Form S.T. 72 by the Deputy Excise and Taxation Commissioner of the district to the eligible industrial unit holding eligibility certificate which entitles it to get deferment of sales tax;" The Court observed that "the eligibility certificate is issued by the appropriate screening committee while the exemption certificate and the entitlement certificate are issued by the DETC in Forms 73 and 72 respectively. As the High Court has rightly observed that there is scope for automatic cancellation in view of the fact that after January, 1997 there was no production. Sub rule (8) deals with the withdrawal of the eligibility certificate. Under sub-rule 8(b) when the eligibility certificate is withdrawn, the exemption/entitlement certificate is also deemed to have been withdrawn from the first day of its validity and the unit shall be liable to payment of tax, interest or penalty under the Act as if no entitlement certificate had been ever granted to it. The other question which is required to be examined is the benefit of Rule 11(a). A bare reading of the same shows that the benefit of tax exemption/deferment under the Rule shall be subject to the condition that the beneficiary/industrial unit after having availed all the benefit shall continue its production for at least next five years not below the average production for the preceding five years. Clause (b) of the sub rule is of considerable significance; it shows that in case the unit violates any of the conditions laid down in clause (a) it shall be liable to make in addition to the full amount of the benefit availed of by it during the period of exemption/deferment, payment of interest chargeable under the Act as if no tax exemption/deferment was ever available to it. The proviso is also of significance. It provides that the provisions of clause (b) shall not come into play if the loss in production is explained to the satisfaction of the DETC concerned as being due to reasons beyond the control of the unit. Thus there are several conditions which are relevant; firstly there is a requirement of continuing the production of at least next five years; secondly consequences flowing in case of violation of the conditions laid down in clause (a). In other words, in case of non- continuance of production for next five years, the result is that it shall be deemed as if there was no tax exemption/entitlement available to it. The proviso permits to the dealers to explain satisfactorily to the DETC that the loss in production was because of the reasons beyond the control of the unit. The materials have to be placed in this regard by the party. The High Court seems to have completely lost sight of Rule 11(b). In any event, the Supreme Court found that the High Court had permitted the authorities to go before the Screening Committee to get the eligibility certificate cancelled. Undisputedly that has been done, and the appeal against cancellation has been dismissed. It is stated that a writ petition is pending before the High Court. As in the instant case the writ petition filed by the respondent has been allowed without examining effect of Rule11, the order of the High Court cannot be maintained. It is to be noted that in terms of clause (b) of Rule11 if the conditions stipulated in clause (a) are not fulfilled, it shall be deemed that exemption/entitlement was not ever availed. Therefore, the High Court was not justified in its view that demand cannot be maintained.

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