HARSH CHEMICALS vs. STATE OF GUJARAT

C/SCA/4424/2019 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 4424 of 2019 With R/SPECIAL CIVIL APPLICATION NO. 10652 of 2019

FOR APPROVAL AND SIGNATURE:

HONOURABLE MR.JUSTICE J.B.PARDIWALA Sd/- and HONOURABLE MR.JUSTICE A.C. RAO Sd/- ========================================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? NO 2 To be referred to the Reporter or not ? NO 3 Whether their Lordships wish to see the fair copy of the judgment ? NO 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India or any order made thereunder ? NO ========================================================== S AND H CHEMICALS Versus THE STATE OF GUJARAT ========================================================== Appearance: UCHIT N SHETH(7336) for the Petitioner(s) No. 1 NOTICE SERVED BY DS(5) for the Respondent(s) No. 1 ========================================================== CORAM: HONOURABLE MR.JUSTICE J.B.PARDIWALA and HONOURABLE MR.JUSTICE A.C. RAO

Date : 21/08/2019

ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE A.C. RAO) Page 1 of 17

C/SCA/4424/2019 JUDGMENT 1.00. RULE, returnable forthwith. Mr.Soham Joshi, learned AGP waives service of notice of rule for and on behalf of the respondents, in both the petitions. Considering the nature of the controversy involved, both these petitions are taken up for final hearing. 2.00. As common question of law arise in both these petitions and are between the same parties, both these petitions are heard, decided and disposed of by this common judgement and order. 2.01. By way of Special Civil Application No.4424 of 2019, petitioner – D & H Chemicals has prayed for appropriate writ of certiorari or any other appropriate writ, order and/or direction quashing and setting aside the order dated 10/12/2018 passed by the Gujarat Value Added Tax Tribunal in Second Appeal No.1346 of 2018 demanding pre-deposit of Rs.7,00,000/- against the tax due of Rs.37,59,325/- for admission of Second Appeal and grant of stay against recovery of dues in assessment for the year 2013-14 under the Gujarat Value Added Tax Act, 2003 (“the Act” for short). 2.02. By way of Special Civil Application No.10652 of 2019, petitioner – Harsh Chemicals has prayed for appropriate writ of certiorari or any other appropriate writ, order and/or direction quashing and setting aside the order dated 25/04/2019 passed by the Gujarat Value Added Tax Tribunal in Second Appeal No.60 of 2019 demanding pre- deposit of Rs.85,00,000/- against the tax due of Rs.21,21,10,184/- for admission of Second Appeal and grant of Page 2 of 17

C/SCA/4424/2019 JUDGMENT stay against recovery of dues in assessment for the year 2013- 14 under the Act. 3.00. Since in both the petitions same issue of pre- deposit is involved, Special Civil Application No.4424 of 2019 is treated as main petition and facts of the said petition are reproduced hereinbelow: 3.01. As per the case of the petitioner, the petitioner – S & H Chemicals is a Partnership Firm which was having place of business at 219, The Grand Monarch, Near Seema hall, Anandnagar Road, Satellite, Ahmedabad 380 015. The petitioner was a dealer engaged in trading of chemicals. The petitioner was duly registered under the VAT Act. The petitioner was engaged in local trade for which movement of goods took place in private vehicles of sellers or buyers of the petitioner. The sellers of the petitioner directly delivered the goods to the buyers of the petitioner on instruction by the petitioner. The purchases were made from registered vendors under the VAT Act against the tax invoices and payment was made through banking channels. In the assessment for the A.Y. 2013-2014, majority of the input tax credit was allowed by the A.O., but the input tax credit of purchases from one M/s.H.L. Enterprise was disallowed on the ground that its registration certificate had been cancelled with retrospective effect. As per the petitioner, in the assessment order it was neither alleged nor established that the purchase transactions of the petitioner were not genuine and it was not disputed that the As per the petitioner, copy of the order cancelling registration certificate of the vendor was never given to the petitioner. As per the revenue, the petitioner was not able to produce proof of Page 3 of 17

C/SCA/4424/2019 JUDGMENT transportation of the goods. As per the petitioner, huge demand was raised against the petitioner. The petitioner challenged the assessment order by way of preferring appeal before the first appellate authority and the first appellate authority demanded payment of Rs.20% of the total dues for admission of the first appeal. As the appellant did not make payment of the amount of pre-deposit, the first appellate authority summarily dismissed the appeal on the ground of non-payment of pre-deposit. Against the order of the first appellate authority, the petitioner preferred Second Appeal before the tribunal and the Tribunal vide impugned order dated 10/12/2018 passed in Second Appeal No.1346 of 2018 directed the petitioner assessee to deposit Rs.7,00,000/- as pre-deposit against total dues of Rs.37,59,325/-. 3.02. So far as Special civil Application No.10652 of 2019 is concerned, the tribunal vide impugned order dated 24/5/2019 passed in Second Appeal No.60 of 2019 directed the petitioner assessee to deposit Rs.85,00,000/- as pre-deposit against total dues of Rs.21,21,10,184/-. 4.00. Mr.Uchit Sheth, learned counsel appearing for the respective petitioner – assessee has vehemently submitted that the input tax credit of purchases from one M/s.H.L. Enterprise has been disallowed on the ground that its registration certificate had been cancelled with retrospective effect. He has further submitted that in the assessment order it was neither alleged nor established that the purchase transactions of the petitioner were not genuine and it was not disputed. He has further submitted that even the copy of the order cancelling registration certificate of the vendor was Page 4 of 17

C/SCA/4424/2019 JUDGMENT never given to the petitioner and therefore, the impugned order of assessment itself is in violation of principles of natural justice. 4.01. Mr.Sheth, further submitted that now the business of the petitioners is closed down and the petitioners are facing financial hardship and they have no money to deposit. He has further submitted that however, the petitioners have managed to deposit Rs.2,00,000/-, however, the tribunal has directed to deposit further amount of Rs.5,00,000/-. 4.02. Mr.Sheth, learned counsel for the petitioners has further submitted that the petitioner has a strong prima facie case and therefore the orders of the appellate authorities demanding huge re-redeposit deserve to be quashed and set aside. It is submitted that the entire tax demand is on account of dis-allowance of input tax credit on purchases made from one vendor and such dis-allowance is absolutely unsustainable in law. It is contended that admittedly the vendor was registered under the Vat Act when the purchases were made by the petitioner. It is contended that the Input tax credit cannot be straightaway disallowed on the basis of retrospective cancellation of registration certificate of the vendor. It is contended that in fact Section 11(5)(mmmm) of the Gujarat Value Added Tax Act, 2003 specifically provides that input tax credit can be disallowed only if the purchases are made from such dealer after name of the dealer is published as cancelled by the Commissioner under Section 27 (11) or Section 97 of the VAT Act. It is contended that It is also held by the Supreme Court in the case of State of Maharashtra v/s Suresh Trading Company, (1998) 109 Page 5 of 17

C/SCA/4424/2019 JUDGMENT STC 439 (SC) that input tax credit cannot be disallowed on the basis of retrospective cancellation of registration certificate of vendor. It is contended that similar view has been taken by this Court in the case of Meet Traders v/s State of Gujarat, (2013) 63 VST 246 (Guj.). It is contended that input tax credit can be disallowed only if it is concluded that the purchaser had colluded with the vendor and the registration certificate of the vendor was cancelled specifically in reference to transactions with the purchaser. 4.03. Mr.Sheth, learned counsel for the petitioners has further submitted that the copy of the order cancelling registration certificate of the vendor is required to be provided to the purchaser and after giving an opportunity to the purchaser to rebut adverse allegations if any in such order in relation to his transactions if it is ultimately found that the purchaser had not actually made genuine purchases from the vendor then input tax credit can be disallowed. It is contended that Disallowance of input tax credit without following the procedure of providing copy of order cancelling registration certificate of the vendor to the purchaser and adjudication of genuineness of the transactions is completely in breach of principles of natural justice. Mr.Sheth, learned counsel for the petitioner has placed reliance in this regard to the judgement of this Hon. Court in the case of Shree Bhairav Metal Corporation v/s State of Gujarat (2015) 82 VST 324 (Guj.) and State of Gujarat v/s Modi Oil Industries Sales Tax Reference No. 2 of 2001 decided on 1.7.2016. It is contended that since the assessment order is passed in breach of principles of natural justice and is unsustainable, the petitioner has a strong prima-facie case and hence the orders of the Page 6 of 17

C/SCA/4424/2019 JUDGMENT appellate authorities demanding pre-deposit are arbitrary and illegal. It is contended that so far as the allegation of the learned appellate authorities that the petitioner has not been able to produce evidences of genuineness of transactions, for all its purchase transactions disputed as well as undisputed it has the same set of evidences being tax invoice and proof of payment through banking channels. It is contended that since the petitioner was a trader and the delivery took place in private vehicles of sellers or the buyers of the petitioner, there is no lorry receipt for even the undisputed purchases of the petitioner. However on the basis of tax invoice and payment proofs huge input tax credit of Rs.31,99,47,695/- has been admittedly allowed in assessment. It is contended that Disallowance of Rs.37,73,163/- is thus only on the ground of cancellation of registration certificate of the vendor and there is in fact no allegation of non-genuine transactions in the assessment order. It is contended that such dis-allowance being grossly in breach of principles of natural justice the petitioner deserves hearing before the appellate authority on merits without insistence of any pre-deposit or security. 4.04. Mr.Sheth, learned counsel for the petitioners has further submitted that this Court has passed various orders completely waiving pre-deposit condition in similar facts. It is contended that this Court in the case of Capital Traders v/s State of Gujarat in Special Civil Application No. 18963 of 2019 decided on 11.2.2019 in the context of payment of pre-deposit itself in similar facts where the input tax credit was disallowed without providing the purchaser with a copy of the assessment order passed in the case of vendor, the pre- Page 7 of 17

C/SCA/4424/2019 JUDGMENT deposit condition imposed by the tribunal was fully waived by this Court by inter-alia making the following observations: “11. At this juncture, reference may be made to the decision of this court in the case of Shree Bhairav Metal Corporation v. State of Gujarat (supra), wherein it has been held thus: ”9.4 As observed earlier, the impugned order has been passed by the adjudicating authority denying the ITC claimed by the petitioner 0n the alleged purchases made by the petitioner from M/s Lucky Enterprises on the ground that the registration certificate of M/s Lucky Enterprises on the ground that the registration certificate of M/s Lucky Enterprises seller has been cancelled ab initio on the ground that the seller had involved into the billing activities only and all the transactions by M/s Lucky Enterprises are held to be bogus. The petitioner has been denied the ITC on the ground of the aforesaid activities/alleged transactions between the petitioner and W5 Lucky Enterprises. However, as observed herein above, the petitioner was not served with the copy of the order in the case of M/s Lucky Enterprises. Now, the copy of the order passed in the case of M/s Lucky Enterprises is available with the petitioner. Therefore, after giving an opportunity to the petitioner with respect to observations made in the case of M/s Lucky Enterprises insofar as the alleged transactions Page 8 of 17

C/SCA/4424/2019 JUDGMENT between the petitioner and W5 Lucky Enterprises and after giving an opportunity to the petitioner to prove the genuineness of the transaction between the petitioner and W5 Lucky Enterprises in light of the observations made herein above, therefore, the matter is required to be remanded to the adjudicating authority to consider the claim of the petitioner for ITC on the alleged purchases made by the petitioner from M/s Lucky Enterprises.” 12. In the opinion of this court, the above decision would be squarely applicable to the facts of the present case. Having regard to the fact that at the time when the assessment order was made, the petitioners did not have the copies of the assessment orders made in the case of the vendors, the petitioners did not have any opportunity to prove the genuineness of such transactions.” ”15. In the light of the above discussion, the court is of the view that the petitioners have made out a strong prima-facie case in their favour. Under the circumstances, the Tribunal and the first appellate authority were not justified in directing payment of huge amount of pre-deposit for the purpose of admitting the appeal and staying recovery. 16. The petition, therefore, succeeds and is, accordingly, allowed. The impugned orders dated 10.10.2018 as well as 6.9.2018 by the Tribunal in Second Appeal No.1003 of 2018 as well as the order dated 27.6.2018 passed by the Page 9 of 17

C/SCA/4424/2019 JUDGMENT Joint Commissioner of State Tax Division-II, Ahmedabad (the first appellate authority) directing payment of pre- deposit and dismissing the appeal for nOn-payment of pre-deposit, are hereby quashed and set aside and the matter is restored to the file of the first appellate authority who shall hear the appeal on merits, without insisting upon payment of any predeposit. The recovery of the demand raised under the assessment order shall remain stayed till the first appellate authority finally decides the appeal. Rule is made absolute accordingly with no order as to costs.” 4.05. Mr.Sheth further

submitted that, similar observations were also made by this Court in the case of Utsav Enterprise v/s State of Gujarat Special Civil Application No. 1173 of 2019 decided on 1.5.2019.

4.06. Mr.Sheth, in the alternative submitted that the appeals may kindly be directed to be heard on merits on the basis of payment already made and additional security in the form of immovable property. 4.7. Mr.Sheth, learned counsel for the petitioners further submitted that without prejudice to the above submissions and in the alternative it is respectfully submitted that the financial position of the petitioner is extremely weak. The business of the Petitioner is closed down. The Petitioner has already deposited Rs. 2,00,000 pursuant to order of Hon. Tribunal. Further the partner of the petitioner being Mr. Milan Nayankumar Mehta may be permitted to offer security in the Page 10 of 17

C/SCA/4424/2019 JUDGMENT form of his residential house where the partner is currently residing. The said security may be considered on consolidated basis for the demand in the case of the petitioner - S&H Chemicals in SCA No.4424 of 2019 as well as demand in the case of petitioner - being M/s Harsh Chemicals in Special Civil Application No. 10652 of 2019, which is sister concern of petitioner of SCA No.4424 of 2019. It is contended that the valuation report of the property has been placed on record of this petition by pursis dated 21/08/2019. It is contended that if this Court is not willing to completely waive pre-deposit, the appeals of the petitioners may be directed to be heard on merits on the basis of payment already made and the security offered by the partner of the petitioners. He has contended that this Court has in the case of Shri Dalpatsinh Ukabhai Vasava v/s The Principal Commissioner of Income Tax-2 in Special Civil Application No. 9825 of 2019 has permitted furnishing of security instead of payment of pre-deposit. It is contended that the petitioners will be rendered remediless without intervention of this Court. Pursis dated 21/8/2018 submitted pursuant to the order dated 27/6/2019 placing on record valuation report along with the share certificate and purchase deed of the residential property where the partner of the petitioner is residing and which the said partner is ready to give the same as security for the purpose of hearing the appeals, is ordered to be taken on record. 4.08. Mr.Sheth, learned counsel for the petitioners has further submitted that the petitioner will be rendered Page 11 of 17

C/SCA/4424/2019 JUDGMENT remediless if this Court does not intervene since the appeal of the petitioners will not be heard on merits because of the inability of the petitioners in fulfilling the condition of pre- deposit. It is contended that on the other hand the revenue will not suffer even if the present petition is allowed since eventually if the petitioners fail in appeals then it will remain liable to pay the assessed dues. It is contended that the balance of convenience is therefore in favour of allowing the writ petition particularly considering the strong prima facie case and the judgements of this Court in similar facts and circumstances. By making above submissions and relying upon above decisions, Mr.Sheth requested to allow both these petitions. 5.00. Both these petitions are opposed by Mr.Soham Joshi, learned AGP appearing for the respondents State. He has submitted that no error has been committed by the tribunal in dismissing the Second Appeals preferred by the petitioners on account of non-deposit of amount of pre-deposit, as ordered by the tribunal. He has submitted that the impugned orders are just, legal and proper and the same do not warrant any interference at the hands of this Court. 5.01. Mr.Joshi, learned AGP further contended that it is the duty of the petitioners to establish the genuineness of the purchase and the petitioners have failed to establish the genuineness of the the purchase. It is submitted that considering the stake involved in the matter and considering Page 12 of 17

C/SCA/4424/2019 JUDGMENT the provisions of the Act and considering the fact that the condition of pre-deposit is a statutory requirement, impugned orders are not required to be interfered with and the petitions are required to be dismissed. 6.00. Heard Mr.Uchit Sheth, learned counsel appearing for the respective petitioners and Mr.Soham Joshi, learned AGP appearing for the respondents in both the petitions at length. Considered the material on record as well as the pleadings of the parties. 6.01. The sole question that arises for consideration in the present case is as to whether the first appellate authority and the Tribunal were justified in directing the petitioners to make pre-deposit in terms of the orders passed by them. 6.02. At this juncture, reference may be made to the decision of this court in the case of Shree Bhairav Metal Corporation versus State of Gujarat (supra), wherein it has been held thus:“ “9.04. As observed earlier, the impugned order has been passed by the adjudicating authority denying the ITC claimed by the petitioner on the alleged purchases made by the petitioner from M/s Lucky Enterprises on the ground that the registration certificate of M/s Lucky Enterprises on the ground that the registration certificate of M/s Lucky Enterprises – seller has been cancelled ab- Page 13 of 17

C/SCA/4424/2019 JUDGMENT initio on the ground that the seller had involved into the billing activities only and all the transactions by M/s Lucky Enterprises are held to be bogus. The petitioner has been denied the ITC on the ground of the aforesaid activities/alleged transactions between the petitioner and M/s Lucky Enterprises. However, as observed herein above, the petitioner was not served with the copy of the order in the case of M/s Lucky Enterprises. Now, the copy of the order passed in the case of M/s Lucky Enterprises is available with the petitioner. Therefore, after giving an opportunity to the petitioner with respect to observations made in the case of M/s Lucky Enterprises insofar as the alleged transactions between the petitioner and M/s Lucky Enterprises and after giving an opportunity to the petitioner to prove the genuineness of the transaction between the petitioner and M/s Lucky Enterprises in light of the observations made herein above, therefore, the matter is required to be remanded to the adjudicating authority to consider the claim of the petitioner for ITC on the alleged purchases made by the petitioner from M/s Lucky Enterprises.” 6.03. In our considered opinion, the above decision would be squarely applicable to the facts of the present case. Having regard to the fact that at the time when the assessment orders were made, the petitioners did not have the copies of the assessment orders made in the case of the vendors, the petitioners did not have any opportunity to prove the Page 14 of 17

C/SCA/4424/2019 JUDGMENT genuineness of such transactions. 6.04. As can be seen from the assessment orders, the Assessing Officer has placed reliance upon section 11(7A) of the GVAT Act for disallowing input tax credit to the petitioners. Section 11(7A) of the GVAT Act reads as under: “Notwithstanding anything contained in this section, in no case the amount of tax credit on any purchase of goods shall exceed the amount of tax in respect of the same goods, actually paid, if any, under this Act or any earlier law, into the Government treasury:” 6.05. Sub-section (7A) of section 11 of the GVAT Act envisages disallowance of tax credit in excess of the amount of tax paid in respect of the same goods. Therefore, to disallow tax credit on any purchase, it has to be established that it is in respect of the very goods purchased by a dealer that the tax has not been paid. Input tax credit cannot be disallowed by working out the percentage of purchases made from a dealer whose registration is cancelled, without first establishing that in respect of the goods purchased by the dealer, the vendor had not paid tax. 6.06. In the light of the above discussion, the court is of the view that the petitioners have made out a strong primafacie case in their favour. Under the circumstances, the Tribunal and the first appellate authority were not justified in directing payment of huge amount of pre-deposit for the purpose of admitting the appeal and staying recovery. Page 15 of 17

C/SCA/4424/2019 JUDGMENT 6.07. Considering the overall facts of the case and the fact that in Second Appeal No.1346 of 2018 tax due is rs.37,59,325/- and in Second Appeal No.60 of 2019, total dues is Rs.21,21,10,184/-, and considering the fact that the business of the petitioners is closed and the petitioners wants to pursue the Second Appeals even by giving the residential premises of the partner of the petitioner firm as security, we are opinion that if the residential premises of the partner of the petitioner firm as offered by pursis dated 21/8/2019 along with the valuation report and share certificate and purchase deed, is considered by the tribunal as security towards pre-deposit amount in both the appeals, ends of justice would be met. 7.00. Considering the overall facts and circumstances of the case, both these petitions are allowed. Impugned order dated 10/12/2018 passed by the Gujarat Value Added Tax Tribunal in Second Appeal No.1346 of 2018 demanding pre-deposit of Rs.7,00,000/- as well as the impugned order dated 25/04/2019 passed by the Gujarat Value Added Tax Tribunal in Second Appeal No.60 of 2019 demanding pre-deposit of Rs.85,00,000/-, are hereby quashed and set aside on condition that property being Flat No.601, 6th Floor, “Sahil apartment”, situated opposite Railway Station, Navsari, Gujarat 396 445 which is of the ownership of the partners in both the petitions namely Milan Nayankumar Mehta, be treated as security towards pre-deposits for deciding the First Appeals and for stay against recovery till final disposal of the first appeals by the first appellate authority. The matters are remanded to the first appellate authority to decide the matters afresh in accordance with law and on merits, on the basis of payment Page 16 of 17

C/SCA/4424/2019 JUDGMENT already made and treating the aforesaid property of the partner of the petitioners as security towards the pre-deposit for admission of appeals and grant of stay. The petitioners to make appropriate application before the first appellate authority for treating the aforesaid property as security towards pre-deposit and the first appellate authority to pass order treating the said property as security towards pre- deposit. The petitioners shall also file necessary undertaking to the aforesaid effect before the first appellate authority for treating the said property as security towards pre-deposit. The recovery of the demand raised under the assessment orders shall remain stayed till the first appellate authority finally decides the appeals. Rule is made absolute accordingly with no order as to costs. Sd/- (J. B. PARDIWALA, J) Sd/- (A. C. RAO, J) RAFIK Page 17 of 17