State Of Haryana & Ors vs M/S. A.S. Fuels Pvt. Ltd. & Anr

2. Challenge in these appeals is to the order of a Division

Bench of the Punjab and Haryana High Court holding that the

cancellation of exemption certificate after its validity period was over on 30.6.1997 did not attract the provisions of clause

(v) of sub Rule 10 of Rule 28 (A) of the Haryana General Sales

Tax Rules, 1975 (hereinafter referred to as the `Rules').

According to the High Court, it was clearly not a case of

cancellation of exemption certificate because it was done after

expiry of the period. In that view of the matter, it was held

that the Deputy Excise and Taxation Commissioner (in short

the `DETC') was not justified in directing the respondent to

deposit an amount of Rs.40,45,324/- in respect of the

exemption availed of by it for the period up to 30th June, 1997.

The High Court did not think it necessary to examine whether

sub rule 10(v) of Rule 28(A) in so far as it empowers the

department to withdraw the tax exemption certificate was

valid or not. However, liberty was granted to the present

appellants, if there was a case for withdrawal of the eligibility

certificate under sub-rule (8) of Rule 28A of the Rules, to

proceed in accordance with law.

3. The State of Haryana has filed the appeals in respect of

orders of the High Court in writ petition filed by the 2 respondent in each case. The first judgment was rendered in

case of M/s A.S. Fuels Pvt. Ltd. The judgment in that case was

the primary foundation for decision in the other cases.

4. Background facts in Civil Appeal No.5386 of 2002 are

essentially as follows:

Under Rule 28A 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 3 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 4 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 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 was no exceptional

circumstances provided under which consequence could be 5 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. Reference was also made to sub rule (9) which provides

the circumstances under which exemption certificate granted

was liable to be cancelled. It was therefore argued that once

the exemption certificate is cancelled it necessarily follows

that the exemption of tax already availed would be without

authority of law and was liable to be recovered. Reference was

made in this context to clause (v) of sub rule (10) of the Rules.

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 6 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 dis-

continued 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 7 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.

5. Learned counsel for the appellant-State submitted that

after having held that the cancellation was right, High Court

was not correct to say that it can only be withdrawn for the

period concerned. Reference is made to sub-rule (11). It

provides that the benefit of tax exemption/deferment after it is

availed shall continue for the next five years. Sub-rule 10(v)

deals with currency of the certificate and sub rule 11(1)(b)

proviso that DETC has the authority to ask for deposit of the

amount in respect of which exemption has been availed if

there is violation of any of the conditions stipulated.

6. Learned counsel for the respondents on the other hand

submitted that once certificate has lost its currency and the

application was made after the expiry of the period, there 8 could not have been any cancellation and there was also no

question of any renewal. It is also pointed out that pursuant

to the directions of the High Court, the eligibility certificate

has been withdrawn by the concerned authority and the

eligibility certificate has been cancelled with effect from

27.6.2007, an appeal has already been dismissed on 8.6.2006

and the writ petition was pending.

7. Rule 28(A) so far as relevant reads as follows:

"28(A) - Class of industries, period and other conditions for exemption/deferment from payment of tax- (1) The industries covered under this rule shall not be entitled to any deferment or exemption from payment of tax under any other provisions of these rules.

xx xx xx

(6). (a) An eligible industrial unit which has been issued with an eligibility certificate (hereinafter referred to as the applicant unit), shall, within sixty days of its receipt make an application for the grant of exemption or entitlement certificate as the case may be, in Form S.T. 71 to the Deputy Excise and Taxation Commissioner of the District in which his unit is located. The application shall be accompanied with an attested copy of the 9 eligibility certificate and other documents mentioned in the application.

No application shall be entertained if not received within time. An application with incomplete or incorrect particulars including the documents required to be attached therewith shall be deemed as having been not made if the applicant fails to complete it on an opportunity afforded to him in this behalf. On receipt of application, the Deputy Excise and Taxation Commissioner shall ask the applicant unit seeking benefit of :-

(i) tax deferment to either execute a mortgage deed in Form S.T. 74 creating a pari-passu first charge alongwith financial institutions/banks on the assets of the unit, or to furnish a bank guarantee for 15% of the total benefit to be availed of in a year, and a surety bond in Form S.T. 50 for the balance amount of 85%. The mortgage deed/agreement or-bank guarantee shall be valid till the recovery of the entire deferred amount of tax. The bank guarantee, if expiring early or if furnished, on annual basis shall be renewed two months before the date of expiry failing which the unsecured deferred tax shall become due for payment immediately;

(ii) tax exemption, to either execute a surety bond in Form S.T. 50 equivalent to 15% of the amount of notional sales tax liability sought to be exempted for a bank guarantee for that amount in a year, which shall be valid for the period extending to five year, which shall be 10 valid for the period extending to five years after the expiry of total period of tax exemption;

(b) The Deputy Excise and Taxation Commissioner shall after satisfying himself that the applicant unit is holding a genuine and valid eligibility certificate, has furnished adequate security and that his application is in order will issue him the exemption/entitlement certificate as the case may be within thirty days of the receipt of the application. One copy of the certificate shall be sent to the Director of Industries or The General Manager, District Industries Centre as the case may be and one copy shall be retained in the record. The certificate issued shall he valid unless cancelled or withdrawn from the date of commercial production or from the date of issue of entitlement/ exemption certificate as the case may be to the 30th June next or when notion sales tax liability first exceeds the quantum of tax exemption/deferment fixed for the unit, whichever is earlier.

Note:-- The agreement or the mortgage deed or the bank guarantee, as the case may be, is an important document and shall be entered in a register to be maintained in Form S.T. 75 by the Deputy Excise and Taxation Commissioner concerned in his personal custody. At the time of transfer of the charge of his office, the Deputy Excise and Taxation Commissioner shall hand over the register as well as the documents to his successor personally against proper receipt and shall send a certified copy of the same to the Excise and Taxation Commissioner by name who will acknowledge its receipt to both the officers.

11 (7)(a) The exemption certificate or the entitlement certificate as the case may be, shall be renewed from year to year for which the industrial unit shall make an application to the Deputy Excise and Taxation Commissioner incharge of the District by the 31st May in Form S.T. 71. The application shall be accompanied with exemption/entitlement certificate, additional security as specified in sub clauses (i) and (ii) of clause (a) of sub-rule (6) equal to fifteen per cent of the declared notional sales tax liability of the current year and the difference between the actual and the declared notional sales tax liability of the previous year in the case of sales tax exemption and equivalent to the extent of estimated tax liability of the current year and difference between actual and estimated tax liability of previous year in case of tax deferment, as also other documents mentioned in the application.

The Deputy Excise and Taxation Commissioner after making such enquiries as are necessary, and after satisfying himself that the applicant is a bonafide industrial unit and has not misused the exemption/entitlement certificate, shall renew the exemption/ entitlement certificate within 30 days of the making of the application for renewal failing which the certificate shall remain valid until the renewal is refused or the certificate otherwise expires. The exemption/ entitlement certificate on renewal shall unless cancelled or withdrawn be valid from lst of July of the year in which the application is made if it is in time or otherwise from the date of application to 30th June, next or when the eligibility certificate expires or the cumulative notional sales tax liability first exceeds the quantum of tax exemption/deferment fixed for the unit, whichever is earlier.

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(b) If the Deputy Excise and Taxation Commissioner incharge of the district finds that the application for renewal of exemption/ entitlement certificate is not in order or the particulars contained in the application are not correct and complete or the applicant is not a bonafide industrial unit or has misused exemption/entitlement certificate or has note complied with any of the directions given to it by him within the specified time; he may reject the application after giving the applicant an opportunity of being heard.

(c) An appeal against the order passed by the Deputy Excise and Taxation Commissioner under clause (b) of this sub-rule shall lie to the Excise and Taxation Commissioner, Haryana, if preferred within thirty days of the communication of the order appealed against.

(8)(a) The eligibility certificate granted to an industrial unit shall be liable to be withdrawn at any time during its currency by the appropriate screening committee, in the following circumstances

(i) if it is discovered that it has been obtained by fraud, deceit, misrepresentation, mis-statement or concealment of material facts;

(ii) discontinuance of its business by the unit or closing down of its business for a continuous period exceeding six months except in case of fire, flood and other natural calamities, riots, strike or lock-out which in the opinion of the committee concerned is beyond the control of the unit;

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(iii) disposal or transfer by the unit of any off its fixed assets adversely affecting its manufacturing or production capacity:

Provided that no order of withdrawal of the eligibility certificate shall be made without affording a reasonable opportunity of being heard to the affected unit.

(b) When the eligibility certificate is withdrawn, the exemption/entitlement certificate shall be deemed to have been withdrawn from the 1st 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 ever been granted to it.

(9) The exemption/entitlement certificate granted to an eligible industrial unit shall be liable to be cancelled by the Deputy Excise and Taxation Commissioner concerned in the following circumstances, after affording an opportunity of being heard to the unit:-

(i) discontinuance of its business by the unit at any time for a period exceeding six months or closing down of its business during the period of exemption/deferment.

(ii) disposal by the unit of any of its fixed assets mortgaged with the Government in the Excise and Taxation Department;

(iii) failure to furnish adequate security by the unit as required under the rules;

(iv) failure of the unit to make payment of the deferred amount on the date of payment;

(v) contravention of any of the provisions of the Act and/or the rule, or conditions of the eligibility 14 certificate or the exemption/ entitlement certificate by the unit;

(vi) when the appropriate committee, which sanctions eligibility certificate recommends that the exemption /entitlement, certificate of the unit be cancelled for reasons to be recorded in writing.

(10) (i) The eligible industrial unit shall continue to be liable to file the returns in the manner prescribed under the Act, and the rules and its failure to do so shall expose it to penalty as provided in the Act;

(ii) The assessment of an eligible industrial unit holding exemption/entitlement certificate shall be framed in accordance with the provisions of the Act and Rules framed thereunder as early as possible and shall be completed by the 31st December, in respect of the assessment year immediately preceding thereto and the additional demand so determined, if any, shall be paid as per the provisions of the Act and the Rules;

(iii) The State Government may appoint special assessing authority for framing assessment of units mentioned in the preceding clause;

(iv) Notwithstanding the provisions relating to payment of tax due, according to returns, the eligible industrial unit which has availed of the benefit of sales tax deferment shall make payment of the deferred amount after the expiry of a period of five years to the extent of the amount deferred, every quarter or month, as the case may be, within the period specified in the rules:

15 (v) On cancellation eligibility certificate or exemption/entitlement certificate before it is due for expiry, the entire amount of tax exempted/deferred shall become payable immediately, in lump sum, and the provisions relating to recovery of -tax, interest and imposition of penalty shall be applicable in such cases.

11 (a) The benefit of tax-exemption/deferment under this rule shall be subject to the condition that the beneficiary/industrial unit after having availed of the benefit:-

(i) shall continue its production at least for the next five years not below the level of average production for the preceding five years; and

(ii) shall not make sales outside the State for next five years by way of transfer or consignment of goods manufactured by it.

(b) In case the unit violates any of the conditions laid down in clause (a), it shall be liable to make an addition to the full amount of tax 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:

Provided that the provisions of this clause shall not come into play if the loss in production is explained to the satisfaction of the Deputy Excise and Taxation Commissioner concerned as being due to the reasons beyond the control of the unit:

Provided further that a unit shall not be called upon to pay any sum under this clause without

16 having been given reasonable opportunity of being heard.

8. 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

17 the eligible industrial unit holding eligibility certificate which entitles it to get deferment of sales tax;"

9. 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 only 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 18 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 19 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, we find 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.

10. 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 Rule

11, 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. In view of the conclusions, Civil Appeal No. 676

20 of 2005 is without merit and is dismissed, while the other

appeals are allowed.

...........................................J (Dr. ARIJIT PASAYAT)

...........................................J (P. SATHASIVAM) New Delhi, August 20, 2008

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