Is communication of acceptance of a High Court order binding on Revenue?
From Ranaday Micro Nutrients ( ) through paper products () to Dhiren Chemicals () the Supreme Court had held that Board circulars are binding on Revenue. The basic idea that ran through all the decisions of the Supreme Court was that if the Board had given a circular allowing a concession or benefit to an assessee and if the assessee had acted on that, later the Board or the department could not claim that the Board was wrong and proceed against the assessee.
Recently an assessee tried to take this principle to a preposterous limit.
The assessee has won a tax dispute in the High Court against the commercial taxes department of a state claiming exemption from tax during a particular period. The state went in appeal to the Supreme Court. The Supreme Court admitted the appeal but declined to grant stay. In the absence of stay, the state was bound to implement the order of the High Court. So the state government issued a letter to the subordinate tax officers informing them that the state government has accepted the High Court order and it should be implemented.
Can this letter of government accepting the High Court order be treated like the Circular from the Board which is binding on the officers? After a couple of years the case came up for hearing before the Supreme Court. There the party pleaded that the governments’ letter to the field about the acceptance of the High Court order was binding on them and even if the Supreme Court set aside the orders of the High Court, no tax can be collected from them. The Supreme Court found this objection misconceived. The Circular in question here was merely an official communication to the subordinate officers directing compliance with the decisions of the High Court. They were not clarifications of statutory provisions. If they were clarifications, they would represent the official understanding of the statutory provisions and would be binding on the taxing authority. The Supreme Court further observed that the state law in question did not have a provision corresponding Section 37B of the Central Excise Act. It was circulars issued under this Section that the Supreme Court held to be binding on the Revenue in the Dhiren Chemicals case. In this particular case the Supreme Court had granted leave to appeal in August 2000 and stay was refused on contest in January 2001. In the absence of the stay by the Supreme Court the government was bound to comply with the High Court’s order. The Supreme Court observed that such compliance by itself cannot destroy the governments’ right to press their appeals before the Supreme Court.
What happens if exemption allowed by the High Court is later disallowed by the Supreme Court? In the above case what would happen if the assessee had not collected tax from its customers and not paid it to the government based on the High Court order for which stay was refused by the Supreme Court? Further the state Act had a provision that no tax can be collected by the assessee from the customer if it was not liable to pay the tax to the state. There is even a hefty penalty if the tax is collected. Now suppose the assessee loses in the Supreme Court after five years of the High Court order; what happens? As per the High Court order the assessee was not required to pay tax and therefore it did not pay tax. As it was not required to pay tax it was not allowed to collect the tax from the customers. Had it collected the tax from the customers there would have been another case against the assessee and a penalty would have been imposed. Now having lost the case in Supreme Court is the assessee required to pay the tax? Yes says the Supreme Court.
The Supreme Court had in the State of Rajastan Vs. J K Udaipur - , held that the mere circumstance that the assessee having availed of the exemption were prohibited from collecting the tax from their customers, is of no consequence. The primary liability to pay the sales tax is on the seller. The seller may or may not be entitled to recover the same from the purchaser. The State government is entitled to recover the same from the assessees irrespective of the fact that they have lost the chance of passing on their liability to pay sales tax to their purchasers.
Moral of the story: Be very careful when you avail an exemption in Central Excise, Service Tax, or any other tax for you may be struck with a liability a decade after you have availed the concession. And you will be made to pay the tax in glorious isolation.