Sixteen years of VAT scrutiny collapses on a clause nobody had read closely: Meghalaya High Court quashes notices for forty-one quarters

Justices H.S. Thangkhiew and B. Bhattacharjee hold that scrutiny under Section 39 reaches only a registered dealer who was served a notice under Section 35, and that the Superintendent had no delegated power either.

In March and November 2023 the Superintendent of Taxes for East Jaintia Hills issued a company a run of scrutiny reports and defect notices covering every quarter from the one ending 30 June 2007 to the one ending 30 June 2017 — forty-one of them, the oldest reaching back sixteen years. A Division Bench of the Meghalaya High Court has quashed the lot, on the ground that the power to scrutinise returns under Section 39 of the Meghalaya VAT Act was never available against this dealer at all, and that the officer who exercised it had no gazetted delegation to do so.

The provision, and the five words that decided it

The petitioner is a company registered under the Companies Act with its registered office at Lumshnong in East Jaintia Hills. It challenged the scrutiny reports and the notices for curing defects in tax returns issued under Section 39 of the Meghalaya Value Added Tax Act, 2003, on two principal grounds: that no notice under Section 35 had ever been issued to it, which it said is a condition precedent for scrutiny under Section 39; and that the power cannot be exercised at any time, since the Act prescribes five years from the end of the tax period as the limitation for completing an assessment, and these notices came long after that.

Senior counsel for the petitioner argued that a plain reading of Section 39 shows scrutiny can be done only where a notice has been issued to the dealer by the Commissioner of Taxes under Section 35. He relied on a Division Bench decision of the Tripura High Court in Shri Pankaj Bihari Saha v. State of Tripura, which construed the pari materia Section 27 of the Tripura VAT Act and held the power exercisable only in relation to a dealer to whom the Commissioner had issued notice under Section 24 of that Act. It is a normal rule of construction, he added, that where a statute vests a power in an authority to be exercised in a particular manner, it must be exercised only in that manner.

The Court agreed, and its reasoning turns on the way Section 39(1) is worded. The sub-section provides that each and every return in relation to any tax period furnished by a registered dealer “to whom notice has been issued by the Commissioner under Section 35” shall be subject to scrutiny by the assessing authority.

The respondents read “each and every return” as the operative words, and said scrutiny is available irrespective of any Section 35 notice. The Bench held that to be a misreading: the qualifying clause defines the class of registered dealers whose returns may be scrutinised. The requirement is therefore not merely a procedural formality but a condition precedent going to the root of the authority and jurisdiction to undertake scrutiny at all.

The principle applied was from Kunwar Pal Singh v. State of U.P. — that where a statute prescribes a particular manner of doing a particular act, it must be done in that manner alone, and an authority cannot assume jurisdiction in a manner the statute does not authorise. The Tripura decision was treated as of great persuasive value, having reached the same conclusion on provisions in the same terms: unless notice is issued under Section 24(2) of that Act, the authorities cannot invoke Section 27.

Why a registered dealer can never receive such a notice

The second step is the more interesting one, because it explains why the condition precedent could not have been satisfied here however the department proceeded.

Section 35 deals with periodical returns. Sub-section (2) requires every registered dealer to furnish returns in the prescribed manner, by the prescribed dates, to the prescribed authority — without any notice. Sub-section (3) deals with a dealer other than a registered dealer, who must furnish returns in accordance with sub-section (2) if the Commissioner so requires by notice in the prescribed manner.

The scheme therefore distinguishes the two classes: registered dealers are duty bound to file without notice, while unregistered dealers may be required to file by a notice under Section 35(3). It follows, the Bench reasoned, that a registered dealer cannot be issued a notice under Section 35(3), because that sub-section excludes registered dealers from its ambit.

That produces a narrow reading of Section 39, and the Court adopted it as the only harmonious construction available. Scrutiny under Section 39 applies only to those registered dealers who were previously unregistered, were brought into the tax net by a notice under Section 35(3), and thereafter became registered. The petitioner was never in that position: it was always registered and had filed its returns under Section 35(2) without any notice.

The department's attempt to find a Section 35 notice on the record failed. It relied on a notice of April 2017, which the Court disregarded because it was for production of books of accounts for assessment purposes and not a notice to furnish returns — and because, even if it were treated as such, it would be invalid, Section 35(3) not authorising the issuance of a notice to a registered dealer.

A second defect: who was allowed to do this

The petitioner had also challenged the delegation of power, and the Bench upheld that ground independently.

Section 26 of the Act read with Rule 3 of the Meghalaya VAT Rules, 2005 mandates that the Commissioner “shall” delegate powers by a notification in the Official Gazette. In the course of the proceedings the respondents placed no such notification on record delegating the Section 39 power to the Superintendent of Taxes, who issued all forty-one notices. Reliance on internal orders and circulars, the Court held, will not satisfy a statutory requirement of gazette notification.

That finding has consequences beyond this dealer, because the same officer's authority to scrutinise returns under Section 39 is now on the record as unestablished until a notification is produced.

Maintainability

Tax matters of this kind usually attract the objection that the dealer should have pursued the statutory appellate remedy. The Bench answered it briefly. Given its clear findings on jurisdiction, and the fact that no proper notice was issued so that the mandatory precondition of a Section 35 notice was not satisfied, the writ petition was held maintainable as meeting the exceptions laid down by the Supreme Court in Whirlpool Corporation — the line of cases holding that an alternative remedy is no bar where the action complained of is without jurisdiction.

Having reached those conclusions, the Court recorded that the other judgments cited by the parties were noted but not discussed or elaborated upon. The limitation argument — that an assessment must be completed within five years of the end of the tax period, and that these notices came well outside it — was therefore not decided, the jurisdictional findings being sufficient to dispose of the case.

That leaves the limitation question open, and it is worth noting what was at stake in it. The company's case was that it had been regularly filing its monthly returns throughout, and that the Act fixes five years from the end of the tax period as the outer limit for completing an assessment. On that argument the oldest of these notices, issued in March 2023 for a quarter that ended in June 2007, was roughly eleven years beyond the period. Because the Court found the power was never available against this dealer at all, it did not have to say whether a scrutiny exercise can be mounted outside the assessment limitation — a question that will return the next time a department reaches back over a closed period against a dealer who did receive a Section 35 notice.

Order

The writ petition was allowed. The impugned scrutiny reports and every one of the notices for curing defects in tax returns were set aside and quashed — twelve dated 8 March 2023 covering quarters from June 2007 to March 2010, sixteen dated 13 March 2023 covering June 2010 to March 2014, and thirteen dated 30 November 2023 covering June 2014 to June 2017 — together with the referred notices for the whole period from the quarter ending 30 June 2007 to the quarter ending 30 June 2017. The petition was closed and disposed of.

The judgment is a reminder of how much turns on the qualifying words in a scrutiny provision. Departments tend to read Section 39 as a general audit power over all returns, and the phrase “each and every return” invites that reading. On this construction it is nothing of the kind: it is a power exercisable against a defined and rather small class of dealers — those who came into the net by notice and were later registered — and against everyone else the returns simply are not open to Section 39 scrutiny.

Two features make the holding durable. It rests on the internal logic of Sections 35(2) and 35(3) rather than on anything peculiar to this dealer, so any registered dealer who has always filed on its own obligation falls outside the provision for the same reason. And it is reinforced by a Tripura Division Bench reading identical language the same way, which makes the construction harder to displace. The delegation finding is the narrower but more immediately useful point: a power the rules say must be delegated by gazette notification cannot be exercised on the strength of a departmental circular, and the burden of producing the notification lies with the department that acted.