Why Allahabad High Court’s judgement against tax department has far-reaching consequences

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By CobraPost.com

In a damning judgment setting aside the ex-party assessment order against Flipkart, the Court orders the Commercial Tax Department to pay back about Rs. 50 crore it had unlawfully withdrawn from the company’s bank account.

In a historic judgment, the Allahabad High Court has come down heavily on the authorities of the Uttar Pradesh Commercial Tax Department who had arbitrarily not only passed an ex-party assessment order asking Flipkart to pay Rs. 49.82 crore in taxes but had also attached and withdrawn the same from the bank account of the online shopping major by pressuring the bankers.

Imposing an indemnity of Rs. 2 lakh, the high court has advised the Commercial Tax Commissioner, Lucknow, to “institute an enquiry and fix responsibility on the erring officer” to recover the cost.

Delivered a month back, on February 29 to be precise, the high court ruling brings a big reprieve to not only Flipkart but also to other businesses and industry which most of the time find themselves at the receiving end of what is widely known as a regime of fear, as the ruling sets a precedent by holding the taxmen accountable for their actions.

Flipkart fell into trouble with tax authorities when it shifted its principal place of business from Noida to Ghaziabad in January 20, 2013 – its other principal place of business is at Bangalore. However, the company filed an application for change of business address after 11 months on December 5, 2013 and requested the registering authority to amend the registration certificate accordingly. However, no action was taken on the application despite a reminder a year later. The department rather chose to reject the application on September 2014 on the ground that the company had failed to intimate the department within 30 days and had not remitted the fee of Rs. 20 for the same.

Meanwhile, the assessment authority of the Commercial Tax Department at Noida passed an ex-parte assessment order for the assessment years 2011–12, 2013–14 and 2014–15. The authority served all summons and the order instead on the old Noida address which had been abandoned by Flipkart. Pursuant to this order, the Tax Department seized the bank account of the company and withdrew the taxable amount of Rs. 27.65 crore The company went in appeal and the ex-parte assessment orders were set aside and fresh assessment was ordered. Far from refunding the amount withdrawn from the company’s account, the department instead served garnishee notices to the company – in other words a legal warning of attachment of property against outstanding dues – but again on its closed Noida address, for recovery of Rs. 49.82 crore in taxes. Although the company filed a petition against such arbitrary orders of the tax authority concerned, the department chose to repeat its earlier feat. It attached the account of the company and withdrew the amount before the high court could hear the matter.

The department, in fact, proceeded with such speed and efficiency that the first and the last date of hearing was slated for December 10, 2015 and the ex-parte orders were passed three days later, While the taxmen failed to serve the summons at their Ghaziabad address, they got the same affixed on its closed Noida address. As directed by the high court on February 2. 2016, Flipkart filed a application with the department for recall of the ex-parte assessment orders that were passed under the Uttar Pradesh Vat Act and Central Sales Tax Act, but it was summarily rejected by the authority concerned on February 11, and the department quickly moved to attach the bank account of the company and withdrew Rs. 49.82 crore.

The main contention the petition had was that the department did not change the address and make necessary amendment in the registration certificate accordingly, it did not serve the summons and garnishee notices on its present business address and had unlawfully seized the money from its account. While a change of business address leads to change of territorial jurisdiction of the assessment authority, the law enjoins upon the tax authority to make proper inquiry of the new business premises and effect the change in the certificate of registration. Section 17(14) (a) of the UP Vat Act makes it mandatory for the taxmen to carry out such an amendment no matter if the application has not been filed within the stipulated time of 30 days.

The department erred on all counts: it failed to change the business address of the company, the assessment authority overstepped its territorial jurisdiction as defined under the tax laws by making and passing ex-party assessment orders and by not serving the summons and garnishee notices at the present address as required by rules defined under these laws, and finally the department acted unlawfully by wrongfully seizing the bank account of the company and withdrawing Rs. 49.82 crore. Overturning all ex-party assessment orders and other orders of the Commercial Tax Department, Noida, untenable under tax laws, the high court has asked it to return all the money it had seized after deducting the admitted tax of Rs. 3.3 crore. Giving a sharp rap on the taxman’s knuckle, the judgment reads: “… it would be open to the Assessment Authority to make a fresh assessment in accordance with law.” Terming the manner in which  the authorities proceeded with the assessment and recovered the amount fromthe company’s bank account in haste as “deplorable and in gross violation of the provisions of the Act”, the judgment does not mince words when it says: “If in this cavalier fashion the Commercial Tax Department functions and withdraws huge sums of money without valid service, it would be difficult for big business houses to carry on their businesses.” Imposing a cost of Rs. 2 lakh on the department to be paid to the petitioner, the high court directed the Commercial Tax Commissioner to institute an inquiry against the erring official concerned to fix responsibility and recover the cost.

Experts feel the judgment is a watershed as it may pave the way for reforming the tax regime and the way tax authorities function.

In order to give the other side of the story, Cobrapost contacted the Commercial Tax Department Commissioner, Lucknow, but our calls remained unattended. We also approached Flipkart India Pvt. Ltd, but to no avail. However, the lawyer who had represented the case on behalf of the online shopping major, Taran Gulati has this to say: “The recovery against Flipkart was made illegally by not following the procedures prescribed by law. The approach was high-handed and business- unfriendly and the Allahabad High Court has correctly come down heavily on the  Uttar Pradesh Commercial Tax Department and quashed the recovery of Rs. 49.82
crore.”

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