Hides And Skin Owners Seva Mandal C/O Babubhai Shakrabhai Solanki vs. State Of Gujarat

Facts

The petitioners, an association of traders of animal hides and skins and its members, challenged Notification No. (GHN-14) VAT-2010-S.11(6)(2)-TH dated 29th June, 2010, issued by the Government of Gujarat. This notification mandated a reduction in input tax credit (ITC) for purchases of hides and skins resold in inter-State trade, which were subject to tax under the Central Sales Tax Act, 1956 (CST Act). The petitioners argued this violated Article 286(3) of the Constitution and Section 15(b) of the CST Act, which mandates reimbursement of local tax paid on declared goods when sold in inter-State commerce. The petitioners sought a declaration that the notification was invalid concerning their trade and a direction to grant full reimbursement under Section 15(b) of the CST Act, which they believed was being denied through the reduction of ITC.

Held

The Court held that Notification No. (GHN-14) VAT-2010-S.11(6)(2)-TH, as amended by Notification No. (GHN-14) VAT-2014-S.11(6)(4)-TH, is violative of Article 286(3) of the Constitution of India read with Section 15(b) of the CST Act, 1956, to the extent it curtails the entitlement to input tax credit on sales or purchases of declared goods made during the course of inter-State trade or commerce. The Court reasoned that Section 15(b) of the CST Act mandates reimbursement of local tax paid on declared goods when they are sold in inter-State trade and subjected to tax under the CST Act. The impugned notification, by reducing the input tax credit, effectively denies this mandated reimbursement. Therefore, the notification must be read down to exclude its application to goods that are both purchased and sold as declared goods. The Court found that the reliance placed by the respondents on various Supreme Court judgments was misplaced as those cases dealt with different factual matrices and legal issues. The Court directed the respondents to grant input tax credit for the whole of the tax paid by the petitioners on declared goods purchased and resold in the course of inter-State trade or commerce. No issue was expressly left undecided.

Key Issues

1. Whether Notification No. (GHN-14) VAT-2010-S.11(6)(2)-TH, as amended, is violative of Article 286(3) of the Constitution of India read with Section 15(b) of the CST Act, 1956, in so far as it requires reduction of input tax credit in respect of purchases of hides and skins resold in the course of inter-State trade and commerce? Petitioner's arguments: The impugned notification, by reducing ITC on declared goods (hides and skins) sold in inter-State trade, contravenes the mandate of Section 15(b) of the CST Act, which requires reimbursement of local tax paid on such goods. This reimbursement is a restriction imposed by Parliament under Article 286(3) of the Constitution, and the State cannot defeat this object through delegated legislation. The object of Sections 14 and 15 of the CST Act, as recommended by the Taxation Enquiry Commission, was to regulate the tax burden on declared goods, which the notification undermines. Revenue's arguments: The judgment does not record specific arguments made by the revenue or State.