Supreme Court refers the issue of Commissioner’s power to extend assessment time to a larger bench: Commissioner of Sales Tax Odisha vs. Essel Mining

Date of the Judgment: July 11, 2022
Citation: Not Available
Judges: Uday Umesh Lalit, J. and Pamidighantam Sri Narasimha, J.

Can a tax authority extend the deadline for completing an assessment after the original time limit has passed? The Supreme Court of India grappled with this question in a batch of cases concerning the Orissa Value Added Tax Act, 2004. The core issue revolves around the interpretation of Section 42(6) of the Act, which sets a six-month deadline for completing audit assessments, with a provision for the Commissioner to grant a further six-month extension.

The Supreme Court bench comprising Justices Uday Umesh Lalit and Pamidighantam Sri Narasimha, after hearing the arguments, decided to refer the matter to a larger bench of three judges. The court noted the conflicting interpretations and the need for a clear precedent on whether the Commissioner’s power to extend time can be exercised after the initial six-month period has lapsed.

Case Background

The cases before the Supreme Court involve multiple appeals against orders of the High Court of Orissa. These cases all revolve around the interpretation of Section 42(6) of the Orissa Value Added Tax Act, 2004, which deals with audit assessments. The core question is whether the Commissioner of Sales Tax can extend the time for an Assessing Authority to complete an audit assessment after the initial six-month period has expired.

The primary case, Commissioner of Sales Tax Odisha and Ors. vs. M/s. Essel Mining and Industries Ltd and Anr., involves an assessment where the Audit Visit Report (AVR) was received by the assessee on May 14, 2007. The six-month period for assessment was to end on November 13, 2007. The Assessing Authority applied for an extension on October 24, 2007, which was granted on November 16, 2007, three days after the initial period expired. The assessment order was passed on December 31, 2007. The High Court quashed the assessment order, stating that the extension was granted over the telephone. The High Court also held that the Commissioner was obliged to consider the request for extension on a case-to-case basis depending on the merit of each case which necessarily postulates the assigning of reasons.

Other similar cases include: M/s Shreem Electric Ltd., where the assessment order was passed after the six-month period without a clear extension order from the Commissioner; M/s Cobra Instalaciones Y Servicios S.A., where the Commissioner granted a post-facto extension after the assessment order was already passed; and two cases of M/s Swastik Ingot (P) Ltd., where the assessment orders were passed after the six-month period, and the extension was sought after the expiry of the six-month period.

Timeline:

Course of Proceedings

The High Court of Orissa, in the case of Essel Mining, quashed the assessment order on the grounds that the extension of time was granted by the Commissioner over the telephone. The High Court held that the Commissioner was obligated to consider each case on its merits and provide reasons for granting an extension. The High Court dismissed the Review Petition filed by the State on the ground of delay.

In the case of M/s Shreem Electric Ltd., the High Court allowed the Writ Petition, stating that the assessment order passed after the mandatory six-month period was invalid, especially since the Commissioner did not exercise the power to extend the time. This decision followed the precedent set in M/s Cobra Instalaciones Y Servicios S.A., which itself relied on the Supreme Court’s decision in State of Punjab v. Shreyans Industries Ltd.

The High Court in M/s Cobra Instalaciones Y Servicios S.A. held that the Assessing Authority could not have presumed that the Commissioner would grant an extension and therefore could not have passed the assessment order in advance. It also held that the Commissioner had to apply his mind to the facts of the case before granting an extension and that the power of extension should have been exercised before the expiry of the original limitation period. In the two cases of M/s Swastik Ingot (P) Ltd., the High Court followed the decision in M/s Cobra Instalaciones Y Servicios S.A., and allowed the Writ Petitions.

Legal Framework

The core legal provision in question is Section 42 of the Orissa Value Added Tax Act, 2004. This section deals with audit assessments. Specifically, Section 42(6) states:

“Notwithstanding anything contained to the contrary in any provision under this Act, an assessment under this section shall be completed within a period of six months from the date for receipt of the Audit Visit Report:”

The proviso to Section 42(6) states:

“Provided that if, for any reason, the assessment is not completed within the time specified in this sub-section, the Commissioner may, on the merit of each such case, allow such further time not exceeding six months for completion of the assessment proceeding.”

In 2010, Section 42(6) was amended to read:

“(6) Notwithstanding anything contained to the contrary in any provision under this Act, an assessment under this section shall be completed within a period of six months from the date of service of notice issued under sub-section (1) along with the Audit Visit Report:”

A further amendment in 2015 introduced a second proviso and deleted sub-section (7) to Section 42. The second proviso states:

“Provided further that if the Commissioner feels it necessary to do so for good and sufficient reasons, he may allow such further time not exceeding another six months beyond the time allowed under the first proviso for completion of the assessment proceeding.”

Section 41 of the Orissa Value Added Tax Act, 2004, outlines the procedure for conducting assessment proceedings. Section 41(2) empowers the Commissioner to direct a tax audit, and Section 41(4) requires the audit officer to submit an Audit Visit Report (AVR) to the Assessing Authority within seven days of completing the audit. Section 42(1) allows the Assessing Authority to issue a notice to the dealer based on the AVR, and Section 42(4) allows the Assessing Authority to assess the tax due.

Arguments

Petitioners’ Arguments (State of Odisha):

• The decision in State of Punjab v. Shreyans Industries Ltd., which held that the power to extend time must be exercised before the expiry of the original period, should not apply to these cases.
• Shreyans Industries dealt with Section 11 of the Punjab General Sales Tax Act, 1948, which had a longer period of three years for completing original assessments, unlike the six-month period under the Orissa Value Added Tax Act, 2004.
• The Punjab Act did not specify an outer limit for extension, whereas the Orissa Act allows a maximum of six months’ extension.
• The Punjab Act required reasons to be recorded in writing for granting an extension, which is not the case under the Orissa Act.
• Shreyans Industries concerned original assessments, not cases involving tax evasion found in audits, as is the case here.
• The Supreme Court’s decision in CIT v. Ajanta Electricals, which allowed for extension even after the expiry of the prescribed period, should apply here, as the proviso to Section 42(6) uses the expression “if the assessment is not completed within the time specified.”
• In Shreyans Industries, the assessing officer had sent notices after the expiry of three years, which is different from the present case, which concerns the extension of time for completing the assessment.

Respondents’ Arguments (Assessees):

• The principle laid down in Shreyans Industries should apply to these cases.
• The expiry of the six-month period under Section 42(6) extinguishes the right to make an assessment, and the Commissioner cannot exercise the power of extension after this period.
• The principle in Shreyans Industries is that the power to extend time must be exercised before the original period expires.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issues:

1. Whether the power of the Commissioner to allow further time of six months to the Assessing Authority to complete the audit assessment must be exercised before the Assessing Authorities time to conclude the proceedings expires.
2. Whether an Assessing Authority could pass the assessment order after the period of six months in expectation of the Commissioner extending the time.
3. Whether a Commissioner could grant post-facto extension, ratifying the assessment order passed beyond the period of six months.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Court considered the following authorities:

Cases:

• State of Punjab v. Shreyans Industries Ltd. [2016 (4) SCC 769], Supreme Court of India: This case was the primary point of contention, with the High Court relying on it to quash assessment orders. The Supreme Court noted that the ratio of the judgment is that, upon the lapse of period provided for the AO to make the assessment, the right of the department to assess gets extinguished. This extinguishment also gives rise to a valuable right to the assessee. Once the right to make assessment extinguishes there is no question of extension of time when the assessment has become time barred.
• M/s. Tata Sponge Iron Ltd. v. Commissioner of Sales Tax, Orissa & Ors. [(2011) SCC OnLine Ori 49], High Court of Orissa: This case settled that the date of receipt of the AVR by the assessee is the date for reckoning the six-month period under Section 42(6).
• M/s. Lalchand Jewellers Pvt. Ltd. v. Assistant Commissioner of Sales Tax, Puri, High Court of Orissa: This case also held that the date of receipt of the AVR by the assessee is the date for reckoning the six-month period under Section 42(6).
• BHEL v. CCT [(2006) 143 STC 10 (Kar)], High Court of Karnataka: This case, approved and followed in Shreyans Industries, held that the power to pass a deferment order must be exercised before the expiry of the period of limitation.
• CIT v. Ajanta Electricals [1995 (4) SCC 182], Supreme Court of India: This case was distinguished in Shreyans Industries. The court in this case had taken a view that the power of extension can be granted by an Income Tax officer even after the expiry of the prescribed period, based on the interpretation of the words ‘it has not been possible’ occurring in Section 139(2) of the Income Tax Act.

Legal Provisions:

• Section 42(6) of the Orissa Value Added Tax Act, 2004: This section mandates that an assessment must be completed within six months from the date of receipt of the Audit Visit Report.
• Proviso to Section 42(6) of the Orissa Value Added Tax Act, 2004: This proviso empowers the Commissioner to extend the time for assessment by a further six months.
• Section 11 of the Punjab General Sales Tax Act, 1948: This provision was interpreted in Shreyans Industries and deals with the assessment of tax.
• Section 139(2) of the Income Tax Act, 1961: This provision was discussed in CIT v. Ajanta Electricals and deals with the power to extend the time for filing returns.
• Section 41 of the Orissa Value Added Tax Act, 2004: This section prescribes the procedure for conducting the assessment proceedings.

Authorities Considered by the Court

Judgment

The Supreme Court did not provide a final judgment on the merits of the case. Instead, it referred the matter to a three-judge bench due to the importance of the legal questions involved and the need for consistency in the law. The Court noted the conflicting interpretations of Section 42(6) of the Orissa Value Added Tax Act, 2004, and the applicability of the decision in Shreyans Industries.

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• State of Punjab v. Shreyans Industries Ltd. [2016 (4) SCC 769]: The Court noted that the decision in this case is based not merely on the interpretation of the Section but on a principle of law. The Court considered the ratio of this judgment and whether it is applicable to the facts of the present case.
• M/s. Tata Sponge Iron Ltd. v. Commissioner of Sales Tax, Orissa & Ors. [(2011) SCC OnLine Ori 49] and M/s. Lalchand Jewellers Pvt. Ltd. v. Assistant Commissioner of Sales Tax, Puri: These cases were followed for the limited purpose of determining the date of reckoning the six-month period under Section 42(6).
• BHEL v. CCT [(2006) 143 STC 10 (Kar)]: The Court noted that this case was approved and followed in Shreyans Industries. The Court noted the ratio of this judgment.
• CIT v. Ajanta Electricals [1995 (4) SCC 182]: The Court noted that this case was distinguished in Shreyans Industries.

What weighed in the mind of the Court?

The Supreme Court’s decision to refer the matter to a larger bench indicates that the Court was grappling with several key considerations. The Court was particularly concerned about the conflicting interpretations of Section 42(6) of the Orissa Value Added Tax Act, 2004, and the applicability of the decision in Shreyans Industries. The court noted that the principle laid down in Shreyans Industries is based not merely on the interpretation of the Section but on a principle of law, and it is difficult to distinguish the judgment on the facts or wordings of the statute. The Court also noted that there are certain alternative perspectives based on the interpretation, as well as on the principle of administrative law.

The Court’s reasoning was influenced by the following:

1. The need for consistency in the law of precedents.
2. The potential for multiple judgments drawing subtle distinctions between one another.
3. The interpretation of the proviso to Section 42(6), particularly whether the Commissioner’s power to extend time is limited to the initial six-month period.
4. The principle of administrative law, specifically the need to balance executive flexibility with the quest against arbitrariness.
5. The need to consider the text and context of the provisions of the statute as a whole.

Ranking of Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio

The Supreme Court’s reasoning in this case was primarily driven by legal considerations rather than factual aspects. The ratio of fact to law is approximately:

Fact: 20%

Law: 80%

Logical Reasoning

Key Takeaways

• The Supreme Court has not yet decided on the validity of assessment orders passed after the initial six-month period, where the Commissioner has granted an extension after the expiry of the initial period.
• The Court has referred the matter to a larger bench, indicating the complexity and importance of the issue.
• The decision in Shreyans Industries is a key point of contention, and its applicability to the Orissa Value Added Tax Act, 2004, needs to be clarified.
• The interpretation of Section 42(6) and its proviso will have significant implications for tax assessments in Orissa.
• The Court is also considering the administrative law perspective, which involves balancing executive flexibility with the need to prevent arbitrariness.

Directions

The Supreme Court has directed that the matter be placed before a three-judge bench for a comprehensive consideration and resolution of the legal issues involved.