Supreme Court Upholds High Court Decision: State Lacks Power to Cancel Validly Issued Declaration Forms under CST Act (2025)

Introduction

Date of the Judgment: April 16, 2025

Judges: Abhay S. Oka, J., Ujjal Bhuyan, J.

Can a state government make rules that allow them to cancel declaration forms issued under the Central Sales Tax Act? The Supreme Court of India recently addressed this question, focusing on the powers of state governments versus the central government in the context of tax regulations. The court examined whether the State of Rajasthan had the authority to enact a rule that allowed them to cancel declaration forms if they believed the forms were obtained through fraud or misrepresentation. The Supreme Court, in this case, examined the validity of Rule 17(20) of the Central Sales Tax (Rajasthan) Rules, 1957.

The bench comprised Justice Abhay S. Oka and Justice Ujjal Bhuyan.

Case Background

The case originated from a writ petition filed by Combined Traders against the State of Rajasthan, challenging the validity of sub-rule (20) of Rule 17 of the Central Sales Tax (Rajasthan) Rules, 1957. This rule, effective from July 14, 2014, allowed authorities to cancel declaration forms or certificates if they were obtained through misrepresentation or fraud, contravening the Central Sales Tax Act, 1956.

During 2017-18, Combined Traders sold goods to M/s. H.G. International and M/s. Saraswati Enterprises, providing Form C declarations amounting to Rs. 4.89 crores and Rs. 7.20 crores, respectively. Inspections by revenue authorities revealed that these firms were not conducting any business at their registered places and their registrations were bogus.

Notices were issued to Combined Traders for the cancellation of Form C declarations. The firm had claimed reduced tax rates under Section 8(1) of the CST Act, furnishing Form C as required by Section 8(4) of the same act. Combined Traders then sought a refund under the Delhi Value Added Tax Act, 2004, for the first quarter of 2017-2018, which was eventually ordered by the Delhi High Court due to delays.

Subsequently, the declaration forms of M/s. H.G. International and M/s. Saraswati Enterprises were cancelled by the third appellant on December 7, 2017, under sub-rule (20) of Rule 17 of the Rajasthan Rules, along with Sections 48 and 16(4) of the Rajasthan Value Added Tax Act, 2003. Their registration certificates were also cancelled. This led Combined Traders to file a writ petition challenging the validity of sub-rule (20) of Rule 17 and seeking to overturn the cancellation orders.

Timeline:

Arguments

Arguments by the Appellants (State of Rajasthan):

• ✓ The state’s senior counsel argued that sub-rule (20) of Rule 17 of the Rajasthan Rules is consistent with the CST Act.
• ✓ They referred to Section 13(3) of the CST Act, which grants the State Government the power to make rules to carry out the purposes of the CST Act.
• ✓ They contended that preventing fraud and contravention of the CST Act falls under the scope of carrying out the purposes of the Act.
• ✓ The counsel pointed to the orders dated December 7, 2017, where Form C declarations issued to M/s. H.G. International and M/s. Saraswati Enterprises were cancelled due to the firms not conducting business at their registered premises.

Arguments by the Respondent (Combined Traders):

• ✓ The respondent’s counsel argued that Section 13(1)(d) of the CST Act confers rule-making power to the Central Government regarding the form and particulars of declarations but does not authorize the cancellation of such declarations.
• ✓ They emphasized that no rules have been framed by the Central Government regarding the cancellation of Form C declarations.
• ✓ They referred to Section 8 of the CST Act, stating that it does not provide for the cancellation of declarations, unlike Section 7, which specifically allows for the cancellation of registration certificates.
• ✓ The counsel highlighted that sub-rule (20) of Rule 17 was introduced 57 years after the CST Act came into force and that no other state has enacted a similar rule.
• ✓ They cited the Delhi High Court’s decision in Jain Manufacturing (India) Pvt Ltd v. Commissioner of Value Added Tax & Anr, where it was stated that there is no provision in the CST Act for the cancellation of Form C.

Issues Framed by the Supreme Court

1. Whether the State Government has the power to frame rules providing for the cancellation of declaration forms furnished as per the rules framed by the Central Government in accordance with clause (d) of sub-section (1) of Section 13 of the CST Act.

Treatment of the Issue by the Court

Authorities

The court considered the following authorities:

1. Section 8 of the CST Act: The court analyzed sub-sections (1) and (4) of Section 8 to determine the conditions for reduced tax rates on inter-state sales, emphasizing the requirement of furnishing a declaration in Form C.
2. Section 13 of the CST Act: The court examined sub-sections (1), (3), and (4) of Section 13 to delineate the rule-making powers of the Central and State Governments, focusing on the consistency of State rules with Central rules.
3. Central Registration Rules: The court referred to these rules, framed under Section 13(1)(d) of the CST Act, to ascertain the form and particulars of declarations, noting the absence of provisions for cancellation of Form C declarations.
4. Jain Manufacturing (India) Pvt Ltd v. Commissioner of Value Added Tax & Anr (Delhi High Court): The court noted that the counsel appearing for the Commissioner stated that there was no provision in the CST Act for cancellation of Form C.
5. Sales Tax Officer, Ponkunnam & Anr. v. K.I. Abraham (Supreme Court): This case was relied upon for its interpretation of the rule-making powers under the CST Act.
6. The State of Madras v. R Nand Lal & Co (Supreme Court): This case was cited to support the principle that State rules must not be inconsistent with Central rules under the CST Act.

Judgment

How each authority was viewed by the Court:

• ✓ Section 8 of the CST Act: The Court used this section to establish the conditions under which reduced tax rates can be claimed, emphasizing the need for proper declarations.
• ✓ Section 13 of the CST Act: The Court relied on this section to differentiate the rule-making powers of the Central and State Governments, noting that State rules must be consistent with Central rules.
• ✓ Central Registration Rules: The Court observed that these rules, framed by the Central Government, do not provide for the cancellation of Form C declarations.
• ✓ The State of Madras v. R Nand Lal & Co [CITATION NEEDED]: The Court supported the principle that State rules must not be inconsistent with Central rules under the CST Act.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle of maintaining consistency between Central and State rules under the Central Sales Tax Act (CST Act). The Court emphasized that the power to prescribe the form and particulars of declarations lies with the Central Government, and State Governments cannot enact rules that contradict or override these Central rules. This adherence to the statutory framework and the division of powers between the Central and State Governments was the most significant factor in the Court’s reasoning.

Logical Reasoning

Key Takeaways

• ✓ State Governments cannot make rules that are inconsistent with the Central Sales Tax Act and the rules made by the Central Government under it.
• ✓ The power to prescribe the form and particulars of declarations lies with the Central Government.
• ✓ Businesses can rely on the fact that State Governments cannot arbitrarily cancel declaration forms based on their own rules if those rules conflict with Central regulations.

Development of Law

The ratio decidendi of this case is that State Governments cannot frame rules that are inconsistent with the Central Sales Tax Act and the rules made by the Central Government under it, particularly regarding the cancellation of declaration forms. This decision reinforces the division of powers between the Central and State Governments in matters of taxation and ensures consistency in the application of tax laws across the country.

Conclusion

The Supreme Court’s judgment reaffirms the principle that State Governments cannot enact rules that conflict with the Central Sales Tax Act and the rules established by the Central Government. The Court held that the State of Rajasthan lacked the authority to create a rule allowing the cancellation of validly issued declaration forms, as this power is vested in the Central Government. This decision ensures uniformity and consistency in the application of tax laws, protecting businesses from arbitrary actions by State authorities.

Category

• Central Sales Tax Act, 1956
  • Section 8, Central Sales Tax Act, 1956
  • Section 13, Central Sales Tax Act, 1956
  • Central Sales Tax (Rajasthan) Rules, 1957
  • Declaration Forms
  • Rule-Making Power
• Tax Law
  • Inter-State Trade
  • Value Added Tax
  • Tax Compliance

FAQ

1. Q: Can the Rajasthan government cancel my Form C declaration if they think I misrepresented facts?
   
   A: No, the Supreme Court has said that the Rajasthan government does not have the power to make rules allowing them to cancel Form C declarations. This power lies with the Central Government.
2. Q: What if other state governments try to bring similar rules?
   
   A: This judgment makes it clear that state governments cannot make rules that go against the Central Sales Tax Act and the rules made by the Central Government.
3. Q: What should I do if a state authority tells me that my declaration form is cancelled?
   
   A: You can refer to this Supreme Court judgment to show that the state authority does not have the power to cancel declaration forms if it contradicts central rules.