State of Rajasthan v. Combined Traders

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Citation : 2025 (4) KLR (SC) 26 : 2025 INSC 496
Court : Supreme Court of India, Civil Appellate Jurisdiction
Judges : Abhay S. Oka, J., Ujjal Bhuyan, J. 
Date of Judgment : April 16, 2025 
Case Number : Civil Appeal No. 1208 of 2025 
Parties : State of Rajasthan & Ors. v. Combined Traders

Central Sales Tax Act, 1956 – Sections 8(4), 13(1)(d), 13(3), 13(4)(e) – Central Sales Tax (Rajasthan) Rules, 1957 – Rule 17, sub-rule (20) – Validity of State rule for cancellation of Form C declarations – Ultra vires – State Government’s rule-making power under Section 13(3) and 13(4) does not extend to cancelling Form C declarations prescribed by Central Government under Section 13(1)(d) – Sub-rule (20) of Rule 17, allowing cancellation of Form C for fraud or misrepresentation, inconsistent with Central Registration Rules, which lack such provision – Rule held ultra vires CST Act – Rajasthan High Court’s decision upheld – Appeal dismissed.

For Appellant(s): Mr. Irshad Ahmad, AOR

For Respondent(s): Mr. Rajesh Jain, Adv. Mr. Virag Tiwari, Adv. Mr. K.J Bhat, Adv. Mr. Ramashish, Adv. Ms. Tanya Saraswat, Adv. Mr. Rishabh Jain, Adv. Mr. Avadh Bihari Kaushik, AOR

Facts

  • The respondent, Combined Traders, challenged the validity of sub-rule (20) of Rule 17 of the Central Sales Tax (Rajasthan) Rules, 1957, introduced on July 14, 2014, which allowed the cancellation of declaration forms (Form C) obtained by fraud or misrepresentation.
  • During 2017-18, Combined Traders sold goods worth Rs. 4.89 crores and Rs. 7.20 crores to M/s. H.G. International and M/s. Saraswati Enterprises, respectively, against Form C, claiming reduced tax rates under Section 8(1) of the Central Sales Tax Act, 1956 (CST Act).
  • Revenue authorities found M/s. H.G. International and M/s. Saraswati Enterprises to be non-functional with bogus registrations. Their Form C declarations were cancelled on December 7, 2017, under sub-rule (20) of Rule 17, and their registration certificates were also cancelled.
  • Combined Traders filed a writ petition in the Rajasthan High Court, which declared sub-rule (20) ultra vires Sections 8(4), 13(1)(d), 13(3), and 13(4)(e) of the CST Act, holding that the State lacked rule-making power to cancel validly issued declaration forms.

Issues

  1. Whether sub-rule (20) of Rule 17 of the Rajasthan Rules, allowing cancellation of Form C declarations, is ultra vires the CST Act.
  2. Whether the State Government has the rule-making power under Section 13(3) or 13(4) of the CST Act to provide for the cancellation of declaration forms issued under Section 8(4).

Arguments

  • Appellants:
    • Sub-rule (20) is within the State’s rule-making power under Section 13(3) of the CST Act to carry out the Act’s purposes, including preventing tax evasion.
    • The rule is not inconsistent with the CST Act or Central Registration Rules and was enacted to address fraud.
    • Inspections revealed no business activity at the premises of M/s. H.G. International and M/s. Saraswati Enterprises, justifying cancellation of their Form C declarations.
  • Respondent:
    • Section 13(1)(d) grants the Central Government exclusive power to prescribe the form and particulars of declarations, with no provision for cancellation.
    • Section 13(4) does not empower the State to frame rules for cancelling declarations, unlike Section 7(5), which explicitly allows cancellation of registration certificates.
    • Sub-rule (20) is inconsistent with the Central Registration Rules, which do not provide for Form C cancellation.
    • No other state has a similar rule, and prior judicial decisions (e.g., Jain Manufacturing) support the absence of such cancellation power.

Judgment

  • The Supreme Court dismissed the appeal, upholding the Rajasthan High Court’s decision that sub-rule (20) of Rule 17 is ultra vires the CST Act.
  • Key Findings:
    • Section 8(4) of the CST Act requires a dealer to furnish a declaration (Form C) for reduced tax rates, with the form prescribed by the Central Government under Section 13(1)(d). The Central Registration Rules (Rule 12) specify Form C but do not provide for its cancellation.
    • Section 13(4) lists specific purposes for State rule-making, none of which include cancelling declarations. Section 13(3) allows State rules to carry out the CST Act’s purposes but prohibits inconsistency with the Act or Central Rules.
    • Sub-rule (20), by allowing Form C cancellation, is inconsistent with the Central Registration Rules, which lack such a provision. This makes it ultra vires, as the State cannot override Central rule-making authority under Section 13(1)(d).
    • The Court relied on R. Nand Lal & Co., which held that State rules cannot contradict Central rules under Section 13(1)(d) regarding declaration forms.
  • Conclusion: The State of Rajasthan lacked the authority to enact sub-rule (20), and the cancellation of Form C declarations was invalid.

Ratio Decidendi

The State Government’s rule-making power under Section 13(3) and 13(4) of the CST Act does not extend to cancelling declaration forms (Form C) prescribed by the Central Government under Section 13(1)(d). Such a rule is inconsistent with the Central Registration Rules and ultra vires the CST Act.

Obiter Dicta

The absence of a cancellation provision in the Central Registration Rules, contrasted with the explicit provision for registration certificate cancellation under Section 7(5), reinforces that Form C cancellations are not contemplated under the CST Act.

Disposition

Appeal dismissed with no order as to costs.

Multiple Choice Questions (MCQs)

  1. What was the primary issue in the case State of Rajasthan & Ors. v. Combined Traders?
    A) Validity of the registration certificates issued under the CST Act
    B) Legality of sub-rule (20) of Rule 17 of the Central Sales Tax (Rajasthan) Rules, 1957
    C) Refund disputes under the Delhi Value Added Tax Act, 2004
    D) Taxation rates for inter-State trade under Section 8(1) of the CST Act Answer: B) Legality of sub-rule (20) of Rule 17 of the Central Sales Tax (Rajasthan) Rules, 1957
  2. Which provision of the Central Sales Tax Act, 1956, was sub-rule (20) of Rule 17 held to be ultra vires?
    A) Section 7(5)
    B) Sections 8(4), 13(1)(d), 13(3), and 13(4)(e)
    C) Section 12(1)
    D) Section 16(4) Answer: B) Sections 8(4), 13(1)(d), 13(3), and 13(4)(e)
  3. What was the Supreme Court’s reasoning for declaring sub-rule (20) of Rule 17 ultra vires?
    A) It violated the Delhi VAT Act
    B) It was inconsistent with the Central Registration Rules framed under Section 13(1)(d)
    C) It lacked approval from the Central Government
    D) It imposed excessive penalties on dealers Answer: B) It was inconsistent with the Central Registration Rules framed under Section 13(1)(d)
  4. Under which section of the CST Act does the Central Government have the power to prescribe the form of declarations like Form C?
    A) Section 8(1)
    B) Section 13(1)(d)
    C) Section 13(3)
    D) Section 7(5) Answer: B) Section 13(1)(d)
  5. What was the consequence of the Supreme Court’s decision in this case?
    A) The registration certificates of M/s. H.G. International were restored
    B) Sub-rule (20) of Rule 17 was struck down as ultra vires
    C) The respondent was denied tax refunds
    D) The State was directed to amend the CST Act Answer: B) Sub-rule (20) of Rule 17 was struck down as ultra vires
  6. Which case was relied upon by the Supreme Court to support its decision?
    A) Jain Manufacturing (India) Pvt Ltd v. Commissioner of Value Added Tax
    B) Sales Tax Officer, Ponkunnam v. K.I. Abraham
    C) The State of Madras v. R. Nand Lal & Co.
    D) Combined Traders v. State of Delhi Answer: C) The State of Madras v. R. Nand Lal & Co.
  7. What power does Section 13(3) of the CST Act confer on the State Government?
    A) To prescribe the form of declarations like Form C
    B) To make rules to carry out the purposes of the CST Act, not inconsistent with Central Rules
    C) To cancel registration certificates
    D) To impose penalties for tax evasion Answer: B) To make rules to carry out the purposes of the CST Act, not inconsistent with Central Rules
  8. Why was the cancellation of Form C declarations by the State authorities deemed invalid?
    A) The dealers were not given a hearing
    B) The Central Registration Rules do not provide for Form C cancellation
    C) The inspections were conducted unlawfully
    D) The notices were not properly served Answer: B) The Central Registration Rules do not provide for Form C cancellation

Frequently Asked Questions (FAQs)

  1. What was the main challenge in the State of Rajasthan & Ors. v. Combined Traders case?
    The main challenge was the validity of sub-rule (20) of Rule 17 of the Central Sales Tax (Rajasthan) Rules, 1957, which allowed the cancellation of Form C declarations obtained by fraud or misrepresentation. The respondent, Combined Traders, argued that this rule was ultra vires the Central Sales Tax Act, 1956.
  2. Why did the Rajasthan High Court declare sub-rule (20) of Rule 17 ultra vires?
    The Rajasthan High Court held that the State of Rajasthan lacked the rule-making power under the CST Act to frame a rule allowing cancellation of validly issued Form C declarations. It found sub-rule (20) inconsistent with Sections 8(4), 13(1)(d), 13(3), and 13(4)(e) of the CST Act.
  3. What was the Supreme Court’s ruling in this case?
    The Supreme Court upheld the High Court’s decision, ruling that sub-rule (20) of Rule 17 was ultra vires the CST Act. It held that the State Government’s rule-making power under Section 13(3) and 13(4) does not include cancelling Form C declarations, as this power is reserved for the Central Government under Section 13(1)(d), and the Central Registration Rules do not provide for such cancellations.
  4. What role does Section 13(1)(d) of the CST Act play in this case?
    Section 13(1)(d) grants the Central Government the exclusive power to prescribe the form and particulars of declarations (like Form C) under the CST Act. The Supreme Court noted that the Central Registration Rules, framed under this section, prescribe Form C but do not allow for its cancellation, making the State’s rule inconsistent.
  5. How did the Supreme Court interpret the State’s rule-making power under Section 13(3)?
    The Court clarified that Section 13(3) allows the State to make rules to carry out the CST Act’s purposes, but these rules must not be inconsistent with the Act or the Central Rules framed under Section 13(1). Sub-rule (20) was found inconsistent with the Central Registration Rules, rendering it invalid.
  6. What was the factual background leading to the dispute?
    Combined Traders sold goods to M/s. H.G. International and M/s. Saraswati Enterprises against Form C in 2017-18. Revenue authorities found these entities to be non-functional with bogus registrations and cancelled their Form C declarations under sub-rule (20). Combined Traders challenged this cancellation, leading to the dispute.
  7. What precedent did the Supreme Court rely on in its judgment?
    The Court relied on The State of Madras v. R. Nand Lal & Co., which held that State rules under Section 13(3) or 13(4) cannot contradict Central rules under Section 13(1)(d) regarding declaration forms, reinforcing that the State lacked authority to cancel Form C.
  8. What is the significance of the absence of a cancellation provision in the Central Registration Rules?
    The absence of a provision in the Central Registration Rules for cancelling Form C declarations was critical. The Court contrasted this with the explicit provision for cancelling registration certificates under Section 7(5), indicating that the CST Act does not contemplate Form C cancellations.
  9. Did the Supreme Court address the issue of tax evasion or fraud?
    While the appellants argued that sub-rule (20) was necessary to prevent tax evasion and fraud, the Court focused on the legal question of the State’s rule-making power. It did not rule on the merits of the fraud allegations but held that the rule itself was invalid.
  10. What was the outcome for the parties involved?
    The Supreme Court dismissed the appeal by the State of Rajasthan, upholding the Rajasthan High Court’s decision to strike down sub-rule (20). The cancellation of Form C declarations was deemed invalid, benefiting Combined Traders. No costs were awarded.
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