The Meghalaya High Court has quashed VAT scrutiny reports and notices covering tax periods from June 2007 to June 2017, holding that the department cannot invoke scrutiny powers without satisfying the statutory notice requirement or use such proceedings to circumvent the five-year limitation governing assessments.

The bench of Justice H.S. Thangkhiew and Justice B. Bhattacharjee held that issuance of a notice under Section 35 of the Meghalaya Value Added Tax Act, 2003, is a condition precedent for exercising scrutiny powers under Section 39. 

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The bench also found that the tax department had not placed on record the mandatory Official Gazette notification delegating those powers to the Superintendent of Taxes.

The company challenged proceedings relating to tax periods from the quarter ending June 30, 2007, to the quarter ending June 30, 2017. It submitted that it had regularly filed returns, claimed remission under the Meghalaya Value Added Tax Remission Scheme, 2006, and paid the taxes due according to those returns.

The company argued that the department issued the disputed notices in 2023, after expiry of the five-year assessment limitation prescribed under Section 57 of the Act. It further contended that no notice under Section 35 had been issued, although Section 39 expressly made such a notice a prerequisite for scrutiny.

The company also questioned the Superintendent’s authority to initiate the proceedings, arguing that the statutory requirement of delegation through a notification in the Official Gazette had not been fulfilled.

The State defended the proceedings by relying on a notice dated April 27, 2017, requiring production of sales and purchase registers, tax invoices, cashbooks, ledgers, stock registers and details of exempted goods.

According to the department, the company produced its books of account on October 19, 2021. The State argued that the earlier notice answered the company’s objections concerning prior notice and limitation, and alleged that the company had suppressed this material fact.

The department further maintained that Sections 35 and 39 had to be read harmoniously, so that returns furnished by registered dealers remained subject to scrutiny. It also argued that the company should have pursued the alternative statutory remedy under Section 65 before approaching the High Court.

The Court held that Section 39(1) specifically qualifies the registered dealers whose returns may be scrutinised by requiring that a notice under Section 35 must have been issued to them.

The bench explained that this requirement was more than a procedural formality: it went to the authority and jurisdiction to undertake scrutiny. The reference to scrutiny of every return could not be read independently of the accompanying statutory condition.

The Court applied the principle that when a statute prescribes a particular manner for exercising a power, the authority must act in that manner. It cannot assume jurisdiction through a procedure that the statute does not authorise.

The bench examined the distinction between Sections 35(2) and 35(3). Section 35(2) requires registered dealers to furnish returns without awaiting a notice. Section 35(3), however, permits the Commissioner to require returns from dealers other than those registered dealers.

Reconciling these provisions with Section 39, the Court held that scrutiny under that section would apply to dealers who were previously unregistered, were brought into the tax net through a notice under Section 35(3), and subsequently became registered.

That situation did not apply to the company, which had remained registered and furnished returns under Section 35(2) without any such notice.

The Court also rejected the attempt to treat scrutiny proceedings as a means of proceeding beyond the statutory assessment period.

Drawing support from the Tripura High Court’s decision in Shri Pankaj Bihari Saha v. State of Tripura, which considered comparable VAT provisions, the bench held that authorities cannot circumvent assessment limitation by resorting to scrutiny or summary adjustment powers.

It concluded that the five-year limitation scheme under Section 57 of the Meghalaya VAT Act must also apply in respect of Section 39 proceedings.

The Court declined to treat the April 27, 2017 notice as the statutory notice required under Section 35.

It found that the notice sought production of books of account for assessment purposes and did not require the company to furnish returns. Even if treated as a Section 35 notice, the bench held that it would be invalid because Section 35(3) did not authorise issuance of such a notice to an already registered dealer.

The earlier notice therefore could not supply the missing jurisdictional prerequisite.

On delegation of powers, the bench held that Section 26 of the Act, read with Rule 3 of the Meghalaya VAT Rules, 2005, required delegation by notification in the Official Gazette.

The department had not produced any such notification delegating Section 39 powers to the Superintendent of Taxes. Reliance on internal orders and circulars did not satisfy that statutory requirement, the Court held.

The bench held that the petition was maintainable despite the availability of a statutory remedy because the challenge concerned the jurisdiction to initiate the proceedings.

The Court set aside and quashed the impugned scrutiny reports and notices issued in March and November 2023 concerning the disputed tax periods.

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