Brief: Whenever the assessing authorities creates a huge demand against any dealer, the dealer if aggrieved from the order of the assessing authorities prefer an appeal before the Dy. Commissioner Appeals and along with the appeal the dealer also files an application in VAT-18 under Rule 25 for stay of the demand till the disposal of appeal. Sometimes the Aappellate authorities put a condition in the stay order that the dealer shall furnish security, according to the satisfaction of the AO, within the time prescribed in the stay order. Now the question is “what is the satisfaction of the AO and what is the legislative intent regarding satisfaction of the AO?
To understand the meaning of the term “satisfaction of the AO” first we discuss the relevant provisions of the RVAT Act and Rules which are Section 38(4) of RVAT Act 2003 read with Rules 77 of RVAT Rules 2006.
First we discuss the provisions of Section 38(4) of RVAT Act 2003 which provides as under–
Section 38(4) - Where a dealer or a person has filed an appeal to the Appellate Authority against an order passed by an assessing authority or any other officer, the said Appellate Authority may, after registering such appeal and after having heard the appellant and the assessing authority or officer or any representative thereof, stay the recovery of the disputed amount of tax or demand or any part thereof for a period of one year from the date of such order or till the disposal of the appeal, whichever is earlier, on the condition that the said dealer or the person furnishes sufficient security to the satisfaction of the assessing authority or the officer, as the case may be, in such form or in such manner as may be prescribed;
Provided ………., in such manner as may be prescribed.
Analysis of this sub section- In this sub section the word sufficient security has been inserted before the phrase “to the satisfaction of the AO”. The word “sufficient” indicates to or refers to or is linked with the amount of security which the AO may demand according to his satisfaction. The satisfaction of AO is with respect to the amount of security, it is not with respect to the manner or mode of security as the line of condition that “the dealer shall furnish sufficient security to the satisfaction of the AO has been separated by comma i.e. (,) before the next portion of condition starts i.e. in such form or in such manner as may be prescribed”. The discretion of the AO is not with respect to the form or manner of the security. He can exercise his discretion only with respect to the amount of security. Suppose if the stay is for Rs.5 lakhs then it is upon the AO to decide how much security he needs for his satisfaction, he may demand maximum security of Rs. 5 lakh or he may demand lessor security of Rs 4 lakhs or say 3 lakhs and so on. But he cannot decide the form or manner of security in which security has to be furnished by the dealer. This discretion is upon the dealer as per rule 77 of RVAT Act.
If it had been the intention of the legislature that the AO will have sole discretion both about the amount of security and as well as about the form and manner of the security then the condition would have been framed or drafted in the manner: ”that the dealer shall furnish sufficient security in the form and manner as per satisfaction of the AO”. In this assumed condition the word satisfaction is attached both to the sufficient security and to the form of security. It cannot be split or separated as it is only one sentence and there is no comma in the entire sentence. But since the legislature has not framed the condition in this manner it has a meaning different and distinct then the later. In the condition as mentioned in section 38(4) the word satisfaction is attached only with the amount of security not with the form or manner of security as this portion has been separated by comma. As a result of this the security has to be furnished in the form or manner as prescribed in Rule 77 of RVAT Rule 2006, not in the form as decided by the AO.
Now we discuss the provisions of Rule 77 of RVAT Rules 2006 which provides as under;-
Rule 77 Furnishing of Security- Every dealer or person who is required under any of the provisions of the Act or the Rules to furnish a security, shall furnish it in any of the following forms:-
1. In cash, which shall be paid in accordance with Rule 39; or
2. By depositing with the officer concerned, saving certificate issued by the Government of India of a face value not less than the amount of security required to be furnished, duly endorsed in favour or the officer concerned; or
3. By furnishing to the officer concerned a bank guarantee payable by a branch situated in the state, agreeing to pay to the State Government or any of its officer, on demand the amount of security fixed by the officer concerned; or
4. By executing a bond in Form VAT-64, with necessary modification where necessary, with two sureties acceptable to the officer or authority concerned
Analysis of Rule 77- This rule provides that the dealer shall furnish the security in any of the forms prescribed in this rule. The starting para of the Rule nowhere has referred to AO rather it has referred only to the dealer. Thus the discretion has been given to the dealer not to the AO. Section 38(4) provides that the security shall be furnished in the form or manner prescribed and Rule 77 has prescribed the form and manner and it provides that the dealer shall furnish the security in any of the form as prescribed in this rule. Here the discretion to choose or decide the form or manner of security has been given to the dealer not to the AO. If the legislature intended to give such discretion to the AO then the rule would have been framed or drafted like “ that the AO may require the dealer to furnish the security in any of the following forms which the AO orders or decides”. But the Rule has not been so framed.
The provisions of Section 38(4) and Rule 77 has been enacted by the State Assembly with the legislative wisdom. As per these provisions the discretion to fix the amount of security to validate the stay granted by the DC Appeal has been given to the AO and the discretion to choose the form and manner of security has been given to the dealer.
Objective of Security vis a vis principal of natural justice- The object behind the concept of furnishing security in favour of the State Government is to protect the interest of revenue and at the same time to give benefit or relief to the dealer not to deposit the demand till the disposal of appeal or till the time of stay order whichever is earlier. It does not much matter in which form the security is furnished. In whatever form it is furnished it serves both the purposes. The motive behind taking the stay is that the department will not force the demand till the disposal of appeal and the dealer gets tension free that he will not undergo any financial crises or burden or that he is not required to make any financial arrangements to make the payment of demand till the disposal of appeal. But If the discretion to decide the mode of security is given to the AO and if the AO demands the security in cash or by way of Bank Guarantee then there will be no meaning of stay. The very purpose of stay will be nullified or defeated. Stay of demand is a benefit or relief to the dealer that he will not be required to deposit the demand till the disposal of appeal, it is not a punishment. For obtaining the Stay Order if the dealer requires equal amount of cash for cash security or for obtaining bank guarantee, then what is the benefit to the assessee. If this is the situation the assessee would be put to same hardship as no stay was granted to him and the basic purpose of stay will get nullified. It will be against the principal of natural justice that the DC Appeal is granting the stay and the AO is not giving benefit of the stay. It is a fancy of the AO. It will be a joke with the assessee as he will be in a situation that although stay has been granted to him but it will be taken as no stay has been granted to him as it will not work at all. For a moment if it is assumed that the AO has discretion to decide the mode of security and he demands cash security as per clause (i) of Rule 77, then it will amount to deposit of tax or demand in vat-37 and similar will be the position with bank guarantee as he will be required to deposit equal amount in bank to get the guarantee. In this situation the Stay Order will remain only a piece of paper and all the formalities of stay would be a futile or useless exercise. If the dealer is forced to deposit the entire demand in the guise of his satisfaction then what is the benefit of stay order to the assessee, nothing. It will be a complete joke with the assessee. It is not the intention of the legislature to give any discretion to the AO to decide the mode of security. If it is assumed by the AO on his own it will not be permissible in law and will be against the principal of natural justice.
The provisions of stay of demand are for the benefit and to provide relief to the dealer in order to meet out his hardship regarding payment of demand. These provisions should be interpreted in the spirit and objective law in a manner to provide justice to the parties. As per provisions of section 38(4) read with Rule 77 the legal position is that AO can fix the amount of security against the amount of stay but not the mode of security, it is at the discretion of the dealer. We can also refer to the decision of RHC in the case Parle Products P. Ltd. Vs State of Rajasthan & Others, RHC, Tax Update-V-35, Part-6, Mar 16-31 (2013) 196 wherein it was held that the dealer is not a “fly by night operator” but a well reputed company and granted stay of demand. In case of M/s Apollo Surgicals vs The State of Rajasthan & Ors. (RHC) Tax Update-V-33, Part-7, Aug 1-15 (2012) 253, RHC held directed there was no material or occasion before the RTB to take different view and directed to give solvent security (not bank guarantee) by submitting bond in Form VAT-64 along with two sureties acceptable to the AO as per Rule 77 of RVAT Rule 2006.