SC Strikes Down Rajasthan Rule on Cancellation of CST Form C

The Supreme Court dismissed the appeal filed by the State of Rajasthan against the judgment of the High Court of Judicature for Rajasthan, which had invalidated sub-rule (20) of rule 17 of the Central Sales Tax (Rajasthan) Rules, 1957. The contested rule empowered state authorities to cancel declaration forms or certificates if they were generated through misrepresentation, fraud, or contravention of the Central Sales Tax Act, 1956 (CST Act) and its rules.

The High Court had concluded that the State lacked the rule-making authority to provide for the cancellation of validly issued declarations/forms under the CST Act.

The matter arose when the respondent, Combined Traders, sold goods against Form C to two entities whose registrations were subsequently found to be bogus, and when the state authorities issued notices and eventually cancelled the Form C declarations provided by these entities by invoking the challenged sub-rule (20) of Rule 17. Combined Traders then approached the High Court, primarily contending that it vires of the said rule. The appellants further argued that the rule was enacted to prevent fraud and was consistent with the State's rule-making power under Section 13(3) of the CST Act, which allows rules to be made to carry out the purposes of the Act.

Supreme Court, nonetheless, confirmed the order of the High Court and held that sub-rule (20) of Rule 17 is inconsistent with the Central Registration Rules made by the Central Government under Section 13(1)(d) of the CST Act. The Apex Court also noted that the Section 13(1)(d) of the Act expressly vests in the Central Government the authority to provide for the form and details of declarations such as Form C. Although the Central Registration Rules provide the form of Form C under Section 8(4) of the CST Act, none of these rules vests any power with any authority to cancel the said declaration.

The Apex Court further held that the rule-making power of the State under Section 13(3), although wide, is clearly restricted to rules which are not repugnant to the CST Act and the rules framed by the Central Government. The Supreme Court based its earlier decision in R. Nand Lal & Co. to reaffirm that if the Central Government has the power to make a particular provision under Section 13(1), the State Government cannot make it.

Hence, the Court held that the Rajasthan Rule, by making a provision for the cancellation of Form C where the Central Rules are silent on it, exceeded the State's rule-making power and was correctly held to be ultra vires.

Coram: Justice Abhay S. Oka & Justice Ujjal Bhuyan