State VAT department qualifies as a law enforcement agency

State VAT department qualifies as a law enforcement agency under CBDT Circulars for monetary limits.

Issue

Whether information received from the State VAT department qualifies as information received from a “law enforcement agency” under Clause 10(e) of CBDT Circular No. 3/2018 dated 11.07.2018 read with Circular dated 20.08.2018, thereby excepting the Revenue’s appeal from dismissal on grounds of low tax effect.

Facts

The Revenue filed an appeal before the Income Tax Appellate Tribunal (ITAT) for Assessment Year 2011-12.
The tax effect involved in the appeal was below the monetary limit prescribed by the Central Board of Direct Taxes (CBDT) for filing appeals before the Tribunal.
The Revenue relied on Clause 10(e) of the CBDT Circular dated 11.07.2018 (read with Circular dated 20.08.2018), which carved out an exception to the monetary limits for cases where prosecution/assessment is based on information received from external law enforcement agencies.
The information triggering the assessment in this case originated from the State Value Added Tax (VAT) department.
The Tribunal dismissed the Revenue’s appeal on the grounds of low tax effect, holding that the State VAT department did not fall within the ambit of a “law enforcement agency” under Clause 10(e).

Decision

The Court/Tribunal held that the State VAT department constitutes a “law enforcement agency” within the scope and meaning of Clause 10(e) of the relevant CBDT Circulars.
The ITAT erred in misinterpreting Clause 10(e) by excluding the State VAT department from its ambit.
Consequently, the impugned order of the Tribunal dismissing the Revenue’s appeal on the ground of low tax effect was set aside, and the matter was remanded for decision on merits.

Key Takeaways

Broad Ambit of Law Enforcement Agencies: State VAT/Sales Tax authorities qualify as law enforcement agencies under CBDT Circular exceptions governing appeal filing monetary limits.
Overriding Low Tax Effect Limits: If an assessment or appeal is founded on information received from state tax authorities or law enforcement agencies, the Revenue’s appeal cannot be dismissed merely because the tax effect falls below the prescribed monetary threshold.
Remand for Merits: Dismissals based solely on erroneous applications of monetary limit circulars warrant setting aside the order and remanding the matter for adjudication on its legal and factual merits.

HIGH COURT OF GUJARAT

Principal Commissioner of Income-tax

Kabir Jewels (P.) Ltd

A.S. Supehia and Ms. VAIBHAVI D. NANAVATI, JJ.

R/SPECIAL CIVIL APPLICATION NO. 5700 of 2022 ^†

JUNE 24, 2026

Karan G. Sanghani for the Petitioner. Ms. Vaibhavi K. Parikh for the Respondent.

JUDGMENT

A.S. Supehia, J.- The present petition has been filed assailing the order dated 10.02.2021 passed by the Income Tax Appellate Tribunal, Surat Bench, Surat (for short, “the Tribunal”) in ITO v. Kabir Jewels (P.) Ltd. [MA No.26/SRT/2019, dated 10-2-2021] (arising out of ITA No. 1829/Ahd/2016 for AY 2011-12), whereby the miscellaneous application filed under Section 254(2) of the Income Tax Act, 1961 (for short, “the Act”) by the Revenue, seeking rectification of the original order dated 16.11.2018 came to be rejected.

2. Learned Senior Standing Counsel Mr.Sanghani, appearing for the petitioner department, at the outset, has submitted that the Tribunal fell in error in interpreting Clause 10(e) of the Circular dated 11.07.2018, as modified by the Circular dated 20.08.2018. It is submitted that the Tribunal has held that there is no reference of any State Government Agencies such as Sales tax department or Value Added Tax (for short ‘VAT’) department and therefore, would not fall within the ambit of “law enforcement agencies”, as mentioned in Clause 10(e) of the aforesaid circulars. It is submitted that, in fact, State VAT department is an enforcement agency and ought to be considered as one of the agencies referred to in Clause 10(e) of the said circulars. Consequently, it is submitted that the case of the Revenue would fall within the exception provided therein and the monetary limit of Rs.20 lakhs, as prescribed in the circulars, would not apply to the present case. Thus, it is urged that the impugned judgment and order be quashed and set aside.

3. Per contra, learned Senior Advocate Mr. Tushar Hemani appearing for the respondent has submitted that, subsequent to the order dated 10.02.2021 passed by the Tribunal, the Department has issued Circular dated 15.03.2024, which has further been clarified by Circular dated 17.09.2024. It is submitted that, as per the aforesaid circulars, the enhanced monetary limits of Rs.60 lakhs for the Tribunal and Rs. 2 crores for the High Court would not apply only to such cases, where the assessment is reopened on the basis of information relating to any offence alleged to have been committed under any other law, received from law enforcement or intelligence agencies referred to in Clause 10(e) of the Circular dated 11.07.2018 read with Circular dated 20.08.2018, Clause 3.1(c) of the Circular dated 15.03.2024 and the paragraph No.5 of the Circular dated 17.09.2024. Learned Senior Advocate Mr. Hemani further argued that State law enforcement agencies are not referred under Clause 10(e) of the Circular dated 11.07.2018 read with Circular dated 20.08.2018. Thus, it is urged that the present petition be dismissed.

4. We have heard the learned advocates appearing for the respective parties at length.

5. We have also perused the impugned order dated 10.02.2021 passed by the Tribunal. It is not in dispute that by the order dated 16.11.2018 passed in ITA No. 1829/AHD/2016, the appeal came to be disposed of by the Tribunal on the ground of low tax effect, applying the monetary limit of Rs.20 lakhs prescribed for filing appeals before the Tribunal. The Tribunal placed reliance on the Circular dated 11.07.2018 read with the Circular dated 20.08.2018 and disposed of the matter accordingly. Subsequently, the Revenue filed MA No.26/SRT/2019 under Section 254(2) of the Act, placing reliance on Clause 10(e) of the Circular dated 11.07.2018 read with the Circular dated 20.08.2018. The relevant clause of the Circular is reproduced as under:

“10. ** ** **

(e) Where addition is based on information received from external sources in the nature of law enforcement agencies such as CBI/ED/DRI/SFIO/ Directorate General of GST Intelligence (DGGI).”

6. The Tribunal, by placing reliance on the order of Coordinate Bench at Pune in the case of Dy. CIT v. Chhabi Electricals (P.) Ltd. [M.A. No. 01 (PUN) of 2019, dated 3-6-2019] rejected the miscellaneous application by holding that VAT department is not referred as a law enforcement agency and, therefore, would not be covered by paragraph 10(e) of the Circular dated 11.07.2018 read with the Circular dated 20.08.2018. We find that the Tribunal has committed an error in recording such a finding.

7. A careful reading of Clause 10(e) of the Circular dated 11.07.2018 read with the Circular dated 20.08.2018 would indicate that it contains references to agencies such as “CBI/ED/DRI/SFIO/Director General of GST Intelligence (DGGI)”. It is not in dispute that VAT department is also an enforcement agency. Hence, the agencies referred to in Clause 10(e) are illustrative in nature and VAT department being a law enforcement agency, ought to be considered as one of the agencies akin to those mentioned therein.

8. Thus, the Tribunal has misinterpreted the provision of Clause 10(e) of the Circular dated 11.07.2018 read with the Circular dated 20.08.2018 by excluding VAT department from its ambit. On this short ground, we set aside the impugned order dated 10.02.2021 passed by the Tribunal and remand the matter to the Tribunal.

9. We direct that ITA No.1829/Ahd/2016 shall be restored to its original file. The Tribunal shall decide the same on merits after granting full opportunity of hearing to the respective parties.

10. We clarify that all rights and contentions of the respective parties are kept open.

11. With these observations, the present writ petition stands allowed.