Rules Must Not Be Inconsistent with the Act: Supreme Court Strikes Down Rajasthan’s Power to Cancel Form C under CST Act

Summary of the Judgment

Case Name: State of Rajasthan & Ors. v. Combined Traders
Court: Supreme Court of India
Date of Judgment: 16 April 2025
Coram: Hon’ble Justice Abhay S. Oka and Hon’ble Justice Ujjal Bhuyan
Citation: 2025 INSC 496
Appellants’ Advocate: Learned senior counsel for State of Rajasthan
Respondent’s Advocate: Learned counsel for Combined Traders
Acts & Sections Involved:
- Central Sales Tax Act, 1956: Sections 7, 8(1), 8(4), 13(1)(d), 13(3), 13(4)(e)
- Rajasthan Value Added Tax Act, 2003: Sections 16(4), 48
- Constitution of India: Article 226
Key Cited Judgments:
- Sales Tax Officer, Ponkunnam v. K.I. Abraham, (1967) 20 STC 367 (SC)
- State of Madras v. R. Nand Lal & Co., (1967) 20 STC 374 (SC)
- Jain Manufacturing (India) Pvt. Ltd. v. Commissioner of VAT, 2016 SCC OnLine Del 3656

Introduction

Can a State Government independently frame rules to cancel declaration forms issued under the Central Sales Tax Act, 1956 (CST Act)? The Supreme Court in State of Rajasthan & Ors. v. Combined Traders answers this crucial question. This case scrutinises the extent and limits of a State's rule-making power under a Central statute, in the context of an alleged fraudulent use of Form C, a declaration enabling inter-State concessional sales.

Factual Backdrop

The respondent, Combined Traders, sold goods worth approximately ₹12 crore to two dealers—M/s. H.G. International and M/s. Saraswati Enterprises—against Form C declarations during FY 2017-18. Upon inspection, these entities were found non-existent. Consequently, the State of Rajasthan, invoking sub-rule (20) of Rule 17 of the Central Sales Tax (Rajasthan) Rules, 1957, cancelled the declaration forms.

The respondent challenged this action before the Rajasthan High Court under Article 226, contending that Rule 17(20) was ultra vires the CST Act. The High Court agreed, striking down the provision. The State appealed to the Supreme Court.

The Legislative Framework

The controversy hinges on Section 13 of the CST Act, which divides rule-making powers between the Central and State Governments:

Section 13(1)(d): Empowers the Central Government to prescribe the form and content of declarations (including Form C).
Section 13(3): Allows State Governments to make rules “not inconsistent” with the CST Act or Central rules to carry out its purposes.
Section 13(4)(e): Lists specific areas where States may legislate, including maintenance and use of forms.

However, no clause authorises States to cancel declaration forms—a critical lacuna that the Supreme Court examined in depth.

Supreme Court's Observations

The Hon’ble Bench meticulously analysed the CST Act and corresponding Central Rules, reiterating the sanctity of legislative competence and constitutional limitations.

“The State Government cannot frame rules in exercise of power under Section 13(3) which will be inconsistent with the rules framed by the Central Government...”

Central Rules Prevail

Rule 12(1) of the Central Sales Tax (Registration and Turnover) Rules, 1957 prescribes Form C. However, these rules do not authorise any authority to cancel a declaration once issued.

The Supreme Court clarified:

“The form of declaration under Section 8(4) and the contents thereof are to be provided by the rules framed by the Central Government.”

Therefore, the impugned sub-rule (20) of Rule 17, introduced by the Rajasthan Government in 2014, directly conflicts with Central provisions.

Misuse vs Ultra Vires: A Subtle Yet Crucial Distinction

The State argued that cancellation of Form C was necessary to prevent tax evasion and fraud. However, the Court highlighted a key legal principle—purpose cannot override power.

“Power of sub-section (3) [Section 13] is circumscribed... rules must not be inconsistent with the CST Act and the Central Rules.”

In essence, while fraud prevention is indeed aligned with the CST Act's objective, any mechanism to address it must fall within the legally sanctioned limits of rule-making authority.

Rule of Law and Legislative Discipline

The State contended that since the fraudulent firms were untraceable, cancellation of Form C was justified under public interest. However, the Court refused to dilute constitutional discipline.

Quoting State of Madras v. R. Nand Lal & Co., the Bench stressed:

“The State Government is undoubtedly empowered to make rules... but the rules must not be inconsistent with the Act and the rules made under sub-section (1).”

The Court reaffirmed the doctrine of ultra vires, ensuring that subordinate legislation remains tethered to the parent Act.

Other Judicial References

The respondent relied on Jain Manufacturing (India) Pvt. Ltd., where the Delhi High Court ruled that cancellation of Form C was impermissible in absence of enabling statutory provision. The Apex Court took judicial notice of this, reinforcing the correctness of that view.

Implications for Inter-State Trade Compliance

The judgment has far-reaching implications for inter-State traders and tax administrators alike:

Certainty in Law: Traders can rely on issued declarations without fear of arbitrary post-facto cancellation by State authorities.
Jurisdictional Boundaries Reinforced: States cannot usurp functions constitutionally or legislatively vested in the Centre, particularly under a Central taxing statute.
Remedy for Fraud: The Court did not condone fraud, but clarified that the State's recourse lies in prosecution, registration cancellation, and audit mechanisms—not unilateral cancellation of Central forms.

Closing Remarks

In dismissing the appeal, the Supreme Court has sent a clear message:

“We are constrained to observe that the rule-making authorities have failed to appreciate the scheme of Section 13 of the Central Sales Tax Act.”

The verdict reaffirms the delicate federal balance in India’s tax framework, particularly in the context of inter-State trade. It upholds the supremacy of Parliament and the Central Government in framing binding rules under a Central statute, while cautioning States to operate strictly within their constitutionally demarcated spheres.

Conclusion

This judgment in State of Rajasthan & Ors. v. Combined Traders will undoubtedly serve as a precedent in matters involving:

Delegated legislation;
Fiscal federalism;
Statutory interpretation under the CST Act.

While the State’s desire to curb tax evasion is valid, the Court rightly ruled that such efforts must remain within the ambit of the law. This decision stands as a beacon for regulatory clarity, constitutional fidelity, and legislative restraint.