2017 (1) TMI 1716 - HC - GST

Assessee bound by Kerala GST Act's Section 7 compounded rate; liable per turnover, audit findings upheld.

The Kerala High Court held that once an assessee opts to pay tax at a compounded rate under Section 7 of the Kerala General Sales Tax Act, they are bound ... Option to pay tax at compounded rate - compounding crystallises a bilateral contract between assessee and State - regular assessment under S. 5 - application of S. 7(1)(i) Clauses (a) and (b) determined by revenue yield/turnover - pre-determined tax based on turnover of three previous consecutive years - Accountant General's audit prompting reassessment/demand for differential - no jurisdictional error in demanding balance under S. 7Option to pay tax at compounded rate - application of S. 7(1)(i) Clauses (a) and (b) determined by revenue yield/turnover - Assessee cannot choose between Clauses (a) and (b) of S. 7(1)(i); application of the appropriate limb is determined by which yields higher revenue as per S. 7. - HELD THAT: - The court held that the statutory option under S. 7 is to opt out of regular assessment under S. 5 and to be governed by the compounding scheme in S. 7. Once the compounding option is exercised and accepted, the contractual bargain between the State and the assessee is confined to being assessed under S. 7. There is no provision permitting the assessee to select a particular limb of S. 7(1)(i); whether Clause (a) or (b) applies depends on which alternative yields higher revenue based on the applicable turnover or formula prescribed in S. 7. Prior decisions cited do not permit an assessee to pick between the clauses as part of the compounding bargain. [Paras 1]Request to treat the compounding acceptance as an election in favour of Clause (a) was rejected; the applicable clause is determined by revenue/turnover as per S. 7.Accountant General's audit prompting reassessment/demand for differential - no jurisdictional error in demanding balance under S. 7 - pre-determined tax based on turnover of three previous consecutive years - Assessing authority was entitled to demand the balance tax under S. 7 after the Accountant General's audit pointed out a deficiency; such action did not amount to jurisdictional error. - HELD THAT: - The court observed that the Accountant General's audit may point out deficiencies in tax receipt as part of routine fiscal oversight and that the assessing authority, upon discovering that amounts due under S. 7(1) were not fully paid, is empowered to call for payment of the balance. Since tax under Clause (b) of S. 7(1)(i) is a pre-determined amount dependent on prior years' turnover, issuing a notice to require payment of the differential does not constitute a fresh assessment de novo but enforcement of the liability that arises by operation of S. 7. Thus, reliance on the audit by the assessing authority did not render the demand unfounded or without jurisdiction. [Paras 2]Notice/demand for unpaid amounts under S. 7 following Accountant General's audit was valid and not a jurisdictional nullity.Compounding crystallises a bilateral contract between assessee and State - option to pay tax at compounded rate - Acceptance of the compounding option by the assessing authority did not operate as a concession barring subsequent demand for unpaid tax nor did it amount to misrepresentation. - HELD THAT: - The court rejected the contention that acceptance of the compounding option amounted to a representation or concession that precluded the assessing authority from later seeking unpaid amounts. The legal consequence of exercising the compounding option is automatic liability under S. 7; it does not depend on any representation by the assessing authority. Therefore, acceptance of the option does not estop the Revenue from asserting the correct liability under the compounding scheme when a shortfall is discovered. [Paras 3]Argument of estoppel/misrepresentation against the assessing authority was rejected; subsequent demand for unpaid compounding liability is maintainable.Final Conclusion: All revisions were dismissed; the compounding option is governed exclusively by S. 7 and does not permit election between its limbs, the assessing authority may act on audit prompts to recover unpaid compounding liability, and acceptance of the compounding option does not preclude subsequent lawful demands for balance tax. Issues:Interpretation of provisions under Section 7 of the Kerala General Sales Tax Act, 1963 regarding payment of tax at a compounded rate and the applicability of Clauses (a) and (b) under Section 7(1)(i).Analysis:The judgment by the Kerala High Court, delivered by T.B. Radhakrishnan, J., addresses the issue of an assessee eligible to pay tax at a compounded rate under Section 7 of the Kerala General Sales Tax Act, 1963. The court clarifies that once the option to pay tax at a compounded rate is exercised, the payment of tax will be governed by the provisions of Section 7, and there is no opportunity to choose among different limbs of Section 7. The court emphasizes that the liability to pay tax at a compounded rate is determined based on the turnover or total revenue generated by the assessee, deciding whether Clause (a) or (b) of Section 7(1)(i) applies. The judgment cites various decisions, including Bhima Jewellery v. Asstt. Commissioner, Raju Jacob v. Sales Tax Officer, Koothattukulam Liquors v. Deputy Commissioner of Sales Tax, and Annie George v. The State of Kerala, to support the principle that once the compounding option is exercised, a bilateral contract is formed between the assessee and the State, binding them to the compounding mechanism under Section 7.Moreover, the court addresses the argument raised by the assessee regarding the assessing authority's acceptance of tax and subsequent demand by the Accountant General's office for unpaid amounts under Section 7(1). The court rejects the contention that the action taken against the assessee was unfounded, stating that the statutory liability to pay tax at a compounded rate arises once the option is exercised. The court emphasizes that the assessing authority has the right to demand payment of any balance due under Section 7, even if prompted by the Accountant General's audit findings. The judgment clarifies that no fresh assessment is required when the pre-determined amount of tax under Section 7(1)(i) is applicable, as it is based on the turnover of previous years and guided by the assessee's own books of accounts.Furthermore, the court dismisses the argument of misrepresentation by the assessing authority, asserting that the payment of tax following the exercised option is not dependent on any representation by the authority. The court concludes that there is no scope for the assessee to opt for a specific rate of tax or choose between Clauses (a) and (b) of Section 7(1)(i) against the interest of the Revenue. Ultimately, the court upholds the Tribunal's decision and dismisses the revisions, affirming the statutory liability of the assessee to pay tax at a compounded rate as per the provisions of the Act.