2019 (12) TMI 7 - HC - VAT and Sales Tax

Court Quashes Retrospective Cancellation, Deems Reassessment Invalid

M/s. Bellor Estates & Hotels (P) Ltd., Versus State Of Karnataka, The Commissioner Of Commercial Taxes, Bangalore

The court allowed the writ petition, quashing the retrospective cancellation of the composition scheme certificate and the reassessment notice. The court ... Cancellation of registration of compensation scheme with retrospective effect - Karnataka VAT Act - Rule 137[2] of the KVAT Rules read with Section 15 of the Act - validity of notice impugned dated 9.2.2004 issued by the respondent No.4 to initiate reassessment proceedings for the tax periods April 2012 to March 2013 - time limitation. HELD THAT:- The order of cancellation is based on the inspection report dated 30.5.2015 forwarded to the Divisional VAT officer, D.V.Road, Mangalore, to take action to cancel the composition registration scheme granted under Section 15 (1) (c) of the Act. During the course of inspection on verification of the books of accounts relating to the business activities of the dealer, it was found that the petitioner is engaged in sale of Indian Made Foreign Liquor (IMFL) along with articles of food which is a condition prohibited for grant of composition under sub rule(4) of Rule 135 of the Rules. The order impugned does not traverse beyond this inspection report. The petitioner has not collected tax on his sales during the period of the operation of the composition scheme and has not claimed the input tax credit. Cancellation of the composition scheme retrospectively creates additional tax liability where the dealer has not collected the tax while opting for composition under Section 15 of the Act, otherwise the dealer was entitled to collect tax if the liability to pay tax was under Sections 3 and 4 of the Act. It is well settled that the retrospective withdrawal or cancellation of the registration certificate will have no effect upon the assessee who has acted upon it when it was valid and operative - In the present case, it is not in dispute that the petitioner had acted on the composition registration certificate issued by the competent authority and it had carried on its business on the basis of the said certificate. Thus it will be harsh for the respondents to assess the petitioner under the VAT regular scheme and demand the payment of tax even for that period for which the petitioner had carried on his business under the composition scheme. Cancellation of the composition certificate with retrospective effect would damage the business activity of the dealer with cascading effect denying the input tax credits which would have been claimed by the petitioner collecting the taxes on his sales for which maintaining of regular books of accounts would be necessary - Since the cancellation of composition registration certificate with retrospective effect cannot be approved, the re-assessment notice dated 09.02.2018 at Annexure-A2 deserves to be quashed. Petition allowed. Issues Involved:1. Justification of the retrospective cancellation of the composition scheme certificate.2. Validity of the reassessment notice for the tax periods April 2012 to March 2013.Detailed Analysis:1. Justification of the Retrospective Cancellation of the Composition Scheme Certificate:The petitioner, a private limited company engaged in the business of running hotels and restaurants, challenged the retrospective cancellation of its composition scheme certificate by the Commercial Tax Officer. The petitioner argued that the cancellation, effective from 19.06.2009, was based on the alleged violation of Rule 135(4) of the Karnataka Value Added Tax Rules, 2005, which prohibits dealers selling liquor from availing the composition scheme under Section 15 of the Karnataka Value Added Tax Act, 2003.The court observed that the composition scheme is a beneficial scheme designed to simplify tax compliance for eligible dealers. It noted that the petitioner had acted on the composition registration certificate issued by the competent authority and had conducted its business based on this certificate. The court emphasized that retrospective cancellation of the certificate would create additional tax liability for the petitioner, who had not collected tax during the period the composition scheme was in effect.The court cited several precedents, including the Supreme Court's decision in State of Maharashtra Vs. Suresh Trading Company, which held that retrospective withdrawal or cancellation of a registration certificate would not affect an assessee who had acted upon it when it was valid and operative. The court also referred to the Bombay High Court's decision in Ramdas Maneklal Gandhi Vs. The Union of India, which supported the view that retrospective withdrawal of a certificate could not affect the rights of the assessee who acted upon it while it was valid.The court concluded that the retrospective cancellation of the composition scheme certificate was unjustifiable and harsh, as it would disrupt the business activities of the dealer and deny input tax credits. It held that the competent authority could cancel the registration of the composition certificate from the relevant tax period but not with retrospective effect, especially when the reassessment for certain tax periods had already been concluded without objections.2. Validity of the Reassessment Notice for the Tax Periods April 2012 to March 2013:The petitioner also challenged the reassessment notice issued by the respondent No.4 for the tax periods April 2012 to March 2013. The court noted that the reassessment proceedings were initiated as a consequence of the retrospective cancellation of the composition scheme certificate.Given the court's decision to quash the retrospective cancellation of the composition scheme certificate, it also found the reassessment notice dated 09.02.2018 to be invalid. The court emphasized that the reassessment notice was based on the invalid retrospective cancellation and, therefore, could not be sustained.Conclusion:The court allowed the writ petition, quashing both the impugned order dated 23.01.2016, which retrospectively canceled the composition scheme certificate, and the reassessment notice dated 09.02.2018. The court held that the retrospective cancellation of the composition scheme certificate was unjustifiable and that the reassessment notice, being consequential to the invalid cancellation, was also invalid. No order as to costs was made.