2025 (12) TMI 87 - HC - VAT / Sales Tax

KVAT Section 8(f)(iv) cancellation time-barred; Section 25AA(5) retroactive, limits action to suppressed turnover only for compounders

M/s. Josco Fashion Jewellers Versus State of Kerala, The Commissioner State Goods And Services Tax, Thiruvananthapuram, Assistant Commissioner Special Circle State Goods And Services Tax Department, Kottayam.

HC held that cancellation proceedings under Section 8(f)(iv) KVAT for A.Ys. 2010-11 and 2011-12, initiated on 15.03.2018, were beyond the reasonable ... Cancellation of permissions to pay tax at compounding rate - Petitioner did not declare certain purchases in the Returns in Form 10DA filed during the relevant Assessment Years in which the compounding were opted - time barred proceedings - invocation of Section 8(f)(iv) and/or Section 25(1) of the KVAT Act - Cancellation proceedings under Section 8(f)(iv) are to be initiated as per the subjective satisfaction of the Assessing Authority and after forming an opinion after hearing the dealer or not - Exts.P4 and P5 proceedings were initiated prior to the introduction of Section 25AA, and hence the said provision is not applicable to Exts.P4 and P5 proceedings - Cancellation of permission to pay tax at the compounded rate, relying on the alleged suppression of the very same year in which compounding was opted, not legally permissible. Time barred proceedings as initiated beyond the period of five years prescribed under Section 25(1) - HELD THAT:- There could not be any quarrel that if Section 25(1) of the KVAT Act is applicable, Exts.P4 and P5 Notices are beyond the period of five years as per the provision that existed before 01.04.2017. The limitation period for the assessment years 2010-11 and 2011-12 expired on 31.03.2017. Following the decision of the Hon’ble Supreme Court in Assistant Commissioner (Assessment) v. M/s. Cholayil Private Limited [2023 (9) TMI 801 - SUPREME COURT], this Court in N.K. Trading Company (M/s.) v. State of Kerala [2024 (10) TMI 1744 - KERALA HIGH COURT] and V2 Associates [2024 (3) TMI 1503 - KERALA HIGH COURT] held that the extension contemplated under the Third Proviso to Section 25(1) is only for completion of assessments that have already been initiated in accordance with Section 25(1) and that the Third Proviso does not extend the period of limitation for initiation of proceedings provided in Section 25(1). In MCP Enterprises v. State of Kerala [2022 (11) TMI 1547 - KERALA HIGH COURT], this Court considered the extent of retrospective operation of Section 42(3) of the KVAT Act. Considering the Scheme of the Act and the Rules, this Court held that there can be inferred a finality to assessment proceedings within a specified period from the end of the assessment year and relying on the decisions in State of Gujarat v. Patel Raghav Natha and Others [1969 (4) TMI 90 - SUPREME COURT], State of Punjab and Others v. Bhatinda District Cooperative Milk Producers Union Ltd. [2007 (10) TMI 300 - SUPREME COURT]; Director of Income-Tax (International Taxation) v. Mahindra and Mahindra Ltd. [2014 (7) TMI 265 - BOMBAY HIGH COURT]. It is further held that the fixing of such a specified period would also be in line with the judgments that hold that in the absence of a prescribed time limit for completing assessments under the Statute, a reasonable period has to be read in, and in determining what that reasonable period should be, clues can be gathered from the other provisions under the KVAT Act and Rules. Thus, the same period of five years could be fixed as the limitation period for initiating the proceedings under Section 8(f)(iv) of the KVAT Act for cancellation of permission to pay tax at compounded rate on the principle that where there is no limitation period prescribed under a taxing statute for taking action against an assessee, a reasonable period of limitation has to be read into the statutory provision by the Court. In such case, even if Section 25(1) referred in Exts.P4 and P5 is ignored, the proceedings initiated on 15.03.2018 with respect to the assessment years 2010-11 and 2011-12 are beyond the limitation period of five years. In view of the contention of the Special Government Pleader that Section 25(1) is not invoked in Exts.P4 and P5 and in view of my finding regarding the limitation period for the initiating the proceedings under Section 8(f)(iv) independently of Section 25(1), there is no need to consider the contention of the Special Government Pleader with reference to Section 42(3). Cancellation proceedings under Section 8(f)(iv) are to be initiated as per the subjective satisfaction of the Assessing Authority and after forming an opinion after hearing the dealer or not - HELD THAT:- It is clear from Exts.P4 and P5 that the basis for initiating the cancellation proceedings therein is the Crime file of the Intelligence Officer (IB), Thiruvananthapuram, in which the suppression of purchases was found in respect of the assessment years 2010-11 and 2011-12. Even if Exts.P9 and P10 Orders are ignored, the Respondent No.3 is well justified in initiating the action for cancellation proceedings under Section 8(f)(iv). Merely because Exts.P9 and P10 Orders of the Deputy Commissioner preceded Exts.P4 and P5 proceedings, it could not be held that the proceedings are vitiated and that it is not in accordance with Section 8(f)(iv). Exts.P4 and P5 are only notices inviting objections to the proceedings and giving the opportunity of hearing. The Petitioner can very well raise all objections and legal contentions before the Respondent No.3. It could not be anticipated that the Respondent No.3 will not consider the contentions of the Petitioner and that he has been acting in a predetermined manner on account of Exts.P9 and P10 Orders of the Deputy Commissioner - This Point is found against the Petitioner. Exts.P4 and P5 proceedings were initiated prior to the introduction of Section 25AA, and hence the said provision is not applicable to Exts.P4 and P5 proceedings - HELD THAT:- Section 25AA(5) provides that if any suppression of turnover of gold is detected with respect to dealers who have paid the compounded tax under Section 8(f), such suppressed turnover alone shall be assessed at the scheduled rates applicable to the goods and in such case the option of compounding for that year shall not be cancelled. If Section 25AA(5) is applicable to the case of the Petitioner, Exts.P4 and P5 proceedings are impermissible. Section 25AA was introduced after the VAT regime was over. There is no purpose for the prospective application of Section 25AA, as the KVAT Act was not existing as on the date of introduction of the said provision. It could have been intended only for retrospective application - In the present case, cancellation proceedings are still pending and the cancellation is not carried out and the assessment is not concluded on a best judgment assessment basis. In such case, Section 25AA(5) is applicable and the option of compounding shall not be cancelled and the suppressed turnover alone shall be assessed at the scheduled rate applicable to the goods. In view of Section 25AA(5), Exts.P4 and P5 Notices proposing to cancel the permission to pay at compounded rate are clearly unsustainable. This Point is answered in favour of the Petitioner. Cancellation of permission to pay tax at the compounded rate, relying on the alleged suppression of the very same year in which compounding was opted, not legally permissible - HELD THAT:- On going through the judgment dated 23.10.2018 in M/S. ARAFA GOLD [2018 (10) TMI 2063 - KERALA HIGH COURT ], it is found that the Writ Appeal was dismissed consequent to the dismissal of the C.M. Application to condone delay. In such case, the Writ Appeal was not available before the Division Bench to consider the legality of the findings of the learned Single Judge. True, the Divisional Bench has left the question of law open while considering the Application to condone delay. The judgment of the learned Single Judge was not modified in any manner. Petition allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the writ petition was maintainable despite the availability of an alternate statutory remedy before the Assessing Authority. 1.2 Whether the notices proposing cancellation of permission to pay tax at compounded rates under Section 8(f)(iv) of the KVAT Act were barred by limitation, and whether a reasonable period of limitation must be read into Section 8(f)(iv). 1.3 Whether the initiation of cancellation proceedings under Section 8(f)(iv) was vitiated for want of independent subjective satisfaction of the Assessing Authority, on the ground that such proceedings were preceded by directions of the Deputy Commissioner. 1.4 Whether Section 25AA(5) of the KVAT Act applied to the pending cancellation proceedings so as to bar cancellation of the option for compounding and confine assessment to the suppressed turnover alone. 1.5 Whether alleged suppression in the very assessment years for which compounding was opted could legally form the basis for cancellation of permission to pay tax at compounded rates. 1.6 Whether the contention regarding the requirement to declare purchases in returns filed by a dealer who has opted for compounding could be examined in writ jurisdiction. 2. ISSUE-WISE DETAILED ANALYSIS 2.1 Maintainability of the writ petition in the presence of an alternate remedy 2.1.1 Interpretation and reasoning The Court referred to the established principle that existence of an alternate remedy is a self-imposed restriction and not an absolute bar to writ jurisdiction. It noted the recognised exceptions where writ jurisdiction may still be exercised, including situations involving purely legal questions, absence of disputed facts, and cases where the statutory authority is alleged to have acted contrary to the statute. The Court relied on the fact that: (i) the controversy was confined to pure questions of law, principally limitation and statutory non-compliance, resolvable on admitted facts; (ii) the writ petition had been pending since 2018 with an unconditional interim order staying proceedings pursuant to the impugned notices; and (iii) the material facts were not in dispute and were available from admitted documents. The Court followed earlier decisions holding that in long-pending matters involving only legal issues, it is appropriate for the High Court to decide the case on merits rather than relegate the assessee to alternate remedies. 2.1.2 Conclusion The Court held the writ petition to be maintainable and proceeded to adjudicate the legal issues on merits, without relegating the petitioner to the Assessing Authority. 2.2 Limitation for initiating proceedings under Section 8(f)(iv) - reading a reasonable period into the provision 2.2.1 Legal framework Section 8(f)(iv) of the KVAT Act governs cancellation of permission to pay tax at compounded rates but does not prescribe any express period of limitation for initiating such cancellation proceedings. Section 25(1) prescribes a period of limitation for assessment and reopening of escaped turnover. Rule 58(20) of the KVAT Rules obliges an assessee to maintain books of account only for five years from the end of the assessment year (or for an extended period tied to disposal of appeals/revisions or connected proceedings). 2.2.2 Interpretation and reasoning The petitioner contended that the impugned notices were barred under Section 25(1) since they were issued after expiry of five years from the end of the relevant assessment years. The State argued that the proceedings were initiated under Section 8(f)(iv) and therefore the limitation in Section 25(1) did not apply; and that even if Section 25(1) were relevant, the operation of Section 42(3) would keep the assessment pending where returns failed to disclose certain purchases. The Court held that even if reference to Section 25(1) in the impugned notices were ignored, the question remained whether proceedings under Section 8(f)(iv) could be initiated without any temporal limit. Relying on prior interpretation of Section 42(3), the Court reiterated that where a taxing statute omits to prescribe a limitation for taking action adverse to an assessee, a reasonable period of limitation must be read into the provision to avoid unreasonableness, unfairness, and arbitrariness. The Court treated the five-year books-maintenance period in Rule 58(20) as a guiding indicator of what constitutes a reasonable period, consistent with the need for finality and certainty in tax matters and ensuring that an assessee is not prejudiced when no longer statutorily bound to preserve records. On that basis, the Court held that proceedings under Section 8(f)(iv) for cancellation of compounding permission must also be initiated within a reasonable period of five years from the end of the relevant assessment year. As the impugned notices were issued on 15.03.2018 concerning the assessment years 2010-11 and 2011-12, the Court held they were issued beyond the five-year period ending on 31.03.2017 and therefore were time-barred. Having independently found limitation applicable to Section 8(f)(iv) proceedings, the Court found it unnecessary to examine the effect of Section 42(3) for this purpose. 2.2.3 Conclusion The Court held that a reasonable limitation period of five years applies to initiation of cancellation proceedings under Section 8(f)(iv). Since the notices were issued beyond that period, they were barred by limitation and invalid on that ground. 2.3 Alleged lack of subjective satisfaction due to prior directions of the Deputy Commissioner 2.3.1 Interpretation and reasoning The petitioner argued that Section 8(f)(iv) requires the Assessing Authority to form an independent opinion and subjective satisfaction before initiating cancellation proceedings, and that the notices issued pursuant to orders of the Deputy Commissioner reflected a predetermined mind and absence of such independent satisfaction. The Court examined the contents of the notices and found that the foundation for initiation of proceedings was the crime file and findings of the Intelligence Officer (IB) regarding suppression of purchases in the relevant assessment years. It held that even if the Deputy Commissioner's prior orders were ignored, the Assessing Authority was independently competent to act on the information received from the Intelligence Officer and initiate proceedings. The Court viewed the Deputy Commissioner's involvement and prior approval as, at most, a procedural aspect, and not something that automatically vitiated the Assessing Authority's jurisdiction or indicated absence of application of mind. The notices were only show cause notices inviting objections and affording an opportunity of hearing; it could not be presumed in advance that the Assessing Authority would not consider the petitioner's objections on merits. 2.3.2 Conclusion The Court rejected the contention that the proceedings were vitiated by lack of subjective satisfaction or by the Deputy Commissioner's directions. It held that initiation of proceedings under Section 8(f)(iv) was not invalid on this ground. 2.4 Applicability and temporal scope of Section 25AA(5) to pending cancellation proceedings 2.4.1 Legal framework Section 25AA was introduced into the KVAT Act with effect from 01.04.2019, after the end of the VAT regime. Sub-section (5) provides that where suppression of turnover of gold is detected in respect of dealers who have paid tax at compounded rates under Section 8(f), only the suppressed turnover shall be assessed at the scheduled rate and, in such cases, the option of compounding for that year shall not be cancelled. Earlier decisions of the Court had construed Section 25AA as having only prospective effect applicable to pending assessments or assessments directed to be redone in appeal or revision, and not so as to reopen completed assessments. 2.4.2 Interpretation and reasoning The State contended that Section 25AA could not apply, as the impugned cancellation proceedings were initiated before the insertion of that provision. The petitioner argued that because Section 25AA was brought into force after the KVAT regime had ended, it must necessarily have been intended to operate retrospectively, at least to pending matters, otherwise it would serve no purpose. The Court held that there would be no meaningful rationale for a purely prospective application of Section 25AA introduced after the VAT regime had ceased, and therefore it must be read as applying to pending proceedings to the extent indicated by prior binding decisions. Applying the interpretation that Section 25AA covers pending assessments or proceedings to be redone in appeal or revision, the Court observed that in the present case the cancellation proceedings were still pending; cancellation had not yet been effected and no best judgment assessment had been completed. In such a situation, the Court held that Section 25AA(5) governed the case and precluded cancellation of the option for compounding, limiting the authority to assess only the suppressed turnover at the normal scheduled rates. 2.4.3 Conclusion The Court held that Section 25AA(5) applied to the pending cancellation proceedings. Consequently, the proposed cancellation of permission to pay tax at compounded rates was impermissible in law and the impugned notices were unsustainable on this ground as well. 2.5 Use of suppression in the same assessment year as the basis for cancelling compounding 2.5.1 Interpretation and reasoning The petitioner argued that, where tax under compounding is computed based on turnover of earlier years, alleged suppression in the very year for which compounding is opted cannot form the legal basis for cancellation of compounding permission for that year. Reliance was placed on a prior Single Bench decision holding that suppression, if any, in the compounding year did not affect the tax liability determined on the basis of turnover of the previous three years, and that such suppression in the compounding year therefore could not justify cancellation of the compounding option for that year. The State contended that the said Single Bench decision should not be followed because a later writ appeal had kept the question of law open. The Court examined the writ appeal order and noted that the appeal had been dismissed solely on account of dismissal of an application for condonation of delay and that there had been no modification or reversal of the Single Bench findings on merits. The Court therefore considered that the precedential value of the Single Bench decision remained intact. The Court further noted a later Division Bench decision wherein reliance was placed on that Single Bench judgment and the questions of law framed by the State were answered against the revenue and in favour of the assessee. In light of these authorities, the Court followed the principle that suppression, even if established in the compounding year, cannot constitute a legal ground to cancel the compounding scheme for that very year when the basis for compounding is past turnover. As the basis for the impugned notices was the alleged suppression of purchases in the very assessment years 2010-11 and 2011-12 for which compounding was opted, the Court held that the proposal for cancellation was legally unsustainable. 2.5.2 Conclusion The Court held that alleged suppression in the compounding year itself cannot justify cancellation of the permission to pay tax at compounded rates when compounding for that year is based on turnover of earlier years. On this ground also, the impugned notices were held to be invalid. 2.6 Challenge relating to return filing obligations and declaration of purchases 2.6.1 Interpretation and reasoning The petitioner's final contention was that, having opted for payment of tax at compounded rates, the dealer was not required to submit monthly returns under Rule 22 but only quarterly returns in Form 10D under Section 24, and that there was no provision mandating declaration of purchases in such returns. The Court held that this was a matter within the domain of factual and legal adjudication by the Assessing Authority and not appropriate for adjudication in writ jurisdiction in the present proceedings. 2.6.2 Conclusion The Court declined to examine or decide the contention regarding the obligation to declare purchases in the returns, leaving it to be adjudicated by the Assessing Authority in appropriate proceedings. 2.7 Overall conclusion In view of the findings that: (i) the cancellation proceedings under Section 8(f)(iv) were time-barred; (ii) Section 25AA(5) applied to the pending proceedings and barred cancellation of the compounding option, limiting assessment to the suppressed turnover at scheduled rates; and (iii) suppression in the compounding year could not legally form the basis for cancelling compounding for that year, the Court allowed the writ petition and quashed the impugned notices and all proceedings thereon.