2008 (7) TMI 889 - HC - VAT and Sales Tax

Recovery - demand notice - orders of assessment - whether the petitioner cannot be made liable on the basis of section 26 of the KVAT Act? Held that - Having given our anxious consideration to the case pleaded by the appellant, we are of the firm opinion that the order passed by the assessing authority is contrary to statutory provisions. Therefore, learned Single Judge was not justified in relegating the petitioner to prefer an appeal, if she is aggrieved by the orders passed by the assessing authority in exercise of his powers under section 26 of the Act. Since we have come to the conclusion that the order passed by the assessing authority is contrary to the provisions of the Act, the impugned order requires to be set aside. Accordingly, we allow the appeal. The impugned order passed by the assessing authority is set aside.

Issues Involved:
1. Validity of the assessment orders (Exhibits P6 and P7) under Section 26 of the Kerala Value Added Tax Act, 2003.
2. Legitimacy of the demand notices (Exhibits P8 and P9) issued based on the assessment orders.
3. Jurisdiction of the assessing authority to pass the assessment orders.
4. Applicability and interpretation of Section 26 of the Kerala Value Added Tax Act, 2003.
5. Whether the petitioner should be directed to file an appeal against the assessment orders.

Detailed Analysis:

1. Validity of the Assessment Orders (Exhibits P6 and P7) under Section 26 of the Kerala Value Added Tax Act, 2003:
The petitioner challenged the assessment orders (Exhibits P6 and P7) issued under Section 26 of the Kerala Value Added Tax Act, 2003. The petitioner's contention was that she merely attested photographs and introduced individuals for registration under the KVAT Act, which does not amount to "carrying on business" as required by Section 26. The court observed that Section 26 requires the assessing officer to have "reason to believe" that a person is or was carrying on business in association with another person. The court found that the assessment orders lacked sufficient material to substantiate that the petitioner was carrying on business, either directly or indirectly, with the individuals in question.

2. Legitimacy of the Demand Notices (Exhibits P8 and P9) Issued Based on the Assessment Orders:
Following the assessment orders, demand notices (Exhibits P8 and P9) were issued to recover the amounts from the petitioner. The court held that since the assessment orders themselves were under scrutiny and potentially invalid due to lack of jurisdiction and insufficient evidence, the demand notices based on these orders should also be kept in abeyance until a final decision is made by the appellate authority.

3. Jurisdiction of the Assessing Authority to Pass the Assessment Orders:
The petitioner argued that the assessing authority lacked jurisdiction to pass the assessment orders under Section 26 of the Act. The court examined the statutory provisions and previous case law, including the requirement for the assessing authority to have a rational basis to form the belief that the petitioner was carrying on business. The court concluded that the assessing authority did not have the necessary jurisdiction as the orders lacked specific findings that the petitioner was directly or indirectly involved in the business activities of the individuals she introduced for registration.

4. Applicability and Interpretation of Section 26 of the Kerala Value Added Tax Act, 2003:
Section 26 of the Act allows for protective assessments if the assessing authority has "reason to believe" that a person is or was carrying on business in association with another person. The court referenced several Supreme Court decisions explaining the term "reason to believe," emphasizing that it must be held in good faith and have a rational connection to the formation of the belief. The court found that the assessing authority's orders did not meet these criteria, as they were based merely on the petitioner's act of attesting photographs and introducing individuals, without any substantial evidence of business involvement.

5. Whether the Petitioner Should be Directed to File an Appeal Against the Assessment Orders:
The single judge initially directed the petitioner to file an appeal against the assessment orders. However, upon review, the court concluded that the orders were contrary to statutory provisions and well-established legal principles. Therefore, the court decided that it was not appropriate to require the petitioner to pursue an appeal. Instead, the court set aside the assessment orders and the related demand notices.

Conclusion:
The appeal was allowed, and the impugned orders passed by the assessing authority were set aside. The court found that the assessment orders were issued without proper jurisdiction and lacked the necessary evidentiary basis to substantiate that the petitioner was carrying on business in association with the individuals she introduced. Consequently, the demand notices issued pursuant to these orders were also invalidated.

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