2015 (2) TMI 1207 - HC - VAT and Sales Tax

Payment of tax at compounded rates - Section 8(f) of the KVAT Act, 2003 - the petitioners had exercised their option, to pay tax in accordance with the provisions of Section 8(f) of KVAT Act, at a time when the Finance Act, 2011 had not yet been enacted, the permission of which was granted by respondent - whether payment of tax u/s 8(f) of KVAT Act in the present case applicable? - Held that - It is trite that, when an assessee opts to pay tax at compounded rates, and such an option is accepted by the authorities under the KVAT Act, either expressly through an order or impliedly through their conduct, there comes into existence a contract from which neither side can resile. This legal position with regard to the binding nature of compounding proceedings has been reiterated in a number of judgments of the Supreme Court, the latest being the decision in Bhima Jewellery v. Assistant Commissioner (Assessment), Kerala & Another 2014 (10) TMI 411 - Supreme Court of India - there was no justification in the respondents proceeding against the petitioners with a demand for differential tax based on the amended provisions introduced through the Finance Act, 2011. The Finance Act, 2011, when enacted, contained a validation clause that made it clear that, the passage of the Finance Act would not affect any action taken in terms of the provisions of the Kerala Finance Bill, 2011 (Bill No.426 of the 12th Kerala Legislative Assembly). In the instant cases, the payment of tax at compounded rates, and the acceptance of the said tax by the respondents, all took place when the provisions of the Kerala Finance Bill, 2011 (Bill No.426 of the 12th Kerala Legislative Assembly), were in force. That being the case, by virtue of the validation clause in the Finance Act, 2011, those actions cannot be revisited, and it would be legally impermissible, and patently unfair, to permit the respondents to proceed against the petitioners with a demand for differential tax under Section 8 (f) of the Act. The actions of the respondents in demanding differential tax amounts from the petitioners after having accepted the payment of tax by the petitioners in accordance with the applications submitted by them for the assessment year 2011 2012, cannot be legally sustained - penalty set aside. The payment of the tax by the assessee on the basis of the provisions of the Kerala Finance Bill, 2009, could only be viewed as one effected under a mistake of law and hence the enhanced tax consequent to the enactment of the Finance Act could be validly collected from the assessee - the petitioners become entitled to any amounts by way of refund of excess tax paid to the Government, then, the respondents shall take steps to either refund the amounts to the petitioners or adjust the same towards the future tax liability of the petitioners. Petition allowed - decided in favor of petitioner.

Summary

Issues Involved:
1. Effect of amendments to Section 8(f) of the Kerala Value Added Tax Act, 2003 (KVAT Act) on the option for compounding exercised by the petitioners.
2. Validity of differential tax demands based on the amended provisions.
3. Legality of penalties imposed for non-payment of tax at the higher rate.

Issue-wise Detailed Analysis:

1. Effect of Amendments to Section 8(f) of the KVAT Act:
The petitioners, dealers in gold and jewellery, opted to pay tax at compounded rates under Section 8(f) of the KVAT Act for the assessment year 2011-2012. During this period, Section 8(f) was amended by the Kerala Finance Bill, 2011, and later by the Kerala Finance Act, 2011. The amendments altered the tax rates and conditions for compounding. The petitioners argued that their applications for compounding were filed and accepted before the amendments, and therefore, they should not be subjected to the higher rates introduced later. The court noted that the petitioners' applications were within the statutory time limits and, in many cases, were accepted by the authorities before the amendments.

2. Validity of Differential Tax Demands:
The respondents issued orders and demand notices for differential tax based on the amended provisions. The petitioners contended that the validation clause in the Finance Act, 2011, protected their payments under the pre-amended provisions. The court agreed, stating that the validation clause ensured that actions taken under the Kerala Finance Bill, 2011, were deemed valid. Therefore, the respondents' acceptance of tax payments at compounded rates under the pre-amended provisions finalized the terms of the tax liability, creating a binding contract from which neither party could resile. The court referenced the Supreme Court's decision in Bhima Jewellery v. Assistant Commissioner (Assessment), Kerala & Another, which supported the binding nature of compounding proceedings.

3. Legality of Penalties for Non-payment of Higher Tax:
In some writ petitions, the respondents imposed penalties for non-payment of tax at the higher rates introduced by the amendments. The court found these penalties unsustainable, as the differential tax demands themselves were invalid. Consequently, the orders imposing penalties were also quashed.

Conclusion:
The court quashed the impugned orders and demand notices for differential tax as illegal and legally unsustainable. It held that the petitioners' payments at compounded rates under the pre-amended provisions were validated by the Finance Act, 2011. Additionally, penalties imposed for non-payment of higher tax rates were also quashed. The respondents were directed to refund any excess tax paid or adjust it towards future tax liabilities within three months.