2017 (3) TMI 1690 - HC - VAT and Sales Tax

Doctrine of frustration - presence of disturbing element in the contract, preventing performance of the Contract - Payment of Compounding Tax - Whether the petitioner, carrying on a quarry and crusher unit, be permitted to withdraw from the compounding applied for in the year 2016-17, for reason of failure to obtain licenses from the local authority, to carry on the quarry and crusher operations? Held that - It was stated that the contract was not an ordinary contract for sale and purchase. It was an integral part of a development scheme and there was no time limit within which the roads and drains were to be made. The first requisition order was passed nearly 15 months after the contract and the work was not commenced even within that time. Even when the contract was entered into, the war had already commenced and requisition orders for military purposes were normal events. There was also scarcity of materials and various restrictions by the Government, due to the prevailing war situation - The ground on which frustration was claimed, did not amount to a supervening circumstance, which alone could be successfully alleged to claim frustration under Section 56. To plead frustration under Section 56 of the Contract Act, there should be a supervening impossibility, which was never in the contemplation of the parties at the time when the contract was entered into - the petitioner did not have a D & O license at the time, when the petitioner approached the Appellate Authority for being permitted to pay tax under the compounding scheme. The petitioner also did not press for a D & O licence with respect to the quarry, since no such permit could have been issued to the petitioner without an Environmental Clearance. The petitioner s prayer for consideration of the D & O license for the crusher unit was also on the ground that even if he cannot quarry mineral, he could obtain minerals from other quarries and carry on the crusher operations - It cannot at all be said that the dismissal of the writ petition was a supervising impossibility, which stood against the petitioner s performance of the obligation under the compounding scheme. It is established that there was no supervening subsequent event, which was not in the contemplation of the petitioner, when the petitioner had applied for compounding. The petitioner wanted the best of both worlds; the entitlement under the compounding scheme if the unit was permitted and a regular assessment if not permitted. The petitioner with eyes open, without any license or permit applied for compounding and on denial of the license seeks to turn around and plead frustration - The claim at best is that the obligation under the scheme, which the petitioner voluntarily opted, is onerous. The petitioner hence cannot be permitted to wriggle out of the obligation to pay the compounding tax. Petition dismissed.

Summary

Issues Involved:
1. Whether the petitioner can withdraw from the compounding scheme applied for in 2016-17 due to failure to obtain necessary licenses.
2. Applicability of Section 56 of the Indian Contract Act, 1872 in absolving the petitioner from the compounding scheme.
3. Examination of precedents related to the doctrine of frustration under Section 56 of the Contract Act.
4. Evaluation of the petitioner’s business operations and tax filings during the disputed period.
5. Analysis of the compounding scheme under the Kerala Value Added Tax Act, 2003.

Issue-wise Detailed Analysis:

1. Withdrawal from the Compounding Scheme:
The petitioner, running a quarry and crusher unit, sought to withdraw from the compounding scheme for the year 2016-17 due to the inability to obtain necessary licenses from the local authority. The court examined the petitioner’s claim that the failure to secure these licenses made it impossible to perform the obligations under the compounding scheme.

2. Applicability of Section 56 of the Indian Contract Act, 1872:
The petitioner argued that under Section 56 of the Indian Contract Act, the obligation should be considered void due to impossibility of performance. The court noted that the Supreme Court has consistently held that compounding is a contract between the assessee and the Department, from which neither party can withdraw. The petitioner cited various precedents to support this argument, including Ganga Saran v. Firm Ram Charan Ram Gopal, Satyabrata Ghose v. Mugneeram Bangur & Co., and Naihati Jute Mills Ltd. v. Khyaliram Jagannath.

3. Examination of Precedents:
The court reviewed several key cases:
- Ganga Saran v. Firm Ram Charan Ram Gopal: The Supreme Court found that Section 56 was not applicable when non-performance was due to the defendant’s default.
- Satyabrata Ghose v. Mugneeram Bangur & Co.: The court held that the doctrine of frustration applies when an unexpected event fundamentally changes the contract’s basis.
- Naihati Jute Mills Ltd. v. Khyaliram Jagannath: The court concluded that a contract is not frustrated merely due to altered circumstances unless a supervening event not contemplated by the parties occurs.
- Army Welfare Housing Organisation v. Sumangal Services (P) Ltd.: The court distinguished statutory injunctions as valid grounds for claiming frustration.
- Koothattukulam Liquors v. Deputy Commissioner of Sales Tax: The court emphasized that compounding is a bilateral agreement that cannot be unilaterally rescinded.

4. Petitioner’s Business Operations and Tax Filings:
The court noted that the petitioner had filed monthly returns for April and May 2016 and paid the first installment of tax under the compounding scheme. Despite claiming no business operations, the petitioner’s returns indicated sales activities. The petitioner argued that these sales were from previously quarried materials.

5. Compounding Scheme under the Kerala Value Added Tax Act, 2003:
The court reiterated that the compounding scheme is an alternative route to assessment based on a contract between the assessee and the tax department. The petitioner applied for compounding without having the necessary licenses, hoping that pending legal proceedings would result in favorable outcomes. The court found that the petitioner’s expectation did not constitute a supervening event under Section 56 of the Contract Act.

Conclusion:
The court concluded that there was no supervening impossibility that prevented the petitioner from fulfilling the obligations under the compounding scheme. The petitioner’s hope for a favorable legal outcome did not justify withdrawal from the scheme. The court dismissed the writ petition, holding that the petitioner could not be absolved from the compounding tax obligations merely because the performance had become onerous. The petitioner's claim was rejected, and the court emphasized that contractual terms cannot be altered or modified by the court.