2017 (12) TMI 312 - HC - VAT and Sales Tax

Validity of reassessment proceeding - Section 29 of the U.P. VAT Act 2007 - interpretation of statute reason to believe - escapement from tax - deemed sale of construction material - Held that - the jurisdiction to reassess the petitioner could arise under Section 29 only if after the petitioner s assessing authority records a valid reason to believe as is the requirement of the Act itself - it cannot be gain said that at present merely a show cause notice has been issued to the petitioner and that it would be open to the petitioner to establish that no taxable event had occurred during the assessment year 2008-09 (U.P.). That plea may be permitted to be raised and may be sustained if the proceedings in which or with reference to which such plea is raised are those of regular assessment and not of reassessment. In the course of regular assessment proceedings it is open to assessing authority to raise all his doubts suspicion and seek clarification on the same from the assessee. There is not even any information with the assessing authority of the petitioner as to any turnover having escaped assessment. The petitioner s assessing authority in fact desires to conduct a fishing and roving inquiry to explore the possibility of escapement of turnover though at present he does not appear to have with him any material that may lead to formation of a reason to believe as to escapement of any part of the petitioner s turnover - It being a jurisdictional issue that goes to the very root of the matter the revenue cannot plead that the assessee may be first required to show cause without the revenue first satisfying this Court that it had jurisdiction to reassess the petitioner. Then the jurisdiction to reassess the petitioner cannot be claimed merely because in subsequent assessment years the petitioner has been subjected to tax and the assessing officer wants to explore a possibility if similar liability may arise in the present year as well. There must exist relevant material with the assessing authority to claim occurrence of the taxable event and further that such event occurred during the Assessment Year in question and that it escaped assessment. The fact situation of the present case admits of no doubt that the taxable event of deemed transfer of construction material never occurred during the A.Y. 2008-09. Though the petitioner admitted to have started making the constructions in that assessment year but the petitioner denied existence of any contract to either book or sell any flat/apartment or unit etc. during the assessment year in question. Being a negative fact the petitioner could not have lead any evidence in support thereof. In any case being reassessment proceedings the burden was on the revenue to disclose material to establish otherwise. The assessing authority does not have any material to prove or allege otherwise. Therefore the revenue cannot assert that any taxable event occurred. Consequently in absence of taxable event having occurred the revenue could not have also alleged that any turnover ever escaped assessment at the hands of the petitioner in that year. The reassessment issue notice in the present case dated 2.3.2017 and the sanction order dated 25.2.2017 are wholly without jurisdiction and consequently deserve to be quashed - petition allowed - decided in favor of petitioner.

Summary

Issues Involved:
1. Legality of the reassessment proceedings initiated under Section 29 of the U.P. VAT Act, 2007.
2. Validity of the 'reason to believe' for reassessment.
3. Jurisdiction of the assessing authority to initiate reassessment proceedings.
4. Applicability of the Supreme Court judgments in K. Raheja Development Corporation and Larsen and Toubro cases.

Detailed Analysis:

1. Legality of the Reassessment Proceedings:
The petitioner, a company incorporated under the Companies Act, 1956, challenged the reassessment proceedings initiated against it under Section 29 of the U.P. VAT Act, 2007 for the Assessment Year 2008-09. The reassessment notice dated 2.3.2017 was issued by the Deputy Commissioner, Commercial Tax, Sector-III Allahabad, with prior permission from the Additional Commissioner, Grade-I, Commercial Tax, Allahabad Zone, Allahabad.

2. Validity of the 'Reason to Believe':
The reassessment was based on the belief that there was an alleged escapement from tax on the turnover of deemed sale of construction material. This belief was influenced by the Supreme Court judgments in K. Raheja Development Corporation vs. State of Karnataka and Larsen and Toubro vs. State of Karnataka. However, the petitioner argued that no material existed to doubt the correctness of their statement that no booking or sale of flats occurred during the Assessment Year 2008-09. The court emphasized that the 'reason to believe' must have a rational basis and be germane to the formation of the belief regarding escaped assessment.

3. Jurisdiction of the Assessing Authority:
The court found that the jurisdiction to reassess under Section 29 of the Act arises only if the assessing authority records a valid 'reason to believe.' The court referred to the interpretation of 'reason to believe' by the Supreme Court in Commissioner of Sales Tax vs. Bhagwan Industries (P) Ltd., which requires reasonable grounds for the belief that turnover has escaped assessment. The court held that the reassessment proceedings in this case were initiated without any material that could lead to a 'reason to believe' that turnover had escaped assessment.

4. Applicability of Supreme Court Judgments:
The court analyzed the applicability of the Supreme Court judgments in K. Raheja Development Corporation and Larsen and Toubro. It was clarified that a works contract and deemed sale of construction material arise only if the builder raises constructions on behalf of another. The court noted that the petitioner had not received any booking for flats during the Assessment Year 2008-09 and was raising constructions on its own account. Therefore, no taxable event occurred during that year, and the reassessment notice was without jurisdiction.

Conclusion:
The court concluded that the reassessment notice dated 2.3.2017 and the sanction order dated 25.2.2017 were wholly without jurisdiction and deserved to be quashed. The writ petition was allowed, and the reassessment proceedings were invalidated.