2018 (7) TMI 1705 - HC - VAT and Sales Tax

Evasion of tax - Section 6(1)(f) of the KVAT Act - case of Revenue is that the entire contract amount had to be disclosed in the turnover and tax paid at 12.5% after eligible deductions as available in Rule 10, whereas the assessee having paid only the scheduled rate of those goods, which were incorporated in a works contract - Held that - There occurs a sale from the awardee to the awarder on incorporation or accretion of such goods to the works contract. Such sale when involved in a works contract, the tax liability would be different from the liability imposed by the Schedule on the separate goods. The works contract is liable to tax at a uniform rate for the transfer of goods by way of accretion in the works contract; on the total contract receipts after exemptions provided under Rule 10 Hence, there is a suppression in the return leading to tax evasion. The Tribunal was not correct in relying on U.K.Monu Timbers 2012 (6) TMI 795 - KERALA HIGH COURT which found that the power of best judgment conferred on the Assessing Officer is not available to the officer proceeding for imposition of penalty under Section 67 of the KVAT Act - In the present case, there is no best judgment assessment made and the Intelligence Officer has merely taken the total contract receipts including the deduction made by the awarder for supply of goods, which the assessee disclosed in the returns as a mere sale. Hence, there is no best judgment or estimation carried out by the Intelligence Officer and the turnover found to have been suppressed is from the total contract amount received by the awardee-assessee. Whether in computing the tax evaded there has to be deduction of the input tax credit which could be claimed by the assessee? - Held that - When the awarder purchases goods and supplies it to the awardee, and then deducts the purchase price from the total contract amounts, the purchase made is on behalf of the awardee. There would hence be zero tax liability on the awarder at the time of supply to the awardee. But, the subsequent sale in the present case is by accretion of goods into the works contract and the value addition insofar as the execution of the works contract is concerned, has to be taxed at the rate of 12.5% after allowing the deductions under Rule 10 of the KVAT Rules. At this point, definitely the awardee would be entitled to claim input tax credit being the tax originally paid by the awarder at the time of purchase - However, the claim can be raised only in assessment proceedings and there could be no deduction made of such probable claim, in computing the tax sought to be evaded. Revision allowed - decided in favor of Revenue.

Summary

Issues:
1. Interpretation of Section 6(1)(f) of the Kerala Value Added Tax Act, 2003 regarding disclosure of contract amount in turnover.
2. Application of Cooch-Behar Contractors' Association ruling on sale and resale in works contracts.
3. Validity of penalty imposed based on estimation of turnover and consideration of input tax credit.
4. Relevance of U.K.Monu Timbers and M/s Supreme Food Industries judgments in penalty proceedings.
5. Treatment of input tax credit in computing tax evaded and determination of suppressed turnover.

Detailed Analysis:
1. The judgment dealt with the interpretation of Section 6(1)(f) of the KVAT Act concerning the disclosure of the entire contract amount in turnover for works contractors. The Intelligence Officer alleged evasion by the assessee for not disclosing the full contract amount and paying tax at a lower rate. The Tribunal set aside the penalty, citing that estimation in penalty proceedings is not permissible, and the actual revenue loss should be considered, especially regarding input tax credit entitlement.

2. The application of the Cooch-Behar Contractors' Association ruling was pivotal in determining the existence of a sale and resale scenario in works contracts where the awarder supplies goods to the awardee. The Intelligence Officer relied on this ruling to assert that a sale occurred when goods supplied by the awarder were incorporated into the works contract. This led to a higher tax liability under Section 6(1) of the KVAT Act, distinct from individual goods' tax rates.

3. The validity of the penalty imposed was challenged, questioning the reliance on U.K.Monu Timbers and M/s Supreme Food Industries judgments. The Tribunal's decision to set aside the penalty was contested based on the absence of best judgment assessment and the Intelligence Officer's computation from the total contract receipts. The judgment emphasized that input tax credit cannot be deducted from the suppressed turnover in penalty calculations.

4. The judgment analyzed the relevance of U.K.Monu Timbers and M/s Supreme Food Industries judgments in penalty proceedings under the KVAT Act. It highlighted the distinction between regular assessments and self-assessment under the VAT regime, emphasizing the obligation for correct return filing. The court clarified that these judgments were not directly applicable in the VAT regime's penalty context.

5. The treatment of input tax credit in computing tax evaded was a crucial aspect addressed in the judgment. It was emphasized that input tax credit claims should be raised in assessment proceedings and not deducted from the suppressed turnover for penalty calculation. The court referred to the Venus Marketing case to support the position that input tax credit cannot be considered in determining suppressed turnover, affirming the decision against the assessee and in favor of the Revenue.