2019 (2) TMI 1086 - HC - VAT and Sales Tax

Compounding of tax - Section 7 of the Kerala General Sales Tax Act 1963 - power of rectification - Held that - As the computation being on the one hand under clause (a) and the other under clause (b) and the liability of the dealer being to pay the tax computed under either of these heads whichever is higher. The contention raised by the assessee is on the re-opening not being permissible after the permission has been granted in the commencement of the year and the assessed tax not being contemplated as coming within the provisions of Section 7 - Section 7 is in lieu of the tax payable under Section 5. A dealer desirable of exercising an option under Section 7 has to make an application at the commencement of the year. The application has to be considered and payment of compounded tax permitted by the Department. On such permission being granted as held by the Honourable Supreme Court in Bhima Jewellery 2014 (10) TMI 411 - SUPREME COURT OF INDIA there is a bilateral agreement between the parties from which neither can resile from. The assessee cannot claim to be assessed under Section 17 determining tax under Section 5. Nor can the Department resort to such an assessment based on the turnover of that particular year. However it cannot at all be said that there is no assessment contemplated insofar as a dealer opting for the compounding provision - The dealer who opts for payment of tax under Section 7 cannot be said to have been absolved of the liability for all the consequences arising from such an assessment made for the previous three years which is the reference point for determining the tax payable in the relevant year under clause (b) of Section 7. The assessees would appear before the AO and necessarily adjustments would be made insofar as the compounding tax computed for the subject assessment years - appeal allowed.

Issues Involved:

1. Non-consideration of Division Bench decisions.
2. Validity of re-opening or re-computation of compounded tax liability under Section 7 of the KGST Act.
3. Applicability of Section 17 for assessment of dealers opting for compounding under Section 7.
4. Interpretation of "tax paid" under clause (b) of Section 7.
5. Limitation period for re-computation of tax under Section 7.
6. Correct computation of tax for M/s.Sicillia Hotel (P) Ltd. and M/s. Hotel Breezeland Ltd.

Detailed Analysis:

1. Non-consideration of Division Bench decisions:

The writ petition and appeals were placed before the Division Bench due to a learned Single Judge's reference order, highlighting non-consideration of certain Division Bench decisions in the impugned judgment. The Single Judge agreed with the impugned judgment but sought re-consideration by a Division Bench due to conflicting views in three Division Bench decisions.

2. Validity of re-opening or re-computation of compounded tax liability under Section 7 of the KGST Act:

The assessee contended that once the Department grants permission for compounding, it forms a bilateral agreement, preventing re-opening or re-computation of liability. They argued that any computational exercise should be under Section 43 for rectification, which has a three-year limitation. The State, however, argued that Section 17 allows for assessments even for dealers opting for compounding, and computational modifications are permissible under this section.

3. Applicability of Section 17 for assessment of dealers opting for compounding under Section 7:

The State argued that Section 17 delineates the procedure for assessment, which applies to all dealers, including those opting for compounding. The Division Bench upheld this view, stating that Section 17's procedure applies to determine the tax payable under Section 7. The precedents in Joy Alukkas Traders and other cases supported this interpretation, confirming that assessments under Section 17 are valid for dealers opting for compounding.

4. Interpretation of "tax paid" under clause (b) of Section 7:

The Single Judge initially found that "tax paid" under clause (b) did not include assessed tax, relying on Malabar Ornaments. However, the Division Bench distinguished Malabar Ornaments, noting that Section 7 explicitly includes "turnover tax paid," which encompasses assessed tax. The Division Bench in Kalika Hotel and Bar affirmed that "tax paid" includes assessed tax, and this interpretation was upheld.

5. Limitation period for re-computation of tax under Section 7:

The Division Bench noted that the limitation for assessment under Section 17 is four years. The proceedings for re-computation based on assessments of prior years were initiated within this period. The Court held that the reasonable period of limitation should be derived from the general scheme of the Act, which allows for such re-computation within the four-year period.

6. Correct computation of tax for M/s.Sicillia Hotel (P) Ltd. and M/s. Hotel Breezeland Ltd.:

For M/s.Sicillia Hotel (P) Ltd., the AO had added the opening stock to purchases but did not deduct the closing stock. The Court clarified that the correct computation should involve adding the opening stock, purchases, and then deducting the closing stock to determine the purchase value of liquor sold. For M/s. Hotel Breezeland Ltd., the penalty proceedings affecting the tax payable were set aside by the Court, necessitating adjustments in the compounded tax computation.

Conclusion:

The Division Bench upheld the proceedings initiated by the AO for re-computation of tax under Section 7, based on assessments of prior years. The judgment of the learned Single Judge was set aside, and the writ appeals were allowed. The case was remitted back to the Single Bench for consideration based on the law declared in the Division Bench decisions. The Court emphasized that the compounding provision aims to ensure correct tax collection and does not absolve dealers from the consequences of assessments for prior years.

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