2019 (12) TMI 56 - HC - VAT and Sales Tax

Levy of tax and penalty on advances received by petitioner - Karnataka VAT Act - tax periods 2013-14 - HELD THAT - The liability fastened on the petitioner Assessee for the advance payment received during the tax periods 2013-14 cannot be held to be justifiable, for the reason that Explanation to Rule 3 of the Rules contemplates that any amount paid as advance to a dealer as a part of consideration for transfer of property in goods whether as goods or in some other form involved in the execution of a works contract shall be included in his total turnover in the month in which execution of such works contract commences. The Cognate Bench of this Court in the case of NAGARJUNA CONSTRUCTION COMPANY LIMITED AND ANOTHER VERSUS STATE OF KARNATAKA AND OTHERS 2010 (6) TMI 737 - KARNATAKA HIGH COURT , has observed that the Explanation to Rule 3 a to g of the KVAT Rules is contrary to Section 4 1 c of the Act and Article 366 29A b of the Constitution of India and is hence unconstitutional - Accordingly levy of tax and penalty on advances received by the petitioner therein, was quashed. The matter is remitted to the respondent No.2 Authority to re-consider the same and conclude the re-assessment in an expedite manner after providing an opportunity of hearing to the petitioner - petition allowed by way of remand.

Summary

Issues:
Challenge to order under Karnataka Value Added Tax Act, 2003 related to tax periods 2013-14.

Analysis:
The petitioner, a partnership firm engaged in civil construction activities, challenged an order passed under sections 39, 36, 37, and 72 of the Karnataka Value Added Tax Act, 2003, regarding tax periods 2013-14. The petitioner had received advance payments from a customer for work on laying concrete roads and other allied works. The tax authority imposed tax on these advance payments citing a rule that was later held unconstitutional by the court in previous cases.

The petitioner argued that the rule used to impose tax on advance payments was unconstitutional based on previous court rulings. The court referred to cases involving similar issues where it was held that the explanation to the rule was contrary to statutory provisions and the constitution. The court reiterated that for an amount to be included in turnover, there must be a sale, delivery of possession, or incorporation of goods in the works contract. Since these events did not occur at the time of advance payment, treating it as part of consideration for transfer of property was incorrect.

In light of the previous judgments and the unconstitutional nature of the rule, the court quashed the re-assessment order passed by the tax authority. The matter was remitted back to the authority for reconsideration based on the court's observations. The court emphasized providing an opportunity for the petitioner to be heard during the re-assessment process and directed for an expedited resolution while leaving all rights and contentions of the parties open.

Overall, the court ruled in favor of the petitioner, declaring the tax imposed on advance payments during the tax periods 2013-14 as unjustifiable due to the unconstitutional nature of the rule applied by the tax authority.