2019 (12) TMI 1013 - HC - VAT and Sales Tax

Reopening of completed assessments - escaped turnover - retrospective amendment - mandatory period for retaining books of account already expired - invocation of Section 42(3) of the Kerala Value Added Tax Act - HELD THAT - Section 42 of the KVAT Act was amended through a Notification dated 13.11.2016, and the amendment was given retrospective effect from 01.04.2005, the date on which the KVAT Act was brought into force in the State of Kerala. The legislative power of the State legislature to amend the Act with retrospective effect, cannot be disputed for the power to legislate carries with it the power to legislate retrospectively also - Limitations have, however, been recognised to the power to legislate retrospectively, and the issue to be considered in these cases is whether any such limitation ought to be applied in relation to Section 42(3) of the KVAT Act. While the prospective operation of Section 42(3) satisfies the test of constitutionality, the question arises as to whether the retrospective operation of the newly introduced provision would cause the assessees substantial prejudice or deprive the assessees of any vested right that accrued to them prior to the introduction of the new provision. It is trite that if a retrospective operation of a statutory provision has the effect of depriving an assessee of an accrued right, in a manner that will substantially prejudice him, then such retrospective operation of the amended provisions would not be legally justified. These writ petitions are disposed by upholding the retrospective operation of Section 42(3) of the KVAT Act, but declaring that the power to re-open assessments under the said provision cannot be exercised in relation to such assessments where the period for which the assessee concerned is obliged to retain the Books of account under Rule 58(20) of the KVAT Rules has expired - The retrospective operation of Section 42(3) of the KVAT Act will thus stand controlled by the period of limitation aforementioned, and the legality of the notices/orders impugned in these writ petitions shall stand determined by the said declaration. Petition disposed off.

Summary

Issues Involved:
1. Validity of the pre-assessment notices/assessment orders issued under Section 42(3) of the Kerala Value Added Tax Act (KVAT Act).
2. Retrospective operation of Section 42(3) of the KVAT Act.
3. Constitutionality of Section 42(3) in light of Article 14 of the Constitution of India.

Issue-Wise Detailed Analysis:

1. Validity of the Pre-Assessment Notices/Assessment Orders Issued Under Section 42(3) of the KVAT Act:
The petitioners challenged the pre-assessment notices and assessment orders issued to them under Section 42(3) of the KVAT Act, arguing that the period for reopening assessments under Section 25 had already expired. They contended that the Revenue could not invoke Section 42(3) to reopen assessments that had become final under the KVAT Act. The court noted that the assessment procedure under the KVAT Act begins with the filing of a return by the assessee, and if the return meets the requirements, the assessment is deemed completed under Section 21. Assessments can be reopened under Section 25 within a stipulated period, which was five years until 31.03.2017 and extended to six years thereafter. Section 42(3), inserted retrospectively from 01.04.2005, allowed reopening of assessments for certain dealers without the limitation period under Section 25.

2. Retrospective Operation of Section 42(3) of the KVAT Act:
The court acknowledged the legislative power to amend laws retrospectively but emphasized that such power has limitations. The retrospective operation of Section 42(3) would cause substantial prejudice to assessees if it entailed reopening assessments completed years ago, especially when assessees might not have the relevant Books of account to defend against allegations of escaped turnover. The court highlighted that under Rule 58(20) of the KVAT Rules, assessees are required to keep their Books of account only for five years. Therefore, the retrospective operation of Section 42(3) should be limited to this period to avoid substantial prejudice.

3. Constitutionality of Section 42(3) in Light of Article 14 of the Constitution of India:
The petitioners argued that Section 42(3) violated Article 14 by treating registered dealers with high turnover similarly to unregistered dealers and tax evaders. The court, however, found that the classification of assessees based on turnover for differential treatment in reopening assessments was guided by an intelligible differentia with a rational nexus to the objective of taxing escaped turnover. The court held that the classification was constitutionally valid as it did not treat unequals as equals.

Conclusion:
The court upheld the retrospective operation of Section 42(3) of the KVAT Act but declared that the power to reopen assessments under this provision could not be exercised for periods beyond the timeframe within which assessees are required to retain their Books of account under Rule 58(20) of the KVAT Rules. The legality of the impugned notices/orders would be determined by this limitation.