2022 (7) TMI 417 - HC - VAT and Sales Tax

Violation of conditions of the composition scheme prescribed under the KVAT Act and Rules or not - purchasing goods from outside the State of Karnataka for use in the course of its business - whether prohibition on purchase of goods from outside the State by composition dealer under the KVAT Act does not apply to capital goods? - HELD THAT - Undisputed facts of the case are, respondent owns a Fast Food Restaturant. He has purchased Refrigerators, Freezers etc., from outside the State as capital equipment to run the restaurant. Its main business is not dealing in the said goods. In the case of SRI. ANANTHA PADMANABHA BHAT VERSUS COMMISSIONER OF COMMERCIAL TAXES IN KARNATAKA, BENGALURU AND COMMERCIAL TAX OFFICER (AUDIT) , BENGALURU 2016 (7) TMI 546 - KARNATAKA HIGH COURT , rightly relied upon by the KAT, this Court has held that the vitrified tiles used in the restaurant owned by the assessee therein, were not sold by him in the regular course of business but they were used for the flooring of the restaurant - It was held in the case that When so fixed in the floor, the Vitrified Tiles ofcourse became the part of the immovable property, and it is beyond the common sense and basic commercial prudence to even comprehend that the Vitrified Tiles fixed on the floor of the restaurant could be treated by an assessing authority as the 'goods in stock' dealt with by the assessee or sold in the course of regular course of business. The assessing authorities trained and well acquainted with the commercial terms, cannot be allowed to take such perverse views. In the instant case, admittedly, respondent is in the Restaurant business. The goods purchased by him are in the nature of capital goods for the Restaurant. Hence, they cannot be considered as 'goods held in stock'. The view taken by this Court in Anantha Padmanabha Bhat s case is fully applicable to the facts of present case. The questions framed by the Revenue are answered in favour of the assessee - this revision petition fails and it is accordingly dismissed.

Summary

Issues:
1. Whether the Karnataka Appellate Tribunal erred in holding that the respondent did not violate the conditions of the composition scheme under the KVAT Act despite purchasing goods from outside Karnataka?
2. Whether the Karnataka Appellate Tribunal erred in ruling that the prohibition on purchasing goods from outside the state by a composition dealer under the KVAT Act does not apply to capital goods?

Analysis:

Issue 1:
The case involved a respondent, a proprietary firm running a Fast Food Restaurant, which had opted for the composition scheme under the KVAT Act. The jurisdictional Commercial Tax Officer alleged violations of the scheme's restrictions, disqualifying the respondent. The First Appellate Authority modified the reassessment order partially. The Karnataka Appellate Tribunal (KAT) allowed the appeal and set aside the reassessment order, prompting the Revenue to file an appeal. The Revenue contended that the respondent purchased goods from outside the state, rendering them ineligible for the composition scheme under Rule 135 of the KVAT Rules. The Revenue argued that the KAT's decision was based on an incorrect assumption that the goods were not 'goods held in stock', thus making the composition benefit unavailable to the respondent.

Issue 2:
The respondent, engaged in the Restaurant business, had purchased capital goods like Refrigerators and Freezers from outside the state for the restaurant's operation. The court referred to a previous case where it was established that goods used for specific purposes in a business, like flooring, became part of the immovable property and were not considered 'goods held in stock'. Applying this precedent, the court concluded that the goods purchased by the respondent for the restaurant's operation were capital goods and not 'goods held in stock'. Consequently, the court ruled in favor of the respondent, dismissing the revision petition by the Revenue.

In conclusion, the High Court of Karnataka upheld the Karnataka Appellate Tribunal's decision, ruling in favor of the respondent based on the nature of the goods purchased and their utilization in the business as capital equipment. The judgment emphasized the distinction between capital goods and goods held in stock under the composition scheme of the KVAT Act, providing clarity on the eligibility criteria for composition benefits in such cases.