THERE IS NO PROVISION FOR COMPOUNDING OF PART OF THE TURNOVER AND PAYMENT OF TAX FOR THE BALANCE TURNOVER

[Mr. M. GOVINDARAJAN]

Sec. 5(1) of the KGST Act is the charging Section. Section 7 deals with the payment of tax at compounded rate. Section 7(1) (a) provides that notwithstanding anything contained in sub section (1) of Section 5 any dealer in gold or silver ornaments or wares may, at his option, instead of paying tax in accordance with the provisions of that sub section, pay tax at two hundred per cent of the tax payable by him as conceded in the return or accounts for the tax paid for the immediate preceding year whichever is higher. The terms 'tax payable as conceded in the return or account for the immediate preceding year' means tax payable on the sales turnover under section 5(1) and the tax payable on the purchase turnover under section 5A. Where during the preceding year, the dealer had not transacted business for any period the tax payable for the whole year shall be calculated proportionately on the basis of the tax payable for the period during which such dealer had transacted business. Where such a dealer acquires any running business or a branch of a business with respects to gold, silver or ornaments or wares during the year, the amount of compounding tax payable in respect of such business shall be calculated in accordance with the provisions of this clause as if ti were an independent business, taking into account the turnover conceded in the return or accounts thereof for the previous year with respect to that business or on the quantum of compounded tax fixed for the previous year in accordance with clause (a). Where a dealer paying tax in accordance with the provisions of this sub section opens a new branch during a year, such branch shall be treated as if it were an independent place of business and the provisions of this sub section shall apply to it accordingly.

The question taken for discussion in this article is whether there is provision for compounding of part of the turnover and payment of tax for the balance turnover with decided case law.

In 'Joy Alukhas Traders (India) (P) Ltd., V. State of Kerala' - (2010) 2 GST 300 (Ker) the assessee is engaged in the business of gold jewellery. It has its head office at Ernakulam and three branches in Kerala at Kottayam, Angamaly and Todupuzha. The assessee holds single registration under the KGST Act with branch certificate for each of the three branches. During the year 2003 -04 the assessee made an application before the Assessing Officer in Form 21 for the payment of tax at compounded rate as provided under Section 7(1)(a) of the KGST Act for two branches located at Kottayam and Angamaly. The scheme of payment of tax under compounding rate under section 7(1)(a) is in lieu of tax payable under section 5(1) by the dealer for his total turnover which would include turnover of head office and all branches in the State.

The Assessing Officer without noticing the statutory scheme, ordered the assessee to pay tax under the compounding scheme only for two branches applied for by them. The assessee started remitting tax. Since the compounding scheme for payment of tax was granted only for two branches, the assessee started filing regular returns and remitting tax thereon for the business carried on in the head office and another branch. At the end of the year, the assessment was completed by the Assessing Officer under Section 17(3) of the KGST Act wherein tax is computed under the compounding scheme for two branches and tax is assed under section 5(1) for the head office and another branch based on the turnover determined by him, which is in partial modification of turnover returned by the assessee.

Dy. Commissioner on scrutiny of the assessment found that it is no in accordance with the charging provisions of sections 5(1) and 7(1)(a) of the Act inasmuch as, there is no provision for compounding of part of the turnover and payment of tax for the balance turnover. He, therefore, initiated proceedings under section 35 and order for revision of assessment by directing assessment under section 7(1)(a) in terms of the request made by the assessee and accepted by the officer, but by including the business of all branches of the assessee in terms of section 7(1)(a) of the KGST Act.

Against this order the assessee filed an appeal contending that the order is time barred and that the regular assessment is permissible under the provisions of the Act and Rules. The contention of the assessee was that the mistake, if any, is in the permission granted by the officer on application filed by the assessee for compounding under Rule 30 of the KGST Rules and so much so, the revision, if any, under Section 35 should have been on the approval granted by the officer for compounding, ie. With reference to the compounding order and demand for payment at compounded rate, with reference to which the matter was time barred.

The Tribunal held that the order revised by the Deputy Commissioner was a regular assessment which was completed under Section 17(3) which led to reduced payment of tax on account of misapplication of the compounding scheme by the Assessing Officer and the order directing revision of assessment under Sec. 35 was issued by the Deputy Commissioner within the time frame prescribed therein. Therefore the Tribunal rejected the contention of the assessee on ground of limitation. The Tribunal further upheld the decision of the Dy. Commissioner. Aggrieved against the order the Assessee filed the appeal before the High Court.

The petitioner submitted the following contentions before the High Court:

* The partial compounding applied for by the assessee and approved by the Assessing Officer is permissible under the provisions of Section 7(1)(a) of the Act;

* The mistake, if any, is in the approval granted by the Assessing Officer in Form 21A permitting the payment of tax at compounded rate only for two branches and simultaneously, permitting the assessee to pay tax under section 5(1) for the head office and another branch and so much so, the order prejudicial to the interest of the revenue requiring correction through revision under Sec. 35 in form No. 21A;

* Since the Deputy Commissioner has not revised the said order he has no jurisdiction to revise the regular assessment made in consonance with the compounding scheme approved by the Assessing Officer;

* The compounding scheme is a contract between the Department and the assessee and the same, when incorporated in assessment, cannot be revised by the Deputy Commissioner in exercise of suo motu revision power under Section 35 of KGST Act. For this the petitioner relied on a Division Bench decision of Kerala High Court in 'V.S. Jyothish Kumar V. State of Kerala' - (1994) 95 STC 527 and that of the Supreme Court in 'State of Kerala V. Builders Association of India' (1997) 104 STC 134.

The Department contended that Form No.21A is only an approval granted on application filed under Rule 30 and in such case, the dealer is permitted to file return under Rule 30(5) in Form No. 9 on which the assessment has to be made by the Assessing Officer under Sec. 17(1) or 17(3) of the Act. Even if there is a mistake or omission in the approval granted by the Assessing Officer, it is within his powers to modify such order and demand the tax escaped under the compounding scheme in regular assessment or later by revising assessment under section 19(1). The power of the Deputy Commissioner under Sec.35 can be exercised in respect of any order passed by the Assessing Officer which is prejudicial to the interest of the revenue.

After hearing both the parties the High Court held that the compounding is an alternate method of payment of tax under section 7(1)(a), is for the business as a whole irrespective of the number of branches maintained by the assessee. In fact section 7(1)(a) provides for payment of tax at compounded rate only in respect of one line of business i.e., any gold or silver ornaments or wares and if assessee is engaged in any other line of business, the compounding rate under section 7(1)(a) will apply for only business in gold and silver ornaments and wares. In other words, in the same line of business the assessee cannot opt to pay tax under compounding scheme for some branches and pay tax on the turnover for the other branches under section 5(1) of the KGST Act. Under the second and third provisos to section 7(1) compounding is to be done by including the turnover of the branches maintained where business carried on is in gold and silver ornaments and wares. Therefore the Court held that the Assessing Officer clearly committed violation of statutory provisions by allowing payment of tax at compounded rate under section 7(1)(a) in respect of gold business in two branches and by permitting payment of tax under section 5(1) on the turnover of gold and silver ornaments in the head office and another branch. The Deputy Commissioner, therefore, rightly found that the assessment completed is against the scheme of charging under Section 7(1)(1) OF THE Act. Since the regular assessment had led to loss of revenue, the Deputy Commissioner rightly directed revision of assessment. The High Court therefore held that the Tribunal rightly confirmed the order of revision on merit.

The Court further held that the Deputy Commissioner is competent to revise an assessment prejudicial to the interest of the revenue, no matter, such assessment is completed based on an erroneous compounding order passed by the Officer in Form No. 21A which was not cancelled or revised by the Deputy Commissioner. There is no dispute that the order issued by the Deputy Commissioner under Section 35 is within the time for revision of regular assessment passed by the Adjudicating Officer under Section 17(3). The Tribunal rightly rejected the assessee's challenge against the order of Dy. Commissioner on the ground of limitation. The Court analyzed the judgments relied on by the petitioner. In that cases it was held that if there is any violation of the provisions of the Act in regard to the filing of the application compounding by the Assessee and acceptance of the same by the officer, leading to loss of revenue, the Deputy Commissioner under section 35 has full power to interfere with the orders issued by the Assessing Officer and according to the High Court the compounding scheme for payment of tax opted by the assessee and accepted by the Officer does not achieve finality, because it is subject to supervisory jurisdiction by the Deputy Commissioner. The Court further held that there is no contact between assessee and the Assessing Officer is conceived under the Act and no order of the officer prejudicial to the revenue is immune from scrutiny by the Deputy Commissioner under Sec. 35 of the Act. The Court further noticed that the assessee will have liability to pay interest partly because of the mistake committed by the officer in approving the compounding applied for by the assessee in violation of the charging provision and directed the Assessing Officer to limit levy of interest under Section 23(3A) or Section 23(3) at compensatory rate of 12% per annum, for the entire period of delay.