2015 (1) TMI 453 - HC - VAT and Sales Tax

Reopening of assessment on assessments being completed on compounded basis - Whether assessments completed in respect of an assessee on compounded basis can be re-opened subsequently, pursuant to a revision of the assessment for an earlier year, the tax paid in which year was taken as the basis for determination of the amount payable by the assessee in the compounding proceedings Held that - Any change in the assessment orders for the previous years could not have affected the tax paid on compounding basis for the year 2006-07 because the reference to the earlier years was only to determine the turnover tax payable as conceded in the return or accounts or the turnover tax actually paid - This data would have been available by the end of the following AY for the purposes of finalising the amount of tax liable to be paid by the assessee for that year on compounding basis - the legislature appears to have deliberately omitted a reference to the assessed tax of the previous years in the formula prescribed for compounding, probably on realising that an assessed tax could be modified in subsequent proceedings by way of appeal or revision, thus depriving the figure of a certainty and finality that is warranted for compounding purposes. Similar matter has been decided in State of Kerala Versus Malabar Ornaments (P.) Ltd. 2011 (1) TMI 1281 - KERALA HIGH COURT the option of payment of tax at compounded rates is an alternative to the regular method of payment of tax after an elaborate procedure of assessment - Section 7 begins with a non-obstante clause that clearly indicates that the scheme of payment of tax envisaged thereunder is an alternative to the regular method of assessment and payment of tax - thus, when an assessee opts to pay tax at compounded rates and such an option exercised by the assessee is accepted by the department, then it will not be open to the department, at a later point in time, to re-open those proceedings save to the limited extent of rectifying any apparent computational mistakes that have been occasioned during the compounding proceedings - the option of composition of tax is like a bilateral agreement between the parties with an object to dispense with the rigours of regular assessment - the dealer is given a choice to opt for compounded payment of tax and once the option is exercised and the same is accepted by the authority concerned, it is no longer open to the dealer to request for a regular assessment as envisaged u/s 5 and 5A of the KGST Act thus, the re-opening of concluded compounding proceedings, based on the revised assessments for the AY 2005-06, cannot be legally sustained thus, the order is set aside. Re-opening of the concluded proceedings was sought on a different ground that while computing the figure representing 140% of the purchase turnover for the year 2006-07, the petitioner had not included the opening stock of that year in the purchase turnover for the year - even if it is accepted that the department had the power to rectify mistakes that were noticed in the computation of tax in the compounding proceedings, the power is one that has to be exercised strictly in accordance with the statutory provision - Section 43 of the KGST Act revealed that the power has to be exercised by the authority passing the original order, within three years from the date of the original order - order permitting the petitioner to pay tax on compounding basis for the year 2006-07 is dated 28.11.2006 and order passed in rectification is dated 29.07.2010, well beyond the three year period prescribed in the statute - as the statutory period of limitation limits the jurisdiction and powers of the authority to exercise his power of rectification, the notice and order cannot sustained Decided in favour of petitioner.

Issues Involved:
1. Whether assessments completed on a compounded basis can be re-opened due to a revision of assessment for an earlier year.
2. The legality of re-opening compounding proceedings based on revised assessments.
3. The requirement of adding the opening stock to the purchase turnover for compounding purposes.
4. The applicability of statutory limitation for rectification of compounding orders.

Detailed Analysis:

Issue 1: Whether assessments completed on a compounded basis can be re-opened due to a revision of assessment for an earlier year.

The court examined whether the assessments completed on a compounded basis could be re-opened due to a revision of assessment for an earlier year. The petitioners, bar-attached hotels, opted for the compounding facility under Section 7 of the Kerala General Sales Tax Act (KGST Act) for the assessment years commencing from 2006-07. The department issued notices proposing to revise the assessments for the years 2006-07 and thereafter, on the ground that the figure taken as tax paid for the year 2005-06 was wrong. The court found that the scheme for compounding under Section 7 of the KGST Act required the assessee to choose the higher of two figures for determining the tax liability. The reference to the earlier years was only to determine the turnover tax payable as conceded in the return or accounts or the turnover tax actually paid. The court concluded that any change in the assessment orders for the previous years could not affect the tax paid on a compounding basis for the year 2006-07, as the assessed tax was not relevant for the compounding formula.

Issue 2: The legality of re-opening compounding proceedings based on revised assessments.

The court held that the re-opening of concluded compounding proceedings based on revised assessments for the assessment year 2005-06 could not be legally sustained. The court referred to the Division Bench decision in State of Kerala v. Malabar Ornaments, which held that the scheme of compounding did not contemplate the assessment of tax at compounded rates based on tax assessed or demanded for any of the three preceding years. The court emphasized that the option of payment of tax at compounded rates is an alternative to the regular method of payment of tax after an elaborate procedure of assessment. Once the option for compounding is exercised and accepted, the department cannot re-open those proceedings, except to rectify apparent computational mistakes.

Issue 3: The requirement of adding the opening stock to the purchase turnover for compounding purposes.

For the petitioner in W.P.(C).No.36210/2010, the re-opening of the concluded proceedings was sought on the ground that the opening stock of the year was not added to the purchase turnover while computing 140% of the purchase turnover for the year 2006-07. The court referred to the decision in Sannidhan Bar and Restaurant, which held that the requirement of adding the value of opening stock of liquor while computing the purchase turnover of the first year of compounding had to be read into the provisions of Section 7 as it then stood. However, the court noted that the power to rectify mistakes must be exercised within the statutory period of limitation.

Issue 4: The applicability of statutory limitation for rectification of compounding orders.

The court highlighted that the power to rectify mistakes under Section 43 of the KGST Act must be exercised within three years from the date of the original order. In the case of W.P.(C).No.36210/2010, the original compounding order was dated 28.11.2006, and the rectification order was dated 29.07.2010, which was beyond the three-year period. Therefore, the rectification order and the consequent demand notices were quashed.

Conclusion:

The court allowed all the writ petitions, quashing the revised orders, appellate orders, and demand notices related to the re-opening of compounding proceedings based on revised assessments. The court emphasized the finality of compounding orders and the statutory limitation for rectification, thereby providing relief to the petitioners.

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