2016 (2) TMI 282 - HC - VAT and Sales Tax

Doctrine of promissory estoppel - Continuity of exemption after migration from sales tax regime to VAT regime - tax holiday of ten years - KST to KVAT - exemption from CST - Information Technology Policy of the State Government - It is true that in the notification dated 21.8.1997 issued under the KST Act, there was a specific condition that if the Unit (exercising the option for tax exemption) collects any tax, it shall become ineligible for tax exemption. But the same was applicable only up to 1.4.2005. If such condition was to continue after 1.4.2005, then the procedure for grant of exemption, which was provided in the notification dated 18.4.2005 under the KVAT Act, which was that the output tax is to be collected and input tax is to be deducted, and net tax has to be paid, then only the net tax paid would be refunded, would clearly mean that after 1.4.2005, the condition of ineligibility of the unit if it collects tax, had been done away with. The notification providing for such ineligibility was under the KST Act, which was followed in the case of CST Act up to 31.3.2005. When the subsequent notification dated 18.4.2005 (effective from 1.4.2005) issued under the KVAT Act itself provides for collection of tax, and such benefit of exemption is granted for Karnataka Value Added Tax even when the assessee collects tax, then the same cannot be denied to the same assessee under the CST Act, as admittedly, the procedure provided under the general sales tax law of the State (which presently would be KVAT Act), would be applicable for the purpose of Central Sales Tax, but the substantive provisions of the CST Act were to be followed. The present is a case where the benefit has been for encouraging new industries. It is settled law that a beneficial legislation or notification, has to be liberally interpreted. - The law is thus clear that once an assessee is found entitled to grant of exemption, the procedure for the same is to be construed liberally in favour of, and for the benefit of the assessee. In the present case, the petitioner is admittedly eligible for grant of exemption. As such, the petitioner cannot be denied the benefit on technical grounds. - Decided in favor of assessee.

Summary

Issues Involved:
1. Eligibility for tax exemption under the CST Act post-1.4.2005.
2. Applicability of the condition of ineligibility if tax is collected by the assessee.
3. Interpretation of notifications dated 21.8.1997 and 18.4.2005.
4. Procedure for grant of tax exemption and refund mechanism.

Issue-wise Detailed Analysis:

1. Eligibility for tax exemption under the CST Act post-1.4.2005:
The petitioner, a company engaged in the manufacture and sale of 'Hybrid Micro Circuits', was initially granted tax exemption under the KST Act and CST Act through notifications dated 21.8.1997. With the introduction of the KVAT Act on 1.4.2005, new notifications dated 18.4.2005 were issued to continue the tax exemption. The petitioner followed the procedure under the KVAT Act for both KVAT and CST, collecting and depositing tax, and then claiming a refund of the net tax. The authorities initially allowed this refund but later denied it for the period post-1.4.2007 under the CST Act, citing the earlier condition of ineligibility upon tax collection.

2. Applicability of the condition of ineligibility if tax is collected by the assessee:
The core issue was whether the condition under the 1997 notification, which rendered a unit ineligible for tax exemption if it collected tax, continued to apply after the introduction of the KVAT Act. The court noted that the procedure for tax exemption had changed significantly with the 2005 notifications. The new procedure required the collection of output tax, deduction of input tax, and payment of net tax, which would then be refunded. This change implied that the condition of ineligibility due to tax collection was no longer applicable post-1.4.2005.

3. Interpretation of notifications dated 21.8.1997 and 18.4.2005:
The court examined the relevant notifications:
- The 1997 notifications under the KST and CST Acts included a condition that collecting tax would render a unit ineligible for exemption.
- The 2005 notifications under the KVAT and CST Acts introduced a new procedure requiring tax collection and subsequent refund of the net tax.
The court concluded that the 2005 notifications superseded the earlier ones, and the condition of ineligibility due to tax collection was no longer applicable.

4. Procedure for grant of tax exemption and refund mechanism:
The court emphasized that the procedure for tax exemption had evolved to include tax collection and refund mechanisms. The petitioner followed this new procedure in good faith, and the authorities initially accepted and processed refunds accordingly. Denying refunds post-1.4.2007 based on the old condition was unjustified, as the new notifications did not include such a condition. The court highlighted that beneficial legislation should be interpreted liberally in favor of the assessee once eligibility is established.

Conclusion:
The court found that the petitioner was entitled to the tax exemption and refund mechanism as per the 2005 notifications. The denial of refunds based on the old condition of ineligibility was not justified. The petitions were allowed, and the Assessing Officer was directed to give effect to the order within three months. The judgment underscored the importance of liberal interpretation of beneficial legislation once eligibility is established.