2016 (7) TMI 218 - HC - VAT and Sales Tax

Validity of re-assessment - Cancellation of registration certificate - Demand of VAT @12.5% rejecting the benefit of composition scheme - rate of tax on paving bricks/blocks - 4% or 12.5% - distinction between bricks and paving bricks/ blocks - whether the nature of activity is works contract or not - Section 15 r/w Rule 137 of Rule 15 of the Karnataka Value Added Tax Act, 2003 (KVAT) - Held that - although the KVAT Act or Rules do not prescribe any provision for hearing a dealer prior to cancellation of the certificate issued by the authorities for payment of tax by way of composition under Section 15 of the Act, we are of the view that the principles of natural justice have to be read as part and parcel of Rule 145 of the Rules which deals with cancellation of certificate. If the facts of the present case are further examined, it is not the case of the appellant - revenue that at any point of time, notice was issued under Rule 145 of the Rules, by the concerned officer for cancellation of certificate nor it is even the case of the appellant-revenue that the certificate has been cancelled and notice was given in Form VAT-11. Under these circumstances, if the certificate is not cancelled and order of reassessment has been made, in our view, the same would run counter to the scheme of composition of tax as provided and conceived under Section 15 read with and the relevant Rules referred to above. - Benefit of composition allowed.

Summary

Issues Involved:
1. Validity of reassessment without cancellation of the tax composition certificate.
2. Applicable tax rate on paving bricks/blocks under the Karnataka Value Added Tax Act, 2003 (KVAT Act).

Detailed Analysis:

1. Validity of Reassessment Without Cancellation of the Tax Composition Certificate:

The primary issue revolves around whether the reassessment could be made without first canceling the certificate of composition of tax issued under Section 15 of the KVAT Act. The respondent had applied for and was granted a composition of tax certificate in 2006, which allowed them to pay tax at a reduced rate. However, in 2010, the tax authorities issued a show-cause notice for reassessment without canceling this certificate.

The court emphasized that the cancellation of the certificate is a prerequisite for reassessment. The relevant statutory provisions and rules were examined, particularly Section 15 of the KVAT Act and Rules 135, 136, 137, and 145 of the KVAT Rules. Section 15 allows certain dealers to opt for a composition scheme, paying a fixed percentage of their turnover instead of the standard tax rates. Rule 145 specifies the procedure for canceling such certificates, which includes issuing a notice and providing an opportunity for the dealer to be heard.

The court highlighted that any cancellation of the certificate must adhere to principles of natural justice, as established in various Supreme Court rulings, including State of Orissa v. Dr. Ms. Binapani DEI and Mohinder Singh Gill v. Chief Election Commissioner. The principles of natural justice require that the affected party be given adequate notice and an opportunity to present their case.

In this case, the tax authorities did not issue any notice for cancellation of the certificate, nor did they provide any opportunity for the respondent to be heard. Consequently, the reassessment was deemed invalid. The court concluded that the reassessment could only be valid if preceded by the proper cancellation of the composition certificate.

2. Applicable Tax Rate on Paving Bricks/Blocks:

The second issue concerns the applicable tax rate for paving bricks/blocks. Initially, the learned Single Judge had ruled that the tax rate should be 4%, as paving bricks/blocks were included in Entry-2 of Schedule-III of the KVAT Act. However, this decision was challenged by the appellant - State, which argued that the correct tax rate should be 12.5%.

The court referred to its previous decision in W.A.No. 5798/2011, where it was held that paving bricks/blocks are not included in Entry-2 of Schedule-III, and therefore, the applicable tax rate is 12.5%. This ruling was upheld, indicating that the learned Single Judge's decision to apply a 4% tax rate was incorrect.

Conclusion:

The court ultimately ruled that the reassessment order was invalid due to the failure to cancel the composition certificate following the principles of natural justice. However, it acknowledged that the correct tax rate for paving bricks/blocks is 12.5%, not 4%. The following directions were issued:

1. The dealer is entitled to continue with the benefit under Section 15 of the Act on composition of tax as the certificate has not been canceled.
2. Any reassessment can only be made after the certificate is canceled following the proper procedure under Rule 145, which includes issuing a notice and providing an opportunity for the dealer to be heard.
3. The appellate authority may initiate proceedings for cancellation of the certificate if a case is made out, and the rights and contentions of both sides shall remain open as per the law.

The appeals were disposed of with these modifications, and no order as to costs was made.