2018 (3) TMI 1369 - HC - VAT and Sales Tax

Demand of tax refunded earlier - manufacture of refined rice bran oil - obtained de-oiled rice bran as a by-product - partial rebate under Section 17 of the KVAT Act - interest - penalty. Held that - it is clear that Annexure-C notice issued under section 42 of the KVAT Act is only for the purpose of information to the assessee and has no legal force and the same cannot be enforced. The same is held to be only for the purpose of information. Parallel proceedings initiated by the Deputy Commissioner if any, is not the subject matter of the present proceedings, there is no overlapping as such and hence, the argument of the petitioner on this ground also fails. Penalty - Held that - It is trite law that penalty is not automatic, while imposing penalty, it is mandatory to provide an opportunity of hearing to the dealer but in the batch of present cases, no such penalty is levied by the prescribed authority. Interest - Held that - there is a delay caused in making the payment of legitimate taxes to the department. However, levy of interest under Section 36 shall be subject to hearing in the peculiar circumstances of the case on hand. It is true that interest would have been attracted if there is any omission on the part of the dealer if no output tax paid or short paid or higher input tax claimed. The prescribed authority ought to have examined this aspect of the matter in providing an opportunity of hearing to the petitioner. Once indemnity bond is furnished, the payment of tax refunded is mandatory and the same cannot be assailed by the petitioner. Hence, confirming the demand of tax refunded, the matters are remanded to the prescribed authority to examine the levy of interest applicable to the tax demanded. Petition allowed in part.

Issues Involved:
1. Applicability of the Karnataka Value Added Tax Act (KVAT Act) post its repeal and the implementation of the Karnataka Goods & Services Tax Act (KGST Act).
2. Legality of the refund recovery based on the Supreme Court judgment in M.K. AGRO TECH case.
3. Validity of the notices issued under Section 69(1) and Section 42 of the KVAT Act.
4. Requirement of providing the Circular of the Commissioner of Commercial Taxes (CCT) to the petitioner.
5. Authority of the CCT to issue Circular No.09/17-18 dated 9.10.2017.
6. Distinguishability of the present case from the M.K. AGRO TECH case.
7. Requirement of providing an opportunity of hearing before levying interest and penalty.

Detailed Analysis:

1. Applicability of the KVAT Act Post-Repeal:
The court examined Sections 173 and 174 of the KGST Act, which repeal the KVAT Act but save certain proceedings and actions initiated under it. The court noted that the refund order was directed to be passed by this court subject to the result of the Special Leave Petition pending before the Hon'ble Apex Court. The refund orders were passed after obtaining indemnity bonds from the petitioner. Thus, the repeal of the KVAT Act on 1.7.2017 does not affect the proceedings initiated by the authorities in view of Section 174(1)(f) and (3) of the KGST Act.

2. Legality of Refund Recovery Based on Supreme Court Judgment:
The court held that the refund was subject to the result of the Special Leave Petition pending before the Hon'ble Apex Court. The Supreme Court reversed the judgment in M.K. AGRO TECH's case, and based on this, the authorities initiated proceedings to recover the refunded amount. The court found that the petitioner must comply with the orders of this court and cannot deviate from the undertaking given by filing indemnity bonds while obtaining the refund orders.

3. Validity of Notices Issued Under Section 69(1) and Section 42 of the KVAT Act:
The court observed that Section 69(1) of the KVAT Act allows for the rectification of mistakes. The court noted that no enhancement of assessment or increasing of liability was made by the prescribed authority in rectifying the refund orders. The impugned orders were passed under Section 10(5) read with Section 69(1) of the KVAT Act. The court held that the proceedings initiated by the prescribed authority under these sections are valid.

4. Requirement of Providing the Circular of the CCT:
The court held that the respondent should have provided the circular of the CCT, which was the basis for the impugned orders, before passing the orders. It is settled law that any information/documents/circulars relied upon by the authorities must be made known to the assessees. The failure to provide the circular was a violation of the principles of natural justice.

5. Authority of the CCT to Issue Circular No.09/17-18:
The court observed that the circular issued by the CCT was based on the judgment of the Hon'ble Apex Court in the M.K. AGRO TECH case. The circular was intended to maintain uniformity in assessments and for the smooth administration of the department. However, the court noted that the levy of penalty and interest is not automatic and requires providing an opportunity of hearing to the dealer.

6. Distinguishability of the Present Case from M.K. AGRO TECH Case:
The court did not find the factual aspects of the present case distinguishable from the M.K. AGRO TECH case. The petitioner had sought a refund based on the M.K. AGRO TECH judgment and obtained an order. Thus, the petitioner is obligated to comply with the orders of this court.

7. Requirement of Providing an Opportunity of Hearing Before Levying Interest and Penalty:
The court referred to the judgment of the Hon'ble Apex Court in J.K. SYNTHETICS LTD. v. COMMERCIAL TAXES OFFICER, which emphasized that penalty provisions must be strictly construed and that interest is compensatory in nature. The court held that while the levy of interest is compensatory, the prescribed authority should have provided an opportunity of hearing to the petitioner before quantifying the interest amount.

Order:
1. Petitions are allowed in part.
2. Demand of refunded tax amount is confirmed.
3. The commissioner's circular dated 9.10.2017 is read down to the effect that the levy of penalty/interest is not automatic; while demanding refunded tax, an opportunity of hearing is mandatory to levy penalty/interest.
4. Matters are remanded to the prescribed authority to provide an opportunity of hearing regarding the levy of interest and to pass appropriate orders in accordance with the law in quantifying the interest amount.

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