2019 (7) TMI 1240 - HC - VAT and Sales Tax

Compounding benefits - Section 7-D of the U.P. Trade Tax Act, 1948 - Whether in face of the entire tax liability of the assessee having been compounded and in absence of any material to establish sale of coal, the Assessing Officer could impose any tax liability on the assessee on the presumed sale of coal? HELD THAT - Under Section 7-D of the Act, the alternative method of assessment of tax liability by way of composition is subject to the direction of the State Government. As to the directions that are applicable to the present case, clearly under Clause (1) of the composition scheme dated 08.03.2001 as circulated by communication dated 12.03.2001 issued by the Commissioner of the Trade Tax, U.P., the State Government had issued directions for composition of the entire liability of tax on purchase of bricks, tiles etc., manufactured in the brick kiln and also the entire liability of tax that may have otherwise existed on the purchase of sand, coal, wood and sawdust. It appears that the Assessing Authority had compounded the entire liability of tax on the purchase of entire quantities of coal without any stipulation of limitation as to the quantities which are required for running the brick kiln of the capacity disclosed by the assessee. The order under Section 7-D of the Act and composition of tax liability thereunder is in the nature of an alternative to regular assessment - Also, once accepted, it creates a binding contract between the assessee and the revenue. Therefore, the revenue cannot claim contrary to the order under Section 7-D of the Act. What remains to be considered is whether there was any material to draw an inference of sale of coal made by the assessee outside its books of accounts during A.Y. 2002-03. In this regard, a perusal of the three orders, in this case reveal, other than the circular of the Commissioner dated 19.04.1993, there is no material, whatsoever, to infer that the assessee had engaged in an activity of trading in coal. Thus, there is no evidence that the assessee violated the terms of the composition scheme - thus there is a complete absence of any evidence or material to reach a conclusion that the assessee had engaged in trading in coal and he was liable to tax on such quantities of coal sold by him. The question of law, framed above, is answered in negative i.e. in favour of the applicants-assessee and against the revenue - revision allowed.

Summary

Issues:
1. Whether the Assessing Officer could impose tax liability on the assessee on the presumed sale of coal despite the entire tax liability being compounded.
2. Whether the circular issued by the Commissioner limiting the compounding of tax liability on coal purchased by a brick kiln is valid.
3. Whether there was sufficient evidence to establish that the assessee engaged in trading coal outside its books of accounts during the assessment year.

Analysis:
Issue 1:
The applicants-assessees challenged the imposition of tax liability on the sale of coal by the Assessing Officer despite the entire tax liability being compounded under Section 7-D of the U.P. Trade Tax Act, 1948. The State Government's directions under the compounding scheme did not limit the compounding on the purchase of coal to any specific quantity. The applicants argued that there was no evidence of the assessee engaging in coal trading, and the compounding covered all coal purchased for brick kiln operation. The court held that once tax liability on coal purchase was compounded, the Assessing Officer had no jurisdiction to impose additional tax on assumed coal sales, especially without evidence of trading activity.

Issue 2:
The Standing Counsel contended that the circular issued by the Commissioner specified limits for compounding tax on coal purchases based on the brick kiln's capacity. However, the court found that the Commissioner's circular was outside the scope of the composition scheme and lacked legal authority to limit the compounding. The court emphasized that the State Government's directions, not the Commissioner's circular, governed the compounding of tax liability. The court ruled that the circular could not be enforced against the terms of the composition scheme.

Issue 3:
The court examined whether there was substantial evidence to suggest that the assessee engaged in coal trading during the assessment year. Apart from the Commissioner's circular, no material indicated the assessee's involvement in coal trading. The court noted the absence of any exemplar or evidence to show excessive coal consumption compared to similar brick kilns. The court concluded that the authorities' findings were based on speculation rather than concrete evidence, leading to a lack of proof for imposing tax on coal sales. Consequently, the court ruled in favor of the applicants-assessees, emphasizing the absence of evidence supporting the tax liability on coal sales.

In conclusion, the court allowed both revisions, rejecting the tax liability imposed on the assessee for presumed coal sales and emphasizing the binding nature of the compounding agreement between the revenue and the assessee.