2019 (11) TMI 169 - HC - VAT and Sales Tax

Interpretation of statute - Basis for payment of tax for the business carried on in the new branch - initially tax was paid on compounded basis - KVAT Act - payment of tax under Section 8(f) of the KVAT Act, in respect of the category of dealers enumerated therein, or payment of tax in terms of Section 6 of the KVAT Act? Whether or not the petitioner herein is obliged to pay tax on compounded basis, in respect of the newly opened branch, for the whole year or only for that portion of the year when it was functioning as a business entity? HELD THAT - As per the charging section under the KVAT Act (Section 6), there can be a levy of tax under the Act only when the taxable event of sale or purchase of goods occurs. In other words, there cannot be a levy of tax under the Act, either actual or notional, for the period when the assessee did not occasion a taxable event - In the instant case, although the petitioner had exercised his option to pay tax on compounded basis, in lieu of the regular method of payment of tax under the Act, the assessment and consequential collection of tax from him could only have been for the period during which he carried on a business of sale or purchase of goods, that attracted the levy of tax, in his newly opened branch. The tax liability of the branch that was opened in December 2012 had to be computed on the basis of the tax paid in relation to the principal place of business, but for the period during which the branch functioned as a business entity during the relevant assessment year. The assessment of the petitioner for the year 2012-13 would, therefore, have to be completed by adopting the figure of ₹ 23,07,180/- as the compounded tax payable for the principal place of business and adding to the said sum, an amount of ₹ 7,67,269/- (2307180/12) x4 as the compounded tax payable for the newly opened branch. Inasmuch as in Ext.P3 assessment order, the assessment has not been completed in the manner indicated above, this Writ Petition is allowed by quashing Ext.P3 and direct the 1st respondent to pass a fresh order of assessment - petition allowed by way of remand.

Summary

Issues:
Interpretation of Section 8(f) of the KVAT Act regarding payment of tax on compounded basis for a newly opened branch.

Analysis:
The petitioner, a partnership business, opted to pay tax on a compounded basis under the KVAT Act since 2005-2006. In December 2012, the petitioner opened a new branch, leading to a dispute over the basis for tax payment for the new branch. Section 8(f) required an assessee paying tax on a compounded basis at the principal place of business to do the same for all branches existing in the relevant year. The petitioner argued that since the new branch operated for only four months in the assessment year 2012-2013, the tax should apply only for that period. The assessing authority, however, determined the tax for the new branch at the same rate as the principal place of business, resulting in a demand notice for the differential tax amount.

The respondents contended that Section 8(f) mandated payment of tax on a compounded basis strictly according to the formula provided. They argued that when an assessee opts for compounded tax payment, they must adhere to the statutory provisions, paying the same tax for all branches as for the principal place of business. The court analyzed the statutory provisions and constitutional principles, emphasizing that tax can only be levied when a taxable event occurs. Therefore, the levy of tax should correspond to the period when the business entity incurs a tax liability. The court concluded that the tax liability for the new branch should be based on the tax paid for the principal place of business but only for the period the branch operated as a business entity during the assessment year.

The court ruled in favor of the petitioner, quashing the assessment order and directing a fresh assessment in line with the judgment within one month. The decision highlighted the need to calculate the tax liability for the new branch based on the period of operation during the assessment year, ensuring compliance with the statutory provisions and constitutional principles governing tax collection.

This judgment clarifies the application of Section 8(f) of the KVAT Act concerning the payment of tax on a compounded basis for newly opened branches, emphasizing the importance of aligning tax liability with the operational period of the business entity to ensure fair and lawful tax collection practices.