2021 (1) TMI 247 - HC - VAT and Sales Tax

Karnataka VAT - Effect of Conversion of partnership firm into joint stock company - Carry forward deduction of unabsorbed contractor payments - the adjudicating authority as well as the first appellate authority allowed the claim but tribunal did not Whether the petitioner had substantiated with documentary evidence its claim for deduction of excess unabsorbed sub contractor payments? - HELD THAT - It is evident that the petitioner had filed a copy of the agreement entered into with M/S B.E. Billimoria Ltd. for carrying on civil work of construction of apartments for and on behalf of the petitioner and had also filed copies of the purchase orders awarded to other registered sub contractors for carrying on the structure work, sanitary work etc. It has further been found by the first appellate authority that the petitioner had also filed certificates / declarations issued by sub contractors certifying that they have received consideration for executing the work contract and their details were also mentioned by the first appellate authority in para 8 of its order. On the basis of the aforesaid material, the adjudicating authority as well as the first appellate authority held that the petitioner had complied with the requirements of Section 15(5)(b) of the Act and therefore, it is entitled to benefit of the amounts paid to registered sub contractors to the extent of certificates / declarations filed - it is held that the finding recorded by the tribunal that the petitioner had not substantiated its claim for deduction of excess unabsorbed sub contractor payments before the adjudicating as well as first appellate authority is perverse and the aforesaid finding is therefore, set aside. Whether petitioner, which is a joint stock holding company can be permitted to carry forward unabsorbed sub contractor payments accumulated during its status as a partnership firm? - HELD THAT - In the instant case, the erstwhile partnership firm has been converted to joint stock holding company by operation of law under Part-IX of the 1956 Act as ongoing concern and continues the business of the partnership firm, which is now being carried on by the company with all its assets movable and immovable, debts and liabilities in connection therewith. Therefore, there is no need of any explicit provision of law to state that all assets and liabilities of the erstwhile firm shall vest with the company. It is also pertinent to mention here that as per requirements contained in Section 28(2)(b) of the Act, the petitioner on transfer of business has already obtained a new registration under the Act. The tribunal erred in invoking Section 46(2-A) of the Act, which deals with adjustment of excess input tax, which is not the subject matter of the appeal. It ought to have been appreciated that in the instant case, there was no change in the ownership of the business and there was only change in the status of the business i.e., from partnership firm to joint stock company - the tribunal erred in law in holding that the petitioner which is a joint stock company cannot be permitted to carry forward unabsorbed sub contractor payment accumulated during its status as a partnership firm. The impugned order dated 18.12.2015 passed by the Karnataka Appellate Tribunal is quashed and it is held that the petitioner is entitled to the benefit of carrying forward of the payments made to sub contractors and is not liable to make payment of tax under Section 39(1) of the Act - Petition allowed.

Summary

Issues Involved:
1. Whether the petitioner had substantiated with documentary evidence its claim for deduction of excess unabsorbed sub-contractor payments.
2. Whether the petitioner, which is a joint stock holding company, can be permitted to carry forward unabsorbed sub-contractor payments accumulated during its status as a partnership firm.

Detailed Analysis:

1. Substantiation of Deduction Claim:

The petitioner, a company engaged in the development and sale of residential apartments, claimed a deduction of ?3,96,82,936 as 'sub-contractors turnover' in its revised VAT return for the period from June 24, 2008, to June 30, 2008. The Deputy Commissioner of Commercial Taxes issued notices demanding tax along with penalties and interest for the periods June 2008 to March 2009 and 2009-10, rejecting the petitioner's claim to carry forward unabsorbed sub-contractor payments due to a change in status from a partnership firm to a joint stock company. The Joint Commissioner partially allowed the appeal, but the Additional Commissioner of Commercial Taxes maintained the first appellate authority's order upon revision.

The tribunal dismissed the appeal, stating that the petitioner did not substantiate its claim with documentary evidence. However, the High Court found that the petitioner had indeed provided sufficient evidence, including agreements with sub-contractors and certificates/declarations from them, as noted by the adjudicating authority and the first appellate authority. The tribunal's finding that the petitioner had not substantiated its claim was deemed perverse and set aside.

2. Carry Forward of Unabsorbed Sub-Contractor Payments:

The second issue was whether the petitioner, now a joint stock company, could carry forward unabsorbed sub-contractor payments from its time as a partnership firm. The High Court referred to Section 575 of the Companies Act, 1956, which states that all property of a company at the time of registration vests in the company upon incorporation. Further, Sections 27 and 28 of the Karnataka Value Added Tax Act, 2003, were examined, which deal with the cancellation of registration and the obligations of a registered dealer to inform changes after registration.

The court noted that the conversion of the partnership firm to a joint stock company was by operation of law under Part-IX of the Companies Act, 1956, and the business continued as an ongoing concern with all assets and liabilities. The court found no explicit provision required to state that all assets and liabilities of the erstwhile firm vest with the company. The tribunal erred in invoking Section 46(2-A) of the Act, which deals with the adjustment of excess input tax, not applicable to this case. The court concluded that there was no change in the ownership of the business, only a change in status from a partnership firm to a joint stock company. Therefore, the petitioner was entitled to carry forward unabsorbed sub-contractor payments.

Conclusion:

The High Court quashed the tribunal's order dated December 18, 2015, and held that the petitioner is entitled to the benefit of carrying forward payments made to sub-contractors and is not liable to pay tax under Section 39(1) of the Karnataka Value Added Tax Act, 2003. The petition was allowed accordingly.