2021 (11) TMI 892 - HC - VAT and Sales Tax

Collection of differential tax - compounded tax for dealers in ornaments or articles of gold, or other metals were retrospectively amended for the year 2011-12 - interpretation of the validation clause - HELD THAT - Under S. 8(f)(i) of the KVAT Act, the rate of compounded tax for dealers who opted to pay tax under the section for the first time was marginally higher than those who had opted to pay the tax at compounded rates from the previous year or even before that period. Section 8(f)(v) of the Act dealt with the category of dealers who had opted for compounded tax from the previous years. It may be essential to extract section 8(f)(i) and S.8(f)(v) of the KVAT Act as it stood on 31-03-2011. As per the provisions of Article 196(5) of the Constitution of India, a Bill pending before the Legislative Assembly of a State shall lapse on dissolution of the Assembly. The 12th Kerala Legislative Assembly was dissolved on 14-05-2011 and thus, the First Bill lapsed as on that date, by operation of law. The apparent confusion among the dealers is created on account of the wording in the validation clause of Act 16 of 2011. On a deeper scrutiny of sub clause (2) of the validation clause, it can be understood that the language used in the said provision was not with a view to erase the retrospectivity brought in by the amended provisions but was intended only as a measure of validating the First Bill which had by virtue of Article 196(5) of the Constitution lapsed. The First Bill was pending in the Legislative Assembly of the State when the Assembly was dissolved. As per Article 196(5) of the Constitution, a bill which is pending in the Legislative Assembly of a State, shall lapse on dissolution of the Assembly. The validation clause was included in Finance Act 16 of 2011 to overcome the legal imbroglio that arose on account of the dissolution of the Assembly on 14.05.2011 and the subsequent presentation of the Second Bill on 19.07.2011. The validation clause brings in a continuity and overcomes the vacuum created by the dissolution of the Assembly. The State was bound and entitled to recover the differential tax from the dealers and the demand notices were issued in valid exercise of power - Petition dismissed.

Issues Involved:

1. Retrospective Amendment of Compounded Tax Rates
2. Legality of Differential Tax Collection
3. Interpretation of Validation Clause in Finance Act 16 of 2011
4. Legislative Authority and Retrospective Legislation
5. Contractual Nature of Compounded Tax Scheme

Issue-wise Detailed Analysis:

1. Retrospective Amendment of Compounded Tax Rates:
The primary issue revolves around the retrospective amendment of the compounded tax rates for dealers in gold ornaments and articles for the assessment year 2011-12. The dealers challenged the collection of differential tax based on the amended rates. The court examined the legislative amendments, specifically the First Bill introduced on 24-02-2011 and the Second Bill introduced on 19-07-2011, which culminated in the Kerala Finance Act 16 of 2011.

2. Legality of Differential Tax Collection:
The dealers contended that the government was estopped from demanding higher compounded tax rates after the assessing officer had already sanctioned the tax payment under the original rates. The court noted that the compounded tax scheme, once opted and accepted, creates a contractual obligation that neither party can unilaterally alter. However, the court clarified that the assessing officer's demand for differential tax was based on the retrospective operation of the amended provisions, which is legally permissible.

3. Interpretation of Validation Clause in Finance Act 16 of 2011:
The court scrutinized the validation clause in Section 12 of Finance Act 16 of 2011, which aimed to validate actions taken under the lapsed First Bill. The validation clause ensured continuity and legality of tax collection during the period from 01-04-2011 to 19-07-2011. The court interpreted that the validation clause did not negate the retrospective effect of the amended tax rates but rather provided legal backing for actions taken under the lapsed Bill.

4. Legislative Authority and Retrospective Legislation:
The court affirmed the legislative power to enact laws with retrospective effect, citing precedents such as M/s. J. K. Jute Mills Co. Ltd. v. State of U.P. and Another and State of Karnataka and Others v. Karnataka Pawn Brokers Association and Others. The court emphasized that the dealers did not challenge the retrospective nature of the amendments, thus the differential tax collection was within the legislative authority.

5. Contractual Nature of Compounded Tax Scheme:
The court acknowledged that once an assessee opts for compounded tax and the option is accepted, it forms a contract. However, the court distinguished that the demand for differential tax was not an attempt to resile from the contract but a consequence of the retrospective amendment. The court referenced Bhima Jewellery v. Asst. Commissioner to support the notion that compounded tax rates can be subject to legislative changes.

Conclusion:
The court concluded that the State was entitled to recover the differential tax from the dealers based on the retrospective amendments. The judgment of the learned Single Judge, which quashed the demand notices, was set aside. The appeals were allowed, and the writ petitions were dismissed, affirming the validity of the differential tax collection under the amended provisions.

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