2025 (2) TMI 473 - HC - VAT / Sales Tax

Addition of sale turnover by relying on the income disclosed under the head Income from Other Sources / Other Income in the trading profit and loss account for the relevant assessment year - estimating the sales turnover for the purpose of assessment under the Kerala Value Added Tax Act - estimating the sales turnover from the income disclosed under the head Income from Other Source in the trading profit and loss account without any independent finding - estimating the sale turnover by adopting the turnover at 8% as gross profit as the benchmark without any comparable data - benefit of the sub clause (3) of Section 25AA of the KVAT Act - HELD THAT - Section 25 (1) of the Kerala Value Added Tax Act 2003 prescribes the power of the assessing authority to complete the assessment on best judgment basis if it is found that any income has escaped the assessment. It is now trite law that even when an intelligence officer initiates proceedings for penalty under Section 67 of the KVAT Act and finalises a report the said report cannot form the basis of reopening of the assessment. The above principle equally applies to the proceedings initiated under Section 25. The assessing officer is bound to conduct an independent enquiry as regards the materials available which according to him requires reopening of the assessment or completing the assessment on a best judgment basis. The assessing officer proceeded clearly on an assumption which is impermissible under the scheme of the Act. The infirmity which had crept into the assessment order was not considered in proper perspective by the first appellate authority as well as by the appellate tribunal. Conclusion - None of the authorities have considered the case in hand in its true perspective and applied the law correctly. Thus the order of assessment as confirmed by the first appellate authority and the tribunal cannot be sustained. The O.T. Revision is allowed by setting aside the order of assessment dated 17.10.2017 as confirmed by the first appellate authority as well as by the tribunal and answering the questions of law in favour of the assessee and against the Revenue.

Summary

ISSUES PRESENTED and CONSIDERED1. Whether the authorities were correct in adding sales turnover based on income disclosed under 'Income from Other Sources' in the trading profit and loss account?2. Can income disclosed under 'other sources' for Income Tax Act purposes be used to estimate sales turnover for Kerala Value Added Tax Act assessment?3. Was the assessing authority justified in estimating sales turnover solely based on income disclosed under 'Income from Other Sources' without independent findings or proof of stock variation?4. Were the authorities correct in estimating sales turnover at 8% gross profit without comparable data?5. Is the petitioner eligible for the benefit of Section 25AA of the KVAT Act, with prospective operation, and is the law as laid down by the court in Souparnika Project & Infrastructure v State of Kerala correct?ISSUE-WISE DETAILED ANALYSISThe assessing officer completed an assessment under the best judgment process, estimating sales turnover at Rs. 14,64,67,025 based on income disclosed under 'Income from Other Sources'. The petitioner argued that the assessment was based on assumptions without proper evidence, while the Revenue contended that the income shown in Income Tax returns represented income from the sale of gold ornaments. The court considered the legality of the assessment process and the evidence presented.The court referred to Section 25(1) of the Kerala Value Added Tax Act, 2003, which allows assessments on a best judgment basis if income has escaped assessment. It emphasized the need for independent inquiry and evidence to support such assessments. The court found that the assessing officer's assumptions lacked supporting evidence and were impermissible under the Act. The appellate authorities failed to address this infirmity.Citing precedents, including M/s. Girdhari Lal Nannelal v. Sales Tax Commissioner, the court held that for sales tax purposes, it is essential to show a nexus between unexplained money and taxable transactions. Without such evidence, additions by income tax authorities cannot form the basis for sales tax assessments. The court also referenced P.C. Ittymathew & Sons v. Deputy Commissioner of Sales Tax, emphasizing the need for a nexus between added income and taxable transactions.The court concluded that the authorities had not applied the law correctly and failed to establish a nexus between the added income and sales transactions. Consequently, the court allowed the revision petition, setting aside the assessment order and ruling in favor of the assessee.SIGNIFICANT HOLDINGSThe court's decision focused on the necessity of evidence and a nexus between added income and taxable transactions for sales tax assessments. It emphasized the importance of independent inquiry and proper application of the law in such cases. The court's ruling favored the assessee, highlighting the need for a factual basis for assessments under the Kerala Value Added Tax Act.