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TMI Blog2018 (1) TMI 1434X X X X Extracts X X X X X X X X Extracts X X X X ..... om S.LP.(C)19982 of 2007) and connected matters as per the order dated 23.04.2009, while setting aside the verdict dated 28.09.2007 passed by a Division Bench of this Court, for fresh consideration in accordance with law. W.A. No. 1865 of 2007 (arising from W.P.(C) No. 8711 of 2007) is treated as the lead case. Mr. Sudhi Vasudevan, the learned Sr. Counsel led the arguments on behalf of the appellants/writ petitioners, supported by other learned lawyers appearing for the other appellants/writ petitioners. The arguments on behalf of the State/Department were put forth by Mr. Govindan, the learned Spl. Government Pleader (Taxes). 2. The pleadings and proceedings are referred to as given in W.A. No. 1865 of 2007, except where it is separately dealt with, based on the context. At the very outset, it is to be noted that there is not much controversy on the facts. The issue involves pure legal questions, particularly with regard to the scope of S. 7(b) of the Act, which was introduced by the Kerala Finance Act, 2006 (Act 22 of 2006) incorporating an amendment to the existing provision on 24.10.2006, retrospectively w.e.f. 01.07.2006 [the date on which the Bill was introduced in the Legis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 01.07.2006 by filing fresh option. 5. Based on the above Circular, Ext. P1 notice was issued to the appellant/assessee, pointing out that there was some deficit in the compounded tax satisfied by the assessee and hence the differential portion was required to be satisfied; to be in conformity with the amended provisions of the Statute. This made the assessee to feel aggrieved, who approached this Court by filing W.P.(C) No. 8711 of 2007 with the following prayers: "i) to call for the records leading to Exhibit P2 circular and quash the same by issuing a writ of certiorari or any other appropriate writ, direction or order, ii) to call for the records leading to Exhibit P1 Notice and quash the same by issuing a writ of certiorari or any other appropriate writ, direction or order; iii) to declare that the petitioners are entitled to pay tax at the rate prescribed in Clause (a) of S. 7 of the KGST Act of the purchase of liquor during the assessment year 2006-07, namely 140% or 135% as the case may be. iv) To declare that amended provisions of S. 7(a) and (b) of the KGST Act have no retrospective operation in the case of those who have paid compounded tax for the assessment y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hotel and determine the turnover tax liability at the rate provided under S. 5(2) of the Act on 140% or 135% of the purchase price depending on whether the bar hotel is located in a Municipal area or in a non-Municipal area. (2) Verify the returns and details of payment of turnover tax on liquor by the bar hotel in the three years immediately preceding 2006-2007 and find out the highest turnover tax payable or paid in any of the said preceding years. (3) Compare the amount of tax determined under Clause (1) with 115% of the turnover tax payable or paid as found in clause (2) and adopt the higher amount as the turnover tax liability for payment for the year 2006-2007." 8. It was in the said circumstance that the learned Single Judge held that the clarification issued by the Commissioner, as per Ext. P2 Circular was not necessary to determine the tax liability (as interpreted by the Court) and hence it was not necessary to consider the challenge against the said clarification. It was also made clear that the tax payable under clause (b) of S. 7, after the amendment, should not be reckoned with reference to the assessed Turnover tax contested in appeal or any other proceedings an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Anr. (2009(2) KLT 1101 (SC) : S.LP.(C) No. 1471 of 2008) for re-consideration, as per order dated 23.04.2009. It was accordingly, that the common judgment passed by the Division Bench on 28.09.2007 was set aside, framing the two questions to be dealt with by this Court, as mentioned in the opening paragraph of this judgment. 11. The main contention raised on behalf of the appellants/petitioners is that the assessees had opted for compounding, based on the provision as it was existing on the first day of the commencement of the assessment year, i.e., on 01.04.2006, which was accepted by the Department. As it stands so, the subsequent amendment brought about w.e.f. 01.07.2006 cannot in any manner be applied to the case of the assessees for the year 2006-07. It is further contended that Clause (b) of S. 7 operates in a different sphere, than the field governed by Clause (a) of S. 7 and as such, there cannot be any instance to compare the tax to be worked out under S. 7(a) and the quantum payable under S. 7(b). It is pointed out that, to work out the figures under Clause (b) of S. 7, accounts have to be maintained, which is totally alien to the concept of 'compounding' as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Such a provision cannot be changed by the Finance Act, it being a substantial provision. According to the assessees, only the rate of tax alone can be changed by the Finance Act. According to the learned counsel, two fictions have been brought about by way of S. 7(a) and 7(b) and the latter has been introduced as per the Finance Act, 2006, which is not permissible. The fiction created by the statute/KGST Act under S. 7(a) is definite and workable which can immediately/easily be understood by the assessees; whereas the fiction now created as per the amendment by way of S. 7(b) is not clearly understandable and is quite obscure. When fiction is created, only one fiction can be there, which cannot be enlarged by another fiction. Support is sought to be drawn from the observations of the Apex Court in Commissioner of Income tax (Central), Calcutta v. Moon Mills Ltd. (1966 KLT 1203 (SC) : AIR 1966 SC 870) (paragraph 8). Fiction has to be certain and it shall not lead to any mind boggling exercise. It is pointed out that S. 7(b) of the Act does not provide for any 'machinery' to work out the figures, which is stipulated for the first time by the Commissioner as per Ext. P2 Circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mstances under which modification is possible). By virtue of the amendment brought about by the State, inconsistency has been resulted between the Central Statute and the State enactment, resulting in violation of the Article 251 of the Constitution of India. It is also pointed out that the amendment/course pursued by the State/Department is not sustainable on equity as well and that the same has got a cascading effect, which requires to be intercepted by this Court. 15. The main argument advanced by the learned Spl.Govt.Pleader (Taxes) is that, satisfaction of tax by way of 'compounding' is only optional and that there is no compulsion at all, by virtue of which, the provisions for compounding cannot be challenged by the assessees. Since the compounding provision was introduced only as per the Finance Act 2005, the assessees, till such time, were governed by regular assessment under S. 5 and they were very much aware of the tax payable/paid by them for the preceding three years, 2002-03, 2003-04 and 2004-05. This being the position, there is absolutely no confusion under S. 7(b) of the Act in calculating the amount and the contention raised to the contrary has no basis at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ict passed by a learned Judge of this Court in Prakash Jewellery & Anr. v. State of Kerala (2014 (12) KTR 543) (paragraph 3), the rate of tax means, as modified by the Finance Act, which dictum has been approved by a Division Bench of this Court in the Writ Appeal preferred therefrom. It is also pointed out that, as per the verdict passed by another learned single Judge in Sasi v. The Commercial fax Officer (2010 (1) KLT 661) (para 4), rate fixed for compounding can be varied during the middle of the year in view of the Circular issued in this regard, which has been upheld by a Division Bench of this Court in W.A. No. 284 of 2010. Once the dealer has opted for compounding, he cannot turn back to have regular assessment, in view of the law declared by a Division Bench of this Court in Zodiac Regency v. Commissioner of Commercial Taxes (2011 (3) KLT SN 95 (C. No. 94) : 2011 (3) KHC 332 (D.B.)). 18. The learned Govt. Pleader seeks to place reliance on the decision of the Supreme Court in Krishnamurthi and Co. v. State of Madras & Anr. (1973 KLT 1103 (SC) : (1973) 31 STC 190) as to the legislative power and scope for interference. Reference is made to the verdict of the Apex Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der submits that the circumstance under which the amendment was brought about is clear from the 'Budget Speech' and as such there is nothing wrong in having issued Ext. P2 Circular, to explain what was intended under S. 7(b) of the Act (brought in as per the amendment). Reliance is sought to be placed on 1994 (104) STC 134 (cited supra) as well, pointing out that the provision for compounding is only 'optional' and that there is no basis for the challenge with reference to the option to be exercised. 19. The learned counsel for the assessees submits in reply, that the verdicts passed by the Division Bench of this Court in W.A. No. 284 of 2010 (affirming 2010 (1) KLT 661), in STR 33 of 2014, in W.P.(C) No. 12429 of 2014 and in STR 59 of 2012 are having no application to the case in hand. It is reiterated that the words "or"/"whichever is higher" appearing in S. 7(b) are disjunctive and not conjunctive. For answering the questions framed by the Apex Court, with reference to the scope and mandate of the amended provision, i.e., S. 7(b) of the KGST Act, it will be worthwhile to examine the compounding provision as it existed prior to 01.07.2006 and the position that re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ils for the assessment year arose, the rate was undoubtedly 3 pies per rupee on the turnover, and the question which falls to be determined is whether by reason of the alteration of the rate and its incidence in the course of the year, the assessee became liable to pay tax at the higher rate on a part of the turnover of the previous year and if so, on what basis. A tax payer who adopted the previous year's turnover had under S. 7 and RAO to submit his return within sixty days of the commencement of the assessment year, and no provision for submission of any supplementary returns in the case of alteration of rates in the course of the year was made in the Act or the Rules: nor was any method provided for retrospective modification of an assessment once made. There were under the Act and the Rules two distinct and clear-cut schemes to assess sales tax, (1) where the tax payer elected to submit his return based on the turnover of the previous year and (2) where he elected to or was bound by law to submit his return on the turnover of the year of assessment. Under these two schemes the points of time at which liability arose and the turnover on which liability was to be assessed we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. But the adoption of the turnover of the previous year as the taxable turnover for the year of assessment is itself based on a fiction and in the absence of any express provision either in the Act or the Rules or even in the notification setting out machinery for such a division of the year, we are unable to hold that this scheme of a fictional division may be projected into the previous year to make an artificial division of the turnover for imprinting thereon the altered rate of assessment as from the date of the division. Counsel for the State of Uttar Pradesh submitted several hypothetical cases suggesting that by refusing to adopt this method of division of the previous year of assessment for the application of the altered rate, several anomalies may arise in working out the liability to tax. He submitted that a person who was not a manufacturer or an importer of goods included in the schedule to the notification under S. 3-A may, if he has adopted the turnover of the previous year as his taxable turnover be liable even though it was the intention of the Government to absolve him from liability to pay tax. But a tax payer adopting the turnover of the previous year for payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1950. Surcharge at the rate of 5% on the Agricultural Income Tax and Supertax were levied and collected for the year 1957 and 1958. The appeal preferred before the first appellate authority and before the Tribunal did not turn to be fruitful, which ended up in a Reference to the High Court, to decide the question of law framed by the Tribunal as to whether any surcharge could be levied as above, for the assessment year 1957-58. The contention of the appellant was that the Kerala Surcharge on Taxes Act had come into force only on 01.09.1987 and it had no retrospective operation. The tax liability was to be fixed only with reference to the position as it existed on 01.04.1957, i.e., the date of commencement of the assessment year, in conformity with the provisions of the Income Tax Act, by virtue of which, the subsequent variation could be made applicable only for the next year. Reliance was sought to be placed on the verdict passed by the Apex Court in Commissioner of Income Tax, Bombay v. Scindia Steam Navigation Co. Ltd. (1961 KLT 1202 (SC) : AIR 1961 SC 1633) affirming the view taken by the Mumbai High Court in this regard. 23. Verdict already rendered by another Constitution Be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessed during the assessment year. 25. In support of the contention of the appellant/assessee that the Finance Act is only to prescribe the rate and it cannot bring in any substantive assessment with regard to the statutory provision, reliance is sought to be placed on (1966 KLT 1202 (SC) : AIR 1966 SC 1370 : 1966 KHC 616) [cited supra]. Correctness of 'three' questions referred to the High Court of Calcutta under S. 27 of the Wealth Tax Act was the subject matter of consideration. The three questions referred were the following: (1) Whether, on the facts and in the circumstances of the case, the Wealth Tax Officer was justified in taking the value of the assets of the assessee as shown in its balance-sheet on the relevant valuation date. (2) Whether, on the facts and in the circumstances of the case, in computing the net wealth of the assessee the amount of proposed dividend was deductible from its total assets. (3) Whether, on the facts and in the circumstances of the case, in computing the net wealth of the assessee, the amount of the provision for payment of income-tax and supertax in respect of the year of account was a debt owed within the meaning of S. 2(m) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be given effect to only from the next year onwards. It was in the said circumstance, that the Apex Court observed that in (1966 KLT 1202 (SC) : AIR 1966 SC 1370 : 1966 KHC 616) (cited supra) that the chargeability was independent of passing of the Finance Act and further that the Finance Act had to be read in consonance with the provisions of the charging section; besides holding that the State can always revise the rates in the middle of the financial year; provided the assessable extent of the lands comprised in the plantation as on 1st of April of each year was not altered. Reference was also made to AIR 1966 SC 1385 (cited supra), holding that imposition of different tariffs in the course of the year could be altered by the Legislature, provided the Legislature had devised the 'machinery' for computing it, in the absence of which, such a course cannot be pursued resorting to a fiction, which is not prescribed by the Legislature (paragraph 26). In paragraph 28, it was made clear that the scope of the said judgment was confined only to the insertion of Schedule I in the said 1960 Act by the Kerala Finance Act 18 of 1987 and that it will not apply to amendments under o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s challenged in a batch of Writ Petitions filed before this Court by several builders/contractors. A learned Judge of this Court dismissed the Writ Petitions, but on appeal, the Division Bench struck down the aforesaid provisions on the ground that they were violative of Clause (29A) of Article 366 of the Constitution, which was taken up in appeal before the Apex Court by the State. The change in stand taken by the assessee, pointing out that they were not pressing the challenge against the validity of the above provisions before the Apex Court was noted, but it was observed that since the provisions were struck down by the High Court, the correctness thereof was to be examined. After referring to the relevant provisions of law and also the verdicts passed by the Apex Court on earlier occasions, it was held that the verdict passed by the Division Bench of this Court was liable to be set aside, which was ordered accordingly and the provisions were put back in position. The appeals filed by the State were allowed and the Writ Petitions filed by the assessees were dismissed, besides ordering a consolidated cost of Rs. 25000/- 29. In 2002 (2) KLT 1001 (SC) : 2002 (127) STC 105 (cited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the said provision or whether it is in relation to have a comparative exercise between the amounts workable under S. 7(a) and separately under S. 7(b), to take out the 'higher one' to be reckoned as the compounded tax payable for the year in question. 32. At the very outset it is to be noted that the earlier provision (prior to amendment brought about w.e.f., 01.07.2006) contained two separate rates mentioned for the different areas (in the Municipal/Corporation Area/Cantonment area) under S. 7(a) with 140% tax and a lesser extent of 135% in respect of other areas as mentioned under S. 7(b). By virtue of the amendment, the above two different rates for different areas were put together without any change and bringing it as S. 7(a), while another provision was introduced as S. 7(b) as extracted below: "(b) at one hundred and fifteen percent of the highest turnover tax payable by it as conceded in the return or accounts or the tax paid for the previous consecutive three years, whichever is higher". While introducing S. 7(b), the conjunction "or" was also added to S. 7(a) as aforesaid. 33. As per S. 7(b), the amount has to be worked out at 115% of the highest turnover T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be submitted in Form No. 21; on receipt of which, the procedure as contemplated under Rule 30(2) has to be pursued. Rule 30(2)(iii) reads as follows: "30. Payment of tax at compounded rates:- Every dealer eligible to pay turnover tax at compounded rate under S. 7, who desires to exercise the option provided for under the said section may apply to the assessing authority concerned for permission to pay turnover tax at the rates specified therein in Form No. 21 or or before the 30th day of April of the year to which the option relates or along with the application for registration under the Act, whichever is later; xx xx xx (2)(i)xx xx (ii) xx xx (iii) The dealer to whom permission is granted under sub-rule (2) shall submit along with the monthly return in Form No. 9 a statement of purchases of liquor made during the month showing invoice number and date, particulars of goods, quantity and value, along with photocopies of the purchase bill/invoices." Once sanction is given enabling the assessee to satisfy the tax under the compounding system, it is for the assessee to submit return showing the particulars of purchase, invoices, dates etc., and satisfy the tax on a month ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;comparative degree' is used only to compare between two instances, whereas super relative degree is to be used when there are more instances than two. For the very same reason, usage of the expression 'the highest Turn Over Tax payable' as conceded by the assessees in the return or the accounts or the turnover tax paid, definitely refers to more than two instances and as such it, evidently, is in respect of the three previous consecutive years, i.e., the amount which is the highest in respect of three different consecutive years has to be reckoned for working out the quantum of 115%. The expression 'whichever is higher'\s only an instance using 'comparative degree'. It cannot be with reference to the three different instances of the tax conceded in the return or accounts or turnover tax paid (as contended by the assessees) and it is definitely in respect of something else, as noted above. 37. That apart, since the highest figure is stipulated to be taken as contained in the first limb/opening part of the sentence, if the version of the assessees is accepted, the words 'whichever is higher used in the very same provision will become otiose. For thi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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