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State of Kerala, Represented by deputy Commissioner of State Tax (Law), State Goods & Service Tax Department, Ernakulam v/s Raphel T. Joseph

Company & Directors' Information:- S & S GOODS PRIVATE LIMITED [Active] CIN = U50300TN2001PTC046470

Company & Directors' Information:- KERALA SERVICE CO LTD [Active] CIN = U65191KL1928PLC000532

Company & Directors' Information:- R P GOODS PRIVATE LIMITED [Active] CIN = U51109WB2007PTC115143

Company & Directors' Information:- KERALA SERVICE CORPORATION LIMITED [Dissolved] CIN = U93090KL1947PLC000579

    OT. Rev. Nos. 75, 77 to 82, 84, 86, 91 92 & 94 of 2018

    Decided On, 22 August 2019

    At, High Court of Kerala


    For the Petitioner: Government Pleader. For the Respondents: Akhil Suresh, T. Archana, G. Harikumar (Gopinathan Nair), K.G. Somanath, K.P. Abdul Azees, Advocates.

Judgment Text

1. All these revision petitions are filed under Section 63 of the Kerala Value Added Tax Act, 2003 (‘KVAT Act’ for short). All these revision petitions arise out of a common order passed by the Kerala Value Added Tax Appellate Tribunal, Ernakulam. The Tribunal had confirmed the order of the first appellate authority, passed in favour of the assessee. The State is in revision against the said order.

2. The assessee had challenged the revised assessments passed by the Assessing Officer under Section 25 of the KVAT Act, with respect to different years. The permission granted to the assessee for payment of tax at the compounded rate as provided under Section 8(a)(ii), was found to be illegal and unsustainable, in view of a Division Bench decision of this Court in C.C.Sebastian v. State of Kerala[(2008) 16 KTR 117(Ker)] in which this Court had relied upon a judgment of the Hon’ble Supreme Court in T.V. Sundaram Iyengar & Sons v. State of Madras [(1975) 35 STC 24 (SC)], to hold that ‘Bus body’ built on chassis supplied by the customer is a sale of goods, which will attract payment of Tax under Entry 94 of the 1st Schedule of the Kerala General Sales Tax Act (KGST Act, for short). The Assessing Authority found that the assessee was not entitled for making payment of tax at the compounded rate, and therefore the assessments already completed were re-opened, by invoking powers vested under Section 25(1) of the KVAT Act.

3. In the first appeals filed by the assessee before the Assistant Commissioner (Appeals), the revised assessments were found to be unsustainable, based on an observation made that the procedure for assessment initiated under Section 25 of the KVAT Act is not in accordance with law, since the permission granted for payment of tax at the compounded rate was not cancelled by invoking Section 56 of the KVAT Act.

4. The revenue had taken up the matter in second appeals filed before the Tribunal. The assessee also filed cross objections in those appeals. The Tribunal found that the Assessing Officer could not have re-opened the completed assessments by invoking Section 25 of the KVAT Act, because the order permitting compounding remained in force and the same was not cancelled. It was found that, once the assessee is permitted to remit the tax at the compounded rate in terms of Section 8 of the KVAT Act, any proceedings under Section 25 cannot be initiated without having the order under Section 8 cancelled, by following the procedure contemplated under Section 56 of the KVAT Act. The Tribunal also found that the revised assessments with respect to the years 2006-2007 &2007-2008 are time barred, because the proceeding were initiated after expiry of the period of five years stipulated.

5. While considering the revision petitions, we notice that the Tribunal had placed reliance on a judgment of a Division Bench of this Court in State of Kerala v. Muhammed Ali A.M.[(2017) 25 KTR 73 (Ker)], wherein it was held that an order permitting compounding will remain in force until it is cancelled in appropriate proceedings; and therefore the assessment made under Section 25 of the KVAT Act, without cancelling such permission, cannot be sustained. In these revision petitions, a question of law is seen framed as to whether the judgment in State of Kerala v. Mohammed Ali A.M. (supra) requires reconsideration to decide whether a proceedings under Section 25 of KVAT Act can be initiated without cancelling the permission granted under Section 8of the KVAT Act.

6. Learned Government pleader appearing for the State/revision petitioner placed reliance on a judgment of a Division Bench of this Court in S.T.Rev. No.92 of 2011, dated 15.12.2011 (State of Kerala v. George Thomas). Referring to identical provision as that of Section 25 of the KVAT Act contained in Section 19(1) of the KGST Act, which enables re-opening of the assessment, it was held that there is no difference between the power of the Assessing Officer under Section 19(1) of the Act and the supervisory power vested on the Deputy Commissioner under Section 35 of the Act. It was a held that, Section 19(1) also will apply to an assessment completed based on compounding and such completed assessments are also amenable for re-opening by invoking Section 19(1). For taking such a view, the Division Bench had placed reliance on another decision of this court in Joy Alukkas Traders (I) Pvt. Ltd v. State of Kerala (2010 (1) KLT SN 87 (C. No.105). In the said case a Division Bench of this Court held that, it is unable to accept the proposition that an option exercised by the assessee to pay tax under the compounded scheme, once accepted by the Assessing Officer, amounts to a contract between the assessee and the Assessing Officer. But, on the facts of the said case, permission granted for payment of tax at the compounded rate was already revised by the Deputy Commissioner in exercising power vested under Section 35 of the KGST Act.

7. Learned counsel appearing for the respondent/assessee had contended that, the view taken by the Division Bench in George Thomas (S.T.Rev.No.92 of 2011) is not correct, mainly because it had relied on the decision in Joy Alukkas Traders (supra), which is a case where the permission for compounding was in fact cancelled by the Deputy Commissioner in exercise of the revisional power. Secondly it was argued that, in George Thomas (supra) the issue was not discussed base on the question whether the permission for compounding will create a concluded contract or not. Further argument is that, the re-opening of a completed assessment under the compounding scheme can be possible only to the extent of the amount or quantum of tax payable under the scheme and not by disallowing payment of the tax at the compounded rate, which is already permitted.

8. Learned counsel had placed heavy reliance on a decision of the Hon’ble Supreme Court in Koothattukulam Liquors v. Deputy Commissioner of Sales Tax [(2014) 72 VST 353 (SC)] wherein it is held that, payment of tax at the compounded rate is on the basis of a bilateral agreement between the parties, for which the dealer is obliged to execute an agreement undertaking to pay the sales tax in lump sum and this assessed at an agreed rate, as envisaged under the Act. The contract of compounding is a statutory contract under a scheme in which the State Government can increase or decrease the rate of tax. It is an invitation to offer for compounding for each financial year, resulting in an agreement qua such financial year. Therefore the contract between the dealer and the assessing authority can be annulled by the parties only under any circumstances which are provided under provisions of the Contract Act. The dealer having once exercised its option under the composition scheme, cannot therefore be permitted to turn around and rescind from its liability. It is held further that, the composition of tax is nothing but an alternative route for assessment regulated by the terms of a contract between the assessee and the Assessing Authority to arrive at the same destination. Therefore the dealer who had voluntarily and with full knowledge of the features of the alternate method of taxation has opted to be governed by it, a fortiori cannot in the lean season, claim for his assessment to be made under the regular assessment in the same assessment year.

9. It is also pointed out that, the Hon’ble Supreme Court in Bhima Jewellery v. Assistant Commissioner (Assessment) Kerala and another [(2014) 71 VST 110 (SC)] has reiterated that, when the dealer is given an option for payment of tax at the compounded rate and once such a option is exercised and accepted by the concerned authority, it is no longer open to the dealer to request for a regular assessment as envisaged under Section 5 or 5A of the KGST Act. Therefore it cannot be said that, when a dealer is assessed under the compounding scheme as envisaged under Section 7 of the Act, is also being assessed under the regular procedure of assessment, and has to be made liable to pay the additional sales tax.

10. Learned counsel for the respondent had placed further reliance on another decision of a Division Bench of this Court in M/S. Zodiac Regency v. Commissioner of Commercial Taxes and another (W.A. No.746 of 2011 dated 23.6.2011). It is held therein that, when a compounding application is submitted by the assessee and the assessee started making payment of tax under the scheme of compounding, which is not objected by the Assessing Officer, the only presumption is that the Officer had accepted the offer. Once the compounding application is filed and tax is paid in terms of the same, the same binds both the assessee and the department, unless the assessee recalls the application before starting payment of tax in terms of the compounding scheme. It is pointed out that, a similar view has been taken by another Division Bench in the judgment in WA No.413/2015 dated 24-01-2019 (Commercial Tax Officer and another V. M/s. Sicillia Hotel Pvt. Ltd.)

11. From the rival arguments advanced, it is evident that there exists divergent views among the legal precedents. In George Thomas (supra) relying on Joy Alukkas Traders (supra) it is held that the powers vested under Section 19 (1) & 35 of the KGST Act (which are in pari materia with Section 25 and 56 of the KVAT Act) are one and same in nature. But considering the rulings cited on behalf of the assessee, including Koothattukulam Liquors (supra), Bhima Jewellers (supra) and other judgments, there is a reiteration of the legal principle that the option for compounding once accepted creates a concluded contract which cannot be rescinded by one of the parties or annulled through a re-opening of the assessment concluded.

12. While referring to relevant provisions, we notice that, the Rules corresponding to Section 8 of the KVAT Act prescribes a procedure which render all the characteristics of a concluded contract by virtue of the permission granted for compounding. Question arises whether the Assessing Officer can revoke the permission by exercising any of the powers vested on him? Of course, under Section 66 of the KVAT Act the Assessing Officer is vested with power to revoke or rectify any orders passed by him. So also under Section 56 of the KVAT Act the Deputy Commissioner is vested with powers to revise any orders passed by any subordinate authority. The provisions under Section 25 of the KVAT Act enables the Assessing Officer to re-open any assessment completed, for the reasons mentioned therein. Can that power be exercised to re-open an assessment completed based on the permission for compounding granted, wh

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ich was held to be in the nature of a concluded contract, is the crucial aspect which needs decision. 13. Learned Government Pleader also raises a contention that the permission for compounding granted in these cases need to be treated as non est in the eye of law, because those orders suffered from the lack of jurisdiction and it becomes a nullity and is void ab initio. The said argument is a different question which need to be considered apart from the question as to whether a re-opening under Section 25 is possible without cancelling the permission for compounding. It is debatable whether the permission for compounding granted lacks jurisdiction or whether it was only an erroneous exercise of the jurisdiction. 14. As observed above, there exists divergent views in various legal precedents. Therefore, we think it only appropriate to refer the questions involved, for an authoritative pronouncement by a Full Bench. Hence the questions mentioned in paragraphs 12 & 13 are referred for decisions of a Full Bench. The Registry shall post the above cases before the Full Bench, after obtaining necessary orders from the Hon’ble Chief Justice.