Kunnathukalathil Jewellers V. The Asst. Commissioner (KVAT) Commercial Taxes Special Circle, Kottayam and Commissioner of Commercial Taxes, Commercial Taxes Special Circle, Kottayam and State of Kerala, represented by its Secretary, Taxes Department, Government Secretariat, Thiruvananthapuram and Inspecting Asst. Commissioner, Dept. of Commercial Taxes, Kottayam

WP(C)/11326/2017

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The case involves M/s. Kunnathukalathil Jewellers, a jewelry business, which opted for compounded tax payment under the Kerala Value Added Tax Act (KVAT Act). The dispute arose when the tax authorities included the turnover of a closed branch in the tax computation for subsequent years. The petitioner argued that the tax for the closed branch should not be considered for the years following its closure, citing amendments and explanations added to Section 8(f) of the KVAT Act in 2014, which clarified the treatment of closed branches. The respondents contended that the inclusion was necessary as the earlier orders had resulted in an escapement of tax. The court sided with the petitioner, finding that the tax for the closed branch should not have been included, based on the legislative intent and the retrospective application of the amendment.

• Counselvise Citation: [2017] 140 COUNSELVISE.COM (IT) 811022 (HC-KERALA)
• Appeal Type: Others
• Pronouncement Date: 17-07-2017
• Assessment Year: misc
• Other Referred Cases: Allied Motors (P.) Ltd. v. Commissioner of Income-tax, Commissioner of Income-tax v. Alom Extrusions Ltd, R.B. Jodhu Mal Kuthiala v. CIT, CIT v. Chandulal Venichand, CIT v. Sri. Jagannath Steel Corpn., Jamshedpur Motor Accessories Stores v. Union of India
• Laws Referred To: Kerala Value Added Tax Act
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: SHAMSUDHEEN
• Assessee Lawyers: HARISANKAR MENON; MEERA MENON
• Keywords: Assessment Order; Compounded tax; KVAT; Rectification of Mistakes; Branch closure
• Section: 25(1); 8(f)

Judgement Text

"IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR. JUSTICE A.K.JAYASANKARAN NAMBIAR MONDAY, THE 17TH DAY OF JULY 2017/26TH ASHADHA, 1939 WP(C).No. 11326 of 2017 (M) ---------------------------- PETITIONER: ----------- M/S.KUNNATHUKALATHIL JEWELLERS, CHANGANASSERY, KOTTAYAM, REPRESENTED BY ITS MANAGING PARTNER K.V. VISWANATHAN. BY ADVS.SRI.HARISANKAR V. MENON SMT.MEERA V.MENON RESPONDENTS: ----------- 1. THE ASST.COMMISSIONER(KVAT) COMMERCIAL TAXES SPECIAL CIRCLE, KOTTAYAM - 686 001. 2. COMMISSIONER OF COMMERCIAL TAXES, COMMERCIAL TAXES SPECIAL CIRCLE, KOTTAYAM - 686 001. 3. STATE OF KERALA, REPRESENTED BY ITS SECRETARY, TAXES DEPARTMENT, GOVERNMENT SECRETARIAT, THIRUVANANTHAPURAM - 695 001. 4. INSPECTING ASST. COMMISSIONER, DEPT. OF COMMERCIAL TAXES, KOTTAYAM - 686 001. BY ADV. GOVERNMENT PLEADER SRI. SHAMSUDHEEN THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 17-07-2017, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: WP(C).No. 11326 of 2017 (M) --------------------------- APPENDIX PETITIONER EXHIBITS: -------------------- EXHIBIT P1 COPY OF PROCEEDINGS ISSUED BY THE 1ST RESPONDENT DATED 13.12.2011 EXHIBIT P1(A) COPY OF PROCEEDINGS ISSUED BY THE 1ST RESPONDENT DATED 04.08.2012 EXHIBIT P2 COPY OF NOTICE UNDER SECTION 25(1) ISSUED BY THE 1ST RESPONDENT DATED 14.06.2013 EXHIBIT P3 COPY OF REPLY FILED BY THE PETITIONER BEFORE THE 1ST RESPONDENT DATED 20.06.2013 EXHIBIT P4 COPY OF ORDER ISSUED BY THE 1ST RESPONDENT FOR THE YEAR 2011-12 DATED 12.10.2015 EXHIBIT P4(A) COPY OF ORDER ISSUED BY THE 1ST RESPONDENT FOR THE YEAR 2012-13 DATED 12.10.2015 EXHIBIT P5 COPY OF NOTICE IN FORM NO.1 ISSUED BY THE 4TH RESPONDENT DATED 20.03.2017 EXHIBIT P5(A) COPY OF NOTICE IN FORM NO.1 ISSUED BY THE 4TH RESPONDENT DATED 20.03.2017 RESPONDENTS EXHIBITS: NIL -------------------- //TRUE COPY// PA TO JUDGE bng A.K.JAYASANKARAN NAMBIAR, J. ............................................................. W.P.(C).No.11326 Of 2017 -(M ) ............................................................. Dated this the 17th day of July, 2017 J U D G M E N T The petitioner is engaged in the business of trade in jewellery and is an assessee under the Kerala Value Added Tax Act (hereinafter referred to as 'the KVAT Act') on the files of the 1st respondent. The facts in the writ petition would indicate that, as part of its business operations, the petitioner was functioning from a Head Office at Changanassery, and two branches at Kottayam and Thiruvalla respectively, from the assessment year 2006-2007 onwards. During all these years, up to 31.03.2010 (assessment year 2009-2010), the petitioner was paying tax on compounded basis under Section 8(f) of the KVAT Act. On 31.03.2010, the petitioner closed the branch at Thiruvalla, and intimated this fact to the respondents. At the commencement of the assessment year 2010- 2011, the petitioner functioned only through the Head Office and the Kottayam branch. While opting for payment of tax on compounded basis for the assessment year 2010-2011, however, -2- W.P.(C).No.11326 Of 2017 -(M ) the petitioner had to reckon the tax paid in respect of the Thiruvalla Branch during the immediately preceding assessment year, on account of the provisions of Section 8(f) as they then stood which read as follows: “Section 8(f) (i) any dealer in ornaments or wares or articles of gold, silver or platinum group metals including diamond may at his option, instead of paying tax in respect of such goods in accordance with the provisions of section 6, pay tax at,- (a) one hundred and fifteen percent, in case their annual turnover for the above goods for the preceding year was rupees ten lakhs or below; (b) one hundred and twenty percent, in case their annual turnover for the above goods for the preceding year was above rupees ten lakhs and upto rupees forty lakhs; (c) one hundred and thirty-five percent; in case their annual turnover for the above goods for the preceding year was above rupees forty lakhs and upto rupees one crore; and at (d) one hundred and fifty percent; in case their annual turnover for the above goods for the preceding year exceeded rupees one crore; of the highest tax payable by him as conceded in the return or accounts, or tax paid by him under this Act, whichever is -3- W.P.(C).No.11326 Of 2017 -(M ) higher, for a year during any of the three consecutive years preceding that to which such option relates. Explanation 1:- xxxxx Explanation 2:- xxxxx Explanation 3:- xxxxx Explanation 4:- xxxxx Explanation 5:- xxxxx Explanation 6:- xxxxx Explanation 7:- xxxxx Explanation 8:- Where a dealer who had opted and paid tax under this clause during previous years with respect to a branch that had remained closed during the whole of the year 2009-10, for the purpose of determining the compounded tax payable for 2010-2011, the tax paid in respect of that branch shall not be reckoned. “ Since the Thiruvalla Branch had not remained closed during the whole of 2009-2010, the petitioner reckoned the tax paid in respect of the Thiruvalla Branch also while paying tax on compounded basis for the assessment year 2010-2011. For the assessment years 2011-2012 and 2012-2013, the petitioner, while submitting the application for compounding and paying tax on -4- W.P.(C).No.11326 Of 2017 -(M ) compounded basis for the said years, excluded that portion of the tax that was paid in the year 2010-2011, as was attributable to the Thiruvalla Branch that had ceased to function during the assessment year 2009-2010. The said compounding applications were accepted by the respondents, as evident from Exts.P1 and P1 (a) order dated 13.12.2011 and 04.08.2012 respectively. It is not in dispute that the petitioner paid tax on the basis of the application for compounding and this tax was accepted by the respondents. 2. By Ext.P2 notice dated 14.06.2013, the respondents initiated proceedings under Section 25 (1) of the KVAT Act and took the stand that the turnover pertaining to the closed branch, on which tax had been paid by the petitioner during the assessment year 2010-2011, would also have to be reckoned for the purposes of payment of tax on compounded basis for the assessment years 2011-2012 and 2012-2013. Although the petitioner preferred Ext.P3 reply dated 20.06.2013 to the said notice, and thereafter, appeared for a hearing before the respondents on 08.11.2013, 20.11.2013 and 27.12.2013, the petitioner was served with Exts.P4 and P4(a) assessment orders, -5- W.P.(C).No.11326 Of 2017 -(M ) both dated 12.10.2015, on 18.02.2017. The assessment orders served on the petitioner effectively confirmed the proposals in Ext.P2 notice that was served on the petitioner. In the writ petition, Exts.P4 and P4(a) orders are impugned on merits, as well as on the ground of limitation. Invoking the ground of limitation, it is contended that, a perusal of Exts.P4 and P4(a) orders would indicate that the 1st respondent was effectively exercising the power of rectification of mistakes that had crept into Exts.P1 and P1(a) orders, inasmuch as they had not included the tax paid in respect of the Thiruvalla Branch for the assessment year 2010- 2011. It is pointed out that the rectification power under the KVAT Act can be exercised only within a period of four years from the year in which the compounding orders were passed, and hence Exts.P4 and P4(a) orders, being admittedly beyond the period of four years, cannot be legally sustained. Alternatively, on the merits of the issue, it is pointed out that although during the assessment year 2010-2011, the petitioner was constrained to include the tax paid in respect of the Thiruvlla Branch, in the computation of tax payable on compounded basis for the assessment year 2010-2011, this was only on account of Explanation 8 to Section 8(f), which at that point of time required -6- W.P.(C).No.11326 Of 2017 -(M ) the petitioner to do so. It is pointed out that, thereafter, by an amendment introduced in 2014, the substantive provision of Section 8(f) was amended and a new Explanation 3 was introduced thereto whereby it was made clear that, where a dealer paying tax under Section 8(f) closed a branch during the year under option, proportionate reduction considering the number of business places, in the payment shall be granted in the next monthly instalment onwards for the remaining months of the year. 3. Section 8(f) of the KVAT Act, after its amendment in 2014 read as follows: “Section 8(f) (i) any dealer in bullion or ornaments or wares or articles of gold, silver or platinum group metals including diamond may at his option, instead of paying tax on their sale in the State in respect of such goods in accordance with the provisions of Section 6, may pay tax at the rate of,- (a) one hundred and fifteen per cent, in case the total turnover of the dealer opting to pay tax under this clause, for the preceding year was rupees ten lakhs or below; -7- W.P.(C).No.11326 Of 2017 -(M ) (b) one hundred and twenty per cent, in case the total turnover of the dealer opting to pay tax under this clause, for the preceding year was above rupees ten lakhs and up to rupees forty lakhs; (c) one hundred and thirty five per cent, in case the total turnover of the dealer opting to pay tax under this clause, for the preceding year was above rupees forty lakhs and up to rupees one crore; (d) one hundred and fifty per cent, in case the total turnover of the dealer opting to pay tax under this clause, for the preceding year was above rupees one crore and above; of the highest tax payable by him as conceded in the return or accounts, or tax paid by him under this Act, whichever is higher, for an year during any of the three consecutive years preceding that to which such option relates. Explanation 1. xxxxx Explanation 2. xxxxx Explanation 3.- Where a dealer paying tax under this clause, closes a branch during -8- W.P.(C).No.11326 Of 2017 -(M ) the year under option, proportionate reduction considering the number of business places, in the payment shall be granted in the next monthly instalment onwards, for the remaining months of the year” 4. It is contended that inasmuch as the amended provision clearly clarified the ambit of the substantive provision with regard to payment of tax on compounded basis, the explanation that was introduced through the amendment should be seen as curing the defect that existed previously in the statutory provision, and therefore, should relate back to the date from which the option for payment of tax on compounded basis was extended to dealers under the statute. Reliance is placed on the decisions of the Supreme Court in Allied Motors (P.) Ltd. v. Commissioner of Income-tax [(1997) 224 ITR 677(SC)] and Commissioner of Income-tax v. Alom Extrusions Ltd [(2009) 319 ITR 306 (SC)]. 5. A counter affidavit has been filed on behalf of the 1st respondent, wherein it is stated that Exts.P4 and P4(a) assessment orders were passed under Section 25(1) of the KVAT Act, and after -9- W.P.(C).No.11326 Of 2017 -(M ) finding that the earlier orders passed, accepting the compounding application of the petitioner, contained mistakes resulted in escapement of tax. It is stated that, since Exts.P4 and P4(a) orders were passed pursuant to proceedings initiated within the period of 5 years from the date of acceptance of the compounding applications, Exts.P4 and P4(a) assessment orders are to be seen as passed within the time granted under the statute. As regards the contention urged on behalf of the petitioner, on the merits of the case, it is contended that the Explanation that was inserted in 2014 cannot be seen as clarificatory of the earlier provisions of Section 8(f), which were also amended through a substantive amendment of 2014. It is pointed out that, if the legislative intention had been to grant retrospective effect to the Explanation the legislature would have expressed that intention in the statute and in its absence, it will not be open to this Court to read into the provisions of the Section something that is not expressly mentioned therein. It is also pointed out by the learned Government Pleader that the amended Explanation only speaks of a situation where any branch of the petitioner ceases to function during the year in which the option was exercised, and does not deal with closure of Branches during a year preceding the year -10- W.P.(C).No.11326 Of 2017 -(M ) under option. 6. I have heard the learned counsel appearing for the petitioner and also the learned Government Pleader appearing for the respondents. 7. On a consideration of the facts and circumstances of the case as also the submissions made across the bar, I find force in the submissions of the learned Government Pleader that Exts.P4 and P4(a) assessment orders are orders passed in exercise of the powers under Section 25(1) of the KVAT Act. No doubt, a perusal of Exts.P4 and P4(a) orders would indicate that it was the need for a rectification of the earlier orders, accepting the compounding application of the petitioner, that prompted the respondents to issue Ext.P2 notice, and thereafter, confirm the proposal in the said notice through Exts.P4 an P4(a) assessment orders. The mere fact that it was the need for a rectification, that prompted the respondents to issue a notice proposing a re-assessment, cannot be a reason to hold that the power exercised by the respondents was also one of rectification of mistake. If, as was demonstrated in this case, the rectification had the result of enhancing the tax liability -11- W.P.(C).No.11326 Of 2017 -(M ) of the assessee, then obviously the power to rectify could not have been exercised, for the power to rectify cannot be resorted to for reviewing or re-opening a concluded assessment. In my view, the only recourse available to the respondents, for bringing to tax amount that had escaped assessment, consequent to the acceptance of an application for compounding, which did not disclose the actual tax liability, was through proceedings under Section 25 (1) of the KVAT Act, which was exercised in the instant case. I, therefore, find against the petitioner on this issue and hold that Exts.P4 and P4(a) orders are passed within the time contemplated under the statute. 8. I find merit, however, in the contention of the learned counsel for the petitioner with regard to the clarificatory nature of Explanation 3 that was introduced to Section 8(f) of the KVAT Act, 2003, with effect from 2014. The provisions of Section 8(f) of the KVAT Act provide an option, for the payment of tax on compounded basis, to a dealer engaged in the business of bullion, ornaments or wares or articles of gold, silver or platinum group metals including diamonds. The Scheme of Section 8(f) is such that it requires the dealer, opting to pay tax on compounded basis, -12- W.P.(C).No.11326 Of 2017 -(M ) to pay tax at the specified rate of 115%/120%/135%/150% depending upon whether the turnover, of the dealer opting to pay tax under the said Clause, for the immediately preceding year, was more than the stipulated limits of Rs.10 lakhs/Rs.40 lakhs/Rs.1 crore/above Rs.1 crore. Explanation 3, which was introduced along with the substantive provisions of Section 8(f) in 2014, clarifies that where a dealer paying tax under the said provision closes a branch during the year under option, a proportionate reduction, considering the number of business places in the payment, shall be granted from the next monthly instalment onwards for the remaining months of the year. The Explanation thus has the effect of clarifying that, if a dealer does not have any business operation in any particular branch during a period constituting an assessment unit, then he should not be liable to tax in respect of the branch that has ceased to function. Although the learned Government Pleader would point out that the legislature had taken note of this ambiguity, that prevailed in the earlier provisions while amending the provision in 2014, and had thought it fit to give a retrospective operation to the amendment only with effect from 01.04.2013, I note that, in the decisions cited by the learned counsel for the petitioner, as noted above, the Supreme -13- W.P.(C).No.11326 Of 2017 -(M ) Court had, taking note of the purport of the proviso that was introduced to Section 43 B of the Income Tax Act, found that the proviso would have to take effect from the date of introduction of Section 43B under the Income Tax Act, and to that extent the amended proviso was to be given effect from a date even prior to the date, which was expressly mentioned by the legislature as the date from which the amendment was take effect. The relevant observation of the Supreme Court in Allied Motors Pvt.Ltd Supra is at paragraph 10 and 11 thereof which reads as follows: “10. Therefore, in the well-known words of Judge Learned Hand, one cannot make a fortress out of the dictionary; and should remember that statutes have some purpose and object to accomplish whose sympathetic and imaginative discovery is the surest guide to their meaning. In the case of R.B. Jodhu Mal Kuthiala v. CIT [(1971) 82 ITR 570], this Court said that one should apply the rule of reasonable interpretation. A proviso which is inserted to remedy unintended consequences and to make the provision workable, a proviso which supplies an obvious omission in the section and is required to be read into the -14- W.P.(C).No.11326 Of 2017 -(M ) section to give the section a reasonable interpretation, requires to be treated as retrospective in operation so that a reasonable interpretation can be given to the section as a whole. 11. This view has been accepted by a number of High Courts. In the case of CIT v. Chandulal Venichand [1994] 209 ITR 7/73 Taxman 349, the Gujarat High Court has held that the first proviso to Section 43 B is retrospective and sales-tax for the last quarter paid before the filing of the return for the assessment year is deductible. This decision deals with the assessment year 1984-85. The Calcuttta High Court in the case of CIT v. Sri. Jagannath Steel Corpn. [1991] 191 ITR 676, has taken a similar view holding that the statutory liability for sales- tax actually discharged after the expiry of the accounting year in compliance with the relevant statute is entitled to deduction under section 43B. The High Court has held the amendment to be clarificatory and, therefore, retrospective. The Gujarat High Court in the above case held the amendment to be curative and explanatory and hence -15- W.P.(C).No.11326 Of 2017 -(M ) retrospective. The Patna High Court has also held the amendment inserting the first proviso to be explanatory in the case of Jamshedpur Motor Accessories Stores v. Union of India [1991] 189 ITR 70/54 Taxman 521. It has held the amendment inserting first proviso to be retrospective. The special leave petition from this decision of the Patna High Court was dismissed. The view of the Delhi High Court, therefore, that the first proviso to section 43B will be available only prospectively does not appear to be correct. As observed by G.P Singh in his Principles of Statutory Interpretation, Fourth edn., pager 291, “ It is well-settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended”. In fact the amendment would not serve its object in such a situation unless it is construed as retrospective. The view, therefore, taken by the Delhi High Court cannot be sustained.” Taking cue from the said judgment of the Supreme Court, and finding that in the instant case it is not in dispute that during the assessment year 2010-2011, the branch office at Thiruvalla did -16- W.P.(C).No.11326 Of 2017 -(M ) not function, the petitioner should be given the benefit of the excluding the tax attributable to the Thiruvalla Branch, although the said tax was taken for the purposes of paying tax on compounded basis for the assessment year 2010-2011, while assessing his liability under Section 8(f) for the assessment year 2011-2012 and 2012-2013. I am, therefore, of the view that Exts.P4 and P4(a) assessment orders, to the extent they hold to the contrary, cannot be legally sustained. The said assessment orders are therefore quashed, and the writ petition allowed with consequential reliefs to the petitioner. Sd/- A.K.JAYASANKARAN NAMBIAR JUDGE mns/17.07.17 "