IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 13th DAY OF NOVEMBER, 2019 BEFORE THE HON’BLE MRS.JUSTICE S.SUJATHA WRIT PETITION No.12745/2019 (T – RES) BETWEEN:
M/s BELLOR ESTATES & HOTELS (P) LTD., KRISHNA PRIME, NO.12/72/1(11), B.C. ROAD, JODUMARGA POST, BANTWAL, D.K.-574219 REP BY DIRECTOR GOPALAKRISHNA P. SHETTY. ... PETITIONER [BY SRI SHIVADASS G., SENIOR COUNSEL A/W SRI SONAL SINGH, ADV.] AND:
1 . STATE OF KARNATAKA THROUGH ITS PRINCIPAL SECRETARY, FINANCE DEPARTMENT, VIDHANA SOUDHA, BANGALORE-560 001.
2 . THE COMMISSIONER OF COMMERCIAL TAXES VANIJYA THERIGE KARYALAYA, GANDHINAGAR, BANGALORE-560 009.
3 . COMMERCIAL TAX OFFICER, VSO-261, BANTWAL, DK-574211.
4 . ASSISTANT COMMISSIOER OF COMMERCIAL TAX (ENF-2) VANIJYA THERIGE BHAWAN, MAIDAN ROAD, MANGALORE-575001. …RESPONDENTS [BY SRI T.K.VEDAMURTHY, AGA.] THIS WRIT PETITION IS FILED UNDER ARTICLE 226 OF THE CONSTITUTION OF INDIA, PRAYING TO DIRECTION UNDER ARTICLE 226 OF THE CONSTITUTION OF INDIA SETTING ASIDE THE ORDER DATED 23.01.2016 VIDE ANNEXURE-A1.
THIS PETITION HAVING BEEN HEARD AND RESERVED, IS COMING ON FOR PRONOUNCEMENT OF ORDER THIS DAY, THE COURT PASSED THE FOLLOWING:
O R D E R The petitioner has assailed the order dated 23.01.2016 passed by the Commercial Tax Officer – respondent No.3 whereby the registration of compensation scheme has been cancelled with effect from 19.6.2009 inter alia challenging the proceedings initiated vide re-assessment notice dated 9.2.2018 issued by the respondent No.4.
2. The petitioner is a private limited company, a registered dealer under the provisions of the Karnataka Value Added Tax Act, 2003 (‘Act’ for short) with principal place of business at Krishna Prime, B.C.
Road, Bantwal. The petitioner is engaged in the business of running hotels and restaurants and sale of food and beverages. It is contended that till 2009, the petitioner was running a restaurant namely ‘Dakhshin Court’ located in the same building i.e., Krishnapuram Prime, BC Road, Bantwal, which was registered under the provisions of the Act as the petitioner’s additional place of business. It transpires that in April 2009, the petitioner filed a letter dated 25.4.2009 submitting details of a newly established vegetarian restaurant namely ‘Krishnima Veg’ in the same building and requested to accept the registration of Krishnima Veg under the composition scheme as per Section 15 of the Act. A certificate was issued in Form VAT-8 under Rule 137(2) of the Karnataka Value Added Tax Rules, 2005 (‘Rules’ for short) for the petitioner’s principal place of business with additional places of business as Dakshin Court and Krishnima Veg on 19.06.2009. It is contended that the petitioner filed returns for Dakshin Court in VAT 100 and returns for Krishnima Veg in VAT 120 upto the tax period 2012-13. Since Krishnima Veg was a pure Veg restaurant where no liquor was being served, Dakshin Court was a Non-veg restaurant with licence for sale of liquor as well. Thereafter, in 2013, the petitioner filed a letter seeking benefit of composition scheme for both the restaurants and continued filing returns under the composition scheme in VAT 120 in respect of both the restaurants upto November 2014; from November 2014 to July 2016 only Krishnima Veg Restaurant was run by the petitioner and Dakshin Court was run by a separate legal entity. From July 2016 to June 2017 only Dakshin Court restaurant was run by the petitioner and Krishnima Veg was run by a separate legal entity under an independent registration certificate. Re-assessment proceedings for the period 2009-10 was concluded vide order dated 15.10.2014 recording the manner of filing of returns by the assessee for the two separate restaurants.
3. The petitioner’s premises was inspected on 26.2.2015 subsequent to which notices dated 16.5.2015 were issued under Section 74 of the Act for the periods 2009-10 to 2013-14 proposing to levy penalty alleging that the registrations obtained by the petitioner and corresponding discharge of tax under two separate schemes are not in accordance with the provisions of the Act. Thereafter, a notice dated 20.10.2015 was issued under Rule 145 of the Rules alleging that the petitioner has violated the conditions of availing composition scheme under Rule 135(4) of the Rules r/w Section 15 of the Act as the petitioner was selling liquor in one of its premises. Accordingly it was proposed to cancel the composition scheme registration granted to the petitioner. A reply was submitted by the petitioner. Rejecting the same, the order of cancellation of composition scheme has been passed which is impugned herein. Pursuant to which, re-assessment proceedings are initiated by the respondent No.4.
4. Learned Senior counsel representing learned counsel for the petitioner submitted that re- assessment proceedings were concluded in respect of Dakshin Court vide order dated 23.06.2017 passed under Section 39(1) of the Act. However no objection was raised with regard to the return filed in VAT 100. Accepting the said returns in VAT 100 demand of VAT was confirmed. The order of cancellation passed withdrawing the benefit of composition scheme on the ground that the petitioner was serving alcohol in one of the premises in the same building in violation of the conditions of the composition scheme prescribed under Rule 135(4) of the Rules read with Section 15 of the Act is only a misconception. The provisions of the Act and the corresponding Rules do not prohibit the petitioner from adopting separate tax treatments for separate restaurants operating from different premises in the same building.
5. Learned counsel submitted that as per 137 of the Rules, before issuing the composition scheme certificate, the respondent authorities had satisfied themselves of all conditions being fulfilled by the petitioner. The respondent No.3 cannot change its views subsequently and cancel the benefit on the ground of violation of conditions prescribed when there has been no change in the facts and circumstances of the case from the time of issuance of certificate till cancellation that too retrospectively. It was argued that no composition scheme benefit can be cancelled retrospectively. Reliance was placed on the following decisions:-
1) M/s. Oriental Cuisines Pvt. Ltd., vs. The Deputy Commissioner of Commercial Taxes, reported in 2018-TIOL- 635-HC-KAR-VAT 2) Amma Construction India Pvt. Limited vs. The Assistant Commissioner of Commercial Taxes, Bangalore reported in 2015 (83) Kar. L.J. 91 (HC);
3) Kalaburagi Cements Pvt. Ltd. Vs. ACCT reported in ILR 2018 Kar. 119.
Thus, it was contended that the proceedings initiated by respondent No.4 to re-open the assessment proceedings under Section 39(1) of the Act for the tax periods 2012-13 is bad in law.
6. Learned counsel for the revenue submitted that the petitioner has violated the conditions stipulated in Rule 135 read with section 15 of the Act. The petitioner having opted for the composition scheme under Section 15 of the Act was engaged in selling liquor contrary to rule 135(4) of the KVAT Rules. The respondent No.3 being a registered authority has got power to cancel the composition scheme certificate for violation of the conditions of the scheme. Moreover, the respondent No.3 has cancelled composition certificate after affording reasonable opportunity. Hence, re-assessment proceedings initiated under Section 39[1] of the Act for the tax periods 2012-13 to levy tax under Section 3 of the Act is justifiable.
7. I have carefully considered the rival submissions of the learned counsel for the parties and perused the material on record.
8. The points that arise for consideration in this writ petition are:
1. In the facts and circumstances of the case, whether the action of the respondent No.3 is justified in canceling the certificate of composition issued under Rule 137[2] of the KVAT Rules read with Section 15 of the Act retrospectively?
2. Whether the notice impugned dated 9.2.2004 issued by the respondent No.4 to initiate re- assessment proceedings for the tax periods April 2012 to March 2013 is valid and justifiable?
9. Composition scheme is a beneficial scheme extended to the assessee at his option. It is a convenient, hassle-free and simple method of assessment. By opting to this alternate method, the contractor saves himself the bother of book-keeping, assessment, appeals and all that it means. Under the Scheme of the Act, Section 15 provides for the composition of tax. In terms of Section 15 [1][c] a hotelier, restaurateur, caterer or dealer running a sweetmeat stall or an Ice Cream Parlor or bakery or any other class of dealers as may be notified by the Government may elect to pay in lieu of the net amount of tax payable by him under the Act by way of composition subject to such conditions and circumstances prescribed.
10. Part VII of the Rules deals with composition of tax. Rule 135 contemplates the conditions of scheme. In terms of Rule 135, a dealer opting to pay tax by way of composition under Section 15, shall satisfy the conditions (1) to (7) prescribed therein. Condition No.4 reads thus:
“He shall not be a dealer selling liquor”
Rule 136 contemplates reporting option and furnishing returns. The assesee is required to report his option, if not already registered, not later than the date on which his registration comes into effect under Section 25 and, if already registered, on the first day of any month after the date of registration in From VAT 1 to the Jurisdictional Local VAT officer or VAT Sub-officer. The Jurisdictional Local VAT officer or VAT Sub Officer shall within a period of 15 days from the date of receipt of Form VAT 1, if he is satisfied that the said form VAT 1 submitted under Rule 136 is correct and complete, he is empowered to issue a certificate in Form VAT 8 to the dealer in terms of Rule 137. Duties of dealer under the scheme are prescribed under Rule 138. Rules 142 to 145 deals with withdrawal from scheme and cancellation of certificate. Rule 142 contemplates requirements when threshold exceeded. Rule 143 contemplates voluntary withdrawal from scheme. As per rule 144(1), every dealer, who after opting to pay tax by way of composition purchases or obtains goods from outside the State or from outside the territory of India shall be ineligible for such benefit and liable to pay tax under Section 3 from first day of the month in which such purchase or procurement was made. As per sub-rule (2), every such dealer falling under sub-rule (1) shall report to the jurisdictional Local VAT officer or VAT sub-officer by furnishing a final return in Form VAT 120 for the previous tax period accompanied by proof of full payment of the tax in accordance with Rule 52 on the first day of the following month and surrender his certificate in From VAT 8 and any certified copies of such certificate issued for any additional place of business.
11. Rule 145 provides for cancellation of certificate. The jurisdictional Local VAT officer or VAT sub-officer shall, on receipt of a final return filed by the dealer under Rule 143 and in the case of a dealer falling under Rule 142 or 144 on receipt of the dealer’s final return or on his own motion, is empowered to cancel such dealer’s certificate and inform the dealer in Form VAT 11. Rule 47 provides for separate registration and filing of returns by the branches of corporate bodies.
12. There is no dispute inasmuch as the power of the jurisdictional Local VAT officer or VAT sub- officer to cancel the composition certificate in terms of Section 145. The main dispute is inasmuch as the cancellation of the said composition certificate retrospectively.
13. Neither the notice issued nor the impugned order indicates about the cancellation of composition certificate with retrospective effect. However, the cancellation of registration issued in form VAT 11 shows that the registration for composition of tax is cancelled with effect from 19.6.2009 for the reasons furnished below:
“1. The dealer contravened provisions of sub-rule 4 of rule 135.
2. Rule 135(4) mandates a dealer who is selling liquor along with food articles and beverages is not entitle to the benefit of composition scheme specify U/s.15(1)(c) of KVAT Act 2003.”
14. The order of cancellation is based on the inspection report dated 30.5.2015 forwarded to the Divisional VAT officer, D.V.Road, Mangalore, to take action to cancel the composition registration scheme granted under Section 15 (1) (c) of the Act. During the course of inspection on verification of the books of accounts relating to the business activities of the dealer, it was found that the petitioner is engaged in sale of Indian Made Foreign Liquor (IMFL) along with articles of food which is a condition prohibited for grant of composition under sub rule(4) of Rule 135 of the Rules. The order impugned does not traverse beyond this inspection report. Indisputably, the assessments of the petitioner were concluded for the earlier assessment years from 2009-10 to 2012-13 and the tax liability was fixed at the applicable rates of tax under the composition scheme. The assessee as well as the Assessing Authority have acted upon the certificate of composition scheme issued. The petitioner has not collected tax on his sales during the period of the operation of the composition scheme and has not claimed the input tax credit. Cancellation of the composition scheme retrospectively creates additional tax liability where the dealer has not collected the tax while opting for composition under Section 15 of the Act, otherwise the dealer was entitled to collect tax if the liability to pay tax was under Sections 3 and 4 of the Act.
15. It is well settled that the retrospective withdrawal or cancellation of the registration certificate will have no effect upon the assessee who has acted upon it when it was valid and operative. Reference may be made in this regard to the decision of the Hon’ble Apex Court in the case of State of Maharashtra Vs. Suresh Trading Company reported in (1997) 11 SCC 738, wherein the Hon’ble Apex Court has held thus:
“ In our view, the High Court was right. A purchasing dealer is entitled by law to rely upon the certificate of registration of the selling dealer and to act upon it. Whatever may be effect of a retrospective cancellation upon the selling dealer, it can have no effect upon any person who has acted upon the strength of a registration certificate when the registration was current. The argument on behalf of the department that it was the duty of persons dealing with registered dealers to find out whether a state of facts exists which would justify the cancellation of registration must be rejected. To accept it would be to nullify the provisions of the statute which entitle persons dealing with registered dealers to act upon the strength of registration certificates.”
16. In the case of Ramdas Maneklal Gandhi Vs. The Union of India and others reported in 2000 (241)ITR 437(Bom) the Hon’ble Bombay High Court while considering the effect of retrospective withdrawal of the certificate, that was granted to the Society of Integral Development – the assessee claiming deduction under Section 35-CCA of the Income Tax Act 1961 in respect of donation of Rs.1 lakh made to the Society of Integral Development held that the retrospective withdrawal of the certificate couldn’t effect the rights of the assesses, who acted upon it while it was valid and operative, placing reliance on the judgment of the Hon’ble Apex Court in Suresh Trading Company supra.
17. In the context of registration of dealers under sale tax laws, the Hon’ble High Court of Orissa at Cuttack in State of Orissa Vs. Santosh Kumar and Company reported in (1983) 54 STC 322 has observed thus:
“5. Before we part with this case, we must bring to the notice of the State that registration of dealers is indeed a serious matter and its officers authorized to grant registration should be very careful. Once a certificate of registration is issued to a person and he becomes a registered dealer, he is entitled to certain benefits under the Act. Certificates granted by the public officers have their value and people in the commercial field would in normal course accept such certificates to be genuine. The fact that registration has been granted, yet the person holding the certificate is a fictitious one seem to be contradictions in term. A certificate of registration can be granted only when the dealer, apart from being a businessman, satisfies the other requirements prescribed by law. A registration certificate cannot be granted to a non-existent person. The fact that there have been some persons who are labelled by the department as fictitious dealers goes to show that the officers under the Act either collude with dishonest people in the field or fail to exercise due diligence and allow fraud to be practised in the commercial field. Whether it is collusion or negligence, these officers bring disrepute to the State and introduce uncertainty and lack of confidence into a true filed of trust. It is high time that the State Government institutes appropriate enquiries, take such steps as the necessary to eliminate fictitious dealers from the filed and also take strong’ ion against persons connected with such matters so that there be no recurrence of it in future.”
18. In the case of Amma Construction India Private Limited, Bangalore Vs. The Asst. Commissioner of Commercial Taxes reported in 2015(83)KLJ 91, this Court has observed that the only condition for making further reassessment in addition to earlier assessment is when the authority takes notice of further evidence, there must be further evidence which is noticed by the Assessing Authority for further assessment or reassessment. Otherwise, the Assessing Authority has no jurisdiction to interfere with reassessment order granting refund of excess tax paid based on the evidence regarding deduction based on TDS certificate which was already before the Assessing Authority.
19. This court in the case of M/s Oriental Cuisines Pvt. Ltd., Vs. The Dy. Commissioner of Commercial Taxes (2018-TIOL) 635 has observed that, it is clear that unless the certificate issued under Rule 137 has not been cancelled, the assessee herein would be entitled to continue with the benefit u/s 15 on composition scheme.
20. In the case of M/s Aswati Inns Private Limited Vs. The State of Karnataka and another, the Division Bench has held that where a dealer is a body corporate and has more than one place of business and if it so desires, the Commissioner may on an application and on being satisfied that the provisions are likely to cause hardship by a special order, grant such permission subject to the condition that may be prescribed by him in terms of the Act and Rules.
21. In the light of these judgments vis-a-vis the provisions of the Act as aforesaid, it is not in dispute that the petitioner had acted on the composition registration certificate issued by the competent authority and it had carried on its business on the basis of the said certificate. Thus it will be harsh for the respondents to assess the petitioner under the VAT regular scheme and demand the payment of tax even for that period for which the petitioner had carried on his business under the composition scheme. Certificates granted by the authorities have significant effect. A certificate granted being after satisfaction of the authority, cannot be cancelled retrospectively disturbing entire business carried on by the dealer. It is for the authorities to take effective steps to eliminate the misuse of the certificates, if any, by conducting frequent inspections and verifying the books of accounts while concluding the assessments for the respective tax periods. Indeed re-assessment proceedings were concluded in 2014 for the tax periods 2009-10 sans raising objections to the returns filed. Cancellation of the composition certificate with retrospective effect would damage the business activity of the dealer with cascading effect denying the input tax credits which would have been claimed by the petitioner collecting the taxes on his sales for which maintaining of regular books of accounts would be necessary. This could be examined in another angle also. Rules 142, 143 and 144 makes it clear that if the dealer exceeds the threshold, voluntarily withdrawn from the composition scheme, purchases or obtains goods from outside the State shall be inelgibile for such composition benefits and is liable to pay tax under Section 3 (VAT scheme) from the relevant periods prescribed therein i.e., prospectively. It may be true that the intelligence wing on the inspection conducted on 26.02.2015 might have discovered the sale of liquor in the business of premises of the assessee having wrongly opted for VAT as well as composition scheme for the two restaurants, filing two separate returns on 26.2.2015 but the multiple registrations obtained by the petitioner during 19.06.2009 to 31.03.2013 is not disputed. In such circumstances, if any conditions of the composition scheme is found to have been violated by the dealer, the competent authority can cancel the registration of the composition certificate from the relevant tax period but not with retrospective effect to undo the transactions acted upon the strength of the composition certificate when it was valid and operative. More particularly, when the re- assessment was concluded for certain tax periods with no objections raised in the manner of filing of the returns by the assessee. Initiation of re-assessment proceedings vide notice dated 09.02.2018 is consequential to the cancellation of composition registration certificate with effect from 19.06.2009. Since the cancellation of composition registration certificate with retrospective effect cannot be approved, the re-assessment notice dated 09.02.2018 at Annexure-A2 deserves to be quashed.
For the reasons aforesaid, writ petition is allowed.
The impugned order dated 23.01.2016 at Annexure-A1 and the notice dated 09.02.2018 at Annexure-A2 are quashed.
No order as to costs.
Sd/- JUDGE Dvr