The issue that arises for consideration in these writ petitions is whether, assessments completed in respect of an assessee on compounded basis can be re-opened subsequently, pursuant to a revision of the assessment for an earlier year, the tax paid in which year was taken as the basis for determination of the amount payable by the assessee in the compounding proceedings. 2. The petitioner in W.P.(C).Nos.1514/2011, 7200/2011, 3446/2012 and 10776/2013 and the petitioner in W.P.(C).No. 36210/2010, are bar attached hotels that opted for the compounding facility under Section 7 of the Kerala General Sales Tax Act, hereinafter referred to as the 'KGST Act', for the assessment years commencing from 2006-07. As per the scheme for payment of tax at compounded rates during the relevant period, the assessee had an option to discharge his tax liability by paying tax in accordance with a formula, in lieu of the amounts determined pursuant to the normal method of assessment to turnover tax under the KGST Act. Section 7 of the KGST Act, as it stood during the relevant period read as follows:
“7. Payment of tax at compounded rates:- Notwithstanding anything contained in sub-section (2) of section 5, any bar attached hotel, not being a star hotel of and above three star hotel, heritage hotel or club, may, at its option, instead of paying turnover tax on foreign liquor in accordance with the provisions of the said sub-section pay turnover tax on the turnover of foreign liquor calculated,-
(a) at one hundred and forty per cent of the purchase value of such liquor, in the case of those situated within the area of a municipal corporation or a municipal council or a cantonment, and at one hundred and thirty five per cent of the purchase value of such liquor, in the case of those situated in any other place; or
(b) at one hundred and fifteen per cent of the highest turnover tax payable by it as conceded in the return or accounts or the turn over tax paid or any of the previous consecutive three years, whichever is higher.”
3. The application of the petitioners seeking permission to pay tax at compounded rates was accepted by the assessing authority and accordingly the petitioners computed the amount in clause (b) by reckoning the highest tax paid during the three previous assessment years and computing 115% of the said figure. They then computed 140% of the purchase turnover of the year as stipulated in clause (a). By the end of the assessment year, therefore, they had the two figures contemplated in (a) and (b) above, and they determined the amount that had to be paid by them under the compounding scheme by adopting the higher of the two figures. This amount was accepted by the department towards their tax liability for the year in question.
4. As far as the petitioner in W.P.(C).Nos.1514/2011, 7200/2011, 3446/2012 and 10776/2013 is concerned, in the subsequent years up to 2012-13, the compounding scheme was applied and the tax liability determined, by adopting the figures for the year 2006-07 and hence, to that extent, the assessments for the subsequent years were dependent upon the figures adopted for the year 2006-07.
5. It would appear that proceedings were initiated by the department, against the petitioner, in respect of the assessment year 2005-06 based on a shop inspection carried out by the department.
The proceedings initiated were for imposition of penalty as well as for re-assessment. The said proceedings eventually resulted in the assessee obtaining substantial relief, both in respect of penalty and in respect of the additions made to the turnover for the year. What is relevant for the purposes of these writ petitions, however, is the fact that, during the pendency of the proceedings in respect of assessment year 2005-06, the department issued notices proposing to revise the assessments completed on compounding basis for the years 2006-07 and thereafter, on the ground that the figure taken as tax paid for the year 2005-06 was wrong and thus, the very basis for the figures taken for determining the amount of tax to be paid under the compounding scheme for 2006-07 and subsequent years was wrong. The notices issued to the petitioners for the years 2006-07 to 2009-10 culminated in orders passed by the assessing authority re-determining the amounts payable by the petitioners for the said years. Although the petitioner filed appeals against the said orders before the first appellate authority, the said appeals were dismissed. W.P.(C).No. 1514/2013 was therefore preferred by the petitioner challenging the orders of the assessing authority as also those of the appellate authority and the consequent demand notices that were issued to the petitioner. While this writ petition was pending before this Court, the assessing authority proceeded to issue similar notices to the petitioner in respect of the assessment years 2010-11, 2011-12 and 2012-13. As this Court was already considering the issue in W.P.(C).No.1514/2013, the notices were challenged in W.P.(C).No.7200/2011 (Assessment year 2010-11); W.P.(C).No.3446/2012 (Assessment year 2011-12) and W.P.(C).No.10776/2013 (Assessment year 2012-13).
6. As far as the petitioner in W.P.(C).No.36210/2010 is concerned, it opted for payment of tax at compounded rates during the assessment year 2006-07. For the purposes of arriving at the amount to be paid, the tax paid by the petitioner during the assessment year 2005-06 was adopted as the basis. Subsequently, however, the department re-computed the amount determined for compounding purposes on the contention that the opening stock of the year was not added to the purchase turnover of the year, while computing 140% of the purchase turnover for the purposes of Section 7 of the KGST Act. Based on the revised order passed for the assessment year 2006-07, consequential revised orders were also passed in respect of assessment years 2007-08 and 2008-09. All the said orders and the consequent demand notices are impugned in the said writ petition.
7. I have heard learned Senior Counsel Sri.Raju Joseph, appearing on behalf of the petitioners in all the writ petitions as also the learned Government Pleader Smt.Lilly.K.T. appearing on behalf of the respondents in the said writ petitions.
8. The main contention of the learned Senior Counsel is that the provisions of Section 7 of the KGST Act, as they stood during the relevant period, contemplated the determination of the amount of tax to be paid by the petitioners on compounded basis by reference to a formula. The said formula envisaged a comparison between two sets of figures and the adoption of the higher of those figures as the amount to be paid by the petitioner. In the case of the petitioners, the figures to be taken for the immediately preceding three years was the figures pertaining to the tax payable by the assessee as conceded in the return or accounts or the tax paid for the previous consecutive three years. It followed, therefore, that a revision of the order permitting compounding, based on a revised assessment for the preceding years, could not be done since the figures pertaining to tax pursuant to an assessment were wholly irrelevant for the purposes of the formula for compounding. It is also the contention of the learned Senior Counsel that, at any rate, the power to re-open concluded proceedings under Section 7, could only be traceable to the rectification power under Section 43 of the KGST Act, and that had to be exercised within three years from the date of the order sought to be rectified. The modified orders in the present writ petitions were all passed beyond that date. As regards W.P.(C).No.36210/2010, it is contended that the requirement of adding the opening stock of the first year of compounding, to the purchase turnover figures of that year for the purposes of determining the amount that had to be paid in terms of Section 7, was inserted in the said Section only with effect from 2010. The said provision could not have been made applicable to a compounding order passed for the assessment year 2006-07. The plea of time bar with reference to Section 43 of the KGST Act is also reiterated for the purposes of this writ petition.
9. Per contra, the learned Government Pleader would contend, by placing reliance on a Division Bench decision of this Court in M/s Joy Alukkas Traders (I) Pvt Ltd v. State of Kerala – [2010 (1) KHC 844[, that it was well within the powers of the respondents to re-open a compounding order that was seen passed erroneously and in contravention of the statutory scheme. The judgment of this Court in MSP Family Jain Trust v. State of Kerala - [2006 KHC 682] is also relied upon for the proposition that proceedings for assessment of escaped tax can also be initiated to assess tax that has escaped even in cases of assessments at compounded rate. Reliance is also placed on the decision reported in Sannidhan Bar and Restaurant (M/s.), Kannur v. State of Kerala – [2010 (2) KHC 461], for the proposition that the requirement of adding the value of opening stock of liquor while computing the purchase turnover of the year of compounding can be read into the provisions of Section 7 as it then stood and the amendments introduced subsequently were only clarificatory.
10. On a consideration of the facts and circumstances of the case as also the submissions made across the bar, I find that the scheme for compounding envisaged under Section 7 of the KGST Act, as it stood during the relevant period, contemplated the payment of tax at compounded rates based on a formula. The said formula required the assessee to choose the higher of the two figures, relating to turnover of foreign liquor, arrived at through separate computations, for the purposes of determining the amount to be paid in discharge of his tax liability for the year. On the one hand, the assessee was required to compute 140% of the purchase value of the liquor and on the other 115% of the highest turnover tax payable by it as conceded in the return or accounts, or the turnover tax paid for any of the previous consecutive three years. The computation had to be done for the purposes of arriving at a figure representing turnover and the rate of tax was to be applied to the said figure for arriving at the tax payable on compounding basis.
11. It is apparent from the scheme of Section 7, therefore, that
● the data required for arriving at the figure representing turnover had to be that available on the date of computation in accordance with the formula; and
● for the purposes of computing 115% of the highest turnover tax pertaining to the previous consecutive three years, the tax payable pursuant to an assessment viz. the assessed tax, was not at all relevant.
It follows, therefore, that any change in the assessment orders for the previous years could not have affected the tax paid on compounding basis for the year 2006-07 because the reference to the earlier years was only to determine the turnover tax payable as conceded in the return or accounts or the turnover tax actually paid. This data would have been available by the end of the following assessment year for the purposes of finalising the amount of tax liable to be paid by the assessee for that year on compounding basis. It is therefore, that the legislature appears to have deliberately omitted a reference to the assessed tax of the previous years in the formula prescribed for compounding, probably on realising that an assessed tax could be modified in subsequent proceedings by way of appeal or revision, thus depriving the figure of a certainty and finality that is warranted for compounding purposes.
12. A Division Bench of this Court in State of Kerala v Malabar Ornaments - [2013 (57) VST 309], had occasion to consider a similar issue with regard to the compounding application preferred by a dealer running a jewellery shop. The scheme of compounding applicable for such dealers contemplated the payment of compounded tax at 200% of the highest tax payable for any of the immediately three preceding years. The assessment year under consideration in that case was 2006-07 and the dealer paid tax at 200% of the tax returned as tax payable for the year 2005-06. The payment of tax at compounded rate was found to be in order by the Appellate Tribunal. In a revision filed before this Court, the contention of the department was that tax at the compounded rate was payable based on the highest tax returned for any of the years or the tax found as payable based on the assessment for the said years. This contention was rejected by this Court which found that insofar as the scheme of compounding contemplated a payment of tax based on “return or accounts”, there was no scope for assessment of tax at compounded rates based on tax assessed or demanded for any of the three preceding years.
13. It is also necessary to note that the option of payment of tax at compounded rates is an alternative to the regular method of payment of tax after an elaborate procedure of assessment. Section 7 begins with a non-obstante clause that clearly indicates that the scheme of payment of tax envisaged thereunder is an alternative to the regular method of assessment and payment of tax. Thus, when an assessee opts to pay tax at compounded rates and such an option exercised by the assessee is accepted by the department, then it will not be open to the department, at a later point in time, to re-open those proceedings save to the limited extent of rectifying any apparent computational mistakes that have been occasioned during the compounding proceedings. In this connection, reference may be made to a recent decision of the Supreme Court in Bhima Jewellery v. Assistant Commissioner (Assessment), Kerala and Anr – [2014 (71) VST 110 (SC)] – where the Court was considering the issue of whether a newly introduced levy of Additional Sales Tax on dealers paying tax under regular assessment would apply to dealers opting to pay tax at compounded rate in lieu of tax under regular assessment. The Court took note of the non-obstante clause that was used in the provision governing payment of tax at compounded rates and found that the levy of additional sales tax being limited to those paying tax under the regular assessment under Sections 5 and 5A of the KGST Act, it would not apply to those who had opted to pay tax at compounded rates under Section 7 of the said Act. The Court also observed that the option of composition of tax is like a bilateral agreement between the parties with an object to dispense with the rigours of regular assessment. The dealer is given a choice to opt for compounded payment of tax and once the option is exercised and the same is accepted by the authority concerned, it is no longer open to the dealer to request for a regular assessment as envisaged under Sections 5 and 5A of the KGST Act.
14. In the light of the discussions above, I am of the view that the re-opening of concluded compounding proceedings, based on the revised assessments for the assessment year 2005-06, cannot be legally sustained. Resultantly, I quash Exts.P9 to P12 revised orders, Exts.P19 to P22 appellate orders and Exts.P13 to P16 Demand notices in W.P.(C).No.1514/2011 (Assessment years: 2006-07 to 2009-10) and the notices impugned in W.P.(C).No.7200/2011 (Assessment year 2010-11); W.P.(C).No.3446/2012 (Assessment year 2011-12); W.P.(C).
No.10776/2013 (Assessment year 2012-13) and allow the said writ petitions.
15. As regards W.P.(C).No.36210/2010, while the general principle discussed above would apply to the compounding proceedings adopted for the petitioner in this case as well, it is seen that the re-opening of the concluded proceedings was sought on a different ground namely, that while computing the figure representing 140% of the purchase turnover for the year 2006-07, the petitioner had not included the opening stock of that year in the purchase turnover for the year. While the learned Senior Counsel would point out that there was no such requirement spelt out in Section 7 of the KGST Act, as it stood during the relevant period, the decision in Sannidhan Bar and Restaurant, Kannur v State of Kerala – [2010 (2) KHC 461], relied upon by the learned Government pleader would show that this Court has already held that the requirement of adding the value of opening stock of liquor while computing the purchase turnover of the first year of compounding has to be read into the provisions of Section 7, as it then stood, and consequently the rectification proceedings initiated by the department to correct the computational error was in order. In the instant case, however, even if it is accepted that the department had the power to rectify mistakes that were noticed in the computation of tax in the compounding proceedings, the said power is one that has to be exercised strictly in accordance with the statutory provision. A reading of Section 43 of the KGST Act would reveal that the power has to be exercised by the authority passing the original order, within three years from the date of the original order. In the instant case, Ext.P1 order permitting the petitioner to pay tax on compounding basis for the year 2006-07 is dated 28.11.2006 and Ext.P2 order passed in rectification is dated 29.07.2010, well beyond the three year period prescribed in the statute. As the statutory period of limitation limits the jurisdiction and powers of the authority to exercise his power of rectification, I am of the view that Ext.P2 order in W.P.(C).No.36210/2010, as well as Exts.P3 and P4 orders and the demand notices issued pursuant thereto, that are passed consequent to, and based on, Ext.P2, cannot be legally sustained. I accordingly quash the said orders and demand notices and allow W.P.(C).No.36210/2010.
Thus all the writ petitions are allowed but with no order as to costs.
A.K.JAYASANKARAN NAMBIAR JUDGE prp