IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 5TH DAY OF NOVEMBER, 2019 BEFORE:
THE HON’BLE MRS. JUSTICE S.SUJATHA WRIT PETITION No.17935/2019 (T – RES) BETWEEN:
M/s. VYBHAV ASSOCIATES A PARTNERSHIP FIRM HAVING ITS OFFICE NEAR ESHWAR RICE MILL TYAVARECHATNAHALLI SHIVAMOGGA-577202 REP. BY ITS PARTNER S.DHANASHEKHARA S/O R.SRINIVAS AGED 50 YEARS. …PETITIONER (BY SRI THIRUMALESH.M., ADV. FOR SRI PRASHANTH CHANDRA.S.N., ADV.) AND:
1. STATE OF KARNATAKA REP. BY ITS SECRETARY TO THE COMMERCIAL TAX & HAVING ITS OFFICE AT VANIJYATHERIGEGALA KARYALAYA 1ST MAIN ROAD, GANDHINAGAR BENGALURU-560009.
2. THE ASSISTANT COMMISSIONER OF COMMERCIAL TAX, AUDIT-III SHIVAMOGGA SHIVAMOGGA-577205. …RESPONDENTS (BY SRI T.K.VEDAMURTHY, AGA.) THIS WRIT PETITION IS FILED UNDER ARTICLES 226 AND 227 OF THE CONSTITUTION OF INDIA, PRAYING TO QUASH THE ORDER DATED 30.03.2019 PASSED UNDER SECTION 39[1], 36, 37 AND 72[2] OF THE KARNATAKA VALUE ADDED TAX, 2003 PASSED BY THE RESPONDENT No.2 IN ANNEXURE-A AND CONSEQUENTLY QUASH THE DEMAND NOTICE DATED 30.03.2019 ISSUED BY RESPONDENT No.2 IN ANNEXURE-B; AND ETC., THIS PETITION COMING ON FOR PRELIMINARY HEARING IN ‘B’ GROUP, THIS DAY, THE COURT MADE THE FOLLOWING:-
O R D E R The petitioner has challenged the order dated 30.03.2019 passed under Section 39[1], 36, 37 and 72[2] of the Karnataka Value Added Tax Act, 2003 [‘Act’ for short] passed by the respondent No.2 relating to the tax periods 2013-14.
2. The petitioner is a partnership firm, carrying on the civil construction activities and a registered dealer under the provisions of the Act. It is contended that the petitioner enters into a contract with prospective customers to meet their demands as such the petitioner had entered into an agreement with its customer – JSS New Hospital for laying concrete road and allayed works. The institution had paid advance to commence the work to the tune of Rs.49,14,000/- on 22.06.2013 and 14.08.2013. Accordingly, the petitioner has carried out the work as per the schedule. The respondent-Authority has imposed tax on the advance payment received by the petitioner during the tax periods in question referring to the Explanation to Rule – 3 of the Karnataka Value Added Tax Rules, 2005 which has been held to be unconstitutional and invalid by this Court.
3. Reliance is placed on the order of this Court in the case of M/s. Nagarjuna Construction Company Limited, Bangalore V/s. State of Karnataka and Others, reported in 2010 [69] Kar.L.J. 97 [HC] as well as State of Karnataka V/s. Reddy Structures Private Limited, Bangalore, reported in 2014 [80] Kar. L.J. 152 [HC] [DB].
4. Learned Additional Government Advocate appearing for the Revenue would submit that though the advance payment was received to the tune of Rs.49,14,000/- during the tax periods in question, Rs.22,00,000/- being utilized in the relevant year, no returns are filed during the subsequent tax periods. Hence, the action of the respondent-Authority to subject the advance payments received to tax during the tax periods in question is justifiable.
5. Having heard the learned counsel for the parties and perusing the material on record, the liability fastened on the petitioner–Assessee for the advance payment received during the tax periods 2013-14 cannot be held to be justifiable, for the reason that Explanation to Rule 3 of the Rules contemplates that any amount paid as advance to a dealer as a part of consideration for transfer of property in goods [whether as goods or in some other form] involved in the execution of a works contract shall be included in his total turnover in the month in which execution of such works contract commences. However, the Cognate Bench of this Court in the case of M/s. Nagarjuna Construction Company Limited, Bangalore supra, has observed that the Explanation to Rule 3[a] to [g] of the KVAT Rules is contrary to Section 4[1][c] of the Act and Article 366[29A][b] of the Constitution of India and is hence unconstitutional. Accordingly levy of tax and penalty on advances received by the petitioner therein, was quashed.
6. In the case of Reddy Structures Private Limited, Bangalore supra, the Division Bench of this Court has observed thus:
“53. Therefore the sale of goods takes place either by transfer of title or by delivery of possession or at the time of incorporation of the goods in the course of execution of any works contract. It is a deeming provision. Therefore for any amount to be included in the turnover, the condition precedent is there should be a sale or delivery of possession or incorporation of the goods in the course of execution of any works contract. If none of these events have happened, there is no turnover. In consideration of entering into the works contract, if amounts are paid in advance as mobilization advance, that amount is paid to the contractor to take steps to execute the work. On the date the amount is paid, the contractor neither transfers title in the property nor delivers possession nor incorporates any goods in the work. Therefore the question of treating the advance amount paid as part of consideration for transfer of property in goods would not become turnover and therefore the explanation added to Rule 3 with the object of levying sales tax on advance receipt runs counter to the aforesaid statutory provisions as well as the constitutional provisions. Therefore the learned Single Judge was justified in holding that the explanation is unconstitutional. Therefore no fault could be found in the said order of the learned Single Judge.”
7. In the light of the above said judgments, the order of re-assessment passed by the respondent – Authority cannot be sustained. Accordingly stands quashed. The matter is remitted to the respondent No.2 – Authority to re-consider the same in the light of the observations made herein above and shall conclude the re-assessment in an expedite manner after providing an opportunity of hearing to the petitioner.
All the rights and contentions of the parties are left open.
With the aforesaid observations and directions, writ petition stands disposed of.
Sd/- JUDGE NC.