(2015) 400 KLW 345

IN THE HIGH COURT OF KERALA AT ERNAKULAM 

PRESENT: THE HONOURABLE MR. JUSTICE A.K.JAYASANKARAN NAMBIAR 

TUESDAY, THE 24TH DAY OF FEBRUARY 2015/5TH PHALGUNA, 1936 

W.P.(C) Nos.3740, 4664, 6433, 6434, 6435, 7451, 21591, 21596 of 2012, 128, 6680, 9278, 9456 and 14691 of 2013

PETITIONER

MALABAR GOLD MALABUR BUSINESS CENTRE (P) LTD., MALABAR FORT, G.B. ROAD, PALAKKAD, REPRESENTED BY ITS DIRECTOR. 

BY ADVS.SRI.S.ANIL KUMAR (TRIVANDRUM) SRI.K.S.HARIHARAN NAIR 

RESPONDENTS

1. ASST COMMISSIONER,COMMERCIAL TAXES, SPECIAL CIRCLE, PALAKKAD-PIN-678001.

2. STATE OF KERALA REPRESENTED BYT HE PRINCIPAL SECRETARY TO GOVERNMENT TAXES DEPARTMENT, SECRETARIAT THIRUVANANTHAPURAM-695001. 

R1 & R2 BY SPL. GOVERNMENT PLEADER SRI. GEORGE MECHERIL

JUDGMENT 

The petitioners in all these writ petitions are dealers in gold and jewellery, who had opted to pay tax at compounded rates under 

Section 8(f) of the Kerala Value Added Tax Act, 2003 

[for short, 'KVAT Act'] during the assessment year 2011 - 2012. During the year in question, the provisions of Section 8(f) were amended and the issue involved in these writ petitions is with regard to the effect the said amendment had on the option for compounding exercised by the petitioners. It would be apposite, therefore, to first notice the statutory provisions as they stood during the assessment year 2011 - 2012. The provisions of Section 8(f) as they stood on 01.04.2011 were as follows : 

2. By the Kerala Finance Bill, 2011 (Bill No.426 of the 12th Kerala Legislative Assembly), certain provisions of Section 8(f) were amended. These assessments came into force with immediate effect on account of the declaration under the Kerala (Provisional Collection of Taxes) Act. The amendments briefly stated were as follows : 

3. Thereafter, there was a change in Government in May, 2011, and consequent to that, a new Finance Bill was introduced, which was later passed as the Kerala Finance Act, 2011 (Act 16 of 2011). By the said Act, the provisions of Section 8(f) of KVAT Act were further amended with effect from 01.04.2011, to read as follows : 

4. It is significant to note that, 

Section 12 of the Kerala Finance Act, 2011 (Act 16 of 2011)

provided for validation of actions taken under the provisions of Kerala Finance Bill, 2011 (Bill No.426 of the 12th Kerala Legislative Assembly). The said validation clause read as under : 

5. The petitioners herein filed their applications for payment of tax at compounded rates before the official respondents within the time stipulated under the KVAT Act and Rules. In many of the cases, the authorities concerned considered the applications, and granted permission to the petitioners to pay tax at the compounded rates as per the provisions in force during the period between 01.04.2011 and 19.07.2011. In some cases, although the petitioners had filed their applications within the period envisaged in the Statute, the authorities concerned did not pass orders on the said applications immediately, but passed orders only subsequently, after the coming into force of the Finance Act, 2011. Even in such cases, however, it is not in dispute that the petitioners, after filing their applications, went ahead and filed the necessary returns in accordance with the provisions of the Act and Rules and also paid tax in accordance with the returns filed. A tabulated chart showing the details of the applications filed by the petitioners in the various writ petitions, and the date on which the orders were passed on the said applications by the respondents is given below :- 

6. Consequent to the enactment of the Finance Act, 2011, the respondents took the stand that, on account of the amendments introduced by the Finance Act, 2011 with effect from 01.04.2011, the petitioners would be liable to pay tax at the higher rate as per the amended provisions. This led to the issuance of the orders and demand notices that are impugned in these writ petitions.

7. It is the case of the petitioners that, on account of their applications having been accepted by the respondents before the enactment of the Finance Act, 2011 or alternatively, in view of their having commenced payment of tax, in accordance with their returns filed as per the pre-amended provisions, and the same having been accepted by the respondents, it was not open to the respondents to demand a differential tax from them in terms of the amended provisions of Section 8(f) of KVAT Act. The petitioners would, in particular, rely on the validation clause in the Finance Act, 2011, which clearly stated that anything done, or any action taken, including the levy and collection of tax or duty during the period from 01.04.2011 to 19.07.2011, by virtue of the declared provisions contained in the Kerala Finance Bill, 2011 (Bill No.426 of the 12th Kerala Legislative Assembly), as they stood amended by the said Bill, would be deemed to be and to have always been, for all purposes validly and effectively done or taken under the provisions of KVAT Act, as if the said amendment had been in force at all material times. It is pointed out that the validation clause envisaged that no action would lie against any dealer or authority on the ground of short levy, or refund of excess tax or duty, and tax or duty collected, if any, by a dealer or an authority as the case may be, would be paid over to the Government.

8. It is the contention of the petitioners, therefore, that on account of the validation clause in the Finance Act, 2011, their payment of tax at compounded rates as per the pre-amended provisions, stood validated, and they could not be fastened with any demand for differential tax. 

The petitioners would place reliance on the decision of the Supreme Court in 

Varkisons Engineers v. State of Kerala and another [(2009) 25 VST 1 (SC)] 

as also the decision of this Court in 

Baniyas Granite Industries v. Agricultural Income Tax & Commercial Tax Officer [2015 (1) KLT 657]. 

9. Per contra, the stand of the Government is that, insofar as the Finance Act, 2011 made the amendments, that it introduced, effective from 01.04.2011, the petitioners, who had opted for payment of tax at compounded rates, could not be heard to complain of the enhanced rate that was introduced with retrospective effect by the Finance Act, 2011. In other words, the contention of the State Government is that, insofar as the petitioners had opted for payment of tax at the compounded rate, any amendment to that rate, effected by a subsequent amendment to the Act, was necessarily binding on the petitioners. This was especially so because the power of the State Legislature, to introduce amendments to the Act with retrospective effect was well settled and could not be called in question by the petitioners.

10.I have heard Sri.Raju Joseph, the learned senior counsel and Sri.Anil Kumar, the learned counsel appearing for the petitioners and Sri.George Mecheril, the learned Special Government pleader appearing on behalf of the State Government/respondents.

11.On a consideration of the facts and circumstances of the case as also the submissions made across the Bar, I find that 

in the instant writ petitions, the petitioners had exercised their option, to pay tax in accordance with the provisions of Section 8(f) of KVAT Act, at a time when the Finance Act, 2011 had not yet been enacted. Their applications, seeking permission for payment of tax at compounded rates, were all preferred within the time permitted by the KVAT Act and Rules. In some cases, the applications were acted upon, and permission granted to them by the respondent authorities. In other cases, while the orders permitting them to pay tax at compounded rates were passed much later, it is not in dispute that, the petitioners had, in the meanwhile, effected payment of tax at compounded rates, in accordance with the applications preferred by them and within the time stipulated in the Act and Rules for payment of tax. In my view, the act of the respondents in granting permission to pay tax at compounded rates to some of the petitioners, and the payment of tax at compounded rates, in accordance with the applications filed by them before the authorities, by those petitioners, in respect of whom no formal orders were passed by the respondents on their applications, both resulted in a finalisation of the terms on which the petitioners were to discharge their tax liability, in accordance with Section 8(f) of KVAT Act, for the year in question. It is trite that, when an assessee opts to pay tax at compounded rates, and such an option is accepted by the authorities under the KVAT Act, either expressly through an order or impliedly through their conduct, there comes into existence a contract from which neither side can resile. This legal position with regard to the binding nature of compounding proceedings has been reiterated in a number of judgments of the Supreme Court,

the latest being the decision in 

Bhima Jewellery v. Assistant Commissioner (Assessment), Kerala & Another [(2014) 71 VST 110 (SC)]

I am of the view, therefore, that there was no justification in the respondents proceeding against the petitioners with a demand for differential tax based on the amended provisions introduced through the Finance Act, 2011.

12.There is yet another aspect to be noticed. The Finance Act, 2011, when enacted, contained a validation clause that made it clear that, the passage of the Finance Act would not affect any action taken in terms of the provisions of the Kerala Finance Bill, 2011 (Bill No.426 of the 12th Kerala Legislative Assembly). In the instant cases, the payment of tax at compounded rates, and the acceptance of the said tax by the respondents, all took place when the provisions of the Kerala Finance Bill, 2011 (Bill No.426 of the 12th Kerala Legislative Assembly), were in force. That being the case, by virtue of the validation clause in the Finance Act, 2011, those actions cannot be revisited, and it would be legally impermissible, and patently unfair, to permit the respondents to proceed against the petitioners with a demand for differential tax under Section 8 (f) of the Act.

13.I must now advert to the decisions relied upon by the learned Special Government Pleader in support of his contentions. In the judgment dated 24.02.2012 of a Division Bench of this Court in OT.Rev.No. 3 of 2010, the Division Bench was dealing with a case of dealers in gold jewellery who had opted for payment of tax at compounded rate for the year 2007 - 2008, in accordance with the provisions of Section 8(f) of the KVAT Act as it then stood. The facts in that case would clearly reveal that, the dealers while effecting payment of tax had erroneously paid tax at 150% of the highest tax paid for the three preceding years, instead of paying tax at 200% of the highest tax paid for the turnover conceded in any of the three preceding years. It would appear that, by virtue of the provisions of the Finance Bill, which later became entrenched in the Act consequent to the passing of the Finance Act for the said year, the dealers were legally obliged to pay tax at 200% of the highest tax paid for the turnover conceded in any of the three preceding years. Under those circumstances, the contention of the dealers that, the erroneous payment of tax at 150%, in lieu of 200%, was to be sustained on account of the mistake committed by the dealers, was not accepted by this Court. It was found that, insofar as the dealers had opted to pay tax at compounded rates, they were bound by the higher rate that was introduced by the Finance Act, and their ignorance of the higher rate could not be an excuse for not making the said rate applicable to the tax that was to be paid by them. The said decision of the Division Bench can be of no assistance to the respondents in the present writ petitions where the facts are clearly distinquishable and the Finance Act, 2011 contained an express clause that validated action taken as per the provisions of the Kerala Finance Bill, 2011 (Bill No.426 of the 12th Kerala Legislative Assembly). The other decision relied upon is that of the Division Bench of this Court in 

Sasi v. The Commercial Tax Officer [2010 (1) KLT 661] 

where the Division Bench found that when a compounding application had been permitted on the basis of the rate of tax provided in the Kerala Finance Bill, 2009, and the said rate of tax was enhanced by the Kerala Finance Act, 2009 which was enacted subsequently, it could not be said that there was an enhancement of tax prejudicial to the interest of the assessee, since the permitted rate of compounded tax had not existed in the Statute at any point of time. In the said decision it was held that the payment of the tax by the assessee on the basis of the provisions of the Kerala Finance Bill, 2009, could only be viewed as one effected under a mistake of law and hence the enhanced tax consequent to the enactment of the Finance Act could be validly collected from the assessee. The said decision cited by the learned Special Government Pleader is also clearly distinguishable as it did not have to deal with a validation clause such as the one contained in the Kerala Finance Act, 2011, that validated any action that was taken in terms of the provisions of the Kerala Finance Bill, 2011 (Bill No.426 of the 12th Kerala Legislative Assembly). 

14.Thus, in any view of the matter, the actions of the respondents in demanding differential tax amounts from the petitioners after having accepted the payment of tax by the petitioners in accordance with the applications submitted by them for the assessment year 2011 - 2012, cannot be legally sustained. Resultantly, I quash the impugned orders/demand notices in the various writ petitions to the extent they demand differential tax from the petitioners, as illegal and legally unsustainable.

15.In W.P.(C) Nos.128 and 14691 of 2013, the orders impugned are orders imposing a penalty on the petitioners for non payment of tax at the higher rate applicable under Section 8(f) of the KVAT Act, consequent to its amendment by Kerala Finance Act, 2011. In view of my findings with regard to the non sustainability of the levy of differential tax above, the impugned orders in these writ petitions will also stand quashed. The writ petitions are hence allowed as above.

16.It is made clear that, if as a consequence of this judgment, the petitioners become entitled to any amounts by way of refund of excess tax paid to the Government, then, the respondents shall take steps to either refund the amounts to the petitioners or adjust the same towards the future tax liability of the petitioners. The same shall be done within a period of three months from the date of receipt of a copy of this judgment.