By TIOL News Service

BANGALORE, APRIL 07, 2018: THE ISSUE BEFORE THE COURT is - Whether the Department can initiate re-assessment proceeding against a registered dealer under the VAT scheme even if, the Composition tax registration certificate issued u/s 15 of KVAT Act has not been cancelled. NO is the verdict.

Facts of the case:

The Assessee-company, a registered dealer, engaged in the business of hotel industry and running a chain of restaurants specialized in different cuisines operating in various States. The Assessee had filed its return for the relevant AY. In the course of the assessment proceeding, the Revenue noted that the Assessee had opted for Composition Scheme u/s 15(1) relating to only two types of outlets, namely 'The French Loaf' & 'Wangs Kitchen'. In the outlet, run under the brand, 'The French Loaf', the Assessee was selling bakery products whereas in the outlet run under the brand name 'Wangs Kitchen', they cater only to chinese cuisine.

The Assessee submitted that in both these outlets, no liquor was served to the customers. In the other two outlets namely, 'Benjarong' which caters to Thai cuisine and 'Entekeralam' which caters to Kerala cuisine and 'Teppan' which caters to Japanese cuisine, alcohol was also served. Further, it was found that the registration certificate was issued to the said effect. The Assessee was duly paying VAT at 14% and regularly filed monthly returns in Form VAT 120 in respect of the said two outlets. However, the said composition facility (COT) which was granted by the Department was cancelled by the Assistant CCT by stating that the Assessee was dealing in liquor either at the principal place of business or branches. Therefore, the Assessee was not entitled to opt for composition scheme u/s 15(1)(c). Later, the Assessee's place of business was inspected by the Enforcement Wing whereby, it was noticed that the Assessee was filing returns under the COT Scheme. Nevertheless, the Assessee was also engaged in inter-state purchase of capital goods, raw materials and had also effected purchase and sales of liquor against excise license CL-9. Accordingly, re-assessment proceeding was initiated by disallowing the input tax credit (ITC) and enhancing the tax liability with penalty and interest.

the High Court held that, ++ form VAT 7 under the Rule 9(1) was issued to the Assessee permitting it to opt for payment of tax under the composition scheme u/s 15 under the category Hotelier / Restaurateur / Caterer / Sweet meat stall / Bakery/Icecream Parlour. The amendment certificate issued on 30.03.2014 is valid from 01.04.2014. Pursuant to the inspection conducted by the enforcement wing on 16.12.2015, whereby it was noticed that the Assessee was filing the returns under the composition scheme and has effected inter-state purchase of raw-material, capital goods on the strength of "e-Sugam" and 'C' Form and has also dispatched the manufactured goods to other states and the Assessee has effected the purchase and sale of liquor under the excise license CL-9, Re-assessment proceedings u/s 39(1) were initiated and concluded, re-assessing the dealer under the VAT Scheme for the tax period 2014-15. Notice dated 22.06.2015 issued u/s 15(1)(c) indicates that the proposal was to cancel COT facility with immediate effect. Similarly, order of cancellation dated 22.07.2015 indicates COT facility granted is cancelled and Assessee is enabled to file VAT 100 returns w.e.f. 01.08.2015;

++ the Authority has not cancelled the composition scheme certificate retrospectively w.e.f. 01.04.2014, if the Assessee has contravened the conditions specified u/s 15 and Rule 135 or from the date of contravention whichever is applicable. The proposition notice issued u/s 39(1) was issued on 7.9.2016 to which detailed reply was filed by the Assessee. On consideration of the objections and rejecting the same, re-assessment proceedings were concluded, assessing the Assessee under VAT Scheme for the tax period 1.4.2014 to 31.3.2015 subjecting the taxable turnover to levy of tax at 14.5% rejecting the composition scheme;

++ it is beneficial to refer to the Division Bench Judgment of this Court in the case of M/s. IDEAL TRADERS CREAM PARLOUR PVT. LTD. and connected matters dated 4.10.2012, whereby this Court has held that "... the Assessee are registered under the KVAT Act and opted for Composition Tax Registration Certificate. The said certificate has not been cancelled by the competent authority. So long as the Composition Tax Registration Certificate stands in the name of the Assessee, the Revenue cannot levy tax u/s 4(1)(b) ..." ;

++ similarly, in the case of ABIDHEEP INTERLOCK PAVERS PVT. LTD., the Division Bench of this Court has held that "... As the certificate issued under Rule 137 has not been cancelled, the dealer herein would be entitled to continue with the benefit u/s 15 on composition of tax. It is only after the certificate is cancelled by exercise of the power under Rule 145, the assessment or re-assessment can be made in respect of the dealer, who has opted for composition of tax ..." ;

++ in the case of M/S. ASWATI INNS PRIVATE LIMITED, the Division Bench has held that on an application filed by the Assessee exercising the powers u/s 38(6), permission was granted to treat each of the places of business as a separate unit for the purpose of levy assessment and collection of tax and thereupon all the provisions of the Act regarding registration, filing of returns, assessment and collection of tax was made applicable. However, the said provisions made it very clear 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 from it and on being satisfied that the provisions are likely to cause hardship, by a special order, grant such permission subject to the condition as may be prescribed by him in terms of the Act and its Rules. In the said case, in the principal place of business where the Assessee was carrying on business of food items, he was also selling liquor, it was thus held that the Assessee did not want to carry his business with liquor in other places, he made a request for a separate registration so that he can have the benefit of scheme of composition. In that context, it was held that the Assessee is entitled to said benefit only when he satisfies the requirement of Rule 47(1). The said judgment would not lend any assistance to the Revenue to levy tax under the VAT Scheme during the subsistence of the composition certificate issued u/s 137;

++ therefore, 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. Indisputably, the order of cancellation of composition scheme facility has been passed on 22.07.2015 with immediate effect. It is also made clear that VAT option is enabled to file VAT- 100 returns w.e.f. 1.8.2015. Even in the notice, for cancellation of composition scheme, it was proposed to cancel the COT facility with immediate effect. The same coming into effect from 22.07.2015, the Prescribed Authority has no power to assess the Assessee under VAT Scheme for the period when the composition certificate issued under Rule 137 was in existence. Rule 137 provides for issuance of certificates. The certificate issued under Rule 137 entitles the Assessee to make payment in terms of composition scheme at 4% unless the same is cancelled in terms of Rule 145. Indisputably, the certificate issued under Rule 137 was not cancelled during the tax period April 2014 to March 2015. Hence, for the period in question, no re-assessment can be made u/s 39(1) subjecting the Assessee to tax under VAT Scheme.

(See 2018-TIOL-635-HC-KAR-VAT)