By TIOL News Service

ERNAKULUM, JULY 10, 2018: THE ISSUE AT HAND BEFORE THE BENCH IS whether a compounding application filed under the VAT Act concerned can be sought for & then withdrawn in the same AY, when no sanction had been issued during that AY. YES IS THE ANSWER.

However, the Bench also held that in such case, no refund of compounded tax paid under compounding scheme can be claimed.

Facts of the case

THE assessee company opted for compounding during the relevant AY. In this regard, quarterly compounding tax was paid. However, during the same AY, the assessee found itself unable to carry on its business and so its applied for withdrawal of the compounding application. Such application was rejected. When the assessee first approached this court, the Single Judge opined that the compounding process was a contract between the assessee & the department and so its withdrawal was impermissible.

Also, the issue decided by the Single Judge was whether the assessee could be absolved from the liability arising from the contract on grounds of the obligation being impossible of performance u/s 56 of the Indian Contract Act, 1872. In this regard, the Single Judge held that the factual & legal position would indicate that there is subsequent supervening circumstance, which created an impossibility in performing the obligations under the contract and therefore such a contention does not merit consideration. It was also held that at best the obligation under the scheme which the assessee voluntary opted is onerous. The Single Judge relied on the decision of the Apex Court in Naihati Jute Mills Ltd. v. Khyaliram Jagannath, wherein it was held that courts cannot absolve parties from the performance of his part of the contract merely for the reason that the performance has become onerous on account of an unforeseen turn of events and the Court cannot modify the terms of the contract. Hence the present appeals.

In writ, the High Court held that,

++ considering the various cases relied on by the assessee and by the Department, we are concerned with cases in which during the assessment year itself, the assessees have sought for withdrawing from the option exercised by them on the ground that the request for compounding had not been sanctioned;

++ it is true that the assessees had submitted compounding application and they had remitted quarterly tax as well. But before passing an order in terms of R.11(2) of the KVAT Rules, they sought to withdraw from the scheme of compounding. In such circumstance, the question would be whether the Department is bound to permit withdrawal from the compounding. The Single Judge in the judgment dated 9/3/2017 in WP(C) No.39547/2016 proceeded on the basis that there was in fact an order of compounding sanctioned by the Department;

++ the only contention urged is that in so far as there is no production, compounded tax is not payable and the assessee cannot be compelled to remit tax for the quarter where there is no sale or production at all. However, during the course of argument, counsel submitted that he had sought for exemption during the currency of the assessment year itself and therefore he should be given exemption from payment of compounded tax;

++ it is true that the contention now urged has not been urged before the Single Judge. But specific pleading had been raised in that regard and even in the memorandum of appeal, a specific ground to that extent had been raised. Hence, in the interest of justice, it is only fair that the matter is decided rather than relegating the parties to seek for a review;

++ taking into consideration the factual aspects involved in the matter and also on an evaluation of the legal aspects involved, we are of the view that the assessee ought to have been given an opportunity to withdraw the compounding application especially when no sanction had been issued during the assessment year. However, we take this view only on account of the fact that the request had been made during the AY;

++ the appeals are only to be allowed and an opportunity should be given to the assessee to file regular return for the respective AYs. However, we make it clear that the assessee shall not be entitled for refund of any amount paid towards compounded tax.

(See 2018-TIOL-1286-HC-KERALA-VAT)