Kerala High Court
M/S. Federal House Construction ... vs The Commercial Tax Officer (Works ... on 8 February, 2016
Author: A.M. Shaffique
Bench: A.M.Shaffique
IN THE HIGH COURT OF KERALA AT ERNAKULAM
PRESENT:
THE HONOURABLE MR.JUSTICE A.M.SHAFFIQUE
MONDAY,THE 6TH DAY OF JUNE 2016/16TH JYAISHTA, 1938
WP(C).No. 9770 of 2016 (U)
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PETITIONER :
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M/S. FEDERAL HOUSE CONSTRUCTION CO-OPERATIVE SOCIETY LTD.,
ALUVA, REPRESENTED BY ITS SECRETARY RAJU M.V.
BY ADV. SMT.S.K.DEVI
RESPONDENTS :
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1. THE COMMERCIAL TAX OFFICER (WORKS CONTRACT)
O/O. THE DEPUTY COMMISSIONER, DEPT. OF COMMERCIAL TAXES,
MATTANCHERY-682 002.
2. STATE OF KERALA,
REPRESENTED BY ITS FINANCE SECRETARY, SECRETARIAT,
THIRUVANANTHAPURAM-695 001.
R1 & R2 BY GOVT. PLEADER SMT. K.T. LILLY
THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD
ON 30-05-2016, ALONG WITH WP(C) NO. 18318/2016, THE COURT
ON 06-06-2016 DELIVERED THE FOLLOWING:
Mn
...2/-
WP(C).No. 9770 of 2016 (U)
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APPENDIX
PETITIONER(S)' EXHIBITS :
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EXT. P1 TRUE COPY OF THE ORDER NO.32151025124/2011-12 DATED
08.02.2016.
EXT. P2 TRUE COPY OF THE NOTICE NO.32151025124/2011-12 DATED
21-10-2015.
EXT. P3 TRUE COPY OF THE REPLY DATED 11TH JANUARY 2016.
EXT. P4 TRUE COPY OF THE LETTER SENT BY E-MAIL.
EXT. P5 TRUE COPY OF THE POSTAL COVER.
RESPONDENT(S)' EXHIBITS : NIL
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//TRUE COPY//
P.S. TO JUDGE
Mn
A.M. SHAFFIQUE, J.
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W.P. (C) Nos. 9770 & 18318 of 2016
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Dated this, the 6th day of June, 2016
J U D G M E N T
Petitioner is a Society registered under the Co-operative Societies Act. Petitioner challenges the assessment orders made under Section 25(1) of the KVAT Act, 2003, in respect of assessment years 2010-2011 and 2011-2012. The orders were preceded by a notice dated 21/10/2015 wherein it was stated that in an earlier notice issued proposing to complete the assessment for the respective years, certain material mistakes were noticed and accordingly, revised notice had been issued.
2. The main contention urged by the petitioner is that the 1st respondent levied tax on the total contract receipts at 12.5% after deducting sub contract proved with Form 20H and labour charges allowed as per Rule 10(2)(b) of the KVAT Rules. Such a view had been taken on the ground that the assessee had not opted to pay tax at compounded rate. According to the petitioner, the building is constructed by the assessee and the transfer takes place only when the building is registered and transferred to the W.P(C) Nos.9770 & 18318/16 -:2:- member. Until such time, parties are bound only by an agreement for sale. That apart, the petitioner is not executing any work as the entire construction is awarded to contractors and therefore, the petitioner does not come under the purview of the Act. It is further contended that the petitioner happened to take registration under the Act in March, 2008 at the instance of the Officers of the Department.
3. Further, it is contended that, from 2008 onwards, petitioner used to pay tax at compounded rate. When notice was received stating that the petitioner has not opted for payment of tax by filing compounding application, petitioner had filed a consolidated reply on 11/1/2016 indicating that some more time may be granted, if it is found that petitioner has not opted for the compounding facility.
4. Petitioner raises three specific contentions. One is that petitioner has opted to pay tax at compounding rate which was being remitted from time to time. At any rate, if the petitioner was not eligible to pay tax at the compounded rate, the return submitted under section 20(1) ought to have been rejected and an opportunity should have been granted to file fresh return after W.P(C) Nos.9770 & 18318/16 -:3:- curing the defects in terms of Section 22 of the KVAT Act and, having not done so within the prescribed period, proceedings under Section 25 could not have been invoked. Further, it is contended that petitioner had not undertaken any works contract.
5. Reference is also made to the judgment of the Supreme Court in Larsen and Toubro Ltd. v. State of Karnataka [(2014) 1 SCC 708]. It is submitted that as far as the petitioner is concerned, the transaction is only for its members. Reliance is also placed on the judgment in Assotech Reality Pvt. Ltd v. State of U.P. [(Allahabad) 2007 8 DST 738] and M/s.K.Raheja Development Corporation v. State of Karnataka [2005 141 STC 2989.(SC)]. Petitioner has also a case that time was not granted though request was made to that extent.
6. Counter affidavit has been filed on behalf of the 1st respondent in WP(C) No.9770/2016. It is stated that petitioner is a registered dealer at the office of the Works Contracts Officer. The Intelligence Officer verified the accounts and found that they have suppressed contract receipt and penalty was imposed for the year 2009-10. The crime file was received in the office of the 1st W.P(C) Nos.9770 & 18318/16 -:4:- respondent during February, 2015. Subsequent to the same, returns were scrutinised for ascertaining the actual facts. On verification it was found that petitioner has not filed any compounding application with the related documents as required under Sub rule 1 of Rule 11, but has remitted tax adopting the compounding rate. No application has been filed as provided under the Rules. In so far as no order had been issued, the allegation that tax has been paid at compounding rate which has to be ascertained is not sustainable. It is further stated that notice under Section 22 cannot be issued since the time limit has expired. According to the respondent, Section 25(1) can be invoked if a mistake is noticed relating to the rate of tax, escaped assessment, under assessment etc,. Respondent also submits that petitioner is a works contractor and is liable to pay tax. Reference is made to Section 2(iv) of the KVAT Act and it is contended that petitioner comes within the said definition. In para 5 of the counter affidavit, it is stated as under:
"5. It is submitted that the self assessment annual return in Form 10 B filed by the petitioner on 16.6.2015 is as shown below:
W.P(C) Nos.9770 & 18318/16 -:5:- Contract amount Exemption under Taxable Turn received during the Rule 10 over Quarter 151286889 NIL 151286889 The above self assessment return itself admits that the petitioner executed an agreement with the members and constructing flats for them after collecting advance."
On these facts, it is contended that the authority was justified in making the assessment in terms of Ext.P1 order.
7. Having heard the learned counsel appearing for the petitioner and the learned Government Pleader appearing on behalf of the respondents, the first question to be considered is whether it was open for the respondent to issue notice under Section 25(1), when the return is not rejected under Section 22 of the KVAT Act, within the period prescribed under Rule 35 of the KVAT Rules. Sections 22(1) and (2) read as under;
"22. Assessment in case of non-filing of return and filing of defective return -(1) Where the return submitted under sub-section (1) of section 20 is not in the prescribed manner or not accompanied by the prescribed documents or with incorrect particulars, the assessing authority shall, after recording its reasons, reject the return with due notice to the dealer.
Provided that the payment of any tax declared as W.P(C) Nos.9770 & 18318/16 -:6:- payable as per the return shall be provisionally accepted.
(2) A dealer whose return is rejected under sub-
section (1) may, file a fresh return curing the defects in such manner and within such time as may be prescribed and accompanied by such documents as provided under sub-section (1) of section 20 together with proof of payment of interest on the tax payable at the rates provided under section 31 for the period from the due date of filing of return till the date of filing of such fresh return. On the receipt of such return by the assessing authority, the assessment for the return period shall, subject to the provisions of section 24 and section 25, be deemed to have been completed."
According to the petitioner, they have filed their returns and if at all there was any defect, it should have been returned within the time limit specified under the Rules. Once, such an action has not been taken in the matter, Section 25 cannot be invoked. Section 25 is a special provision. Section 25(1) reads as under:
"25. Assessment of escaped turnover.- (1) Where for any reason the whole or any part of the turnover of business of a dealer has escaped assessment to tax in any year or return period or has been under assessed or has been assessed at a rate lower than the rate at which it is assessable or any deduction has been wrongly made W.P(C) Nos.9770 & 18318/16 -:7:- therefrom, or where any input tax or special rebate credit has been wrongly availed of, the assessing authority may, at any time within five years from the last date of the year to which the return relates, proceed to determine, to the best of its judgment, the turnover which has escaped assessment to tax or has been under assessed or has been assessed at a rate lower than the rate at which it is assessable or the deduction in respect of which has been wrongly made or input tax or special rebate credit that has been wrongly availed of and assess the tax payable on such turnover or disallow the input tax or special rebate credit wrongly availed of, after issuing a notice on the dealer and after making such enquiry as it may consider necessary:
Provided that before making an assessment under this sub-section the dealer shall be given a reasonable opportunity of being heard.
Provided further that where the escapement is due to the application of incorrect rate of tax, no assessment under this sub-section shall be made where the dealer files revised return and pays the tax which has escaped assessment along with interest under sub-section (5) of section 31 and thrice the interest as settlement fee."
It is clear from the reading of Section 25 that it is a special power given to the assessing officer to take action if for any reason the whole or any part of the turnover of the business of a dealer has W.P(C) Nos.9770 & 18318/16 -:8:- escaped assessment in any year or has been under assessed. Therefore, when a fact situation gives rise to a situation warranting interference under Section 25(1), Section 22 cannot control Section 25. Section 25 is an independent power available to the Department to consider and take action in respect of escaped assessment, under assessment etc,. That apart, Section 22(2) would further clarify that even in an instance where revised return is filed, assessment is deemed to be completed subject to Section 25 of the Act. Therefore merely for the reason that the authorities did not invoke Section 22 within the prescribed period does not preclude them from invoking Section 25, if the facts give rise to an eventuality as provided therein. Hence, I do not find anything wrong in the action of the Department in invoking Section 25(1).
8. Next question is whether payment of tax at compounded rate in terms of Section 8(a) without a formal application would preclude the Department from invoking Section 25(1). Learned counsel for the petitioner relies upon judgment of the Division Bench in Johnson and Johnson Ltd. v. Asst.Commissioner (Assmt.) [(2009) 17 KTR 613]. Reference W.P(C) Nos.9770 & 18318/16 -:9:- to the facts of the said case would show that appeal is filed against clarification issued by the Commissioner of Commercial Taxes under Section 94 of the KVAT Act. The appellant, a manufacturer and a dealer in drugs and medicines, did not file application for compounding in Form 1D. However, the appellant was remitting tax at the compounding rate which was 4% on the maximum retail price on the sale of drugs and medicines under Section 8(e) of the Act. When assessment was made, the assessing officer applied the same rate of tax on MRP on medicines sold in other divisions of the company as well. The appellant contended that only in the pharma division they have paid tax at compounded rate and in so far as other divisions are concerned, drugs and medicines cannot be subjected to assessment at compounded rate. Appellant filed a clarification petition before Commissioner who held that appellant is liable to pay tax at compounded rate on the sale of drugs and medicines as stated in Section 8(e) of the Act no matter whether the application is filed under prescribed form or not who are availing the compounding facility. The Division Bench did not find anything wrong in the Commissioner's order. It was held at para 2 W.P(C) Nos.9770 & 18318/16 -:10:- as under;
"2. We do not find anything wrong with the Commissioner's order because even without a formal application for compounding, the appellant adopted the scheme of compounding for payment of tax in respect of drugs and medicines which is at four per cent on MRP. Proviso (b) to Explanation to section 8(e) makes it clear that when tax is collected at the compounded rate on MRP by the seller, the purchasing dealer is entitled to exemption. Going by the collection of tax in the pharma division the appellant cannot deny that they have not opted for payment of tax at compounded rate under section 8(e) of the Act. All what the Commissioner has stated is that once the appellant has started billing in accordance with compounding scheme, then the same itself amounts to opting to pay tax under the compounding scheme and the appellant cannot therefore back out of the same. We uphold this position declared by the Commissioner because by the appellant's conduct the purchasers have claimed exemption under the proviso above referred. In other words, the sale of the drugs and medicines by the appellant should be assessed on MRP at four per cent as provided under section 8(e) of the Act. So far as other products are concerned, compounding is not applicable and the normal provisions of the Act will be applied for assessment and levy of tax. If there is surviving dispute then it is for the appellant to pursue the same before the W.P(C) Nos.9770 & 18318/16 -:11:- statutory authority in appeal."
This judgment apparently will not apply to the facts of the present case. The Division Bench was only approving a clarification issued by the Commissioner wherein the Division Bench clarified that "all what the Commissioner has stated is that once the appellant had started billing in accordance with compounding scheme, then the same itself amounts to opting to pay tax under the compounding scheme and the appellant cannot therefore back out of the same". The Division Bench upheld the said position since by the appellant's conduct itself, the purchasers had claimed exemption under proviso (b) to Explanation to Section 8(e) of the Act. In this case, no compounding application was ever filed and there is no question of any other person claiming benefit based on the same. In order to invoke Section 8
(a) of the Act, option is to be exercised by the works contractor. Option can be exercised only on compliance of the statutory format. In so far as the petitioner did not comply with such procedure, the Department was justified in acting accordingly as if petitioner had not opted for payment of tax at compounded rate. On facts itself, it is clear that the matter came to be noticed W.P(C) Nos.9770 & 18318/16 -:12:- when a crime file was investigated by the officers where penalty had been imposed on the petitioner. Therefore, the said ground also is not available to the petitioner.
9. Next question is regarding the fact as to whether petitioner is a works contractor. According to the petitioner, petitioner had not undertaken any contract work whereas petitioner is only a facilitator who enters into an agreement with its members and the entire contract work is being undertaken by various other contractors. In order to consider as to whether the petitioner is a works contractor or not, the entire factual aspects of the matter require to be considered. Petitioner has raised a contention in their reply stating that the transaction of sale of tax does not come within the purview of the Act and that the work is being done by different contractors.
10. As per Section 6(1)(e) of the KVAT Act, there is a liability to pay tax when during the execution of works contract, there is transfer of goods. The Supreme Court had occasion to consider the issue in Larsen and Toubro Ltd. (supra). It was held that 3 conditions have to be fulfilled; (i) there must be a works contract (ii) goods should have been involved in the W.P(C) Nos.9770 & 18318/16 -:13:- execution of a works contract and (iii) the property in those goods must be transferred to a third party either as goods or in some other form. It is further held that "in a building contract or any contract to do construction, the above three things are fully met. In a contract to build a flat, there will necessarily be a sale of goods element. Works contracts also include building contracts and therefore without any fear of contradiction, it can be stated that building contracts are a species of the works contract." It was also held that where a contract comprises of both, may be a works contract and a transfer of immovable property, such contract does not denude it of its character as works contract. It is held at para 97 as under:
"97. In light of the above discussion, we may summarise the legal position, as follows:
97.1. For sustaining the levy of tax on the goods deemed to have been sold in execution of a works contract, three conditions must be fulfilled: (i) there must be a works contract, (ii) the goods should have been involved in the execution of a works contract, and (iii) the property in those goods must be transferred to a third party either as goods or in some other form.
97.2. For the purposes of Article 366(29-A)(b), in a building contract or any contract to do construction, if the developer has received or is entitled to W.P(C) Nos.9770 & 18318/16 -:14:- receive valuable consideration, the above three things are fully met. It is so because in the performance of a contract for construction of building, the goods (chattels) like cement, concrete, steel, bricks, etc. are intended to be incorporated in the structure and even though they lost their identity as goods but this factor does not prevent them from being goods.
97.3. Where a contract comprises of both a works contract and a transfer of immovable property, such contract does not denude it of its character as works contract. The term "works contract" in Article 366(29-A)(b) takes within its fold all genre of works contract and is not restricted to one specie of contract to provide for labour and services alone.
Nothing in Article 366(29-A)(b) limits the term "works contract".
97.4. Building contracts are a species of the works contract.
97.5. A contract may involve both a contract of work and labour and a contract for sale. In such composite contract, the distinction between contract for sale of goods and contract for work (or service) is virtually diminished.
97.6. The dominant nature test has no application and the traditional decisions which have held that the substance of the contract must be seen have lost their significance where transactions are of the nature contemplated in Article 366(29-A). Even if the dominant intention of the contract is not to transfer the property in goods and rather it is W.P(C) Nos.9770 & 18318/16 -:15:- rendering of service or the ultimate transaction is transfer of immovable property, then also it is open to the States to levy sales tax on the materials used in such contract if such contract otherwise has elements of works contract. The enforceability test is also not determinative.
97.7. A transfer of property in goods under clause (29-A)(b) of Article 366 is deemed to be a sale of the goods involved in the execution of a works contract by the person making the transfer and the purchase of those goods by the person to whom such transfer is made.
97.8. Even in a single and indivisible works contract, by virtue of the legal fiction introduced by Article 366(29-A)(b), there is a deemed sale of goods which are involved in the execution of the works contract. Such a deemed sale has all the incidents of the sale of goods involved in the execution of a works contract where the contract is divisible into one for the sale of goods and the other for supply of labour and services. In other words, the single and indivisible contract, now by the Forty-sixth Amendment has been brought on a par with a contract containing two separate agreements and the States now have power to levy sales tax on the value of the material in the execution of works contract.
97.9. The expression "tax on the sale or purchase of goods" in Schedule VII List II Entry 54 when read with the definition clause (29-A) of Article 366 includes a tax on the transfer of property in goods W.P(C) Nos.9770 & 18318/16 -:16:- whether as goods or in the form other than goods involved in the execution of works contract. 97.10. Article 366(29-A)(b) serves to bring transactions where essential ingredients of "sale" defined in the Sale of Goods Act, 1930 are absent within the ambit of sale or purchase for the purposes of levy of sales tax. In other words, transfer of movable property in a works contract is deemed to be sale even though it may not be sale within the meaning of the Sale of Goods Act. 97.11. Taxing the sale of goods element in a works contract under Article 366(29-A)(b) read with Entry 54 List II is permissible even after incorporation of goods provided tax is directed to the value of goods and does not purport to tax the transfer of immovable property. The value of the goods which can constitute the measure for the levy of the tax has to be the value of the goods at the time of incorporation of the goods in works even though property passes as between the developer and the flat purchaser after incorporation of goods." Learned counsel for the petitioner places reliance on the judgment in Assotech Reality Pvt. Ltd (supra). In the said judgment, there is a finding that the right, title and interest in the construction continue to remain with the builder. That is not the situation here. That apart, the assessing authority considered the matter and held as under;
W.P(C) Nos.9770 & 18318/16 -:17:- "The assessee M/s.Federal Housing Construction Co-op Society is originated only for the purpose of constructing villas/apartments for its members and for that purpose the assessee executed agreement with the members for the construction of apartment and received advance for the said purpose. As the society comes under the purview of works contract they are liable to take registration under the KVAT Act. In the reply it is stated that land is purchased in the name of the society with the advance received from the members. The members of the society are the prospective buyers also. The construction of flats/villas are completed with the advance received from the prospective buyers as per the agreement executed between them and the prospective buyers. The society and the members are having separate legal entity hence the Society is liable to pay tax as per the KVAT Act. The decision in Assotech Reality Pvt. Ltd v. State of UP (All) (2007) 8 VST 738 is not at all applicable in this case. Here the society purchased and constructed Flat with the fund received as advance from the prospective buyers and subsequently transferred the property by registration after collecting balance amount." Having regard to the aforesaid finding of fact, if at all there is a contention contrary to the same or with regard to the factual aspect, it is for the petitioner to agitate the same in a proper W.P(C) Nos.9770 & 18318/16 -:18:- appeal.
11. Though I had rejected the contentions urged on behalf of the petitioner with reference to all the issues raised in the present writ petitions, the same will not preclude the petitioner from availing the statutory remedy of filing an appeal before the statutory appellate authority.
12. Therefore, while dismissing the writ petitions, right of the petitioner to prefer appeals against the impugned orders are reserved and, if appeals are filed, the appellate authority is directed to consider the appeals untrammelled by any of the aforesaid findings.
Petitioner is granted three weeks' time to prefer appeals and until such time, recovery proceedings, if any, shall be kept in abeyance.
Sd/-
A.M. SHAFFIQUE, JUDGE Rp //True Copy// P.S to Judge