The Commissioner of Income Tax (Central) vs. G Radha Charan Reddy

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MRS. JUSTICE SHOBA ANNAMMA EAPEN FRIDAY, THE 23RD DAY OF FEBRUARY 2024 / 4TH PHALGUNA, 1945 WP(C) NO. 106 OF 2015 PETITIONER: JOY ALUKKAS INDIA PVT LTD AGED 46 YEARS MARINE DRIVE, KOCHI - 31, REPRESENTED BY ITS DGM (TAXATION AND ACCOUNTS), MR.VARGHESE P. JACOB. BY ADVS. SRI.A.KUMAR SRI.P.J.ANILKUMAR SMTG.MINI1748 SRI.P.S.SREE PRASAD RESPONDENTS: 1 THE STATE OF KERALA REPRESENTED BY SECRETARY, TAXES DEPARTMENT, THIRUVANANTHAPURAM - 695 001. 2 COMMISSIONER OF COMMERCIAL TAXES THIRUVANANTHAPURAM - 695 001. 3 DEPUTY COMMISSIONER COMMERCIAL TAXES, ERNAKULAM - 682 018. 4 THE ASST.COMMISSIONER ASSESSMENT COMMERCIAL TAXES, SPECIAL CIRCLE - I, KOCHI - 682 018. OTHER PRESENT: SRI. V. K. SHAMSUDEEN, SENIOR GOVERNMENT PLEADER THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 12.12.2023, THE COURT ON 23.02.2024 DELIVERED THE FOLLOWING:

W.P(C) NO.106 OF 2015 :-2-: SHOBA ANNAMMA EAPEN,J -------------------------------------- W.P(C) NO. 106 OF 2015 ------------------------------------- Dated this the 23rd day of February, 2024 J U D G M E N T Petitioner- a private limited company dealing with Gold and Diamond jewellery and other articles of precious stones, is a registered dealer under the Kerala Value Added Tax Act (for short ‘the KVAT Act’) on the rolls of the fourth respondent- the

Assistant

Commissioner

(Assessment), Commercial Taxes, Special Circle-I, Kochi. For the assessment year 2009-10, the petitioner purchased jewellery from the registered dealer within Kerala, who had obtained it under the scheme of compounding under Section 8(f) of the KVAT Act. The tax was collected from the petitioner and the petitioner filed monthly returns and annual returns conceding its total and taxable turnover and claimed credit on input tax in its purchases.

W.P(C) NO.106 OF 2015 :-3-: Thereafter, the assessing authority issued Ext.P3 notice and then completed the assessment vide Ext.P5 order disallowing the input tax credit. The petitioner has approached this Court challenging Ext.P5

order

and

also

challenging

the constitutional validity of Section 11(5)(c) of the KVAT Act. 2. The first respondent filed a counter affidavit contending as follows:- The assessee has purchased jewellery from three different dealers and availed input tax credit. It was further stated that the said dealers had paid tax at a compound rate in the year 2010 and hence the petitioner is not eligible for availing of input tax credit for those purchases. Section 11(5)(c) of the KVAT Act stipulates that no input tax shall be allowed for the purchases from a dealer paying compound tax under Section 8(f) of the Act and hence the input

W.P(C) NO.106 OF 2015 :-4-: tax credit to the tune of Rs.12,90,940/- was disallowed to the petitioner. It is contended that like any other fiscal statute, the grant of input tax is a concession or relaxation and nobody is expected to claim it as a matter of vested right. The denial of the benefit of availing input tax credit to the purchases from dealers who opt for compounding facility cannot be put to challenge as it is within the power of the legislature to make such provisions and restrict the benefit of concession or relaxation either to a class of persons and even in the case of extending such benefits to all, restricting the term or period or fix a time limit for concession that can be availed to. The calculation of tax amount for compounded dealers and non-compounded dealers is entirely different. When the dealers opting for compounding facilities remit tax based on certain slabs or scales,the regular taxpayers paid tax

W.P(C) NO.106 OF 2015 :-5-: based on actual turnover. The input tax credit being a concession granted by the statute is only to be received as per the scheme of the statute. The conditions prescribed in Section 11(5)(c) are absolutely necessary for the smooth implementation of the Act and any deviations from the conditions and procedures prescribed would lead to disruption of the mechanism of the statute. It is further contended that it is not only the dealers in gold who make purchases from the persons availing the benefit of compounding of tax, but other dealers who deal with works contract, metal crusher unit, cooked food, video lending etc. are also denied the facility of availing of input tax credit. Hence, the people, who make purchases from dealers availing compound facilities, make a class by themselves and there is no illegal discrimination among such people. No question regarding the violation of Article 265 of the Constitution of

W.P(C) NO.106 OF 2015 :-6-: India arises since the provisions have been introduced through specific provisions of law which relate its root to Entry 54 of the State list in Schedule VII. 3. Heard the learned counsel for the petitioner and the learned Senior Government Pleader. 4. Learned counsel for the petitioner submits that section 8(f) is not a compounding provision which merely provides for an easy system of payment of tax by the dealer under the compounding and it specifically enables the dealer to collect the tax and thus, as per the said proviso, the tax collected in excess is to be paid over to the Government. It was further submitted that Section 30(1) of the Act, as it stands, allows a registered

dealer

discharging

tax

under subsections (2) and (3) of Section 6 to collect tax and to pay it to the Government. Section 30(2)

W.P(C) NO.106 OF 2015 :-7-: and the proviso to the same sets out the exceptions in regard to the dealers, who are allowed to collect tax even if they are not under Sections 6(1) and 6(2), which are the charging provisions for regular payment. According to the petitioner, Section 8(f) compounding dealer is not covered by the exclusion. Hence, it is meant that dealers under Section 8(f) cannot collect tax. It is also submitted that the structure for Section 8(f), that provides for compounding, is not a mere rough and ready method of payment of tax by the dealer under the scheme of compounding, but it also enables the compounding dealer to collect tax and validates his tax payments with the rider that the tax collected in excess of the compounded tax payable for the year alone needs to be paid over to the Government. Learned counsel further submits that Section 30 is a substantive provision, which recognises collection of tax and also provides for

W.P(C) NO.106 OF 2015 :-8-: validation of collection in certain schemes of compounding and while Section 30(2) prohibits the collection, the proviso to Section 8(f) enables collection. However, the amendments to Section 30(2) in line with Section 8(f) has not been effected and the disparity in the provision is not seen addressed by Section 11(5)(c). Hence it is submitted that allowing collection of tax under Section 8(f) runs against the scheme of Section 30(2) and it does not include the scheme of compounding for gold. Section 8(f) further states that tax collected in excess of the compounded tax payable shall be paid over to the Government and the law relating to the right of the State to collect tax in the context is one of a situation of “forfeiture”. The tax, which is collected without the authority of law, can be forfeited to the Government. Section 11(5)(c) prohibits availing input tax credit on purchases from a

W.P(C) NO.106 OF 2015 :-9-: compounding dealer. No amendment was made to Section 11(5) on the basis of amendments to Section 8(f), in introducing the proviso or any of the other compounding provisions which allowed collection of tax. Thus the proviso to Section 8(f), Section 11(5)(c) and section 30, do not synchronize and do not complement one another in law. Section 30(2) provides for prohibition against collection of tax except in respect of two categories as set out in Section 30(2). It creates a substantial right in respect of the dealers, who are eligible for collection of tax under the provision and also a corresponding liability on the

buyer

purchasing

from

such compounding/presumptive dealer to pay tax. The petitioner to whom the compounding dealer sold the goods had an equal right to insist that they shall not be called upon to pay tax. It was further submitted that the input tax credit cannot be

W.P(C) NO.106 OF 2015 :-10-: denied as tax, that has been collected, has been passed on. The excess tax paid when allowed to be collected by the Government is an indication that the compounding dealer’s collection of tax is validated absolutely. Thus, the act in so far as it denies input tax credit is wholly arbitrary and illegal. The Government itself is not entitled to retain for itself the tax collected by the dealer under the compounding except that such tax has been illegally collected. The collection of tax, if not legally justifiable, the petitioner has to be given the refund as the excess tax collected is the amount from the purchasing dealer. The petitioner is in the same class of persons as dealers under Section 6 and input tax credit is a right and not a concession. The concept of excess tax collected is arbitrary and illegal and demonstrated with a legitimate object, purpose having a rational with the object sought to be

W.P(C) NO.106 OF 2015 :-11-: achieved. The State unlawfully enriches itself at the hands of the tax sufferer which was per se illegal. The petitioner cannot be forced to pay taxes twice, one at the time of purchase and another collect and pay on sale. Hence, the learned counsel submits that Section 11(5)(c) of the KVAT Act has to be declared as unconstitutional and illegal. 5. Per contra, the learned Senior Government Pleader submits that the contention of the petitioner that Section 11(5)(c) of the KVAT Act is discriminatory,arbitrary and irrational, is misconceived and without any basis. The grant of input tax credit is a concession/relaxation and it cannot be claimed as a matter of vested right. The benefit of availing input tax credit is denied to the purchases from dealers, who have opted for payment of tax under the compounding scheme. It cannot be put to challenge as it is within the

W.P(C) NO.106 OF 2015 :-12-: powers of the legislature to make such provisions and restrict the benefit of concession or relaxation either to a class of persons or even in the case of extending such benefits to all. The entries, which enable the legislature to legislate for the purpose of levying tax also enables the legislature to impose provisions which are ancillary, incidental for carrying out the purpose of the Act, by which availing of any benefit can be restricted. Solely on the ground that the taxation statute is harsh to some taxpayers, who do not fulfill the conditions for availing the benefit of concession, taxation statute cannot be held to be arbitrary and unconstitutional. The learned Senior Government Pleader submits that whenever concession is given by a statute, the conditions thereof are to be strictly complied with, in order to avail such concession. Input tax credit is a concession granted by the statute and

W.P(C) NO.106 OF 2015 :-13-: it has to be received only as per the scheme of the statute. It was further submitted that not only the gold dealers, who make purchases from the persons availing the benefit of compounding of tax but also other dealers, who deal with works contract, metal crusher unit, cooked food, video lending, etc are also denied the facility of availing input tax credit. Thus, the people, who make purchases from dealers, availing compound facilities, make a class by themselves and there is no illegal discrimination among such people. 6. For a better understanding, it is relevant to extract the provisions i.e., Section 11(5)(c), first proviso to section 8(f) and section 30 of the KVAT Act. Section 11(5)(c) reads as follows:- “11 . input tax credit : - (5) No input tax credit shall be allowed for the purchases, - (a) xxxxxxx (b) xxxxxxx (c) from a dealer paying compounded tax under Section 8.”

W.P(C) NO.106 OF 2015 :-14-: First proviso to Section 8(f) reads as follows:- “Provided that a dealer who opts for payment of tax under this clause may collect tax on the sales at the rate not exceeding the rate prescribed for the commodity under this Act, but where the tax so collected during the year is in excess of the tax payable for the year under this clause, the tax collected in excess shall be paid over to Government in addition to the tax payable under this clause.” Section 30 of the KVAT Act reads as follows:- “30. Collection of tax by dealers: - (1) A registered dealer may, subject to the provisions of sub-sections (2) and (3), collect tax at the rates specified under section 6 on the sale of any goods, from the person to whom he sells the goods and pay it over to Government in such manner as may be prescribed. (2) Dealers registered under this Act, except those dealers paying presumptive tax under sub-section(5) of section 6 and those paying tax under clause (a) of section 8 by those undertaking works of Government of Kerala, Kerala Water Authority and Local Authorities, and under clause (b), clause (c) (ii) and clause (d) of section 8 alone shall be eligible to collect any sum by way of, or purporting to be by way of tax under this Act. Provided that the dealers who are paying tax under sub-section (5) of section 6 are entitled to recover from the buyers the amount of tax paid by him on the purchase value of such goods at the time of purchase.” KVAT Act was repealed on 22.6.2017 and Goods and Service Tax Act came into existence on 1.7.2017. 7. Earlier, the vires of Section 11(5)(c) of the KVAT Act was challenged before this Court, in Amrutheswari

Jewellers v. State

Kerala

W.P(C) NO.106 OF 2015 :-15-: [2017:KER:1677]. This Court dismissed the writ petition holding that the benefit of input tax credit is granted only to dealers, who purchase gold from dealers and do not pay compounded tax and upheld the constitutional validity of Section 11(5)(c). 8. In this writ petition, though the vires of Section 11(5)(c) is challenged, the challenge is in a different manner stating that Section 8(f) of the KVAT Act enables the dealer to collect the tax and the tax collected in excess as per the proviso to Section 8(f) is to be paid over to the Government. The further challenge is that Section 30(1) allows a registered dealer, who is discharging tax under sub-sections (2) and (3) of section 6, to collect tax and to pay it to the Government. Section 30(2) and its proviso sets out the exceptions in regard to dealers, who are allowed to collect the tax even if they are not under Sections 6(1) and 6(2), which

W.P(C) NO.106 OF 2015 :-16-: are the charging provisions for regular payment. In the aforesaid exclusion, Section 8(f) compounding dealer is not covered. Hence, it has to be said that dealers under Section 8(f) cannot collect tax. The disability to collect tax under Section 30 cannot, when enabled, lead to denial of credit. Learned counsel for the petitioner submits that the tax collected and if allowed to be collected, the aspect of entitlement of an input tax credit is absolute under the scheme of taxation under the KVAT Act. The Government cannot retain for itself tax collected unless it is illegal and even tax collected illegally has to be paid to the beneficiary and is only held in trust by the State till the beneficiary claims. In Amrutheswary Jewellers (supra), the issue was also regarding the entitlement of input tax credit in respect of the purchase from a dealer, paying compounded tax under Section 8(f) of the KVAT Act. When the statute

W.P(C) NO.106 OF 2015 :-17-: itself makes it clear that no input tax credit will be available for purchase of goods from compounded dealers, being a fiscal statute, even if the provision appears to be harsh, there is no reason for this Court to interfere and take a different view. The statute as such may cause hardship to the dealers but it is within the legislative competence of the Government to enact such a law. The petitioner is very well aware of the statutory provision and cannot raise a challenge at a later stage. Section 8(f) starts with a non-obstante clause with Section 6 of the KVAT Act. This non- obstante clause has been omitted by the counsel for the petitioner and extracted the provision without the above non-obstante clause. The State legislature is fully competent to make provisions on the basis of agreement between tax payer and payee, whereas the Kerala Value Added Tax Act has been legislated invoking the powers under Entry 54

W.P(C) NO.106 OF 2015 :-18-: of List II of Schedule VII of Constitution of India. It is, by virtue of Entry 54, the Kerala Value Added Tax Act has been promulgated. The work contractors, granite crushing unit,dealers in cooked food and beverages, video cassette lending library, manufacturers and retailer of medicine, dealers in jewellery etc. can opt for compounding if both of them agree on the terms of the contract. 9. In a composite contract of work, the goods involved in the execution of the works contract alone can be assessed. Tax on composite contract is not on sale as per the Entry 54 List II. Tax on granite crushing unit is on the basis of number and measurement of machineries. Tax on video cassette lending library is on the basis of the number of days. Tax on medicine is based on M.R.P. Tax on jewelry is based on quantum of tax paid for the previous year etc. From the above, it can be seen that the compounded tax is based

W.P(C) NO.106 OF 2015 :-19-: not on sale or purchase of goods, which is otherwise unconstitutional. The compounded tax is a mandatory payment. It is an optional payment of tax based on an agreement between the payer and payee. Otherwise, the above levy of tax would become illegal and unconstitutional. Once the compounding payment is opted, neither the party can resile out of it unless there is a breach of contract. In other words, an application for payment of compounded tax has to come from the dealers fully knowing the pros and cons or the consequences one has to offer his willingness. Once he has offered his willingness, he cannot refrain from it subsequently, stating one or the other reason. 10. As per Section 11(5)(c) of the KVAT Act, there is a prohibition to collect tax by the dealers paying compounded tax under sub-section(5) of Section 6 of the Act. This prohibition is

W.P(C) NO.106 OF 2015 :-20-: applicable to all compounded dealers except jewellery dealers and has been permitted to collect 1 percent tax. This enabling provision has been brought under Section 8 of the KVAT Act which has a non-obstante clause and therefore, it prevails over the other provisions of the statute and the dealers in jewellery have opted for compounding, considering this enabling provision also. As per Section 30(2) of the KVAT Act, compounded dealers come partly under Section 8(a), i.e., who undertake work from Government of Kerala, Kerala Water Authority or any other local authorities are not eligible to collect tax whereas the compounded dealers of jewellery under Section 8, which has a non-obstante provision, can collect tax. Thus, there is a scientific and reasonable differentiation between the tax collection under Sections 30 and 8(f) under Explanation 6 of the KVAT Act. Input tax credit

W.P(C) NO.106 OF 2015 :-21-: is in the nature of a benefit/concession and not a right extended to the dealer under the statutory scheme. The dealer can claim the benefit only as per the scheme of the statute. In the decision reported in State of Himachal Pradesh v. Goel Bus Service, Kullu [2023 Livelaw (SC) 27}, it was held that the test of taxing statutes would be viewed on more stringent tests. Taxing statutes cannot be placed, tested or viewed on the same principles as laws affecting civil rights such as freedom of speech, religion etc. This Court in Amrutheswari Jewellers (supra) has already upheld the constitutional validity of Section 11(5)(c). I do not find any reason to differ from the judgment rendered by this Court in Amrutheswary (supra), which has become final. 11. The learned counsel relied on the decision reported in Deputy Commissioner of Income Tax and Ors. v. Pepsi Foods Ltd. (AIR 2021 SC 2692). There is no

W.P(C) NO.106 OF 2015 :-22-: manifest illegality or arbitrariness in order to invalidate the provisions under Section 11(5)(c). The decision relied on by the learned counsel in Pepsi Foods Ltd (supra) is not relevant to the facts of this case. On the basis of the above discussion, it cannot be said that Section 11(5) (c) being a part of the scheme of Section 8, cannot be said to be unconstitutional. Accordingly, the writ petition is dismissed, without prejudice to the right of the petitioner to challenge Ext.P5 assessment order in accordance with law. Sd/- SHOBA ANNAMMA EAPEN, JUDGE MBS/

W.P(C) NO.106 OF 2015 :-23-: APPENDIX OF WP(C) 106/2015 PETITIONER'S EXHIBITS:- EXHIBIT P1: A COPY OF INVOICE. EXHIBIT P2: TRUE COPY OF ANNUAL RETURN AND AUDIT REPORT. EXHIBIT P3: TRUE COPY OF THE NOTICE DATED 11/11/2014. EXHIBIT P4: TRUE COPY OF REPLY DATED 22/11/2014. EXHIBIT P5: TRUE COPY OF THE ASSESSMENT ORDER DATED 29/11/2014.