The Learned Single Judge Found That The v. Commissioner Of Income Tax [(1997) 224 Itr677 (Sc

IN THE HIGH COURT OF KERALA AT ERNAKULAMPRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE T.R.RAVI FRIDAY, THE 05TH DAY OF JUNE 2020 / 15TH JYAISHTA, 1942WA.No.2318 OF 2017 AGAINST THE JUDGMENT IN WPC 11326/2017 DATED 17-07-2017 OFHIGH COURT OF KERALA APPELLANTS: 1THE ASSISTANT COMMISSIONER (KVAT)COMMERCIAL TAXES, SPECIAL CIRCLE,KOTTAYAM.686 001.COMMERCIAL TAXES, SPECIAL CIRCLE,KOTTAYAM.686 001. 2THE COMMISSIONER OF COMMERCIAL TAXESCOMMERCIAL TAXES, SPECIAL CIRCLE,KOTTAYAM.686 001.COMMERCIAL TAXES, SPECIAL CIRCLE,KOTTAYAM.686 001. 3THE STATE OF KERALAREPRESENTED BY ITS SECRETARY,TAXES DEPARTMENT, GOVERNMENT SECRETARIAT,THIRUVANANTHAPURAM.695 001. 4THE INSPECTING ASSISTANT COMMISSIONERDEPARTMENT OF COMMERCIAL TAXES,KOTTAYAM.686 001. BY GOVERNMENT PLEADER RESPONDENT: M/S.KUNNATHUKALATHIL JEWELLERS, CHANGANASSERYKOTTAYAM, REPRESENTED BY ITS MANAGING PARTNERK.V.VISWANATHAN.686 101. OTHER PRESENT: SRI HARISANKAR V MENON SENIOR GOVERNMENT PLEADER SRI.V.K.SHAMSUDHEEN THIS WRIT APPEAL HAVING BEEN FINALLY HEARD ON 25-05-2020,THE COURT ON 05-06-2020 DELIVERED THE FOLLOWING: Writ Appeal No.2318/2017 "C.R" JUDGMENT Dated, this the 5[th] day of June, 2020 Vinod Chandran, J. The appeal by the State arises from the judgment of the learned Single Judge reducing the taxliability under Section 8(f) for the assessmentsyears 2011-12 and 2012-13, on the finding that theExplanation added in the year 2014 is clarificatoryin nature. 2. The brief facts to be noticed are thatthe assessee engaged in the business of jewelry hadits Head Office at Changanacherry and three branchesat Kottayam, Thiruvalla and Chengannoor. From theyear 2006-2007 onward the assessee was paying taxunder Section 8(f) of the Kerala Value Added Tax Act, 2003 (hereinafter “KVAT Act”).The assessee on 31.03.2010 closed down the branch at Thiruvalla andfrom the next assessment year the business is carriedon from the Head Office and two branches. 3. The assessee for the year 2010-11 appliedfor compounding and the issue is said to be pendingbefore the Tribunal in appeal. The Departmentmaintains that the compounded tax to be paid by theassessee is at the percentage prescribed of the taxpaid in the previous year, ie, 2009-10 which includedthe Head Office and three branches. In the year2011-12 and 2012-13 the assessee again applied forcompounding and the same was permitted. The assesseehad made an application excluding that portion of thetax paid, attributable to the Thiruvalla Branch forthe year 2009-10; in the year 2010-11. The assesseewas permitted to pay tax under the compoundedprovision by Exts.P1 and P1(a) orders dated13.12.2011 and 04.08.2012. Later notice was issuedunder Section 25(1) of the KVAT Act and Exts. P4 and P4(a) orders were passed for the two consecutiveyears including that portion which was excluded inthe previous year, for the purpose of determining thetax payable under the compounding scheme for theyears under option. The assessment orders were dated12.10.2015 and 18.02.2017. 4. The assessee contended before the learned Single Judge that the only measure that could beadopted by the Assessing Officer to correct themistake if at all occasioned, was the devise ofrectification for which limitation is prescribed offour years. The impugned orders were beyond the saidperiod. It was also contended that the relevantExplanation as available in the subject years onlyexcluded the tax paid in respect of a branch thatremained closed during the whole of the year 2009-10.This was absurd, unworkable, resulted in immensehardship and was aimed at helping vested interests;was the argument. Writ Appeal No.2318/2017 5. The learned Single Judge found that the 4. The assessee contended before the learned Single Judge that the only measure that could beadopted by the Assessing Officer to correct themistake if at all occasioned, was the devise ofrectification for which limitation is prescribed offour years. The impugned orders were beyond the saidperiod. It was also contended that the relevantExplanation as available in the subject years onlyexcluded the tax paid in respect of a branch thatremained closed during the whole of the year 2009-10.This was absurd, unworkable, resulted in immensehardship and was aimed at helping vested interests;was the argument. Writ Appeal No.2318/2017 5. The learned Single Judge found that the impugned orders were within the limitation period forreason of they being assessment orders passed underSection 25(1) which has a limitation prescribed offive years from the close of the year of assessment.As to the other contentions, the learned Single Judgefound that an Explanation introduced in the year 2014worked to the advantage of dealers and has to betreated as a clarificatory measure; especiallyfollowing the judgment in Allied Motors PrivateLimited v. Commissioner of Income Tax [(1997) 224 ITR677 (SC)]. 6. We need not labour much on the question of whether the impugned orders are in the nature of arectification or an assessment; since there is noappeal by the assessee. The issue also stands coveredby another Division Bench of this Court in CommercialTax Officer v. Hotel Breezeland Ltd.[2019(2) KLT 432](authored by one of us, KVC(J)). The Division Bench categorically held that though there is a bilateralagreement between the assessee and the department,insofar as application for compounding being acceptedand orders issued by the assessing authority; itcould not be said that an assessment under Section25(1) as such cannot be carried out. Often times theprovision for compounding determines the tax payablein the year under option on the basis of the tax paidin the previous year or years. The assessments of theprevious years may not be completed even by the closeof the year under option and hence there is always apossibility of the tax effect in the year underoption being more than that provisionally accepted atthe time of grant of permission to compound by theassessing authority. Looking at the rules as also theprovisions of the Act, it was categorically held thateven if the assessee is permitted to pay tax underthe compounding provision, there could necessarily bean assessment determining the actual amounts payable under the compounding provision. This would notdetract from the principle of there being a bindingcontract between the assessee and the department;which is on the aspect of compounding, from whichneither can resile from. The binding nature of theagreement between the assessee and the department isinsofar as neither being permitted to resile from thecompounding provision so as to attempt a regularassessment adopting the complicated process ofexamination of books of accounts and records. 7. The learned counsel for the assesseeSri.Harisankar V Menon while accepting the saidposition however, draws a caveat insofar as thecompounding provision not intending to tax anassessee more than that, what would necessarily andlegally follow from Section 6 which is the chargingsection. An alternate mode of assessment would notenable the State to levy more tax than that due underthe charging provision. It is argued that if the 7. The learned counsel for the assesseeSri.Harisankar V Menon while accepting the saidposition however, draws a caveat insofar as thecompounding provision not intending to tax anassessee more than that, what would necessarily andlegally follow from Section 6 which is the chargingsection. An alternate mode of assessment would notenable the State to levy more tax than that due underthe charging provision. It is argued that if the payment under Section 6 was adopted there would be noliability for the assessee insofar as the branchclosed in the previous assessment year. Under thecompounding provision hence that portion which couldnot have been assessed in the year under option couldnot have been included even for the purpose ofdetermining the compounded tax payable. The learnedCounsel would rely on the decisions of the Hon'bleSupreme Court in State of Kerala v. BuildersAssociation of India [(1997) 104 STC 134] and alearned Single Judge of this Court in Kairali-Jewelery v. Assistant CommissionerIII [2019(4) KLT593]. 8. Learned Senior Government Pleader Sri. Mohammed Rafiq, appearing for the Revenue relieson the decision of yet another Division Bench on thevery same facts and provisions; Fashion Jewellery v.Commercial Tax Officer [2013(4) KHC 78]. It is arguedby Sri.Rafiq that no issue arises as to the Writ Appeal No.2318/2017 exigibility of tax under Section 6 since thecompounding provision is an alternate methodrequiring determination of tax payable for the yearunder option on the basis of the tax paid in theprevious year or years. The assessee had exercisedoption quite aware of such determination and cannotchallenge the same on the ground of closure of thebranch in the previous year; which has no effect bythe clear words employed in the statutory provisionfor compounding. The Explanation added in the year2014 cannot be said to be clarificatory especiallysince the entire provision under Section 8(f) wassubstituted. 9. Section 8(f)as available in the subject assessment year and as amended in the year 2014 havebeen extracted by the learned Single Judge which weneed not repeat. Suffice it to find that the entireprovision itself was substituted, on amendment, buthowever, sub-clause (i) in its effect remained the same. The tax payable under the year of option was dependent upon the turnover of the previous year andhad to be at the rate of 115% of the tax paid orpayable, if the turnover for the preceding year wasRs.10 lakhs or below, 120%, if it were above Rs.10lakhs and up to Rs.40 lakhs, 135%, above Rs.40 lakhsand up to Rupees one crore and 150% above Rupees onecrore. The percentage being determined on the highesttax conceded or paid in the three consecutive yearspreceding the year under option. 10. We need extract only the relevant explanations as it existed in the subject assessmentyears and that available in the amended section8(f)(i) in 2014. As it existed in the subject assessmentyears: Explanation 8:- Where a dealer who had optedand paid tax under this clause duringprevious years with respect to a branch thathad remained closed during the whole of the year 2009-10, for the purpose of determiningthe compounded tax payable for 2010-2011,the tax paid in respect of that branch shallnot be reckoned. Explanation relied on as it existed afterthe amendment in the year 2014 Explanation 3. Where a dealer paying taxunder this clause, closes a branch duringtheyear under option, proportionate reductionconsidering the number of business places,in the payment shall be granted in the nextmonthly instalment onwards, for theremaining months of the year”. As it existed in the subject assessmentyears: Explanation 8:- Where a dealer who had optedand paid tax under this clause duringprevious years with respect to a branch thathad remained closed during the whole of the year 2009-10, for the purpose of determiningthe compounded tax payable for 2010-2011,the tax paid in respect of that branch shallnot be reckoned. Explanation relied on as it existed afterthe amendment in the year 2014 Explanation 3. Where a dealer paying taxunder this clause, closes a branch duringtheyear under option, proportionate reductionconsidering the number of business places,in the payment shall be granted in the nextmonthly instalment onwards, for theremaining months of the year”. 11. We are unable to agree with the learnedSingle Judge that Explanation 3 as available in theamended Section 8(f) is clarificatory, for more thanone reason. The Hon'ble Supreme Court in AlliedMotors(supra) was concerned with a proviso insertedto remedy unintended consequences and make theprovision workable which also was held to be supplying an omission in the provision. Section 43Bof the Income Tax Act provided that certaindeductions of statutory dues allowable in computingthe income tax, would only be permitted in theprevious year in which such sum is actually paid.This was to ensure that the taxpayers followingmercantile system of accounting, having suchstatutory obligation, do not claim such expenditurewithout actual payment. Many instances were noticedwhere the taxpayer had challenged the statutory duesand not made such payments for long years; whileclaiming the expenditure as a deduction in the yearin which the liability is purportedly incurred.However, the language in which the provision wasworded caused hardship to some taxpayers like theappellant therein. The appellant had incurred theliability of sales tax in the last quarter of theassessment year, but however paid it only in the nextquarter, as permissible under the sales tax enactment. In the year 1987, with effect from01.04.1988, a proviso was added making such paymentsmade prior to the date of furnishing of the return ofincome, allowable deduction in the previous year. In1989 a further proviso was added in which Explanation2 also stipulated that the sum payable as found inSection 43B(a) includes any sum the liability forwhich was incurred in the previous year, though thepayment is not made within that year as providedunder the relevant law (in that case the sales taxenactment). The second proviso was grantedretrospective effect from April 1984 but the firstproviso was expressly prospective. The Hon'bleSupreme Court found that the original Section 43B didnot intend such hardship to be visited on thetaxpayers and the amendments brought in as the firstproviso and the second proviso were curative innature. It was held that the first proviso thoughprospective in nature cannot be isolated from Explanation 2 in the second proviso or the main body of Section 43B. Without the first proviso,Explanation 2 alone would not obviate the hardship orunintended consequences of Section 43B and itsupplies an obvious omission, was the finding. It washeld that but for this proviso the ambit of Section43B becomes unduly wide bringing within it scopethose payments, which were not intended to beprohibited from the category of permissibledeductions. 12. In the present case we find no suchcurative exercise having been carried out by theamendment of 2014. Clause (f) of Section 8 wassubstituted in its entirety with six explanationswhere as the original clause (f) had eightexplanations. If Explanation 3 in the new clause (f),as introduced in 2014, is found to be clarificatory,it has to be bodily taken out of the amendedprovision and placed in the un-amended clause (f) 12. In the present case we find no suchcurative exercise having been carried out by theamendment of 2014. Clause (f) of Section 8 wassubstituted in its entirety with six explanationswhere as the original clause (f) had eightexplanations. If Explanation 3 in the new clause (f),as introduced in 2014, is found to be clarificatory,it has to be bodily taken out of the amendedprovision and placed in the un-amended clause (f) which is not a permissible exercise. The Explanationin the amended clause(f) applies to that provisionand not to the earlier one. Clause (f) as amended in2014 can only apply prospectively and theExplanations therein are intended at explaining themeaning and intendment of the section itself, toclarify any obscurity or vagueness thereat, to makemeaningful and workable the dominant object of thatparticular provision and not do any or all of thesewith respect to the un-amended provision, which hadall-together different explanations [S.SundaramPillai v. V.R.Pattabiraman (1985 1 SCC 591)]. 13. The fact that in the year 2014 theprovision was substituted also would not have theeffect of it being retrospective. A Division Benchof this Court in 2018(3) KLT 877 [Commercial TaxOfficer v. Najeem]held that it is not an irrefutablerule that a substitution is invariably retrospective.We extract paragraph 16 of the aforesaid judgment: “16. The power of the legislature to make anamendment, with retrospective effect, isundisputed but the requirement is that unlessthe same is expressed in clear language orimplied, without any scope for doubt, then theamendment would only be prospective. We are ofthe opinion that when there is a substitution,unless the same is expressed to be prospectivethe Courts could always interpret it to beretrospective, looking at the scheme of theenactment, the purpose and object of theamendment, especially when the amendment bysubstitution, was intended at removing anobvious anomaly or correcting a blatant error orobliterating an absurdity or bringing it inconsonance with any other law or theConstitution; as was the case in HassanCo-operative Union. On the other hand anamendment other than by substitution would beretrospective only if it is so expressed or itfollows from necessary intendment, as isimplicit from the language employed. Otherwisethere is no requirement for the legislature toexpress the retrospectivity; it could very wellmake a substitution, which would operate fromthe inception of enactment.” The above reasoning squarely applies. We find thatthe provision is not clarificatory nor has it anyretrospective effect by virtue only of the FinanceAct of 2014 having substituted the provision underSection 8(f); which is amended in its entirety. 14. We also pertinently observe that theExplanation relied on by the learned Single Judgedoes not permit exclusion of the turnover of a closedbranch in a previous year for the determination oftax liability under the compounded provision in theyear under option. Explanation 3 is specifically withrespect to the closing of a branch during theyear under option upon which proportionatereduction in the number of business places can beallowed for the purpose of payment from the nextmonthly installment. To illustrate, if in the year2011-12 an assessee has business of one Head Office 14. We also pertinently observe that theExplanation relied on by the learned Single Judgedoes not permit exclusion of the turnover of a closedbranch in a previous year for the determination oftax liability under the compounded provision in theyear under option. Explanation 3 is specifically withrespect to the closing of a branch during theyear under option upon which proportionatereduction in the number of business places can beallowed for the purpose of payment from the nextmonthly installment. To illustrate, if in the year2011-12 an assessee has business of one Head Office and three branches which were continued from theearlier year and he applies under the compoundingprovision the tax liability would be the specifiedpercentage of the highest of the previous three yearsliability. However, if during the course of the yearunder option, 2011-12, say in September, one of thebranches is closed. The liability from October wouldbe reduced insofar as that portion being excluded. Ifin the subsequent year 2012-13, the very sameprovision existed, there could be no reductionclaimed insofar as the tax liability for the previousyear with respect to the closed branch up toSeptember, 2010; though that branch is not functionedin that subsequent year; which then becomes the yearunder option. 15. Explanation 3, of the amended Section8(f) if available in the year 2011-12 and 2012-13would not enable a reduction insofar as thedetermination of the quantum of the tax payable under the compounding provision for the year under optionmerely for reason of the closure of the business inthe previous year, which in the present case is onthe last date of closure, ie, 31[st] of March.Explanations, of the year 2014, speak only of aclosure in the year of option and does not reckon aclosure in the previous year. 16. We also have to take into account theargument of the learned Counsel that under acompounding provision what is not exigible underregular assessment cannot be taken into account. If aregular assessment had been resorted to definitelythere would have been no liability with respect tothe closed branch. Explanation 8 as it existed inSection 8(f), in the relevant years, only grantedexclusion of the turnover in any previous year of abranch which remained closed for the whole of theyear 2009-10. The one out of the three branches ofthe assessee was closed down on 31.03.2010. There could have been no exclusion of the turnover of thatparticular branch since the determination ofcompounded tax for the year under option, ie, 2010-11reckoned the tax liability for the previous year atan increased percentage as specified under Section8(f)(i). This definitely took in the liability of theclosed branch also. The assessee definitely couldhave chosen regular assessment, in which event theassessee would have been assessed only with respectto the Head Office and two branches. 17. Kairali Jewelery was in a differentcontext insofar as the liability of a new branchcommenced in the course of the year under option.Therein the assessee was a partnership engaged injewelery business who had also been paying tax oncompounded basis. In the year 2012-13 the assesseeapplied for compounding and the same was permitted.In the course of the year on December 2012 a newbranch was commenced. The Explanation under Section 17. Kairali Jewelery was in a differentcontext insofar as the liability of a new branchcommenced in the course of the year under option.Therein the assessee was a partnership engaged injewelery business who had also been paying tax oncompounded basis. In the year 2012-13 the assesseeapplied for compounding and the same was permitted.In the course of the year on December 2012 a newbranch was commenced. The Explanation under Section 8(f) provided that when a dealer opens a new branchthe additional compounded tax payable with respect tothat branch, will be average of the tax payable byhim in respect of the principal place of business andall branches. The issue arose as to whether suchcompounded tax for the newly opened branch has to bepaid for the entire year. The learned Single Judgefound that from April to November since there was nobranch functioning or business carried on there wasno taxable event under Section 6. The taxable event,of a business being carried on, arose only fromDecember 2012 and hence the average tax computedwould have to be proportionally adjusted to theperiod in which the business was carried on. In thepresent case, the taxable event insofar as the yearunder option is with respect to the Head Office andtwo branches which alone would have been assessed ifthe assessee had gone under regular assessment.However, the assessee chose to apply for compounding which alternate mode specifically provided for anenhanced percentage of the turnover for the previousyear which took in the business of the 3[rd] branchalso. The assessee had no escape from paying tax onthe basis of the earlier turnover since that was analternate mode available to the assessee for whichthe assessee had voluntarily opted with open eyes. 18. Now, we have to look at whether theExplanation as available in the relevant years underthe un-amended Section 8(f) was absurd or unworkable.Explanation 8 as extracted herein above only providedfor deduction of the business of a branch which hadremained closed during the whole of the year 2009-10.There is no absurdity in the provision nor can it befound unworkable. Hardship, definitely could bepleaded but is no ground against the taxing statuteespecially one which provided an alternate mode fromthat of the rigour of a regular assessment which alsowas available as an alternative option. The assessee Writ Appeal No.2318/2017 had a choice not to opt under the compoundingprovision. Having so opted, he cannot plead hardshipand seek modification of the very computationprovided in the alternate mode. 19. The option available was very clearinsofar as the tax payable under the compoundingscheme to be at a percentage above the tax liabilityof the previous year. The assessee with open eyesapplied under the scheme and obtained permission.There was no cause for any exclusion since the closeddown branch had business in the previous year forwhich tax was also paid at the compounded rate.Coming to the relevant years, 2011-12 and 2012-13again the assessee could not have claimed anydeduction since the provision remained as such. Ifthe assessee had closed the branch mid-year in2009-10, then Kairali Jewelerywould have appliedand could have claimed proportionate reduction inthat year of option, which would have reflected in Writ Appeal No.2318/2017 24 the subsequent years, if opted. The assesseehowever carried on that branch's business for theentire year. Writ Appeal No.2318/2017 24 the subsequent years, if opted. The assesseehowever carried on that branch's business for theentire year. 20.Builders Association (supra)worksagainst the assessee. The alternate method ofcompounding as held by the Hon'ble Supreme Courtsaves the assessee from the botheration of bookkeeping, assessment and appeals and all that itmeans. As found by the Hon'ble Supreme Court, thereis no necessity to enquire and determine the extentor value of goods transferred or the rate applicableto them and so on. The compounding provision evolvesa rough and ready method of assessment of tax andleaves it to the assessee to either opt to it or begoverned by the normal method. It is merely analternative method of ascertaining the tax payablewhich could be availed of by a dealer, if he feelsthe same advantageous to him. There is no compulsionon the assessee to opt under the compounding scheme. We do not think that any exclusion of a liability forthe previous year can be granted under the provisionsunder Section 8(f) as it existed in the year 2011-12and 2012-13. The closure of branch on 31.03.2010 isirrelevant insofar as the tax liability determined inthe years 2011-12 and 2012-13 on the basis of the taxconceded or paid in the three consecutive yearspreceding the year under option. 21. Before we part with the matter we have to notice the reference order of another DivisionBench in State of Kerala v. Raphel T. Joseph [2019(4)KLT 7]. Therein a totally different question ariseinsofar as the permission granted under thecompounding provision having been resiled from by theDepartment so as to proceed under Section 25 (1) ofthe KVAT Act, the regular mode of assessment. Such aquestion does not arise here and the Department hasonly computed the amounts given under the compoundingprovision for which permission was granted by the department. The permission having been granted, it isa bilateral contract between the assessee and thedepartment which neither can withdraw from. However,the actual amounts payable under the compoundingprovision could always be the subject of anassessment under Section 25(1) of the KVAT Act; theprovisions of which are in pari materia with theKGST Act which is so held in Hotel BreezelandLimited. We hence allow the appeal, setting asidethe judgment of the learned Single Judge. No order asto costs. Sd/- K. Vinod Chandran, Judge jma Sd/- T.R.Ravi, Judge