Writ petitions are disposed by upholding the retrospective operation of Section 42(3) of the KVAT Act, but declaring that the power to re-open assessments under the said provision cannot be exercised in relation to such assessments where the period for which the assessee concerned is obliged to retain the Books of account under Rule 58(20) of the KVAT Rules has expired. The retrospective operation of Section 42(3) of the KVAT Act will thus stand controlled by the period of limitation aforementioned, and the legality of the notices/orders impugned in these writ petitions shall stand determined by the said declaration.
FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT
In these batch of writ petitions, the petitioner/assessees impugn the pre-assessment notices/assessment orders issued to them to complete assessments of escaped turnover by invoking the provisions of Section 42(3) of the Kerala Value Added Tax Act [hereinafter referred to as the “KVAT Act”]. It is the common case in all these writ petitions that the period envisaged for re-opening assessments under Section 25 of the KVAT Act had expired by the time the notices for re-opening assessments, invoking Section 42(3) of the KVAT Act, were issued to them. The petitioners therefore contend that in such cases, the Revenue cannot invoke Section 42(3) of the KVAT Act to re-open assessments that have already become final under the KVAT Act.
2. To appreciate the issue raised in these writ petitions, one has to first notice the statutory provisions under the KVAT Act. As per the Scheme of the KVAT Act, the assessment procedure commences with the filing of a return by the assessee. If the return filed by the assessee conforms to the requirement under the KVAT Act and Rules, in respect of the details of turnover to be furnished and the tax to be paid thereon, and there is no query raised by the Revenue within the period prescribed for the same, the assessment to tax is deemed completed as a self-assessment to tax by the assessee under Section 21 of the KVAT Act. If an assessee does not file a return as contemplated by the KVAT Act and Rules or files a defective return, then the assessment is completed on best judgment basis by the Revenue after following the procedure under Section 22 of the KVAT Act. In certain cases, as enumerated under Section 24 of the KVAT Act, an assessment can be completed pursuant to consideration of audit objections in relation to the details furnished by the assessee along with his returns. The assessments completed under Sections 21, 22 and 24 can still be re-opened in terms of 25 of the KVAT Act to assess such turnover as has escaped assessment to tax in an earlier assessment. The power to assess escaped turnover under Section 25 has, however, to be exercised within the period stipulated under the Act for the exercise of such power. The said period was five years from the end of the assessment year concerned till 31.3.2017, and was extended to six years from the end of the assessment year concerned thereafter.
3. Section 42 of the KVAT Act, as it stood till 12.11.2016, read as follows:
“42. Audit of accounts and certification of returns :- (1) Every dealer whose total turnover in a year exceeds rupees forty lakhs shall get his accounts audited annually by a Chartered Accountant or Cost Accountant and shall submit copy of the audited statement of accounts and certificate, in the manner prescribed.
Provided that a co-operative society registered or deemed to be registered under the Kerala Co-operative Societies Act, 1969 (21 of 1969), may in lieu of the statement and certificate mentioned above, submit a copy of the audited statement of accounts and certificate issued by the Registrar of Co-operative Societies on or before 31 st day of December of the year succeeding to the year to which annual return relates.
(2) Where any dealer detects any omission or mistake in the annual return submitted by him with reference to the audited figures, he shall file revised annual return rectifying the mistake or omission along with the audit certificate. Where, as a result of such revision, the tax liability increases, the revised return shall be accompanied by proof of payment of such tax, interest due thereon under sub-section (5) of section 31, and penal interest, calculated at twice the rate specified under sub-section (5) of section 31:
Provided that this sub-section shall not apply to a dealer against whom any penal action is initiated in respect of such omission or mistake under any of the provisions of this Act.”
By a notification dated 13.11.2016, the Section was amended to insert a new sub section therein, with retrospective effect from 01.04.2005, the date on which the KVAT Act came into force in the State of Kerala. Sub Section (3) of Section 42, that was inserted, reads as follows:
“(3) Notwithstanding anything to the contrary contained in this Act, if a dealer,
(i) fails to file audited accounts referred to in sub-section (1), or
(ii) fails to file revised annual return rectifying the mistake or omission, along with the audited statement of accounts and certificate or if the variance in the audited statement of accounts with the returns is not satisfactorily explained in the reconciliation statement prescribed, or
(iii) fails to file the annexures, statements, certificates, declarations, including the statutory declarations to be filed under the Central Sales Tax Act, 1956 which are required to be filed along with the returns to prove the correctness of the concessional rate of tax, exemptions and exports claimed in the returns, or
(iv) fails to declare any sale, purchase or interstate stock transfer as evidenced from the documents prescribed under section 46 available with the assessing authority in the sales and purchase lists filed along with the returns, the assessment of such dealer for the relevant year for the purpose of section 25 shall be treated as pending and the time limit mentioned thereunder shall not be applicable in such cases.”
Soon after the aforesaid amendment, the Revenue initiated proceedings for re-opening the assessments of those assessees whose turnover was above the limits specified under Section 42(1), notwithstanding that the period under Section 25 of the Act for re-opening the assessments of such assessees had expired. In many cases, the assessments were thereafter completed by including the alleged escaped turnover and subjecting the same to tax. As already noticed, the pre-assessment notices and assessment orders are impugned in these writ petitions.
4. The contention raised on behalf of the writ petitioner assessees, as discernible from the pleadings, can be summarised as under:
> As per the Scheme of the KVAT Act, there is a finality attached to assessment proceedings and there are indicators under Sections 21, 22 24 and 25 of the KVAT Act as to when an assessment can be deemed final. Section 42(3), if interpreted as conferring a power on the Revenue to disregard the finality attaching to assessments, would militate against the Scheme of the KVAT Act. Such an interpretation is therefore to be avoided.
> The amendment inserting Sub Section 3 to Section 42 was brought in through Notification dated 13.11.2016 and was with a view to annul the effect of the judgment dated 5.10.2016 of this Court in S.Najeem and Other v. Commercial Tax Officer and Others, that frustrated the attempt of the Revenue to re-open assessments after expiry of the period of limitation prescribed therefor under Section 25 of the KVAT Act. In the absence of a validating provision, a mere retrospective amendment cannot nullify the declaratory judgment of this Court in Najeem’s case [supra]; [Ref. – Iswara Bhat v. CAIT – [1992 KHC 110]; State of Karnataka and Others v. Karnataka Pawn Brokers Assn. and Others – [2018 KHC 6187]].
> The retrospective operation of Section 42(3) with effect from 01.04.2005 would entail the re-opening of assessments that were completed years ago and in respect of assessment years pertaining to which the assessees do not have the relevant Books of accounts and other records to defend their case against an allegation of escaped turnover. It is contended that under the KVAT Rules, an assessee is obliged to keep his Books of account only for five years and hence the retrospective operation of Section 42(3) can, at any rate, be only to such extent and not beyond that. [ Ref. – Rai Ramkrishna v. State of Bihar – [AIR 1963 SC 1667];
> National Agricultural Cooperative Marketing Federation of India Ltd. and Another v. Union of India and Others – [(2003) 5 SCC 23] & Commissioner of Income Tax (Central)-I, New Delhi v. Vatika Township Private Limited – [(2015) 1 SCC 1]].
> Removing the limitation period for re-opening assessments of registered dealers under the KVAT Act would tantamount to treating them at par with unregistered dealers and those subjected to protective assessments, who are seen as evaders of tax. The provisions would therefore breach the mandate of Article 14 in that it treats unequals as equals for the purposes of assessment. Reference is drawn to Ghanshyam Das v. Regional Assistant Commissioner of Sales Tax, Nagpur – [(1964) 4 SCR 436]; Anandji Haridas and Co. (P) Ltd. v. S.P. Kasture and Others – [AIR 1968 SC 565]; State of Gujarat and Another v. Patel Ramjibhai Danabhai and Others – [(1979) 3 SCC 347]].
It is trite that in cases where there is no limitation period prescribed under a taxing statute for taking action against an assessee, a reasonable period of limitation has to be read into the statutory provision by the Court. In the instant cases, the reasonable period would be the period prescribed under Section 25 of the KVAT Act. [Ref. – [Director of Income-Tax (International Taxation) v. Mahindra and Mahindra Ltd. – [(2014) 365 ITR 560 (Bombay)]; Regional Provident Fund Commissioner v. K.T. Rolling Mills Pvt. Ltd. [(1995) 1 SCC 181]; Union of India and Others v. Uttam Steel Limited – [(2015) 13 SCC 209]; Chhedi Lal Yadav and Others v. Hari Kishore Yadav (Dead) Through Legal representatives and Others – [(2018) 12 SCC 527].
Since Section 25 and Section 42 operate in the same field and govern re-opening of assessments so as to assess escaped turnover, prescribing a limitation period for exercise of power under Section 25 to the exclusion of such prescription under Section 42(3) would pave the way for Assessing authorities to choose between remedies. Such discretion cannot be left open to the Revenue in a taxing statute without offending Article 14 of the Constitution and the concept of nonarbitrariness that must inform State action. [ Ref – Southern Motors v. State of Karnataka and Others – [(2017) 3 SCC 467].
5. Per contra, the submissions advanced by the learned Government Pleader on behalf of the respondent/State can be summarised as follows:
> Section 42(3) deals with a separate procedure for the assessment of escaped turnover pertaining to a particular class of assessees viz. those that answer to the description under Section 42(1) of the KVAT Act and have a turnover in excess of the limit prescribed thereunder. For such assessees, the assessment of escaped turnover is not under Section 25 but in terms of Section 42(3).
> The non-obstante clause in Section 42(3) makes it clear that in the case of such assessees as are envisaged under Section 42(1), under the circumstances mentioned in Section 42(3), their assessment will be treated as pending for the purposes of Section 25 of the Act and the period of limitation under that Section will not apply. As for the effect of non-obstante clauses, reliance is placed on Union of India v. G.M.Kokil & Others – [AIR 1984 SC 1022]; South India Corporation (P) Ltd. v. Secretary, Board of Revenue, Thiruvananthapuram & another – [AIR 1964 SC 207]; Municipal Corporation Indore & Others v. Smt. Rethna Prabha & Others – [AIR 1977 SC 308]; State (NCT of Delhi) v. Narendar – [(2014) 13 SCC 100]; Iridium India Telecom Ltd. v. Motorolla IMS – [(2005) 2 SCC 145]; Parayankandiyal Eravath Kanapravan Kalliani Amma v. K.Devi – [(1996) 4 SCC 76]. For the proposition that in the absence of a time limit prescribed under a Statute, the assessing authority is entitled to complete proceedings properly commenced without any restrictions as to time, reliance is placed on Regional Assistant Commissioner Indore v. Malva Vanaspathi & Chemical Company Ltd. – [AIR 1968 SC 894]; Bharat Steel Tubes Ltd. and Others v. State of Haryana and Others – [(1988) 70 STC 122].
> The amendment to Section 42 inserting sub section (3) therein, has been given retrospective operation with effect from 01.04.2005. The said retrospectivity conferred by the legislature has the effect of removing the basis of the judgment rendered in the case of such assessees in the context of the limitation provisions under Section 25 of the KVAT Act. The said judgment only found that in the absence of a power, other than mentioned under Section 25 of the KVAT Act, the Revenue could not re-open an assessment after the expiry of the limitation period under Section 25 of the KVAT Act. The amendment removes the basis of the judgment by introducing a separate provision for assessing escaped turnover in respect of the particular class of assessees mentioned in Section 42 (1) of the KVAT Act. Reliance is placed on M.P. Sundararamier & Company v. State of Andra Pradesh – [1958 SCR 1422]; J.K. Jute Mills Company v. State of Uttar Pradesh – [AIR 1961 SC 1534]; Bahuji v. Municipal Committee, Khandwa – [AIR 1961 SC 1486]; M/s.Reghubar Dayal Jai Prakash v. Union of India – [AIR 1962 SC 263]; Cheviti Venkanna Yadav v. State of Telungana and Others – [(2017) 1 SCC 283]; State of Karnataka and others v. Karnataka Pawn Brokers Association and Others – [(2018) 6 SCC 363].
6. I have heard the learned counsel for the petitioners in all these writ petitions as also the learned Government Pleader for the respondents.
7. On a consideration of the facts and circumstances of the case as also the submissions made across the bar, I find that Section 42 of the KVAT Act was amended through a Notification dated 13.11.2016, and the amendment was given retrospective effect from 01.04.2005, the date on which the KVAT Act was brought into force in the State of Kerala. The legislative power of the State legislature to amend the Act with retrospective effect, cannot be disputed for the power to legislate carries with it the power to legislate retrospectively also [ See M/s. J.K. Jute Mills Co. Ltd. v. State of Uttar Pradesh and another – [AIR 1961 SC 1534]; Mr. Jadao Bahuji v. The Municipal Committee, Khandwa and another – [AIR 1961 SC 1486]; M/s. Raghubar Dayal Jai Parkash and Others v. The Union of India and another – [AIR 1962 SC 263]; State of Karnataka and Others v. Karnataka Pawn Brokers Association and Others – [(2018) 6 SCC 363]]. Limitations have, however, been recognised to the power to legislate retrospectively, and the issue to be considered in these cases is whether any such limitation ought to be applied in relation to Section 42(3) of the KVAT Act.
8. It would appear that by introducing a new Sub section (3) to Section 42, the State legislature wanted to carve out a class of assessees namely, those whose turnover exceeded the threshold limit specified in Section 42(1), for a differential treatment in the matter of re-opening of assessments to assess escaped turnover. The technique that was employed was to define the circumstances under which, in the case of such assessees, the assessments would not be deemed complete under Sections 21, 22 or 24, but would be deemed ending for the purposes of Section 25, notwithstanding the limitation period prescribed under Section 25 which was expressly stated to be inapplicable to such cases. Although the petitioners would contend that the classification brought about between two categories of assessees for differential treatment in the matter of reopening of assessment would offend Article 14 of the Constitution of India, I am of the view that in enacting fiscal legislation the legislature is entitled to a great deal of latitude and this Court would interfere with such a classification only if there is a clear transgression of constitutional principles that is established. In the instant case, when viewed against the object sought to be achieved by the legislature viz. the taxation of escaped turnover, a classification effected amongst assessees, based on turnover, and for the purpose of adopting a different procedure for those with a higher turnover, appears to me to be guided by an intelligible differentia having a rational nexus with the object sought to be achieved by the legislature. The said classification would therefore withstand the tests under Article 14 and the statutory provision cannot be said to be discriminatory in the sense of treating unequals as equals.
9. While the prospective operation of Section 42(3) satisfies the test of constitutionality, the question arises as to whether the retrospective operation of the newly introduced provision would cause the assessees substantial prejudice or deprive the assessees of any vested right that accrued to them prior to the introduction of the new provision. It is trite that if a retrospective operation of a statutory provision has the effect of depriving an assessee of an accrued right, in a manner that will substantially prejudice him, then such retrospective operation of the amended provisions would not be legally justified. [See Rai Ramkrishna v. State of Bihar – [AIR 1963 SC 1667]; R.C. Tobacco Pvt. Ltd. and Another v. Union of India and Another – [AIR 2005 SC 4203]; Jayam and Company v. Assistant Commissioner and Another – [(2016) 15 SCC 125]. In my view, the same would be the position if, on account of a retrospective operation of the newly introduced provision, the assessee is not in a position to adduce material to defend itself against an allegation of suppressed/escaped turnover. In these cases, one of the contentions raised on behalf of the petitioner/assessees is that the retrospective operation of Section 42(3) would entail the re-opening of assessments that were completed years ago, and in relation to which assessment years the assessees do not have the relevant Books of account and other records to defend their case against an allegation of escaped turnover. The said contention is based on the provisions of Rule 58(20) of the KVAT Rules, which obliges an assessee to keep his Books of account only for a period of five years from the end of the assessment year in question or two years from the date of disposal of the appeal or revision arising out of such assessments or from the date of completion of any other provision under the Act connected with such assessment, appeal or revisions whichever is later. Thus, from the Scheme of the Act and Rules, there can be inferred a finality to assessment proceedings within a specified period from the end of the assessment year. The fixing of such a specified period would also be in line with the judgments that hold that in the absence of a prescribed time limit for completing assessments under the Statute, a reasonable period has to be read in, and in determining what that reasonable period should be, clues can be gathered from the other provisions under the KVAT Act and Rules. [ See State of Gujarat v. Patel Raghav Natha and Others – [AIR 1969 SC 1297]; State of Punjab and Others v. Bhatinda District Cooperative Milk Producers Union Ltd. – (2007) 11 SCC 363; Director of Income-Tax (International Taxation) v. Mahindra and Mahindra Ltd. – [(2014) 365 ITR 560 (Bombay)].
10. What then should be the period prescribed for exercise of the power under Section 42(3) and consequently the extent of retrospectivity conceded to the statutory provision ? Ordinarily, one could have looked to the time limit prescribed for exercise of a similar power, and for a similar purpose under the Act, to apply the same time limit for the exercise of power under Section 42(3). A similar power is contained in Section 25 of the KVAT Act but the time limit under the said provision is expressly stated to be inapplicable to Section 42(3). This Court has therefore to look at the overall Scheme of the KVAT Act, the interests of ensuring certainty in taxation matters as also the necessity to interpret the provision in a manner that would avoid unconstitutional results such as unreasonableness, unfairness and arbitrariness of the statutory provision, for determining the limits of exercise of the power under Section 42(3). In my view, the time limit specified in Rule 58(20) of the KVAT Rules offers a safe guide to define the limits of the power under Section 42(3) of the Act. It would ensure that the power to reopen assessments, so as to bring to tax escaped turnover, is not exercised in a manner that prejudicially affects an assessee who is not in a position to meet the charge against him for want of his Books of account and other relevant material. Such a limitation on the power to re-open assessments would also accord with the requirement of ensuring fairness and certainty in maters of taxation, a feature that has been insisted upon in the tax jurisprudence of our country. [See New Delhi v. Vatika Township Private Limited – [(2015) 1 SCC 1]; Principal Commissioner of Income-Tax v. Maruti Suzuki India Ltd. – [(2019) 416 ITR 613 (SC)]]. As observed by the Supreme Court in the last mentioned case, “there is a significant value which must attach to observing the requirement of consistency and certainty. Individual affairs are conducted and business decisions are made in the expectation of consistency, uniformity and certainty. To detract from those principles is neither expedient nor desirable.”
In the result, these writ petitions are disposed by upholding the retrospective operation of Section 42(3) of the KVAT Act, but declaring that the power to re-open assessments under the said provision cannot be exercised in relation to such assessments where the period for which the assessee concerned is obliged to retain the Books of account under Rule 58(20) of the KVAT Rules has expired. The retrospective operation of Section 42(3) of the KVAT Act will thus stand controlled by the period of limitation aforementioned, and the legality of the notices/orders impugned in these writ petitions shall stand determined by the said declaration.