TVAT Act: Regular assessment for composition scheme dealer is untenable in law

Raghavendra Construction Vs State of Telangana (Telangana High Court)

Held that If there is payment of tax under the composition scheme, question of regular assessment would not arise under Telangana Value Added Tax Act, 2005 (TVAT Act).

Facts-

The petitioner is a special class civil contractor registered with the Government of Telangana. It is carrying on the business of execution of civil work relating to construction of roads etc. Petitioner is a registered dealer with the respondent no. 2 under the Telangana Value Added Tax Act, 2005 as well as under the Goods and Services Tax (GST).

Petitioner had opted for composition of tax and therefore filed applications under Form VAT 250 on monthly basis covering the aforesaid assessment periods along with the returns filed under Form VAT 200. The petitioner received an urgent payment notice from the respondent no. 2. The petitioner accordingly contended that urgent payment notice issued by the respondent no. 2 is illegal and needs to be set aside.

Conclusion-

In the instant case there is no dispute that for the assessment periods under consideration petitioner had already paid tax under the composition scheme. Held that If there is payment of tax under the composition scheme, question of regular assessment would not arise.

FULL TEXT OF THE JUDGMENT/ORDER OF TELANGANA HIGH COURT

This order will dispose of both W.P.Nos.27866 of 2021 and 11006 of 2022.

2 We have heard Mr. D.Srinivas, learned senior counsel on behalf of M/s. Pillix Law Firm for the petitioner and Mr. K.Raji Reddy, learned senior standing counsel, Commercial Taxes, for the respondent.

3 In W.P.No.27866 of 2021, the prayer made is to declare the action of the second respondent i.e. Commercial Tax Officer, Bhongir Circle, Bhongir, in issuing the urgent payment notice dated 2007.2019 as illegal and consequently to set aside the same.

4 Petitioner in W.P.No.11006 of 2022 seeks a declaration that action of the second respondent in issuing garnishee notices dated 24.02.2022 to the fourth respondent i.e. Canara Bank, Malakpet Branch, Malakpet, Hyderabad and to others as illegal and consequently to set aside the same.

5 According to the petitioner it is a special class civil contractor registered with the Government of Telangana. It is carrying on the business of execution of civil work relating to construction of roads etc. Petitioner is a registered dealer with respondent No.2 under the Telangana Value Added Tax Act, 2005 (TVAT Act) as well as under the Goods and Services Tax (GST).

6 It is stated that for the assessment periods from the year 2014 till the year 2017, petitioner had filed monthly returns in Form VAT 200 by duly attaching Form VAT 501 along with certification of tax collection at source. It is stated that petitioner had opted for composition of tax and therefore filed applications under Form VAT 250 on monthly basis covering the aforesaid assessment periods along with the returns filed under Form VAT 200.

7 According to the petitioner it was surprised when it received notice dated 20.07.2019. It was an urgent payment notice issued by respondent No.2. Respondent No.2 stated that assessments under the VAT Act was conducted by the Assistant Commissioner (CT) LTU, Nalgonda Division, Nalgonda as per assessment order Nos.35305, 35309 and 35310, all dated 02.07.2019, following which a total amount of Rs.6,52,46,001-00 was outstanding against the petitioner. Petitioner was called upon to make the payment within seven days of receipt of the said notice. The urgent payment notice dated 20.07.2019 reads as under:

GOVERNMENT OF TELANGANA
COMMERCIAL TAXES DEPARTMENT

Office of the
Commercial Tax Officer,
Bhongir Circle, Bhongir.

TIN.36122086628

Dated: 20.07.2019

URGENT PAYMENT NOTICE

Please take notice that according to this office records the VAT assessment was conducted by Assistant Commissioner (CT), LTU, Nalgonda Division, Nalgaonda as per A.O. No.35305, 35309, 35310, dated 02.07.2019 following the arrears are outstanding against you.

Therefore, you are directed to pay the same within (7) days from the date of receipt of this notice. If the arrears have already been paid, please furnish the documentary evidence failing which the arrears will be recovered under Revenue Recovery Act as if were an arrear of land revenue, besides, this action will be initiated for imposition of penal interest under Section 16 (3) of APGST Act 1957 and Section 22 (2) of TGVAT Act 2005.

Sd/-
COMMERCIAL TAX OFFICER
BHONGIR CIRCLE, BHONGIR

8 It is stated that upon receipt of the said notice, petitioner had approached respondent No.2 with necessary documents evidencing payment of tax for the said period. Petitioner contended that it did not receive pre-assessment notices as contemplated under Rule 64 of the Telangana Value Added Tax Rules, 2005 (TVAT Rules). Even the assessment orders were not served upon the petitioner. Besides, it is contended that during the entire assessment period from the year 2014 to 2017 petitioner had undertaken only Government contracts for which VAT was deducted at source and Form VAT 509 was issued. Besides the entire turnover was under the composition scheme for which petitioner filed Form 250 for each work separately. Therefore, the entire turnover of the petitioner for the assessment period 2014­2017 was assessed and tax was paid at the source itself.

9 It is under such circumstances that petitioner filed W.P.No.27866 of 2021 challenging the legality and validity of the urgent payment notice dated 20.07.2019 issued by respondent No.2 for the assessment period 2014 – 2017.

10 While the aforesaid writ petition was pending before this Court, respondent No.2 issued arrear notice dated 14.02.2022 which was followed by the garnishee notices dated 24.02.2022. The garnishee notices were issued to respondent No.4 as well as to the Branch Manager of Canara Bank, Malakpet, Hyderabad. It was mentioned therein that petitioner was in arrears of Rs.6,56,52,213-00 to the Commercial Tax Department, Government of Telangana. Therefore, under Section 29 of the TVAT Act, the bankers were requested to enforce payment / debit fees from the accounts of the petitioner maintained with the bankers.

11 Garnishee notices dated 24.02.2022 have been impugned in W.P.No.11006 of 2022.

12 A common counter affidavit has been filed by respondent No.2 covering both the writ petitions.

13 In paragraph No.3 of the counter affidavit it is stated that petitioner is a dealer engaged in the business of works contract. It is registered with respondent No.2 both under the TVAT Act and under GST. It is stated that for the assessment periods 2014-15, 2015-16 and 2016-17, petitioner had opted to pay tax at the rate of 5% under composition scheme by filing applications in Form VAT 250 for all the works and accordingly filed monthly returns in Form VAT 200 regularly in the office of respondent No.2 disclosing the following sale turnover:

14 On the strength of the authorisation issued by the Deputy Commissioner (CT), Nalgonda Division, Nalgonda, third respondent initiated the audit of the books of accounts of the petitioner covering the above assessment period in order to ensure that the returns filed by the petitioner are complete and correct. In this connection notice dated 11.05.2017 was issued to the petitioner for production of books of accounts for the aforesaid period. The notice was dispatched by way of registered post with acknowledgment due to the business address of the petitioner. But no reply was received. Consequently, there was no production of books of accounts by the petitioner for scrutiny by the third respondent.

15 As the petitioner did not produce the books of accounts despite notice, third respondent proposed assessment for all the three assessment years to the best of his judgment. Accordingly, third respondent issued show cause notices on 20.02.2018 proposing to levy tax at the rate of 14.5%. The show cause notices indicated the following:

16 The above show cause notices were sent to the business address of the petitioner by way of registered post with acknowledgement due on 20.02.2018 itself after obtaining authorisation from the Deputy Commissioner (CT), Nalgonda.

17 Against the above show cause notices petitioner did not file any reply. Consequently, third respondent passed best judgment assessment orders on 02.07.2018 for the three years i.e. 2014-15, 2015-16 and 2016-17 confirming the turnovers and the tax liability proposed in the show cause notices dated 20.02.2018. Thus as per the assessment orders, petitioner has got total tax liability of Rs.6,52,46,001-00. As the same was not paid by the petitioner, urgent payment notice dated 20.07.2019 had to be issued. As the payments were still not made, respondents were compelled to issue garnishee notices dated 24.02.2022 in terms of Section 29 of the TVAT Act.

18 In W.P.No.11006 of 2022 petitioner has filed reply affidavit. Stand taken by the petitioner in the reply affidavit is that petitioner had opted for payment of tax at the rate of 5% under the composition scheme by filing applications in Form VAT 250 for the works executed by him. It is contended that the second respondent having admitted that the petitioner had opted for payment of tax at 5% under the composition scheme, could not have made fresh assessment and thereby levied tax at 14.5% consequently raising a huge demand of Rs.6,52,46,001-00. That apart, petitioner has reiterated the stand that it did not receive the pre-assessment notice as well as the assessment orders.

19 Mr. D.Srinivas, learned senior counsel for the petitioner submits that the short point involved in the two writ petitions is whether after the petitioner had availed and paid tax under the composition scheme, the respondents could have initiated fresh assessment proceedings thereby levying tax at a much higher rate. While referring to the averments made in paragraph Nos.3 and 5 of the counter affidavit, he submits that it is the admitted position that petitioner had paid tax at 5% under the composition scheme. Therefore, respondents were bound by the payment made by the petitioner under the composition scheme and could not have issued fresh assessment orders. This is more so because there is no dispute or rather respondents have not disputed the turnover disclosed by the petitioner in the monthly returns for the assessment period. If that be the position, respondents could not have initiated fresh assessment proceedings and levy tax at a higher rate. To support his above contention, learned senior counsel has placed reliance on a decision of the Supreme Court in Koothattukulam Liquors v. Deputy Commissioner of Sales Taxes¹.

20 In his reply, Mr. K. Raji Reddy, learned senior standing counsel submits that contention of the petitioner that it did not receive pre-assessment notice as well as the assessment orders is not correct. The notice and the assessment orders were sent to the business address of the petitioner by way of registered post with acknowledgement due. Therefore, under Rule 64 of the TVAT Rules, notices were validly sent and would be deemed to have been served on the petitioner. Since the petitioner did not come forward with material papers, the assessing authority had no other option but to make best judgment assessment. That apart, the assessment orders were not challenged and the consequential urgent payment notice dated 20.07.2019 was belatedly challenged in the year 2021. In these circumstances he contends that the assessments made have attained finality and should not be disturbed.

21 In his reply submissions, Mr. D.Srinivas, learned senior counsel for the petitioner submits that the question is not about receipt or non-receipt of pre-assessment notice or assessment orders. The question is, after accepting payment of tax under composition scheme, is it permissible for the assessing authority to resile from such position and make assessments levying tax at a much higher rate? This he submits is not permissible and if this is not permissible then the assessments made would be non-est in the eye of law being without jurisdiction.

22 Submissions made by learned counsel for the parties have received the due consideration of the Court.

23 Section 4 of the TVAT Act finds place in Chapter III which deals with incident, levy and calculation of tax. Heading of Section 4 is ‘Charge to Tax’. Sub-Section (7) (d) says that notwithstanding anything contained in the TVAT Act, every dealer executing works contract may in lieu of the amount of tax payable by him under Clause (a) opt to pay by way of composition at the rate of 5% of the total amount received or receivable by him towards execution of the works contract either by himself or through sub-contractor subject to such conditions as may be prescribed.

24 Rule 17 of the TVAT Rules deals with treatment of works contract. While Sub-Rule (1) deals with treatment of VAT dealer executing works contract, Sub-Rule (2) deals with treatment of works contract under composition. Since this provision is relevant, the same is extracted hereunder:

17. Treatment of works contracts:

*                 *                  *                  *
(2) Treatment of works contracts under composition:

(a) Any VAT dealer who executes a contract and opts to pay tax as specified in clause (b) of sub-section (7) of section 4 must register himself as a VAT dealer;

(b) The VAT dealer mentioned in clause (a) above shall pay tax at the rate of five percent (5%) of the total consideration received or receivable whichever is earlier.

(c) In the case where the VAT dealer opts for composition he shall, before commencing the execution of the work notify the prescribed authority on Form VAT 250 of the details including the value of the contract on which the option has been exercised.

Provided that a consolidated Form VAT 250 can also be filed by the contractor who undertakes multiple works contracts of similar nature. Provided further that single Form VAT 250 can also be filed by the contractor for the full or part of financial year, which will cover all the contracts on which work is commenced during the full or part financial year as the case may be.

(d) On receipt of any payment related to the contract, the contractor VAT dealer shall calculate the tax due at five percent (5%) of the amount received and shall enter such details on Form VAT 200. The tax due shall be paid with the return in Form VAT 200;

(e) VAT dealer shall not be eligible for input tax credit and shall not be eligible to issue tax invoices;

(f) In the case of a contractor mentioned in clause (a), if any part of the contract is awarded to a sub-contractor, the sub­contractor shall be exempted from tax on the value of the sub­contract. The sub-contractor shall not be eligible to claim input tax credit on the inputs used in the execution of such sub-contract;

25 Thus the above provision says that any VAT dealer who executes a contract and opts to pay tax by way of composition, must register himself as a VAT dealer and he shall pay tax at the rate of 5% of the total consideration received or receivable. In a case where the VAT dealer opts for composition he shall before commencing execution of the work notify the prescribed authority in Form VAT 250 details of the contract on which composition option has been exercised. On receipt of the payment by the VAT dealer, he shall calculate the tax at 5% of the amount received and shall enter such details in Form VAT 200 whereafter the tax due shall be paid along with the return in Form VAT 200.

26 In Koothattukulam Liquors v. Deputy Commissioner of Sales Taxes (1 supra) Supreme Court examined the concept of payment of tax under composition scheme. That was a case under the Kerala General Sales Tax Act, 1963 whereunder the appellant had opted for composition of tax in terms of Section 17 thereof. After the appellant had closed his business, he had approached the assessing authority to cancel the permission granted for payment of tax under the composition scheme. It was in that context that the question for consideration before the Supreme Court was whether the appellant could request for a regular assessment in the same year after opting for composition of tax under Section 17 of the Kerala General Sales Tax Act, 1963. The concept of payment of compounded amount of tax was analyzed by the Supreme Court in the following manner:

19. The concept of payment of compounded amount of tax is a bilateral agreement between the parties. The scheme of composition provides that the State Government is empowered to accept a lump sum amount in lieu of tax that may be payable by the dealer in respect of such goods or class of goods and for such period as may be agreed upon. For that purpose, the dealer is obliged to execute an agreement of undertaking to pay the sales tax in lump sum and the same is assessed at an agreed rate as envisaged under the Act itself. The scheme as introduced by the legislature provides for a bilateral agreement between the assessee and the Sales Tax Authorities with an object to dispense with the requirement of regular assessment and for the easy purpose of levy and collection of the tax payable under the Act. A dealer, who has opted for payment of lump sum amount in lieu of tax, is not required to file monthly, quarterly or annual returns of his turnover. It is the choice of a dealer to opt for compounded payment of tax and if the said choice is in accordance with the scheme and is ultimately accepted by the authority concerned, it becomes an agreed amount of tax. The department and the dealer are thereafter bound by the said agreement.

27 According to the Supreme Court, payment of tax under the composition scheme is a bilateral agreement between the parties. The scheme provides for a bilateral agreement between an assessee and the taxing authority with an object to dispense with the requirement of regular assessment and for the easy purpose of levy and collection of tax. It is the choice of a dealer to opt for compounded payment of tax and if the said choice is in accordance with the scheme and is accepted by the taxing authority, it becomes an agreed amount of tax. Thereafter, the department and dealer are bound by the said agreement.

28 Supreme Court further held as follows:

20. The compounding of the tax by way of contract of payment of tax is a lump sum on the value of contract on an agreed rate. The contract of compounding is a statutory contract under a scheme, in which the State Government can increase or decrease the rate of compounding of tax. It is an invitation to offer for compounding for each financial year resulting in an agreement qua such financial year. Therefore, the contract between the assessee and the assessing authority can be then annulled by the parties only under the circumstances which are provided under the provisions of the Contract Act. The right to rescind from the contract is available to the assessee only under the circumstances prevailing under the Contract Act. The term “rescind” as explained in the Contracts Act, 1872 is “revocation of contract by an express and unequivocal cancellation by one party”. The right of rescission is only available when the consent of the party is obtained by fraud, misrepresentation, coercion or undue influence. Therefore, the dealer having once exercised its option under the composition scheme cannot, therefore be permitted to turn around and rescind from its liability merely on the ground that he had no turnover due to losses or had not done any manufacturing activity during the relevant year only for the reason that amount payable under the composition scheme is not relatable to any annual turnover but depends upon the agreement under the scheme at the option of the dealer. In other words, the assessee once having opted for composition and upon the completion of assessment cannot blow hot and cold at the same time, requesting the assessment authority for regular assessment under the Act.

29 Finally Supreme Court held that composition of tax is nothing but an alternative route to assessment regulated by the terms of the contract between the assessee and the assessing authority to arrive at the same destination. Therefore, the dealer who had voluntarily and with full knowledge of the alternate method of taxation had opted to be governed by it, he cannot in the lean season claim that his assessment for the very same assessment year be made under regular assessment.

30 As held by the Supreme Court payment and acceptance of tax under the composition scheme is a statutory contract between the dealer and the assessing authority.

31 Once the contract is affected by way of payment of composition tax and acceptance thereof, both the parties are bound by the contract.

32 In the instant case there is no dispute that for the assessment periods under consideration petitioner had already paid tax under the composition scheme. Respondents have also not disputed the turnover figures of the petitioner. If that be the position and having regard to the law laid by the Supreme Court in Koothattukulam Liquors v. Deputy Commissioner of Sales Taxes (1 supra) it was not open to the respondents to have resorted to regular assessments of the petitioner for the very same assessment periods and thereafter levy tax at a much higher rate. We agree with the submission made by Mr. Srinivas, learned senior counsel for the petitioner that this is a jurisdictional fact which goes to the root of the matter. If there is payment of tax under the composition scheme, question of regular assessment would not arise. In such circumstances receipt or non-receipt of pre-assessment notices or assessment orders would have no significance or bearing as those are besides the point. When an action is without jurisdiction, the fact that the same has been put to challenge after two years would not be of material consequence.

33 Resultantly, the impugned urgent payment notice dated 20.07.2019 and the consequential garnishee notices dated 24.02.2022 being wholly untenable in law and fact are hereby set aside and quashed.

34 Both the writ petitions are accordingly allowed. However, there shall be no order as to costs. Miscellaneous petitions if any pending in these two writ petitions shall stand closed.