“No Tax Without Authority of Law”: Karnataka HC Quashes VAT Demands on Land Value, Slams Revisional Overreach as “Mere Change of Opinion”
Sanchayita Lahkar
The High Court of Karnataka Division Bench of Justice Krishna S Dixit and Justice Ramachandra D. Huddar set aside the reassessment orders passed under the Karnataka Value Added Tax Act, 2003, which included land cost in the tax computation under the Composition Scheme. The Court held that inclusion of land value was contrary to settled legal principles and impermissible under Article 366(29A)(b) of the Constitution. The reassessment orders were quashed in full across three consolidated appeals, with questions of law answered in favour of the appellant.
The High Court of Karnataka Division Bench of Justice Krishna S Dixit and Justice Ramachandra D. Huddar allowed three appeals filed under Section 66(1) of the Karnataka Value Added Tax Act, 2003. The Court quashed the impugned suo motu revision orders passed by the Additional Commissioner of Commercial Taxes that had reassessed tax liability on the inclusion of land cost. It held that reassessment orders were impermissible under law, constituted a mere change of opinion, and could not override the finality attained under the Karasamadhana Scheme, 2019.
The appellant, a Limited Liability Partnership firm engaged in civil construction and development of residential and commercial complexes, had filed VAT returns and paid taxes for the relevant financial years. The reassessment proceedings originated with a notice dated 26 June 2018, citing discrepancies such as improper deduction claims for sub-contractor payments, non-declaration of unregistered dealer (URD) purchases, and incorrect inter-State purchase disclosures. The reassessment order passed on 25 June 2019 acknowledged the correctness of turnover, allowed several deductions including sub-contractor payments, and did not levy tax on URD purchases or service tax components.
Following this, the appellant paid the tax arrears amounting to ₹2,88,557 and availed benefits under the Karasamadhana Scheme, 2019, which granted waiver of interest and penalties upon full payment of taxes. The benefit was availed in two of the three appeals, namely STA No. 19/2022 and STA No. 20/2022.
Subsequently, the Additional Commissioner of Commercial Taxes initiated suo motu revision proceedings through separate notices for the three financial years in question. The revisional authority challenged the inclusion of land cost in deductions and recomputed VAT liability based on total receipts including land value, resulting in fresh tax demands as follows:
- STA No. 18/2022: ₹5,41,46,205 (April 2016–March 2017)
- STA No. 19/2022: ₹82,14,095 (April 2015–March 2016)
- STA No. 20/2022: ₹15,81,80,983 (April 2014–March 2015)
The revised orders disallowed deductions toward land value and alleged erroneous application of tax provisions under the Composition Scheme. These reassessment orders were challenged by the appellant on grounds that the revisional authority lacked jurisdiction, the original reassessment had attained finality, and no statutory basis existed for taxing immovable property under VAT.
The appellant contended that land value, being part of immovable property, was not taxable under the KVAT Act, and that inclusion of such cost violated settled legal positions and binding departmental circulars. The appeals also questioned the validity of reopening matters settled under the Karasamadhana Scheme.
The Division Bench recorded the judicial reasoning with reference to constitutional provisions, statutory rules, and binding precedents.
“Under the VAT Scheme of taxation, more particularly in view of Article 366(29A)(b) of the Constitution of India, which provides for tax on the sale or purchase of goods, the immovable properties cannot be roped in directly or indirectly.” The Court referred to the Supreme Court decision in Larsen & Toubro v. State of Karnataka, stating that “levy of tax under the Act is on sale of goods or transfer of property in goods, and not on immovable property.”
Addressing the exercise of revisional jurisdiction, the Court stated, “for exercising suo moto revisional jurisdiction, the satisfaction of twin conditions namely the order to be revised is erroneous and the said order is prejudicial to the interest of the Revenue is a sine qua non.” It held that these conditions were not met in the present case.
It recorded: “On no count, the orders subjected to SMR at the hands of 1st Respondent were not demonstrably erroneous, be it in law or on facts.”
Regarding the inclusion of land cost, the Court stated: “When value of land is not exigible to VAT, the authority took the turnover excluding the value of land. This cannot be said to be prejudicial to the interest of Revenue merely because cash flow to the Exchequer to that extent is diminished.”
It further added, “What the revisional authority has done is nothing but a mere change of opinion, which is impermissible.”
Rejecting the reasoning offered by the Revenue regarding joint development agreements, the Court held: “Obviously there is no JDA inasmuch as the Assessee himself has undertaken construction activity on his own land, as recorded in the reassessment order.”
On the Karasamadhana Scheme, the Court held: “Once the issue is settled & closed under Karasamadhana Scheme, no fresh proceedings can be initiated by invoking revisional powers under Section 64 of the Act.” It rejected the Commissioner’s clarificatory order permitting reopening of settled cases, stating, “This clarification in itself undermines a legislative scheme and should be considered non est in law.”
The Division Bench, after reviewing the grounds raised in all three appeals, issued the following final directions:
“In view of above discussion, the questions of law framed in these appeals, are answered in favour of the Assessee and against the Revenue; therefore, these appeals succeed and impugned orders are set at naught, costs having been reluctantly made easy.”
Advocates Representing the Parties
For the Petitioners: Sri V. Raghuraman, Senior Advocate for Sri Raghavendra C. R., Advocate
For the Respondents: Sri Aditya Vikram Bhat, Additional Government Advocate
Case Title: M/s Fortious Infradevelopers LLP v. The Additional Commissioner of Commercial Taxes (Zone)-1 and Others
Neutral Citation: 2025:KHC:13861-DB
Case Number: STA Nos. 18, 19, and 20 of 2022
Bench: Justice Krishna S Dixit, Justice Ramachandra D. Huddar
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