Permission To Pay Tax On Compounded Basis Not Revocable For Same-Year Suppression, Only Suppressed Turnover Taxable: Kerala High Court Quashes KVAT Notices
Sanchayita Lahkar
The High Court of Kerala Single Bench of Justice M.A. Abdul Hakhim held that, under the KVAT Act, the tax department cannot withdraw a dealer’s permission to pay tax on a compounded basis for alleged suppression occurring in the very year the scheme was chosen, and that only the undisclosed turnover, if any, may be subjected to the regular rate of tax. The case concerned notices issued to a jewellery dealer proposing cancellation of earlier compounding approvals on the ground of unreported purchases. Concluding that the initiation of proceedings was time-barred, contrary to the statutory framework, and inconsistent with the principle that compounding cannot be annulled for same-year suppression, the Court quashed the impugned notices and the connected actions.
The dispute arose when the Intelligence Officer (IB), Thiruvananthapuram, detected alleged suppression of purchases during the assessment years in which the petitioner had opted for compounding. Based on this, the Assessing Authority issued two notices invoking Section 8(f)(iv) and Section 25(1), proposing cancellation of the earlier compounding permissions.
The petitioner advanced several contentions, including that the impugned notices were time-barred under Section 25(1); that the initiation of proceedings was predetermined because the Deputy Commissioner had issued directions in earlier orders; that Section 25AA(5) barred cancellation of compounding where suppression of turnover alone was detected; that cancellation could not rely on alleged suppression from the same year in which compounding was opted; and that monthly returns were not required from dealers under the compounding scheme.
The respondents opposed the writ petition, questioned its maintainability on the ground of alternate statutory remedies, and asserted that the proceedings were validly initiated under Section 8(f)(iv), that Section 42(3) treated such assessments as pending, that Section 25AA did not apply retrospectively, and that suppression in the same year could legally justify cancellation.
The Court heard both sides and confined its analysis to the challenge against the cancellation notices. It examined the statutory provisions, prior judicial precedents, the nature of the alleged suppression, and the timing of initiation of proceedings. The central issues included limitation, subjective satisfaction of the Assessing Authority, applicability of Section 25AA(5), and whether suppression of the same year could be a basis for cancellation.
On limitation, the Court stated that “there could not be any quarrel that if Section 25(1) … is applicable, Exts.P4 and P5 Notices are beyond the period of five years.” It noted that the limitation for the relevant years expired on 31.03.2017. The Court examined the respondents’ contention that Section 8(f)(iv) alone governed the proceedings and that Section 25(1) did not apply. The Court recorded: “Section 8(f)(iv) does not refer to any limitation period… The question… is whether it could be said that there is no limitation period for initiating proceedings under Section 8(f)(iv).”
Relying on MCP Enterprises, the Court reasoned that a reasonable period of limitation must be read into the statute. It observed that “the time limit specified in Rule 58(20)… offers a safe guide” and that absent such limitation, assessments could be reopened indefinitely. It concluded that “the same period of five years could be fixed as the limitation period for initiating the proceedings under Section 8(f)(iv).” The proceedings initiated on 15.03.2018 were therefore beyond time.
On the question of predetermined action due to directions from the Deputy Commissioner, the Court stated that “the basis for initiating the cancellation proceedings… is the Crime file of the Intelligence Officer (IB)” and that even without those directions, the Assessing Authority was “well justified in initiating the action.” It recorded that Exts.P4 and P5 were “only notices inviting objections” and that premature allegations of predetermined action could not be accepted.
The Bench observed that “cancellation proceedings are still pending, and the cancellation is not carried out, and the assessment is not concluded on a best judgment assessment basis. In such a case, Section 25AA(5) is applicable, and the option of compounding shall not be cancelled, and the suppressed turnover alone shall be assessed at the scheduled rate applicable to the goods. In view of Section 25AA(5), the Notices proposing to cancel the permission to pay at a compounded rate are clearly unsustainable.
Regarding suppression within the same year, the Court referred to an earlier judgment and observed that “the turnover of the Petitioner for the year… is not relevant for the purposes of determining tax liability on compounded basis for that year.” It held that this principle continued to apply.
The Court concluded: “In view of my answers to Points Nos.1, 3 & 4, I find that the Petitioner is entitled to succeed in this Writ Petition.” It ordered that “this Writ Petition is allowed, without costs, issuing a writ of certiorari setting aside Exts.P4 and P5 Notices and all the proceedings thereon.”
Advocates Representing The Parties
For the Petitioner: Shri. A. Kumar (Senior Advocate), Shri. P.J. Anilkumar, Smt. Mini (1748), Shri. P.S. Sree Prasad.
For the Respondents: Shri. K.K. Ravindranath, Additional Advocate General; Shri. Mohammed Rafiq, Special Government Pleader (Taxes).
Case Title: Josco Fashion Jewellers v. State of Kerala & Others
Neutral Citation: 2025: KER:86182
Case Number: WP(C) No.15898/2018
Bench: Justice M.A. Abdul Hakhim
