KVAT Act | Electricity Excluded From 'Goods'; Assessment Order Invalid Unless Compliant With Section 25(1): Kerala High Court

The Kerala High Court recently reiterated that electricity is excluded from the definition of 'goods' as per the Kerala Value Added Tax Act (KVAT Act) and even if electricity were deemed taxable based on its inclusion in the 1st Schedule, an assessment order would not be sustainable unless all the conditions under Section 25(1) [Assessment of escaped turnover] were fulfilled.

Justice Anu Sivaraman added that in such circumstances, the charge against the petitioner would be limited to an inaccurate return filing rather than concealing taxable turnover or tax evasion.

"Even if the contention of the revenue that electrical energy is included in the 1st Schedule is accepted, there would be no element of escaped assessment since the inclusion of electricity is in the 1st Schedule and no tax is payable. Therefore, the charge against the petitioner could, at best, be one of filing of an incorrect return and not of suppression of taxable turnover or attempt to evade tax. In the above circumstances, the essential ingredient under Section 25(1) would not be available to sustain an order of assessment on best judgment"

The petitioner, a registered partnership firm in Hyderabad, obtained approvals and registrations to install a windmill in Kerala. They purchased property, obtained requisite permission and signed a supply agreement for a Wind Electrical Generator with Vestas Technology India Limited. 

Senior Advocate K. Srikumar and Advocate G. Biju appearing for the petitioner argued that electricity does not fall under the definition of 'goods' as per KVAT Act, leading to a nil return. However, they received a notice proposing an assessment based on the assumption that windmill parts were sold in the State. The assessment was finalized ex parte, resulting in a tax liability. The petitioner filed a rectification application, but it was rejected, leading to this challenge.

The petitioner argued that their registration under the KVAT Act was unnecessary due to the specific exclusion of electricity from the definition of 'goods'. They presented evidence that only one windmill was brought into the State, parts of which were assembled at the site. They referred to a case precedent that highlighted the importance of exhausting procedures before resorting to best judgment assessment. They contended that the provisions of Sections 21, 22, and 24 required granting the dealer the opportunity to rectify errors in returns or present evidence.

Advocate T.R Rajan and Government Pleader Resmitha R Chandran countered by emphasising the petitioner's registered dealer status, arguing that they should have disclosed turnover even for non-taxable goods. The respondents also pointed to multiple invoices for windmill parts as evidence for their assessment.

The Court observed that the basis of the assessment notice was the assumption that the petitioner had sold multiple windmills without disclosure, leading to an assessment that imposed a tax rate on the presumed sale of three windmills. However, the petitioner had presented evidence indicating that only one windmill was brought into the state, assembled, and was still operational, generating electricity

The Single Judge then examined the definition of 'goods' and the charging section (Section 6) of the KVAT Act. It determined that since electricity was excluded from the definition, the charge against the petitioner would involve an incorrect return rather than suppression of taxable turnover.

It was observed that even if electricity was considered taxable due to its inclusion in the 1st Schedule, no element of escaped assessment existed, and thus, the conditions for assessment under Section 25(1) were not met. 

Justice Sivaraman also highlighted that the charge against the petitioner could only be for incorrect reporting rather than tax evasion. In light of these factors, the court deemed the assessment order (Ext.P20) unsustainable as it didn't fulfil the requisites of Section 25(1). 

As a result, the assessment was set aside and the petition was allowed.

Case Title: M/S Srinivasa Builders v. Commercial Tax Officer & Ors.

Citation: 2023 LiveLaw (Ker) 390

Click Here To Read/Download The Order