Telangana High Court Quashes Tax Authority's Show Cause Notices To Assessee As Demand Was Settled Under State's One Time Settlement Scheme

The Telangana High Court recently quashed two show cause notices issued by the tax authority to a company, demanding tax which was already settled under the state government's One Time Settlement (OTS) scheme, while noting that there was "no allegation of fraud" committed by the company in the notices. 

A division bench of Justice Sujoy Paul and Justice Namavarapu Rajeshwar Rao in its August 28 order said, that in the "peculiar facts and circumstances of this case", after the petitioner company had availed the One Time Settlement Scheme of the state government, then it was not open for the tax authorities to issue the show cause notice to the petitioner. 

"Putting it differently, in the peculiar facts and circumstances of this case, in our opinion, after having entered into OTS, it was not open for the respondents to issue the impugned show cause notice. Curtains were finally drawn by the respondents by entering into OTS. If we permit the respondents to undertake aforesaid exercise of issuance of show cause notices even after entering into settlement, the very purpose of such scheme will vanish in thin air. This practice will certainly discourage the tax payers to enter into settlement. The settlement should draw the curtains for all times to come otherwise the very meaning of OTS will pale into insignificance," the bench said. 

The high court said this after noting that "very purpose" of bringing such OTS scheme was to "encourage the tax payers to settle their disputes".

Background

An Assessment Order (A.O.) was issued by the Assistant Commissioner (CT), Audit, Begumpet Division, Hyderabad on November 4, 2020 to the petitioner company confirming the demand of Rs.3,25,87,464 for 2015-16, 2016-17 and 2017-18 (up to June 2017). Thereafter on November 28, 2020 another AO was was issued by the Assistant Commissioner demanding penalty of 25% on the tax demand, which amounted to Rs.81,46,866. 

The petitioner, feeling aggrieved by the aforesaid orders preferred appeals before the Appellate Deputy Commissioner challenging the AOs issued demanding Value Added Tax (VAT) and penalty and pre-deposited an amount equivalent to 12.5% of the tax and penalty, which was increased to 50% of the demand of tax and penalty.

The One Time Settlement (OTS) schemes dated May 9, 2022, June 25, 2022 and July 4, 2022 were launched by the Telangana Government as per its 'G.O.Ms.Nos.45, 61 and 71' to enable the tax payers to settle the disputed tax amounts under the Telangana Value Added Tax Act (VAT Act) and the Central Sales Tax Act (CST Act).

Respondent No. 1, Deputy Commissioner (ST) STU-1, Begumpet Division, Hyderabad sent an intimation on May 17, 2022 to the petitioner under the OTS scheme for paying the tax demand of Rs.3,25,87,464 and tax balance of Rs.1,22,20,164. This intimation was in relation to the earlier to AOs. 

The petitioner moved a plea on June 22, 2022  showing its willingness for availing OTS scheme.  On July 11, 2022 the concerned Audit Officer wrote a letter to respondent No.1 indicating short levy of tax and penalty as confirmed in the previous two AOs. 

During the course of hearing, the respondent authorities counsel informed the court that this letter was indeed received by the respondents.

Thereafter on August 16, 2022 petitioner deposited the desired amount vide challan No.6201664297 and consequently, a letter of acceptance issued on August 17, 2022 by the respondent No.2–Assistant Commissioner, Begumpet Division, Hyderabad acknowledged the receipt of arrears and recorded settlement.

Subsequently, a show cause notice were issued to the petitioner on October 31, 2022 proposing raising the demand to Rs. 7,58,43,382. The petitioner raised objections stating that after entering into the OTS scheme, a show cause notice could not issued. Thereafter on January 19 this year a revised show cause notice was issued revising the tax proposed to the tune of Rs.2,46,53,240 in lieu of previous determination of Rs.7,58,43,382. 

Contentions

The petitioner contended that the primary challenge to show cause notices was twofold. Firstly, the petitioners claimed that the show cause notices issued were wholly without jurisdiction in as much as they proceed to re-open the assessment proceedings without making reference to any provision of law, pursuant to which a concluded assessment (settled through OTS) were proposed to be revised/reopened by the Respondents.

Secondly, the Impugned notices have been issued in the teeth of the benefit extended to the Petitioner vide the OTS in as much as they proceed to raise a fresh demand of tax and penalty for the very same Assessment Orders and the same period as were covered under the said Scheme.

Advocate Mannat Waraich appeared on behalf of the Petitioner and argued that the benefit of the OTS scheme was made available to the Petitioner only after a thorough scrutiny of the application of the Petitioner was undertaken by a competent committee. Additionally, during this period, while the application for OTS scheme application was pending, the Respondent was informed by the Audit Officer of the alleged short levy of tax and penalty by the Petitioner. Despite this, the application was accepted, and the benefit granted, exonerating the Petitioner from any remaining tax liability, interest, and penalty.

Meanwhile the Special Government Pleader Sri Swaroop Oorilla for the Respondent raised objection about the maintainability of the petition by placing the reliance on the judgments of the Supreme Court in Union of India vs. Kunisetty Satyanarayana (2006) and Union of India vs. Coastal Container Transport Association (2019). The objection was that the petitioner has called in question the validity of show cause notices and a petition against show-cause notice is not maintainable and since the petitioner has already filed reply, he should await the decision and if it goes against him, he may avail appropriate remedy. The Special Government Pleader by placing reliance on Section 32 of the VAT Act said that this provision nowhere puts any embargo/bar for the Commissioner and other prescribed authorities to undertake the exercise of revision, even if OTS is arrived at.

In absence of any such impediment in the statutory provision, merely because the settlement is arrived at, no fault can be found in the show cause notices, the state counsel said. The Special Government Pleader placing reliance on the Supreme Court's judgment in Bijnor Urban Cooperative Bank Limited, Bijnor Vs. Meenal Agarwal (2023) said that no one has a right to claim settlement under OTS scheme.

Findings

On issue of maintainability of the writ petition against show cause notices, the court taking note of the judgments referred to by the respondents said, "However, a plain reading of both the judgments makes it clear that the Supreme Court made it clear that the correctness of allegations/facts cannot be gone into by this Court at the stage of show cause notice". 

The court noted that in Union of India vs. Coastal Container Transport Association it was made clear that "while exercising power under Article 226, unless there exists lack of jurisdiction, interference may not be made". 

"In the instant case, the sheet anchor of the arguments of learned counsel for Petitioner is regarding authority/jurisdiction to issue show cause notice after entering into OTS. Thus, both judgements cited by the respondents cannot be pressed into service," the high court said. 

On the issue of reassessment/revision after the petitioner had successfully availed the OTS scheme, the bench noted the respondent's submission that it was open to the Revisionary Authority to undertake the revision exercise, even if OTS has taken place as Section 32 of the VAT Act nowhere puts any bar for such exercise

To this the bench said,"In our view, Section 32 became part of the statute book when OTS scheme was not there. In ordinary circumstances, no doubt, the power envisaged under Section 32 can be pressed into service. However, whether this power can be exercised even after OTS is recorded, is the core issue".

The high court said that the "very purpose" of bringing such OTS scheme is to "encourage the tax payers to settle their disputes". The court further noted that interestingly, in the OTS scheme issued by the State Government the entire exercise of determination of tax/penalty amount was in the hands of the respondents for which a committee consisting of senior officers was constituted.

With respect to the present case the high court said,"After having undertaken the entire exercise of determination of amount, a proposal was given by the respondents to the petitioner, which was duly accepted. The most important thing is that between the date of acceptance dated 22.06.2022 and actual recording of OTS on 17.08.2022, the Audit Officer by communication dated 11.07.2022 informed the respondents about the alleged short levy of tax/penalty. Despite having full knowledge about it, the respondent entered into OTS. There is no allegation against the petitioner in the show cause notice that petitioner had committed any fraud. Thus, if the respondents have entered into OTS despite knowledge of Audit Officer letter dated 11.07.2022 with eyes opened, it will be presumed that they have considered the objection and did not find worth in it for exercising powers under Section 32 of the VAT Act or otherwise". 

The court thereafter said that the show cause notices cannot sustain judicial scrutiny, setting them aside and allowing the plea.  

Case Title: ACME Cleantech Solutions Private Limited v/s Deputy Commissioner (ST) STU-1, Begumpet Division, Hyderabad and Anr. 

Counsel for the Petitioner: Advocates Mannat Waraich, Ms. Jaya Rishi and Mr. Aly Ahmed Basith.

Counsel for the Respondents: Sri Swaroop Oorilla, Special Government Pleader for State Tax

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