'Closure Of Branch Irrelevant Where Assessee Chooses Determination Of Tax Liability Under Compounding Provision': Kerala HC [Read Judgment]

"Closure of branch is irrelevant where the assessee chooses determination of tax liability on a compounding basis", ruled the Kerala High Court on Friday.

The assessee engaged in the business of jewellery had its Head Office at Changanacherry and three branches at Kottayam, Thiruvalla, and Chengannur. From the year 2006-2007 onward the assessee was paying tax under Section 8(f) of the Kerala Value Added Tax Act, 2003. The assessee on March 31, 2010, closed down the branch at Thiruvalla, and from the next assessment year, the business is carried on from the Head Office and two branches.

The assessee for the year 2010-11 applied for compounding and the issue is said to be pending before the Tribunal in appeal. The Department maintains that the compounded tax to be paid by the assessee is at the percentage prescribed of the tax paid in the previous year, ie, 2009-10 which included the Head Office and three branches. In the years 2011-12 and 2012-13, the assessee again applied for compounding and the same was permitted. The assessee had made an application excluding that portion of the tax paid, attributable to the Thiruvalla Branch for the year 2009-10; in the year 2010-11. The assessee was permitted to pay tax under the compounded provision. Later notice was issued under Section 25(1) of the KVAT Act and orders were passed for the two consecutive years including that portion which was excluded in the previous year, for the purpose of determining the tax payable under the compounding scheme for the years under option.

Setting aside the decision of the Single Judge, the High Court, in appeal, observed that in the present case, the taxable event insofar as the year under option is with respect to the Head Office and two branches which alone would have been assessed if the assessee had gone under regular assessment. However, the assessee chose to apply for compounding which alternate mode specifically provided for an enhanced percentage of the turnover for the previous year which took in the business of the 3rd branch also. The assessee had no escape from paying tax on the basis of the earlier turnover since that was an alternate mode available to the assessee for which the assessee had voluntarily opted with open eyes.

"The option available was very clear insofar as the tax payable under the compounding scheme to be at a percentage above the tax liability of the previous year. The assessee with open eyes applied under the scheme and obtained permission. There was no cause for any exclusion since the closed down branch had business in the previous year for which tax was also paid at the compounded rate", held the Division Bench.

Considering Section 8(f) as available in the subject assessment year and as amended in the year 2014, the bench found that the entire provision itself was substituted, on amendment, but however, sub-clause (i) in its effect remained the same. The tax payable under the year of option was dependent upon the turnover of the previous year and had to be at the rate of 115% of the tax paid or payable, if the turnover for the preceding year was Rs.10 lakhs or below, 120%, if it were above Rs.10 lakhs and up to Rs.40 lakhs, 135%, above Rs.40 lakhs and up to Rupees one crore and 150% above Rupees one crore. The percentage being determined on the highest tax conceded or paid in the three consecutive years preceding the year under option.

The judgment extracts only the relevant explanations as it existed in the subject assessment years and that available in the amended section 8(f)(i) in 2014.

As it existed in the subject assessment years:

Explanation 8:- Where a dealer who had opted and paid tax under this clause during previous years with respect to a branch that had remained closed during the whole of the year 2009-10, for the purpose of determining the compounded tax payable for 2010-2011, the tax paid in respect of that branch shall not be reckoned.

Explanation relied on as it existed after the amendment in the year 2014

Explanation 3. Where a dealer paying tax under this clause, closes a branch duringthe year under option, proportionate reduction considering the number of business places, in the payment shall be granted in the next monthly instalment onwards, for the remaining months of the year".

"We are unable to agree with the learned Single Judge that Explanation 3 as available in the amended Section 8(f) is clarificatory...Clause (f) of Section 8 was substituted in its entirety with six explanations where as the original clause (f) had eight explanations. If Explanation 3 in the new clause (f), as introduced in 2014, is found to be clarificatory, it has to be bodily taken out of the amended provision and placed in the un-amended clause (f) which is not a permissible exercise", said the bench.

The Court proceeded to state that the Explanation in the amended clause(f) applies to that provision and not to the earlier one. Clause (f) as amended in 2014 can only apply prospectively and the Explanations therein are intended at explaining the meaning and intendment of the section itself, to clarify any obscurity or vagueness thereat, to make meaningful and workable the dominant object of that particular provision and not do any or all of these with respect to the un-amended provision, which had all-together different explanations.

The fact that in the year 2014 the provision was substituted also would not have the effect of it being retrospective.

"We find that the provision is not clarificatory nor has it any retrospective effect by virtue only of the Finance Act of 2014 having substituted the provision under Section 8(f); which is amended in its entirety", declared the bench.

It expounded that Explanation 3 is specifically with respect to the closing of a branch during the year under option upon which proportionate reduction in the number of business places can be allowed for the purpose of payment from the next monthly installment.

To illustrate, the court advanced that if in the year 2011-12 an assessee has business of one Head Office and three branches which were continued from the earlier year and he applies under the compounding provision the tax liability would be the specified percentage of the highest of the previous three years liability. However, if during the course of the year under option, 2011-12, say in September, one of the branches is closed. The liability from October would be reduced insofar as that portion being excluded. If in the subsequent year 2012-13, the very same provision existed, there could be no reduction claimed insofar as the tax liability for the previous year with respect to the closed branch up to September, 2010; though that branch is not functioned in that subsequent year; which then becomes the year under option.

"If a regular assessment had been resorted to definitely there would have been no liability with respect to the closed branch. Explanation 8 as it existed in Section 8(f), in the relevant years, only granted exclusion of the turnover in any previous year of a branch which remained closed for the whole of the year 2009-10. The one out of the three branches of the assessee was closed down on 31.03.2010. There could have been no exclusion of the turnover of that particular branch since the determination of compounded tax for the year under option, ie, 2010-11 reckoned the tax liability for the previous year at an increased percentage as specified under Section 8(f)(i). This definitely took in the liability of the closed branch also. The assessee definitely could have chosen regular assessment, in which event the assessee would have been assessed only with respect to the Head Office and two branches", concluded the Court.

Looking at whether the Explanation as available in the relevant years under the un-amended Section 8(f) was absurd or unworkable, the bench noted that the Explanation 8 only provided for deduction of the business of a branch which had remained closed during the whole of the year 2009-10. "There is no absurdity in the provision nor can it be found unworkable. Hardship, definitely could be pleaded but is no ground against the taxing statute especially one which provided an alternate mode from that of the rigour of a regular assessment which also was available as an alternative option. The assessee had a choice not to opt under the compounding provision. Having so opted, he cannot plead hardship and seek modification of the very computation provided in the alternate mode", it declared.

The bench was of the view that any exclusion of a liability for the previous year cannot be granted under the provisions under Section 8(f) as it existed in the year 2011-12 and 2012-13. The closure of branch on 31.03.2010 is irrelevant insofar as the tax liability determined in the years 2011-12 and 2012-13 on the basis of the tax conceded or paid in the three consecutive years preceding the year under option.

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