Value Of Land Under Works Contract Is Not Exigible To VAT: Karnataka High Court

The Division Bench of Justices Krishna S Dixit and Ramachandra D. Huddar was addressing the issue of whether levying tax on receipt for land cost i.e., immovable property, which does not constitute consideration for works contract under Composition Scheme of KVAT is sustainable.

In this case, Appellant/Assessee is a Limited Liability Partnership engaged in the business of executing civil works, building residential & commercial complexes and performing other allied works. For FY 2015 -16, it had filed VAT returns and paid taxes.

The Assistant Commissioner of Commercial Taxes issued reassessment notice under section 39(1) of the VAT Act. It was alleged that on total receipts of contract declared in VAT 120 and VAT 240 returns was raised.

The claim of deduction towards sub-contractors is liable to be disallowed for the lack of producing certificates mandated under Rule 3(2)(i-1) of KVAT Rules, 2005. In the absence of particulars of tax collected, the deduction claimed towards tax collection is disallowed.

The failure of the Assessee to declare purchases made from the unregistered dealers (URD) and therefore, such purchases are estimated at 10% of the receipts.

The assessee submitted that in the absence of twin test being satisfied, there was no scope for SMR. In any event, the Act does not provide for including the land cost while working out value of works contract and therefore, the impugned orders structured on contra premise are flawsome.

The bench opined that the prescribed authority having verified all the documents, vouchers and the ledgers, accepted the total turnover. 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. After all, no tax can be levied except by the authority of law. What should flow to the Exchequer is what is legally authorized & permissible and not every flow of money, regardless of the legality of its exaction, added the bench.

The bench stated that “separate agreements are entered into for sale of undivided share of land and works contract. What is contemplated by the statute is that the former agreement for sale of land would not be a subject matter of the tax, and the aggregate of works contracts agreements only would be taken into account as they represent the total consideration for the works contract.”

In view of the above, the bench allowed the appeal.

Case Title: M/s Fortious Infradevelopers LLP V. The Additional Commissioner of Commercial Taxes

Case Number: SALES TAX APPEAL NO. 18 OF 2022

Counsel for Appellant/ Assessee: V. Raghuraman

Counsel for Respondent/ Department: Aditya Vikram Bhat

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