M/S.PRABHATH INDUSTRIES v. COMMERCIAL TAX OFFICER (AUDIT ASSESSMENT), COMMERCIAL TAX DEPARTMENT, THRISSUR; THE COMMERCIAL TAX OFFICER, KUNNAMKULAM, THRISSUR DISTRICT; STATE OF KERALA REPRESENTED BY ITS SECRETARY TO GOVERNMENT, TAXES DEPARTMENT, SECRETARIAT, THIRUVANANTHAPURAM; INSPECTING ASSISTANT COMMISSIONER COMMERCIAL TAXES, THRISSUR

# **IN THE HIGH COURT OF KERALA AT ERNAKULAM** ## **PRESENT** ## **THE HONOURABLE MR. JUSTICE AMIT RAWAL** **WEDNESDAY, THE 24[TH] DAY OF MAY 2023 / 3RD JYAISHTA, 1945** ## **WP(C) NO. 17245 OF 2008** ## **PETITIONER/S:** M/S.PRABHATH INDUSTRIES M.G. SHOPPING COMPLEX,, CALICUT ROAD, KUNNAMKULAM, THRISSUR DISTRICT,, REPRESENTED BY C.V. BINOY, PARTNER, BY ADV SRI.K.M.FIROZ ## **RESPONDENT/S:** 1 THE COMMERCIAL TAX OFFICER (AUDIT ASSESSMENT), COMMIERCIAL TAX DEPARTMENT,THRISSUR. 2 THE COMMERCIAL TAX OFFICER KUNNAMKULAM, THRISSUR DISTRICT. 3 STATE OF KERALA REPRESENTED BY ITS SECRETARY TO GOVERNMENT, TAXES DEPARTMENT,, SECRETARIAT, THIRUVANANTHAPURAM. 4 INSPECTING ASSISTANT COMMISSIONER COMMERCIAL TAXES, THRISSUR. BY ADV SRI.MOHAMMED RAFEEQ, SPL.GOVERNMENT PLEADER (TAXES) THIS WRIT PETITION (CIVIL) HAVING COME UP FOR ADMISSION ON 24.05.2023, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: **WP(C) NO. 17245 OF 2008** 2 ## J U D G M E N T Petitioner in the present writ petition, is a registered dealer under the Kerala Value Added Tax Act, 2003 (hereinafter referred to as “KVAT Act”, for short) - erstwhile Kerala General Sales Tax Act, 1963 (hereinafter referred to as “KGST Act”, for short). Order of the assessing authority rejecting the claim of refund of input tax credit for an amount of Rs.9,09,810/- for the year 2005-06 was challenged and also retrospective operation of the second proviso to sub-Section (13) of Section 11 of the KVAT Act introduced in the said Act by Act 39 of 2005 with effect from 1.4.2005, published on 28.8.2005. 2. In respect of the business carried out, a return for the period from April 2005 to March 2006 was submitted, which was verified by the assessing officer. On verification, it was found that the assessee had effected an amount of Rs.8,99,049/- as refund for the year 2005-06. Accordingly, the assessee was called for submission of the books and **WP(C) NO. 17245 OF 2008** **==> picture [7 x 9] intentionally omitted <==** return. On verification of the return and books, the assessing officer noticed that there were certain irregularities inasmuch as the assessee had claimed an amount of Rs.9,09,810/- of input tax credit on the opening stock held on 1.4.2005 and availed the input tax credit in three monthly installments i.e. for the months of May, June and November 2005. Verification of the stock statement with the purchase bills 2004-05 further revealed that the assessee had availed input tax credit for the year 2003-04 on three purchase bills, i.e. Bill Nos.1790/31.3.2004, 1741/26.3.2004 and 1740/ 26.3.2004, for total amount of Rs.10,300/- and purchase bill No.1072/17.9.2004 for Rs.1,398.66 was seen claimed twice. On verification of the purchase bills and sales bills, it was also noticed that the assessee did not make any deduction on the tax paid under the previous tax regime, i.e. KGST Act. Noticing the provisions of sub-Section (13) of Section 11 of the KVAT Act and further that the assessee had not produced any documentary evidence **WP(C) NO. 17245 OF 2008** 4 to prove that the amount was accounted in the year 2005, his request for claiming input tax credit was rejected. Learned counsel appearing on behalf of the petitioner submitted that since the vires of the Act, i.e. the provisions of sub-Section (13) of Section 11 of the KVAT Act introduced on 28.8.2005 with effect from 1.4.2005, have been challenged, it would not be farcical to avail the remedy of appeal. 3. In support of the contention, it was submitted that as per the provision of Section 2(xiii), 'reverse tax' would mean that portion of input tax of the goods for which credit was availed but such goods remained unsold at the closure of business or were used subsequently for any purpose other than re-sale of manufacture of taxable goods or execution of works contract or use as containers or packing materials of taxable goods within the State. The first respondent had not established that the petitioner violated any of the conditions **WP(C) NO. 17245 OF 2008** **==> picture [7 x 9] intentionally omitted <==** of the provisions governing refund of input tax credit. 4. The relevant provisions of sub-Section (13) of Section 11 of the KVAT Act came into force with effect from 1.4.2005, whereas the petitioner filed Form 25A as required under Rule 12(2) of the Kerala Value Added Tax Rules, 2005 (hereinafter referred to as “KVAT Rules”, for short) applicable for input tax credit in respect of opening stock reflecting the entire details along with the purchase list, opening stock inventories etc. Despite that recovery steps were initiated by the fourth respondent by issuing a demand notice demanding a sum of Rs.12,22,546/- under tax and Rs.3,00,875/- towards interest. The second proviso to sub-Section (13) of Section 11 of the KVAT Act can only have operational only with effect from 28.8.2005 and not before that date at any rate. As the petitioner had effected the sale of goods held on opening stock at a higher price no deductions were made on the tax paid under the KGST Act. Such **WP(C) NO. 17245 OF 2008** 6 allegation is based on an irrelevant consideration. In other words, the transaction prior to the date cannot be subjected to the limitations provided under the proviso to sub-Section (13) of Section 11. Petitioner paid tax on the opening stock at the rate of 9% and was liable to pay tax only at the rate of 4% under the KVAT Act. 5. On the other hand, Mr.Rafeeq, learned Special Government Pleader (Taxes) opposed the aforementioned contention on the ground that Entry 54 of List II of the Seventh Schedule empowers the State to impose tax on the goods. There is no restriction until and unless, it was found to be untenable, unreasonable, illegal or lack of any reasonable criteria. In support of the said contention, reliance was laid on the judgment of the Constitution Bench of the Supreme Court in J.K.Jute Mills Co. Ltd. v. State of Uttar Pradesh and Another [AIR 1961 SC 1534] , which was rendered by relying upon the another Constitution Bench decision of the Supreme Court in **WP(C) NO. 17245 OF 2008** **==> picture [7 x 9] intentionally omitted <==** M.P.V.Sundararamier & Co. and another v. State of A.P. and Others [AIR 1958 SC 468] and Union of India and Others v. VKC Footsteps India Private Ltd. [(2022) 2 SCC 603] . 6. It was next contended that the verification of the opening stock statement with the purchase bills for the year 2004-05 revealed that assessee claimed input tax credit on purchase bills relating to the year 2003-04. The input tax credit on opening stock under Form 25A claim was disallowed as per the provisions of sub-Section (13)(iii) of Section 11 of the KVAT Act as the dealer had sold the goods at a higher price without deducting the tax paid under the KGST Act because the aforementioned provisions of the KVAT Act provided that input tax credit on opening stock will not be allowable “when in audit it is found that the dealer claiming input tax credit under the sub-Section had charged tax under Section 6 on a turnover of such goods without making any **WP(C) NO. 17245 OF 2008** 8 deduction” in respect of the tax paid under the old regime, i.e. KGST Act. 7. The provisions of sub-Section (13) of Section 11 of the KVAT Act published on 28.8.2005 were introduced with effect from 1.4.2005, i.e. the financial year. Moreover, the input tax credit for the third installment by the dealer was only in November, 2005. Despite this, the dealer had irregularly availed the input tax credit by violating the KVAT Act and the Rules. Assessee effected sale of opening stock at a higher price and claimed input tax credit, but no deduction was made on the tax paid under the KGST Act. 8. Heard the learned counsel for the parties and appraised the paper books. 9. Entry 54 of List II of the Seventh Schedule of the Constitution of India reads as under: “54. Taxes on the sale of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption, but not including sale in the course of inter-State **WP(C) NO. 17245 OF 2008** 9 trade or commerce or sale in the course of international trade or commerce of such goods.” It was submitted that it empowers the State to legislate law for imposition of tax. The said power of the State was discussed in extenso in the decision in J.K.Jute Mills Co. Ltd. (supra), where in paragraph Nos.11 and 15, the Supreme Court held as thus: “11. The point for decision, stating it succinctly, is whether the Validation Act is within the ambit of Entry 54 in List II of the Seventh Schedule to the Constitution. That entry confers on the States authority to enact a law with respect to tax on sales of goods. Now what is the extent of that authority? There must be, in fact, a sale as recognised by law. It is only then that a tax could be imposed. But if the transaction sought to be taxed is not a sale, a law which seeks to tax it, treating it is a sale, would be ultra vires. Thus in Sales Tax Officer v. Budh Prakash Jai Prakash a tax on agreement to sell was held to be not authorised by the entry, and in State of Madras v. Gannon Dunkerly & Co (Madras) Ltd. a tax on the supply of materials in a contract for the construction of works simpliciter, on the footing of a sale was held to be outside the entry, and the legislation which imposed such a tax was struck down as ultra **WP(C) NO. 17245 OF 2008** 10 vires. But where the transaction is one of sale of goods as known to law, the power of the State to impose a tax thereon is plenary and unrestricted subject only to any limitation which the Constitution might impose, and in the exercise of that power, it will be competent to the legislature to impose a tax on sales which had taken place prior to the enactment of the legislation. ## xxx xxx xxx 15. The power of a legislature to enact a law with reference to a topic entrusted to it, is, as already stated, unqualified subject only to any limitation imposed by the Constitution. In the exercise of such a power, it will be competent for the legislature to enact a law, which is either prospective or retrospective. In Union of India v. Madan Gopal it was held by this Court that the power to impose tax on income under Entry 82 of List I in Schedule VII to the Constitution, comprehended the power to impose income tax with retrospective operation even for a period prior to the Constitution. The position will be the same as regards laws imposing tax on sale of goods. In M.P.V.Sundararamier & Co. v. State of Andhra Pradesh, this Court had occasion to consider the validity of a law enacted by Parliament giving retrospectively operation to laws passed by the State legislatures imposing a tax on certain sales in the course of inter-State trade. One of the contentions raised against the validity of this legislation was that, having regard to the terms of Article 286(2), the **WP(C) NO. 17245 OF 2008** 11 retrospective legislation was not within the competence of Parliament. In rejecting this contention, the Court observed: "Article 286(2) merely provides that no law of a State shall impose tax on inter-State sales 'except insofar as Parliament may by law otherwise provide'. It places no restrictions on the nature of the law to be passed by Parliament. On the other hand, the words 'insofar as' clearly leave it to Parliament to decide on the form and nature of the law to be enacted by it. What is material to observe is that the power conferred on Parliament under Article 286(2) is a legislative power, and such a power conferred on a Sovereign Legislature carries with it authority to enact a law either prospectively or retrospectively, unless there can be found in the Constitution itself a limitation on that power." (p. 1460). And it was held that the law was within the competence of the legislature. We must therefore hold that the Validation Act is not ultra vires the powers of the legislature under Entry 54, for the reason that it operates retrospectively.” 10. Entry 54 List II of the Seventh Schedule to the Constitution of India conferred power on the State authority to enact a law with respect to tax **WP(C) NO. 17245 OF 2008** **==> picture [13 x 9] intentionally omitted <==** on the sales of goods. Only thing which is required to be seen is whether tax when imposed on the goods, was not subject to sale. In the case in hand, it is not the case of the petitioner that the goods were not subjected to sale. 11. Sub-Section (13) of Section 11 of the KVAT Act with condition Nos.(i), (ii) and (iii) with provisos reads as under: ## “ 11 . Input Tax Credit xxx xxx xxx (13). Subject to the provisions of sub-sections (4) to (7) and sub- sections (9) to (12), input tax credit shall be allowed to a registered dealer in respect of the tax paid under the Kerala General Sales Tax Act, 1963 (15 of 1963) where the tax paid by the dealer who sold the goods to such registered dealer or by any previous seller, or the Kerala Tax on Entry of Goods into Local Areas Act, 1994 (15 of 1994), in respect of goods purchased by him during a period of one year immediately preceding the date of commencement of this Act, subject to such conditions and restrictions as may be prescribed, where such goods are— (i) held as opening stock on such date and sold or used in the manufacture of taxable goods or used in the execution of works contract or used as containers or packing materials for the packing **WP(C) NO. 17245 OF 2008** 13 of taxable goods in the state for sale thereafter; or (ii) used in the manufacture of taxable goods or as packing materials for the packing of taxable goods and such manufactured or packed goods are held as opening stock on such date; or (iii) used in the manufacture of taxable goods and are held as opening stock on such date as work in process. Provided that the Assessing Authority may adjust any amount accruing to a dealer as input tax credit under this sub-section towards any tax or other amount due from the dealer, under this Act or under the provisions of the Kerala General Sales Tax Act, 1963 (15 of 1963) or the Central Sales Tax Act, 1956 (Central Act 74 of 1956) or The Kerala Tax on Entry of Goods into Local Areas Act, 1994 (15 of 1994). Provided further that where it is found on audit that the dealer claiming input tax credit under this sub-section has charged tax under section 6 on the turnover of such goods without making any deduction in respect of the tax paid under the KGST Act, 1963 (15 of 1963) for which input tax credit is allowed to him under this subsection, the input tax credit availed of by him shall be liable to be disallowed to that extent and the input tax credit so disallowed shall be deemed to be reverse tax due under sub-section (7). Provided also that no input tax credit under this sub-section shall be allowed in respect of tax paid under the Kerala General Sales Tax Act, **WP(C) NO. 17245 OF 2008** 14 1963 (15 of 1963) on medicines and drugs falling under the Third Schedule to this Act and turnover of sale of such medicines and drugs shall not be included in the taxable turnover of any dealer effecting sales of such medicines and drugs, subject to such conditions and restrictions as may be prescribed.” 12. On perusal of the same, it is evident that input tax credit can be allowed only to registered dealers in respect of the tax paid under the KGST Act, and where the tax is paid by the dealer after sale of goods to such registered dealer or by any previous seller or the Kerala Tax on Entry of Goods into Local Areas Act in respect of goods purchased by him during a period of one year immediately preceding the date of commencement of this Act, subject to the conditions and restrictions, i.e. when the goods are held as opening stock on such date and sold or used in the manufacture of taxable goods or used in the execution of works contract, used in the manufacture of taxable goods or as packing materials and used in the manufacture of taxable goods and are held as opening stock on such **WP(C) NO. 17245 OF 2008** **==> picture [13 x 9] intentionally omitted <==** date as work in process, provided that the assessing authority may adjust any amount accruing to a dealer as input tax credit under the aforementioned sub-Section towards any tax or other amount due from the dealer and further that where it is found on audit that the dealer claiming input tax credit under this sub-Section charged tax under Section 6 on the turnover of such goods without making any deduction in respect of the tax paid under the KGST Act. 13. Attention of this Court was drawn to the order of the assessing authority, where it was found that the assessee failed to bring on record the materials specifically asked for. Counsel representing the petitioner confronted to this argument of the learned Special Government Pleader and sought time to place on record the documents. It is pertinent to mention that before arguments could be commenced this Court had given an option to the petitioner to avail the remedy of appeal to adduce additional evidence, despite that it was not **WP(C) NO. 17245 OF 2008** 16 opted for. It is the common practice among the assessees, instead of availing the remedy of appeal by paying the statutory amount challenging the demand, to file writ petitions under Article 226 challenging the order and vires. Such practice time and again being deprecated. In the case of such kind, the return under the KVAT Act has to be filed every month within the period prescribed under the Act. I do not find any ground to interfere with the findings of the assessing officer or to hold that the Act was contrary and would not have any applicability to the transaction conducted by the petitioner. The writ petition is devoid of any merit and accordingly is dismissed. **==> picture [110 x 40] intentionally omitted <==** **----- Start of picture text -----**<br> Sd/-<br> AMIT RAWAL<br> JUDGE<br>**----- End of picture text -----**<br> jg **WP(C) NO. 17245 OF 2008** 17 ## APPENDIX ## PETITIONER'S EXHIBITS P1 : TRUE COPY OF ORDER NO.AA/32081296274/05-06 DATED 29.2.2008. P2 : TRUE COPY OF OBJECTION DATED 28.2.2008. P3 : TRUE COPIES OF FORM NO.25A AND THE ENCLOSURES THERETO DATED 14.5.2005. P4 : TRUE COPY OF RETURNS FILED BEFORE THE 2ND RESPONDENT FOR THE MONTH OF APRIL TO AUGUST 2005 AND NOVEMBER 2005 P5 : TRUE COPY OF DEMAND NOTICE NO.RR 405/08-09/RRC NO.8/08-09 DATED 29.5.2008.