KVAT Act | Permission For Compounding Tax Cannot Be Cancelled For Suppression; Only Suppressed Turnover Can Be Taxed: Kerala High Court

Justice M.A. Abdul Hakhim opined that cancellation proceedings are still pending, and the cancellation is not carried out, and the assessment is not concluded on a best judgment assessment basis. In such a case, Section 25AA(5) is applicable, and the option of compounding shall not be cancelled, and the suppressed turnover alone shall be assessed at the scheduled rate applicable to the goods. In view of Section 25AA(5), the Notices proposing to cancel the permission to pay at a compounded rate are clearly unsustainable.

In this case, the assessee/petitioner is a dealer in gold ornaments and jewellery registered under the Kerala Value Added Tax Act, 2003 (KVAT Act) and CST (Central Sales Tax).

The assessee had been opting for payment of tax at compounded rates under Section 8(f) of the KVAT Act since the year 2006. Through an order, the Applications of the assessees for compounding and determining tax for the Assessment Years 2010-11 and 2011-12 were allowed.

The assessee is challenging Notices issued by the Assistant Commissioner proposing to cancel Orders permissions to pay tax at compounding rate on the ground that the Intelligence Officer has found that the assessee did not declare certain purchases in the Returns in Form 10DA filed during the relevant Assessment Years in which the compounding was opted.

The Assistant Commissioner issued Notices invoking Section 8(f)(iv) and/or Section 25(1) of the KVAT Act.

The assessee argued that the notices are time-barred as the proceedings were initiated beyond the time limit prescribed under Section 25(1) of the KVAT Act.

As per the assessee, the cancellation of the option of compounding is not permissible under Section 25AA(5) of the KVAT Act which provides that if any suppression of turnover of gold is detected with respect to dealers who have paid tax at the compounding rate, such suppressed turnover alone shall be assessed at the scheduled rate applicable to the goods and in such case the option of compounding for that year shall not be cancelled.

The department contended that the proceedings are initiated under Section 8(f)(iv) of the KVAT Act and not under Section 25(1) of the KVAT Act, and hence the limitation period under Section 25(1) is not applicable to the proceedings.

The bench stated that the period of five years could be fixed as the limitation period for initiating the proceedings under Section 8(f)(iv) of the KVAT Act for cancellation of permission to pay tax at compounded rate on the principle that where there is no limitation period prescribed under a taxing statute for taking action against an assessee, a reasonable period of limitation has to be read into the statutory provision by the Court.

The bench disagreed with the assessee that the cancellation proceedings under Section 8(f)(iv) are to be initiated as per the subjective satisfaction of the Assessing Authority, and after forming an opinion after hearing the dealer concerned, the Assessing Authority has to obtain approval from the Deputy Commissioner prior to the passing of the order.

The bench agreed with the assessee that it is not legally permissible for the Assessing Authority to cancel the permission to pay tax at the compounded rate, relying on the alleged suppression of the very same year in which compounding was opted.

Case Title: M/s Josco Fashion Jewellers v. State of Kerala

Case Number: WP(C) NO. 15898 OF 2018

Citation: 2025 LiveLaw (Ker) 758

Counsel for Petitioner/Assessee: A. Kumar

Counsel for Respondent/Department: K.K. Ravindranath

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