Continuance of Compounding Scheme till the Completion of Work is not mandatory under KVAT Act: Kerala HC [Read Judgment]

Kerala High Court-Tax Exemption-taxscan

In a recent ruling, the Kerala High Court ruled that the assessee need not continue compounding scheme till the completion of work.

Justice Vinod Chandran, while allowing a petition by M/s KNR Constructions, held that continuance of the scheme is not mandatory as per the new amendment to section 8(4) of the Kerala Value Added Tax Act.

The petitioner is a registered works contractor, under the Kerala Value Added Tax Act, 2003. The petitioner was first registered in the assessment year 2013-14. He had only one work in the said year being that of four lining of a section of the National Highway between Walayar and Vadakkanchery. The work extended to the two successive assessment years. The petitioner filed an application for compounding under Section 8(a) of the KVAT Act in all the said three years; 2013- 14, 2014-15 and 2015-16. The permissions granted by the Department is produced as Exts.P1 to P3. The contract concluded on 31.10.2015.In the same year, the petitioner was awarded with another contract of four lining work. Though the agreement was executed in April 2015, the works commenced only in September 2015. The petitioner paid compounded tax for the first bill, which was cleared in the assessment year 2015-16. The work continued in the next assessment year also ie., in 2016-17, for which they do not applied for compounding and filed regular returns and paid tax.The Assessing Officer however, rejected the return and issued notice on the ground that, as per s. 8(4) of the KVAT Act, the petitioner could not have realised from the compounding for that particular work; since as at the date of commencement the petitioner had applied and had been permitted compounding. The Department took a stand that the compounding having been applied for in the assessment year in which the work commenced had to be continued. The petitioner contended that they had applied for a compounding in the year 2015-16 but, had specifically not filed any application for the year 2016-17 and there was no compounding applied for that particular work, ie; the second contract obtained by the petitioner.

It was stated that Section 8(a) of the KVAT Act from the year 2006, which required a dealer, who applied and obtained compounding for a work in a particular year to continue the compounding scheme till the completion of the work. The bench noted that the said position has been changed post-amendment in 2014, which states that “Provided also that in the case of any work compounded under this clause, and which remains unexecuted fully or partly as on 31st March, 2014, the contractor may continue to pay tax in respect of such works in accordance with the provisions of this clause as existed when he had opted for compounding up to 31st March, 2015”.

“Hence, by the use of words “shall”; till 2014 there was a mandate to continue under the compounding scheme once applied for and allowed. In the year 2014-15, the same was substituted by the above proviso, which confined such continuance till the end of the assessment year ie: upto 31.03.2015. The word ‘shall’ as employed in the earlier proviso was also changed to ‘may’; making the continuance optional. There was no change in the assessment year 2015-16, and hence there was no such proviso, which required a dealer, who had applied for compounding, for a work in the earlier year to continue under the compounding scheme itself in that year also. At the commencement of the assessment year 2016-17 also there was no such requirement.”

“From the time of introduction of the 4th proviso, necessarily there is a mandate to continue the compounding when applied for and allowed in an year; at least of that work commenced in the year. However, the proviso was introduced only after the commencement of the subject assessment year being 2016-17. The petitioner had not applied for a compounding in that year. The mere fact that the petitioner’s work, which commenced in the previous year, had been compounded for that year would not require continuance under the scheme in the subsequent year, for reason of there being no provision available requiring such a continuance.”

Read the full text of the Judgment below.