Tax Authorities must Adhere to Official Clarifications from Higher Authority and Cannot Reclassify Arbitrarily: Madras HC [Read Order]

In a recent judgement, the Madras High Court held that tax authorities must follow official clarifications from higher officials and cannot reclassify tax liabilities arbitrarily.

The assessee Aathees Wetcasting Materials (P) Ltd. was engaged in the manufacturing of cement cover block stones and was taxed at 5% per the 2014 order.

Aggrieved, he appealed before the appellate authority, gaining partial relief in 2017. The respondent had also passed an order on 03.01.2018 giving effect to the order of the appellate authority.

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However, the Assessing Officer (AO) later issued a fresh show cause notice, reassessing the tax rate at 14.5% based on a change of opinion that the cement products were taxable at 14.5%, not 5%.

Despite the petitioner's detailed reply, the impugned order was passed on 28.05.2019 without considering any materials.

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Aggrieved by the order, the assessee moved before the Madras High Court.

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The counsel for the petitioner, S. Karunakar, argued that the 2014 assessment had fixed the tax at 5%, and this was later confirmed on appeal.

He contended that the AO had no authority to reopen the assessment after it had attained finality. If aggrieved, the AO should have appealed under Section 58 of the Tamil Nadu Value Added Tax Act, 2006 (Tamil Nadu VAT Act).

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The petitioner also pointed to a clarification issued by the Deputy Commissioner (CT), classifying concrete cover blocks under Item 22, Part B of Schedule-I. Asserting that the reassessment at 14.5% under Part C was invalid.

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Meanwhile, the department's counsel, R. Suresh Kumar, countered that under Section 84 of the Tamil Nadu VAT Act, the AO had the authority to rectify errors even if the assessment was appealed. Hence, filing an appeal was unnecessary.

He pleaded that the petitioner’s products fall under Item 15, Part C of Schedule I, classifying them as cement products taxable at 14.5%, not 5%, and requested to dismiss the petition.

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The counsel also argued that the Deputy Commissioner had no authority to issue clarifications and relied on a circular issued by the Commissioner of Commercial Tax, Chennai, dated 29.09.2008.

The circular stated that any clarification request should be forwarded to the Joint Commissioner, who would instruct the Assessing Officer to provide clarification based on the Act, Rules, Government notifications, and prior clarifications.

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After hearing both sides, the single bench led by Justice K. Kumaresh Babu held that the Deputy Commissioner’s clarification was valid and binding on the Assessing Officer.

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The court noted that the respondent could not dispute the hierarchical superiority of the Deputy Commissioner over the Assessing Officer.

The court observed that the clarification remained unchallenged, unmodified, and had not been rescinded by any higher authority. In such circumstances, the Assessing Officer was bound to follow the clarification issued by the Deputy Commissioner.

The court found the AO's action to be a colorable exercise of power, as it disregarded a valid directive from a higher official. Therefore, the court quashed the impugned assessment order.

To Read the full text of the Order CLICK HERE

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