Court’s Decision
The Kerala High Court, while allowing the revision petition filed by the assessee, set aside the suo motu revisional order issued by the Deputy Commissioner and confirmed by the Commissioner of State Taxes under Section 56 of the Kerala Value Added Tax Act, 2003. The Division Bench comprising Justice A. Muhamed Mustaque and Justice Harisankar V. Menon held that the revisional jurisdiction exercised under Section 56 was unsustainable since the clarificatory order relied upon was to be applied only prospectively. The Court concluded that “the clarification issued under Section 94 of the Act cannot have retrospective operation, as it would severely prejudice the assessee who cannot recover differential tax from his customers.”
Facts
The petitioner, a registered dealer engaged in the trading of thermic fluid heaters, was assessed to tax for the year 2009–10. The assessing officer initially imposed tax at 12.5% based on a clarification issued by the Commissioner in 2006. The assessee challenged the assessment before the first appellate authority, which noted that the clarification relied upon had already been set aside by the High Court in a 2008 judgment, directing the Commissioner to revisit the issue. Consequently, the assessing officer passed a revised assessment order in 2015 imposing tax at 4%.
Subsequently, in 2016, the authority under Section 94 issued a new clarification holding that thermic fluid heaters were taxable at 12.5% as they were not specifically included in Schedule III. Relying on this clarification, the Deputy Commissioner initiated suo motu revision under Section 56, cancelling the 2015 assessment order on the ground that it was prejudicial to revenue. The Commissioner later confirmed this action. The assessee then approached the High Court challenging the legality of the revisional exercise.
Issues
- Whether the exercise of suo motu revisional powers under Section 56 of the KVAT Act was justified in the given circumstances?
- Whether reliance on the clarification dated 07.04.2016 was valid for determining the tax payable by the assessee?
- Whether the clarification issued under Section 94 could operate retrospectively?
Petitioner’s Arguments
The petitioner contended that the Deputy Commissioner’s exercise of revisional jurisdiction was invalid since the assessment order in question had arisen from an appellate direction. The proper course for the department would have been to challenge the appellate order rather than revising a consequential assessment. It was further argued that the thermic fluid heater was covered under Entry 83(1)(f) of Schedule III of the Act and therefore taxable at 4%. Additionally, the petitioner emphasized that the clarificatory order dated 07.04.2016 could not have retrospective effect, relying on the Division Bench judgment in Sreedhareeyam Ayurvedic Medicines (P) Ltd. v. State of Kerala [(2011) 19 KTR 561 (Ker)].
Respondent’s Arguments
The State argued that the Deputy Commissioner was well within his powers under Section 56 to revise any order prejudicial to revenue. It was submitted that the assessment order of 2015 was inconsistent with the later clarification under Section 94, which explicitly classified thermic fluid heaters under a higher tax rate of 12.5%. The State maintained that the clarification correctly identified the HSN Code 8419.89.90 and that the product was not covered under Schedule III, thus justifying the revision.
Analysis of the Law
The Court examined Section 56 of the KVAT Act, which empowers the Deputy Commissioner to revise any order prejudicial to revenue, subject to certain limitations, including when an order has already been appealed. The Bench noted that while the Deputy Commissioner could revise orders under his supervision, the order of 2015 was only a consequence of the appellate authority’s earlier remand direction. However, since the appellate authority had not rendered a definitive finding on the tax rate, the suo motu revision could technically be invoked.
Nevertheless, the Court emphasized that the scope of such revision could not extend to giving retrospective effect to a subsequent clarificatory order, as this would violate the statutory safeguard provided under Section 94(2).
Precedent Analysis
- Sreedhareeyam Ayurvedic Medicines (P) Ltd. v. State of Kerala [(2011) 19 KTR 561 (Ker)]
The Court held that clarificatory orders under Section 94 could not be applied retrospectively since this would deprive the assessee of the right to collect tax at the rate prevailing prior to clarification. The High Court in the present case followed this principle to rule that the 2016 clarification could apply only prospectively. - Reckitt Benckiser (India) Ltd. v. Commissioner, Commercial Taxes [(2008) 15 VST 10 (SC)]
The Supreme Court held that clarificatory notifications or advance rulings could not be given retrospective effect under tax law. This precedent was cited by the Kerala High Court to affirm that retrospective application would cause undue hardship to dealers. - OT.Rev.No.93 of 2022 (Ker HC) — The Court distinguished this earlier ruling by clarifying that in the present case, the appellate authority had merely directed a reassessment rather than giving conclusive directions, thereby leaving room for revisional oversight.
Court’s Reasoning
The Bench observed that while the Deputy Commissioner’s power under Section 56 is broad, its exercise must align with statutory conditions. The Court reasoned that although the revision could be initiated in principle, the reliance on the 2016 clarificatory order to retrospectively alter an assessment of 2009–10 was impermissible. It held:
“If the clarificatory order dated 07.04.2016 is provided with any retrospective operation, an assessee would be seriously prejudiced, since it will not be possible for him to collect the differential tax from his customers.”
The Court further held that the Commissioner’s finding that retrospective operation would only be avoided in cases of conflicting clarifications was legally untenable.
Conclusion
The Kerala High Court answered the first two questions in favour of the Revenue—holding that the suo motu revision power could be invoked and that reliance on the clarification was permissible in principle—but answered the third question in favour of the assessee, declaring that the 2016 clarification could apply only prospectively. Consequently, the Court set aside both the Deputy Commissioner’s and the Commissioner’s orders. The revision petition was allowed.
Implications
This judgment underscores the principle that clarificatory circulars and orders under tax statutes cannot be applied retrospectively unless explicitly authorized by law. The ruling also reaffirms that suo motu revision under Section 56 must not result in retrospective tax liability, as it undermines the assessee’s statutory right to recover tax from buyers. The decision strengthens the jurisprudence around taxpayer protection against administrative overreach in retrospective reassessments.
FAQs
1. Can a clarificatory order under Section 94 of the KVAT Act apply retrospectively?
No. The Kerala High Court held that clarificatory orders cannot operate retrospectively since they would adversely affect the assessee’s ability to recover tax from purchasers, contrary to Section 94(2) of the Act.
2. What limits the Deputy Commissioner’s power to revise orders under Section 56?
The Deputy Commissioner cannot exercise revisional powers if the matter is already under appeal, or if four years have passed from the date of the order. Additionally, such power cannot be used to apply later clarifications retrospectively.
3. What precedent governs the prospective operation of clarificatory orders?
The High Court relied on Sreedhareeyam Ayurvedic Medicines (P) Ltd. and the Supreme Court’s ruling in Reckitt Benckiser (India) Ltd., both affirming that clarificatory orders apply only prospectively.
