Karnataka High Court

Gopalan Enterprises ( India) ... vs The State Of Karnataka on 6 March, 2021

Author: Alok Aradhe S.Kinagi

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 IN THE HIGH COURT OF KARNATAKA AT BENGALURU

        DATED THIS THE 6TH DAY OF MARCH 2021

                        PRESENT

        THE HON'BLE MR. JUSTICE ALOK ARADHE

                           AND

       THE HON'BLE MR. JUSTICE ASHOK S. KINAGI

                 S.T.R.P. NO.238 OF 2011
BETWEEN:

GOPALAN ENTERPRISES (INDIA) P. LTD.
NO.5, RICHMOND ROAD
BANGALORE-560025
REP. BY ITS MANAGING DIRECTOR
MR. C. GOPALAN.
                                             ... PETITIONER
(BY SRI. K.P. KUMAR, SR. COUNSEL FOR
    SRI. V. VINAY GIRI, ADV.,)

AND:

THE STATE OF KARNATAKA
REP. BY THE COMMISSIONER OF
COMMERCIAL TAXES
VANIJYA THERIGE KARYALAYA
GANDHINAGAR, BANGALORE-560009.
                                            ... RESPONDENT
(BY SRI. JEEVAN J. NEERALGI, AGA)
                             ---
      THIS S.T.R.P. IS FILED UNDER SEC 65(1) OF KARNATAKA
VALUE ADDED TAX ACT, 2003, AGAINST THE JUDGMENT DATED
24.6.2011 PASSED IN STA NOS.1295/2008 TO 1306/2008 ON THE
FILE OF THE KARNATAKA APPELLATE TRIBUNAL, BANGALORE,
PARTLY ALLOWING THE APPEALS.
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     THIS S.T.R.P. COMING ON FOR HEARING, THIS DAY,
ALOK ARADHE J., DELIVERED THE FOLLOWING:


                           ORDER

This petition under Section 65(1) of the Karnataka

Value Added Tax Act., 2003 (hereinafter referred to as 'the

Act' for short) has been filed by the assessee against order

dated 24.06.2011 passed by Karnataka Appellate Tribunal.

(Hereinafter referred to as 'the tribunal' for short). The

subject matter of the petition pertains to levy of tax on sale

of apartments in the project between the period April 2005 to

March 2006. The appeal was admitted by this court vide

order dated 12.02.2021 on the following substantial

questions of law:

"(i) Whether the finding recorded by the Tribunal holding that the petitioner has undertaken works contract is liable to be taxed under the provision of Karnataka Value Added Tax Act, 2003 is perverse?

(ii) Whether the Tribunal committed an error of law in holding that the petitioner is liable for pending under Section 72(2) of the Karnataka Value Added Tax Act, 2003?"

2. Facts leading to filing of this petition briefly

stated are that the petitioner is a company incorporated

under the Companies Act, 1956 and is a dealer

registered under the provisions of the Act. The petitioner

is engaged in the business of real estate development

and sale of immovable properties. The petitioner was

owner of land on which it developed an apartment

complex. The petitioner entered into agreements at

various stages i.e., before, during and after construction

of apartments for sale with prospective purchasers for a

consolidated consideration without breaking up the

components for undivided interest in land and for

construction.

3. The Additional Commissioner of Commercial

Taxes (Assessing Officer) issued a notice proposing to

reject the monthly returns filed by the petitioner for the

period from April 2005 to March 2006 as incomplete and

incorrect and to reassess the petitioner to the best of his

judgment. The Assessing Authority by an order dated

02.11.2007 concluded the re assessment. The Assessing

Authority construed the entire sale consideration of

apartments as turnover and computed the taxable

turnover by giving certain deductions except with regard

to sales where there were no agreements during the

construction but were sold after construction. The

Assessing Officer treated the sales where agreements

had entered into doing construction and treated such

transaction and as works contract. The Assessing Officer

applied higher rate of tax in respect of iron and steel

despite the fact that the same was covered under the

category of declared goods and qualified for a rate of tax

not higher than 4%. Accordingly, the further tax,

interest and penalty was levied. The petitioner

challenged the aforesaid order in an appeal before the

Joint Commissioner of Commercial Taxes (hereinafter

referred to as 'the Joint Commissioner' for short). The

Joint Commissioner by an order 09.07.2008 dismissed

the appeal by the petitioner. The petitioner challenged

the order passed by the Joint Commissioner before the

tribunal. The tribunal vide order dated 24.06.2011

affirmed the order passed by the Joint Commissioner in

respect of non leviability of tax on sale of immovable

properties. However, the contention of the petitioner

with regard to rate of tax was accepted with as is

applicable to the declared goods. Thus, the appeal was

partly allowed by the tribunal. In the aforesaid factual

background, this petition has been filed.

4. Learned Senior counsel for the petitioner

submitted that law with regard to levy of Value Added

Tax on Works Contract is settled by decision of the

Supreme Court in LARSEN & TOUBRO VS. STATE OF

KARNATAKA, 2014 (303) E.L.T.3 (SC). It is further

submitted that in the aforesaid decision the Supreme

Court has held that value of the land has to be excluded

from the levy and only value of goods incorporated in

the works after the agreements are entered into with

purchasers of the flat is chargeable to tax. In this

connection, learned Senior counsel has invited our

attention to para 101 of the aforesaid decision. It is

further submitted that the Act and the Karnataka Value

Added Rules, 2005 (hereinafter referred to as 'the Rules'

for short) do not provide for any machinery provisions

either to exclude value of land or to determine the value

of goods incorporated into the work after the

agreements are entered into which alone are liable to

tax. Therefore, the charging provision under the Act and

Rules fail as there is no provision for computation for

determination of value of goods after incorporation into

works and further excluding the value of land akin to

what was provided under the Maharashtra Act and the

Rules. It is urged that in the absence of any machinery

provision in the Act seeking to levy tax on indivisible

works contract providing for exclusion of value of the

land and determination of the value of goods

incorporated into the contract only from the date of the

agreement with the purchasers of the agreement, the

charge fails and therefore, the orders are liable to be

quashed. Attention of this court has also been invited to

Article 336(29A) of the Constitution of India and it has

been submitted that the Legislature is competent to

enact an Act which provides for levy of tax on value of

goods and it cannot enact a law to levy tax on transfer

of properties. It is also urged that under Section 72(2)

of the Act the levy of penalty is not automatic. It is also

urged that in this case there was no clarity on the issue

of taxability and the aforesaid issue was decided by the

Supreme Court in L & T supra. Therefore, the question

of levy of penalty does not arise. In support of aforesaid

submissions, reliance has been placed on decisions in

'LARSON & TOUBRO VS. STATE OF KARNATAKA',

2014 (303) ELT 3 (SC) & 'CCE & CUS KERALA V.

LASEN & TOUBRO', 2015 (39) STR 913 (SC).

5. On the other hand, learned Additional

Government Advocate has invited the attention of this

court to Section 237, Section 3, Section 4(1)(c) as well

as Rule 3(2)(l) & (m) of the Rules as well as the Chart

appended to the Rules and has submitted that the

machinery provisions have been enacted by the State

Legislature. It is further submitted that in L & T, a three

Judge bench of the Supreme Court has upheld the view

taken by a two Judge bench taken in K.RAHEJA

Development Corporation vs. State of Karnataka 2006

(3) STR 337 (SC) supra and no substantial question of

law arises for consideration in this petition.

6. We have considered the submissions made

by learned counsel for the parties and have perused the

record. Before proceeding further, it is apposite to take

note of Section 2(37), Section 3(1) and 4(1)(c) as well

as Rules 3 (2) (l) & (m) of the Rules.

2(37) "Works contract" includes any agreement for carrying out for cash, deferred payment or other valuable consideration, the building construction, manufacture, processing, fabrication, erection, installation, fitting out,

improvement, modification, repair or commissioning of any movable or immovable property.

Section 3(1) Levy of tax (1) The tax shall be levied on every sale of goods in the State by a registered dealer or a dealer liable to be registered, in accordance with the provisions of this Act.

Section 4(1)(c) in respect of transfer of property in goods (whether as goods or in some other form) involved in the execution of works contract specified in column (2) of the Sixth Schedule, subject to Sections 14 and 15 of the Central Sales Tax Act, 1956 (Central Act 74 of 1956), at the rates specified in the corresponding entries in column (3) of the said Schedule.

3(2)(l)(m) (2) Determination of total and taxable turnover The taxable turnover shall be determined by allowing the following deductions from the total turnover:-

(l) All amounts actually expended towards labour charges and other like charges

not involving any transfer of property in goods in connection with the execution of works contract including charges incurred for erection, installation, fixing, fitting out or commissioning of the goods used in the execution of a works contract.

(m) Such amounts calculated at the rate specified in column (3) of the Table below towards labour charges and other like charges as incurred in the execution of a works contract when such charges are not ascertainable from the books of accounts maintained by a dealer.

7. It is not in dispute that the correctness of the

view taken by a two judge bench in Raheja supra has

been referred to a bench of three judges in L & T supra.

The Supreme Court has reiterated the view taken by it

in Raheja supra and in para 101 summarized the legal

position, the relevant extract of which is reproduced

below:

Taxing the sale of goods element in a works contract under Article 366(29A)(b) read

with Entry 54 List II is permissible even after incorporation of goods provided tax is directed to the value of goods and does not purport to tax the transfer of immovable property. The value of the goods which can constitute the measure for the levy of the tax has to be the value of the goods at the time of incorporation of the goods in works even though property passes as between the developer and the flat purchaser after incorporation of goods.

8. It has further been held in para 115 that

activity of construction undertaken by the developer

would be worst contract only from the stage the

developer enters into a contract with purchaser of the

flat and the value addition made to the goods

transferred after the agreement is entered into with

purchaser of the flat can only be made chargeable to tax

by the State Government.

9. Thus, the aforesaid decision of the Supreme

Court by which parameters have been fixed with regard

to levy of value Added Tax on Works contract was laid

down after the tribunal had passed the order on