Best Judgment Assessment Cannot Ignore VAT Composition Scheme Compliance By Contractor: Telangana HC

The Telangana High Court on 13 July held that a best judgment assessment cannot be sustained when the assessing authority fails to consider the statutory composition scheme opted by a works contractor and ignores the records maintained in accordance with the law.

A Division Bench comprising Justices P. Sam Koshy and Nandikonda Narsing Rao set aside the assessment order passed against Chaitanya Enterprises, a proprietary concern engaged in electrical contracting works, which had challenged the levy of VAT of Rs. 28.09 lakh for the period from September 2005 to February 2008. The judges held:

"once when the petitioner having opted for composition scheme under Section 4(7)(b) and more particularly having complied the requirement under Rule 31(2) and also submitted the entire documents available with him those which are required to be maintained under Rule 31(2), none of which having been considered by respondent No.2 in the course of passing the impugned order dated 06.07.2009, it is therefore bad in law", the Court observed.

Chaitanya Enterprises, which undertook electrical works including erection of high-tension lines and substations, had opted to pay tax under the composition scheme provided under Section 4(7)(b) of the Andhra Pradesh Value Added Tax (VAT) Act, 2005. The provision allows works contractors to discharge tax liability under a simplified composition mechanism instead of regular assessment.

Following the option exercised by the petitioner, the contractee deducted tax at source at the applicable rate, deposited the amount with the Commercial Tax Department, and issued tax deduction certificates in Form-501. The petitioner also filed the prescribed monthly VAT returns.

However, the Commercial Tax Department later initiated proceedings alleging that the petitioner had failed to produce books of account during an audit. It subsequently passed a best judgment assessment order, raising an additional tax demand of Rs. 28.09 lakh.

The petitioner argued that dealers who opt for the composition scheme are not required to maintain regular books of account. Further, that it had complied with the record-keeping requirements prescribed under the VAT Rules by maintaining and submitting the relevant documents, including tax deduction certificates and VAT returns.

The High Court noted that Section 4(7)(b) of the VAT Act permits works contractors to opt for payment of tax under the composition scheme. It further observed that Rule 31(2) of the Andhra Pradesh VAT Rules prescribes the records required to be maintained by such dealers. It also held that once a dealer opts for the composition scheme and complies with the requirements under Rule 31(2), the assessing authority must consider the records produced before proceeding with a best judgment assessment.

The Bench observed that the assessing officer had neither examined the documents submitted by the petitioner nor considered the objections raised against the proposed assessment. Also, that the assessment order was a non-speaking order passed without proper consideration of the statutory provisions and the petitioner's defence. Therefore, it concluded that the order was legally unsustainable as it violated the principles of natural justice and the requirements of Section 4(7)(b) of the VAT Act.

Accordingly, the High Court quashed the assessment order and allowed the writ petition. It also directed that there would be no order as to costs.

For Petitioner: S. Srikanth Goud, Advocate 

For Respondent: T. Chaitanya Kiran, Assistant Government Pleader