KVAT Revision Orders Must Be Passed Within Five Years Of Order Sought To Be Revised: Karnataka High Court

The Karnataka High Court has held that tax authorities cannot keep suo motu revision proceedings under the Karnataka Value Added Tax (KVAT) Act pending indefinitely after initiating them within the statutory four-year period.

While the authority validly initiates revision by calling for records within four years of the order proposed to be revised, the final revisional order must also be passed within a reasonable time, the court ruled.

A division bench of Justice S.G. Pandit and Justice K.V. Aravind delivered the ruling while deciding a batch of six sales tax appeals concerning the scope of the Additional Commissioner's revisional powers under the KVAT Act.

The court observed, “The power to pass an order cannot remain unfettered and without any time limit. Such an interpretation would lead to unintended and adverse consequences. It would result in arbitrary exercise of power and harassment of taxpayers.”

The appeals arose from orders passed by the Additional Commissioner in exercise of suo motu revisional powers under the KVAT Act. The dealers challenged the proceedings as being barred by limitation.

They argued that the entire revisional exercise, including the final order, had to be completed within four years from the date of the order proposed to be revised. They also contended that extending the proceedings beyond that period would prejudice taxpayers because the Act requires books of account to be preserved only for five years.

The Revenue relied on two earlier Karnataka High Court decisions to contend that the four-year limitation applies only to the initiation of revision proceedings. According to the revenue, once records are called for within that period, the Act does not prescribe any deadline for passing the final revisional order.

The high court agreed that calling for records within four years amounts to valid initiation of revisional proceedings. It, however, rejected the revenue's contention that this allowed the revisional authority to pass the final order at any time.

The court held that such an interpretation would be inconsistent with the statutory scheme and would expose taxpayers to prolonged uncertainty.

Examining the provision requiring dealers to preserve books of account for five years, the court held that revision proceedings should ordinarily conclude within the same period. It observed that the Act must be read as a whole and that the absence of an express deadline for passing the final revisional order does not confer an unlimited power on the authority.

The court also clarified that revision proceedings commence when the revisional authority calls for records and not when it later issues a show-cause notice.

“The assessee cannot be kept on tenterhooks, anticipating uncertainty regarding the initiation of proceedings under Section 64 of the Act. The mere calling for records by the SMR Authority, by itself, would amount to initiation of proceedings.”

The court further observed that an unreasonable delay after calling for records could seriously prejudice taxpayers. By that stage, books of account and supporting documents may no longer be available.

Dealers may also find it difficult to obtain records from third parties, who are themselves not required to preserve them beyond the statutory period.

Relying on Supreme Court and Delhi High Court rulings, the court reiterated that even where a statute does not prescribe a limitation period, statutory powers must still be exercised within a reasonable time.

Summarising the law, the court held that calling for records within four years of the order sought to be revised constitutes valid initiation of revisional proceedings. It further held that the show-cause notice and the final revisional order must be completed within five years from the date of the order sought to be revised.

“Under Section 64 of the Act, if the records are called for within a period of four years, the proceedings are validly initiated within time. The issuance of a show-cause notice and the passing of the final order shall be completed within a period of five years from the date on which the order sought to be revised was passed. In other words, the final order shall be passed within one year after the expiry of four years from the date on which the order sought to be revised was passed.”, the court ruled.

In view of its findings, the high court disposed of the six appeals by applying the above limitation principles to the facts of each case.

For Appellants: Advocates Sumanth Sudharshan (for Sri Annamalai S.), Chidananda Urs B.G., and Atul K. Alur,

For Respondents: Aditya Vikram Bhat, Additional Government Advocate