Revenue Cannot Deny Composition Rate After Accepting Dealer's Turnover Below ₹50 Lakh: Madras High Court

The Madras High Court has ruled that a dealer eligible for the tax composition scheme cannot be denied its concessional rate when the assessing authority itself determines that the dealer's taxable turnover is below the ₹50 lakh limit.

The bench held that the authority cannot rely on an earlier estimate showing turnover above the limit after finally fixing the taxable turnover below it.

“The Assessing Officer could not maintain two contradictory positions in the same order, i.e., on one hand, accepting that the dealer's total turnover was Rs.37,28,468/- (below Rs.50 Lakhs), and on the other hand, applying a tax rate of 14.5% meant for non-composition dealers on the ground that the turnover had crossed Rs.50 Lakhs,” a Division Bench comprising Chief Justice Sushrut Arvind Dharmadhikari and Justice C.V. Karthikeyan observed.

The bench was hearing a Revenue appeal against relief granted to Nalini Cycle Mart, a registered dealer engaged in retail sales of cycle parts, two-wheeler spare parts, tires, and tubes.

For assessment year 2014-15, the assessing authority had ultimately determined its total and taxable turnover at ₹37,28,468, but denied the 0.5% composition rate because the revised returns had been filed late.

Section 3(4) of the Tamil Nadu Value Added Tax Act, 2006, allows eligible dealers whose taxable turnover does not exceed ₹50 lakh in a financial year to pay tax at a concessional composition rate of 0.5%.

The assessing authority had instead applied the regular 14.5% rate.

The dispute arose after the Revenue, using departmental data, found local purchases amounting to ₹52.51 lakh which it alleged were not fully reflected in the dealer's initial filings. After adding gross profit and freight estimates, the Revenue arrived at estimated sales suppression of ₹69.39 lakh.

That figure put the dealer above the ₹50 lakh ceiling. The Revenue therefore proposed taxing the entire turnover at 14.5% under Section 3(2), instead of the 0.5% composition rate.

The dealer later submitted revised Form-K returns, profit and loss statements, and payments covering differential tax and interest. It explained that personal family emergencies and medical circumstances had prevented its regular online returns from being updated in time. On reconciliation, the total sales turnover for the financial year was calculated and verified at ₹37,28,468.

The assessing authority accepted the figures and formally redetermined both the total and taxable turnover at ₹37,28,468. It nevertheless refused to apply the 0.5% rate because the revised returns had been filed beyond the six-month period under Rule 7(9) of the TNVAT Rules, 2007.

The Revenue argued that the revised returns should not have been entertained because they were filed only after the notice was issued. It also contended that the assessing authority had inadvertently accepted the lower turnover instead of the proposed sales suppression of ₹69.39 lakh. According to the Revenue, the purchase omissions established mens rea and justified taxation at 14.5%.

The bench rejected that position. Once the assessing authority had formally determined the taxable turnover at ₹37.28 lakh, the dealer fulfilled the turnover condition under Section 3(4), the bench held.

“If the Revenue maintained that the turnover exceeded Rs.50,00,000/-, it was required to establish that figure with cogent evidence,” the bench observed. Having fixed the taxable turnover at ₹37.28 lakh, the assessing authority was bound to apply the concessional 0.5% rate applicable to that turnover category.

The bench also rejected the argument based on the delayed returns. It observed that procedural delays in uploading or updating returns could not override the substantive statutory benefit when the actual turnover determined by the department itself remained within the eligibility limit. The dealer had also paid the required tax along with statutory interest.

The bench further observed that the main basis for the pre-assessment notice had ceased to exist once the final turnover was fixed at ₹37,28,468. The Revenue could not seek a remand merely to reopen the assessment and rectify its own concluded determination at the appellate stage.

The bench dismissed the writ appeal and affirmed the Single Judge's order. It left it open to the department to collect any legitimate outstanding balance or statutory interest, if any, strictly in accordance with law under the 0.5% composition-rate framework.

For Appellant: M.P. Senthil, Government Pleader

For Respondent: A. Chandrasekaran