IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE P.S.GOPINATHAN TUESDAY, THE 6TH SEPTEMBER 2011 / 15TH BHADRA 1933 OT.Rev.No. 54 of 2009() ----------------------- AGAINST ORDER DATED 30/07/2009 IN TAVAT.265/2008 of KERALA VAT APPELLATE TRIBUNAL, ERNAKULAM .................... REVISION PETITIONER/APPELLANT/ASSESSEE -------------------------------------------------------------- M/S.KALLIYATH STEELS (P) LTD., CALICUT, REPRESENTED BY ITS MANAGING DIRECTOR, K.ABDUL GAFOOR. BY ADV. SRI.K.SRIKUMAR SRI.K.MANOJ CHANDRAN SRI.P.R.AJITHKUMAR RESPONDENT(S): RESPONDENT/RESPONDENT/REVENUE -------------------------------------------- STATE OF KERALA, REPRESENTED BY THE GOVERNMENT PLEADER, HIGH COURT OF KERALA. SHRI.V.K.SHAMSUDHEEN, GOVERNMENT PLEADER THIS OTHER TAX REVISION (VAT) HAVING BEEN FINALLY HEARD ON 13/07/2011, THE COURT ON 06/09/2011 DELIVERED THE FOLLOWING: OTRV.54/2009 APPENDIX PETITIONER'S EXHIBITS ANNEXURE-1 : COPY OF ORDER OF ASSESSMENT DATED 31/10/2006. ANNEXURE-2 : COPY OF APPELLATE ORDER DATED 28/12/2007. ANNEXURE-3 : COPY OF TRIBUNAL ORDER DATED 30/07/2009. //TRUE COPY// PA TO JUDGE. jg C.R C.N.RAMACHANDRAN NAIR & P.S.GOPINATHAN, JJ. .................................................................... O.T.Rev. No.54 of 2009 .................................................................... Dated this the 6th day of September, 2011. J U D G M E N T Ramachandran Nair, J. The short question arising for consideration in the tax revision case filed by the assessee is whether the Tribunal was justified in confirming disallowance of input tax credit claimed on opening stock held on the first day of the assessment year 2005-06. 2. We have heard learned counsel appearing for the petitioner/assessee and learned Government Pleader appearing for the respondent, and have gone through the orders of the lower authorities including that of the Tribunal. 3. The VAT regime was introduced in the State from 01/04/2005 onwards. Under the scheme of levy of tax under the Kerala Value Added Tax Act, registered dealers are entitled to input tax credit and the liability to pay tax is output tax as O.T.Rev.No.54/2009 2 reduced by the input tax paid on purchases, which is allowed as credit. Admittedly, the assessee is entitled to input tax credit on the opening stock held on 01/04/2005 which has suffered tax on the purchases made under the Kerala General Sales Tax Act. However, in order to be entitled for the benefit of input tax credit availed on opening stock the assessee was bound to reduce the sales tax from the VAT collected on sales made. In other words, the condition for allowing input tax credit on sales tax paid on opening stock is that it should be passed on to the consumers or the dealers to whom goods are sold. However, if the credit of input tax availed on opening stock is not passed on as above, then such amount will be demanded as if it is reverse tax in terms of the 2nd proviso to Section 11(13) of the KVAT Act. 4. In the course of assessment for 2005-2006, the Assessing Officer noticed that the assessee showed an unusually huge opening stock for the year, which was above Rs.1.60 crores, whereas the opening stock for the previous year 2004-2005 was only 25% of this amount. The assessee, O.T.Rev.No.54/2009 3 however, explained the unusual closing stock on 31/03/2005 which happenes to be the opening stock for the year 2005-06 by contending that huge Bank advance was taken and the same was fully utilised for purchase of goods. After accepting this contention, the Assessing Officer proceeded to consider the gross profit obtained by the assessee on the sales made for the first month of the year in which VAT regime applies to the assessee. It was noticed that the average gross profit obtained by the assessee was 4.88% and even the conceded profit itself for the month of April, 2005 was 4.46%. The Assessing Officer noticed that for subsequent months rate of profit came down much lower than this, which is without any explanation. The conclusion, after verifying the audit statement filed in form 25A and after analysing the sales accounted for April and subsequent periods is that assessee in fact did not pass on the sales tax to customers in respect of which input tax credit was availed on the opening stock. In other words, the finding is that the high percentage of gross profit obtained for April is due to the inclusion of sales tax O.T.Rev.No.54/2009 4 paid on the purchases in the sales price collected by the petitioner with tax payable under the KVAT Act. So much so, the clear finding is that in violation of the condition for availing input tax credit, the assessee while charging tax under Section 6 of the KVAT Act did not give set off of tax paid on purchases under the KGST Act. This situation is squarely covered by the 2nd proviso to Section 11(13) of the KVAT Act and accordingly the amount of input tax credit availed on the opening stock was demanded as reverse tax due under sub Section (7) of Section 11 of the KVAT Act. It is this order which is confirmed in two level appeals by the Deputy Commissioner (Appeals) and by the Tribunal. After hearing both sides what we notice is that the findings based on which disallowance was confirmed by the Tribunal are only on findings of fact based on accounts and audit statement filed in Form 25A, wherein from the gross profit accounted it was clearly established beyond doubt that assessee had not passed on to the customers the sales tax paid on purchases of goods held as opening stock in respect O.T.Rev.No.54/2009 5 of which input tax credit was availed by the assessee. Since the tax paid on purchases was also recovered from buyers along with tax payable under Section 6 of the KVAT Act, the input tax credit on opening stock is rightly demanded as reverse tax in terms of the 2nd proviso to Section 11(13) of the KVAT Act read with sub section (7) thereto. We notice that demand is made under the statutory provisions based on the findings of facts with regard to the failure of the assessee to pass on input tax credit availed to the buyers/customers. Consequently, we see no merit in the O.T.Revision case and the same is accordingly dismissed. (C.N.RAMACHANDRAN NAIR, JUDGE) (P.S.GOPINATHAN, JUDGE) jg