VAT | Notice Issued Beyond Limitation Period Cannot Reopen Assessment: Kerala High Court

In a key ruling delivered on October 22, 2024, the Kerala High Court in M/s. N.K. Trading Company v. State of Kerala overturned the Kerala Value Added Tax (KVAT) Appellate Tribunal's order, holding that the re-assessment notice for the financial year 2011-12 was barred by limitation. The court ruled that the notice issued by the VAT department in January 2018 exceeded the statutory time limit, making the entire re-assessment process invalid.

The case involved M/s. N.K. Trading Company, a Kollam-based trading firm, which was subject to re-assessment proceedings for the year 2011-12 under the KVAT Act. The company’s self-assessment was reopened by the VAT Department through a notice issued on January 24, 2018. However, under the unamended provisions of the KVAT Act, the department had only five years from the end of the relevant financial year to initiate re-assessment proceedings, meaning the deadline expired on March 31, 2017. Despite this, the assessment was completed on July 9, 2018, prompting the assessee to challenge the proceedings on grounds of limitation.

The Kerala Value Added Tax Appellate Tribunal, in its order dated November 28, 2022, dismissed the limitation plea, leading the petitioner to file this revision petition before the High Court.

Whether the re-assessment proceedings initiated by a notice dated January 24, 2018, were barred by limitation under the KVAT Act.
The scope and interpretation of Section 25(1) of the KVAT Act, including its amendment in 2017 and the effect of the third proviso to that section.
Limitation for Reopening Assessments
The court referred to Section 25(1) of the KVAT Act, which originally allowed the department five years to reopen assessments for escaped turnover. This period was extended to six years through an amendment effective from April 1, 2017. However, the key issue in this case was whether the extension applied retrospectively to assessments for which the limitation period had already expired by March 31, 2017.

The High Court clarified that the five-year limitation period under the pre-amendment law remained applicable for assessments relating to the year 2011-12. Since the five-year period expired on March 31, 2017, the notice issued on January 24, 2018, was clearly outside the permissible time frame. The court emphasized that the extension to six years under the amended Section 25(1) was intended to apply prospectively, not to reopen cases where the limitation had already lapsed.

Interpretation of the Third Proviso to Section 25(1)
The court carefully analyzed the third proviso to Section 25(1), which allowed the period for reopening assessments to be extended to March 31, 2018, but only in cases where the limitation period was set to expire on March 31, 2017. Citing the Supreme Court's decision in Assistant Commissioner (Assessment) v. M/s. Cholayil Pvt. Ltd. (2023), the court noted that the phrase "proceed to determine" in the proviso referred to the completion of already-initiated assessment proceedings, not the initiation of new ones.

“The expression 'proceed to determine' in the third proviso to sub-section (1) of Section 25 by amendment made to the Finance Act is to 'complete' the proceedings initiated under sub-section (1) of Section 25 within the time-frame indicated in the said proviso.”

Thus, the proviso could not be used to justify the initiation of new assessment proceedings after the five-year limitation period had expired.

The Kerala High Court ruled in favor of the petitioner, holding that the notice issued by the VAT department on January 24, 2018, was barred by limitation. The court set aside the impugned assessment order and allowed the revision petition.

Limitation Period: Re-assessment proceedings must be initiated within the statutory limitation period, and amendments to the limitation period apply prospectively, not retrospectively.
Proviso Interpretation: A proviso that extends time for completing assessments cannot be used to justify the initiation of new proceedings once the limitation period has already expired.
 

Date of Decision: October 22, 2024