Tax assessment authorities should apply mind when determining taxable events; not pass orders mechanically: Kerala High Court

The Kerala High Court recently pulled up assessment authorities under Taxation laws for passing orders mechanically without giving reasons for how the taxable event occurred or why the claim of a person (assessee) is denied for exemption or deduction [Prodair Air Products India Private Limited v The Deputy Commissioner of State Tax]..A division bench of Justices AK Jayasankaran Nambiar and Mohammed Nias CP observed that the assessment authority should apply its mind while determining whether a taxable event exists for demanding from an assessee more tax than what has been admitted as payable. “While on this subject, and going by the number of instances that we have come across of assessing authorities passing orders in a mechanical manner without showing how the taxable event is attracted in a given case or without giving reasons for denying the claim of an assessee for exemption or deduction, we deem it appropriate to observe that in matters of assessment under a taxing statute, the requirement of fairness, that is an integral aspect of the rule of law in our country, mandates that an assessing authority should apply its mind to the various factors that influence an assessment and give a sufficient indication in the assessment order of having done so,” the judgment said.The court stated that an assessing authority can no longer be that of a stern and unreasonable automaton that is programmed solely to collect the tax that the revenue department feels is due from an assessee.“The right of an assessee to seek justification of state action would mandate that this court step in to correct unreasonable orders of assessing authorities so as to uphold the culture of justification that legitimizes state action,” the court further said..The Court was considering appeals filed by Prodair Air Product India Private Limited (Prodair Limited) challenging the order of the assessment authority under the Kerala Value Added Tax Act (KVAT Act) imposing a penalty on it under the KVAT Act for two assessment years..Prodair Limited is a private limited company involved in the production and sale of industrial gases such as Hydrogen, Nitrogen, and HP steam.Bharath Petroleum Corporation Limited (BPCL) found it necessary to ensure a continuous and reliable supply of Hydrogen, Nitrogen, and HP Steam of particular specifications so as to increase the production of their petroleum products.Therefore, Prodair Limited and BPCL entered into a contract for suppling the said gases..According to the appellant, its obligations under the contract were to build, own, operate (BOO) and maintain a Hydrogen and Nitrogen manufacturing plant at its own cost and expenditure on the land to be allocated by BPCL on lease basis, with the objective of ensuring exclusive and uninterrupted supply of Hydrogen, Nitrogen and HP Steam to BPCL at competitive prices.In the contract between the parties, the price of the gases comprised fixed monthly charges as well as variable charges.The contract gave BPCL an option to take over the production plant if the agreement is not renewed upon completion of its initial term of fifteen years from the date of commencement of the supply of gases to BPCL.In the event, BPCL exercises its option, it has to compensate the appellant at a fair value as determined in accordance with the procedure set out in the contract..However, when the assessment authority completed the assessment for two assessment year, it imposed a penalty on the appellant under the KVAT ACT by construing the agreement entered into between the appellant and BPCL as one that effected a transfer of property in the plant and specified gases in the course of execution of a works contract.. This prompted the appellant to approach the High Court..The Court after careful examination of the contract between the parties said that the appellant will build, own and operate a plant on land leased from BPCL for the purposes of supplying specified gases to BPCL, and there is no transfer of the property in the plant or any part of it, to BPCL as assumed by the assessment authority.Therefore, the Court allowed the appeals and pulled up assessment authorities under taxation laws for passing orders mechanically without giving reasons for how the taxable event occurred or why the claim of an assessee is denied for exemption or deduction..The appellant was represented by advocates Aswin Gopakumar, K Amal Nath Naik, Kandampully Vikram, Niranjan Sudhir, P S Sreeprasad and Renoy VincentThe respondents were represented by advocates Mohammed Rafiq (Special Government Pleader).[Read Judgment]