Dealer who opts for composition scheme shall not be eligible for set-off of taxes paid in respect of purchases

The Bombay High Court recently held that If contractor opts for Composition Scheme, it is not necessary to enquire and determine extent or value of goods which have been transferred in course of execution of works contract.

The Division Bench of Justice K.R Shriram and Justice Firdosh P. Pooniwalla observed that “By opting for the Composition Scheme, the contractor saves himself the bother of book keeping, assessment, appeals and other such things. If the contractor opts for the Composition Scheme, it is not necessary to enquire and determine the extent or the value of the goods which have been transferred in the course of the execution of the works contract, the rate applicable to them and so on. This being the purpose and object of such a Composition Scheme, this very purpose and object would be totally and completely defeated if the argument of the assessee is accepted and the AO has to make an enquiry as to what goods have been transferred and in respect of what purchases set-off can be claimed”.

Briefly, the assessee is an association of persons, and is engaged in the business of construction, development and sale of immovable properties, i.e., flats and dwellings, in the State of Maharashtra. As part of its business, the assessee has constructed various apartments / buildings / flats and transferred the same under written agreements to buyers along with the underlying land or the interest in such land. For the purpose of payment of VAT towards the construction activity, the assessee opted for the Scheme of Composition notified by under Section 42(3A) of the MVAT Act. The said Scheme was opted for by the assessee for agreements in respect of sale of flats which were registered during the year 2013-14 and was to be the basis on which the assessee was to pay VAT in respect of construction of such flats. The assessee had, for Financial Year 2013-14, disclosed gross turnover of sales at Rs.28,67,538/- and paid VAT on the same at Rs.1,36,551/-.

The assessee claimed purchases at Rs.3,39,35,70,257/-, out of which it claimed local purchases from registered dealers eligible for set-off at Rs.2,28,74,305/- and claimed set-off of Rs.24,92,113/-. The assessee thus claimed refund of Rs.24,65,766/-. It was the case of the assessee that it was purchasing three types of materials i.e. material which is required in construction activity, purchases for office consumption and purchases at site.

By an Assessment Order, the Deputy Commissioner of Sales Tax rejected the said claim of set-off of the assessee. The AO took the view that the condition disallowing set-off in respect of purchases does not restrict itself to purchases in respect of which property is passed on to the buyer and that same was applicable to all purchases, regardless of whether the property in respect of them passes on to the buyer or not. In other words, all input purchases in respect of flat construction were not eligible for set-off.

After considering the submission, the Bench found that pursuant to the powers vested in it by virtue of the provisions of Section 42(3A) of the MVAT Act, the State Government has notified the Composition Scheme vide the said Notification dated 9th July 2010.

As held by this Court in the case of Maharashtra Chamber of Housing Industry and Others, a dealer has the option as to whether to opt for such a Composition Scheme or not and there is no compulsion or obligation upon a dealer to opt for such a scheme, added the Bench.

The Bench further added that “As per the Composition Scheme notified by the said Notification dated 9th July 2010, the composition amount is one percent of the agreement amount specified in the agreement or the value specified for the purpose of stamp duty in respect of the said agreement under Bombay Stamp Act, 1958, whichever is higher. Thus, the Scheme provides for tax at a flat rate of one percent on the aforesaid amount. However, Condition No.3 provides that a dealer who opts to pay composition under the said Scheme shall not be eligible to claim set-off of taxes paid in respect of the purchases”.

The Bench found that in the present case, the assessee’s claim of set-off pertains to administrative expenses as well as expenses towards the lease of construction equipment which were used for the purpose of undertaking construction activity. The assessee could not have executed the contract without the said expenses.

“On a plain reading of Condition No.3 of the said Scheme, it is clear that the said condition prohibits a dealer opting for the Scheme from claiming set-off of taxes paid in respect of purchases. There is no merit in the argument of the assessee that, just because Condition No.3 refers to “the purchases”, it applies only in respect of certain kind of purchases and does not apply in respect of certain other purchases. If Condition No.3 wanted to make an exception in respect of certain kind of purchases, then it would have expressly stated so. In the absence of any such exception made by Condition No.3, on the plain language of Condition No.3, it applies to all purchases”, added the Bench.

The Bench therefore concluded that the whole purpose of such a Composition Scheme is to provide for a convenient, hassle-free and simple method of assessment.

Cause Title: Oasis Reality vs. Commissioner of Sales Tax [Maharashtra VAT Appeal No. 6 of 2022 / 2023-Enterslice-3-HC-Bom-VAT]

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