Farwood Industries Ltd. v. State of Kerala

# **IN THE HIGH COURT OF KERALA AT ERNAKULAM** ## **PRESENT** **THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN** ## **&** **THE HONOURABLE MR. JUSTICE ASHOK MENON** **TUESDAY ,THE 27TH DAY OF NOVEMBER 2018 / 6TH AGRAHAYANA, 1940** **OT.Rev.No. 129 of 2015** **AGAINST THE ORDER NO.R2-36798/2014/CT DATED 30.5.2015 of COMMR. OF COMMERCIAL TAXES, TRIVANDRUM** ## **REVISION PETITIONER/S:/PETITIONER/ASSESSEE:** **M/S.FARWOOD INDUSTRIES LTD.** **THALASSERY ROAD, KANNUR, REPRESENTED BY ITS MANAGING DIRECTOR, M.P.FAROOK.** **BY ADV. SRI.R.RAMADAS** ## **RESPONDENT/S:/RESPONDENT/STATE:** **STATE OF KERALA REPRESENTED BY DEPUTY COMMISSIONER (LAW), COMMERCIAL TAXES, ERNAKULAM, PIN-682018.** **BY SRI MOHAMED RAFIQ, SR GP** **THIS OTHER TAX REVISION (VAT) HAVING BEEN FINALLY HEARD ON 27.11.2018, THE COURT ON THE SAME DAY PASSED THE FOLLOWING:** OTRev.129/15 -2- **==> picture [346 x 40] intentionally omitted <==** ## O R D E R ## K.Vinod Chandran, J. The revision is filed against the order of the Commissioner of Commercial Taxes confirming the orders of the Assessing Officer and the first appellate authority imposing penalty on the assessee-dealer on the receipt of amounts towards a contract, which admittedly the assessee had not disclosed in the returns. The Intelligence Officer gathered details of a contract receipt of the assessee from one M/s.Gulf Asia Contracting Company, RP Mall, Kozhikkode, who was the awarder; during the year 2012-2013. The awarder had disclosed in its returns a payment of Rs.3,90,00,000/- to the assessee. The awarder had also deducted tax at source and paid it to the Department. The assessee had not revealed the receipt of the said contract amount. Hence, proceedings were taken by the Intelligence Officer, for non-disclosure of the contract receipts. 2. The assessee filed an objection stating that no contract actually was executed and the amounts received was towards mobilisation advance, of the OTRev.129/15 -3- contract awarded to the assessee by M/s.Gulf Asia Contracting Company for the interior works of a Mall constructed by M/s.Gulf Asia Contracting Company. The proceedings were first taken on 12.08.2013 by notice read as item No.(1) in Annexure-A order in the assessment year in which the amounts were received. After the reply filed, the authorised representative is said to have appeared before the Intelligence Officer and admitted to the receipt being for contract as awarded by M/s.Gulf Asia Contracting Company by Annexure-G dated 30.07.2013, even prior to the notice. In response to the summons issued on 20.07.2013, a reply is said to have been filed wherein it has been stated that the assessee had received the same towards mobilisation advance of the contract entrusted to it. 3. The Intelligence Officer found that the contract receipt was not disclosed by the assessee in its return. The contention that the receipt was as mobilisation advance was rejected on the ground that the assessee's own authorised representative had admitted to the non-disclosure. It is also stated that initially the authorised representative had agreed to compound the offence, but however, no application to that end was filed. In such circumstances, the contract receipt was taken and deduction for labour carried out and the OTRev.129/15 -4- balance tax due at the rate of 13.5%, was levied. The first appellate authority-the Deputy Commissioner and the Commissioner confirmed the same. The question of law arising is re-framed as follows:- Has not the Tribunal erred in having affirmed the order levying penalty on the receipt shown, without adverting to the objection of the assessee that there was no contract executed and hence, there had been no incidence of sale or accretion of goods to a works contract attracting levy of tax and hence no evasion, which is necessary under Section 67 of the Kerala Value Added Act, 2003? 4. The learned counsel for the petitioner submitted that the assessee at the first stage itself had filed reply dated 12.06.2013 to the summons received, produced as Annexure-E wherein it has been categorically stated that the receipt was as mobilisation advance. The assessee also admits to the subsequent communication issued by its authorised representative at Annexure-G in the vernacular. The learned Senior Government Pleader specifically pointed out that there is a clear admission as seen from Annexure-G. We notice that there is an admission that the receipt was towards a contract, but however that admission alone cannot lead to the finding OTRev.129/15 -5- that there was execution of the works contract in the subject year which alone could lead to an incidence of taxation by accretion of goods to the works. 5. The learned Senior Government Pleader has specifically referred to Rule 9 of the Kerala Value Added Tax Rules, 2005 specifically clause (1) (c) thereof, which reads as under: “9. Determination of total turnover:(1) The total turnover of a dealer for the purposes of these rules shall be the aggregate ofxxx xxx xxx (c) contract amount received or receivable, in the case of a works contract.” It is the contention of the learned Senior Government Pleader that when contract amount is received, there should necessarily be payment of tax. We notice from clause (c) that incidence for levy of tax as per the Rules of 2005 specifically speak of contract amounts received or receivable which has to be related to the actual execution of the contract. An amount receivable would not attract tax, unless there is execution and accretion of goods, which is the incidence of levy of such tax. Likewise, the levy of tax on the contract amount received or receivable has to be necessarily related to the execution of the works contract and the accretion of goods in such works. OTRev.129/15 -6- 6. We again go back to the penalty order, which is sketchy insofar as there being no consideration as to the incidence for levy of tax. The Intelligence Officer merely found a contract receipt at the hands of the assessee which admittedly was paid by yet another assessee and tax deducted at source. On that basis alone, the Intelligence Officer had deemed the contract to be entirely executed in the subject assessment year and levied tax on the same after deducting the probable labour charges, which we find to be unsustainable. In fact, the Intelligence Officer was aware of the awarder and the awardee and the specific contract, which was entrusted to the assessee. The Intelligence Officer ought to have conducted an enquiry as to the execution and the stage to which it had proceeded. We also pertinently reiterate that the proceedings for penalty were taken in the very year in which the receipt was admitted. No such enquiry having been taken, there could be no quantification of evasion of tax as required in Section 67. On the mere ground of receipt of certain amounts towards mobilisation advance of a contract, there can be no penalty imposed alleging evasion of tax under Section 67, since there is no taxable activity carried out as such by the assessee as is detected by the Intelligence Officer. OTRev.129/15 -7- 7. This is a clear case in which the assessee, though failed to disclose the amounts in the return, had however entered the same in the books of accounts and no work having been carried out in the subject year. The Intelligence Officer also did not conduct any enquiry as to the incidence of tax, which as we found hereinabove is the execution of the works contract. Hence, we find that it was not practical to quantify the evasion and in such circumstances, the penalty could only be of Rs.10,000/for not disclosing the receipt in the returns. 8. The learned Senior Government Pleader has also relied on the Explanation to Section 67 which casts the burden of proving that penalty is not leviable, on the assessee. We notice the judgment of the Honourable Supreme Court in (2008) 16 SCC 504 [Haleema Zubair, Tropical Traders Vs. State of Kerala] , wherein a similar provision of reverse burden came up for consideration, which according to the learned Judges, had to be construed looking at the nature of the statute, there too an enactment levying sales tax on goods. The decision in (2007) 4 SCC 480 [M/s.Co-operative Company Ltd. v. Commissioner of Trade Tax] was referred, to find that under general law, the burden is on the State to prove that there was a taxable transaction and the reverse OTRev.129/15 -8- burden clause would operate only if, first, the State proves that there is a transaction of sale and secondly that one of the persons in the transaction was liable to be registered under the enactment as a dealer. A mere receipt of money, may attract liability to income tax, but sales tax could be levied only if there is a transaction of sale; which the Department has not proved in this case. The receipt alone cannot raise a presumption of taxable transaction or a computation of tax evaded. Unless there is a specific incidence of levy of tax shown, which is the initial burden cast on the Department itself, the Explanation casting only a reverse burden on the assessee cannot be resorted to. 9. The reliance placed is also on the return filed by the awarder and the deduction of tax made at source. We notice that the awarder having passed on the money to the contractor, he could not wait for deducting tax after the contract is executed. On payment of money, the awarder definitely deducts tax and pays it to the Government and the levy on the awardee would be only when the works contract is actually executed. 10. We, hence answer the question of law in favour of the assessee and against the Revenue, but however, retain a penalty of Rs.10,000/- (Rupees ten OTRev.129/15 -9- thousand only) which the assessee will have to pay to the Department. The O.T.Revision is allowed in part. No costs. **Sd/-** **K.VINOD CHANDRAN JUDGE** **Sd/ASHOK MENON JUDGE** OTRev.129/15 -10- ## **APPENDIX** ## **PETITIONER'S EXHIBITS** - **ANNEXURE A : COPY OF THE ORDER DATED 22.10.2013 IN RESPECT OF THE PERIOD 2012-13 ISSUED BY THE INTELLIGENCE OFFICER (IB)-II, OFFICE OF THE DEPUTY COMMISSIONER, COMMERCIAL TAXES, KOZHIKODE.** - **ANNEXURE-B : COPY OF THE ORDER DATED 16.9.2014 IN KVAT RP NO.42/2014 ISSUED BY THE 1ST APPELLATE AUTHORITY.** - **ANNEXURE-C : COPY OF THE ORDER DATED 30.5.2015 IN REVISION PETITION BEFORE THE COMMISSIONER OF COMMERCIAL TAXES, THIRUVANANTHAPURAM.** - **ANNEXURE-D : COPY OF THE FIRST PENALTY NOTICE DATED 21.5.2013 ISSUED BY THE INTELLIGENCE OFFICER (IB).** - **ANNEXURE-E COPY OF THE OBJECTION DATED 12.6.2013 FILED BY THE PETITIONER.** - **ANNEXURE-F COPY OF SUMMONS IN FORM NO.22 ISSUED BY THE INTELLIGENCE OFFICER (IB).** - **ANNEXURE-G COPY OF THE CONTENTS OF LETTER DATED 30.7.2013 OBTAINED FROM THE PETITIONER.** - **ANNEXURE-H : COPY OF NOTICE DATED 12.8.2013 ISSUED BY THE INTELLIGENCE OFFICER (IB).** - **ANNEXURE-I : COPY OF THE RETURN FOR THE PERIOD 2012-13 TOGETHER WITH THE DETAILS OF SALES TO M/S.GULF ASIA CONTRACTING COMPANY SUBMITTED BY THE PETITIONER.** - **ANNEXURE-J : COPY OF RETURN FOR THE PERIOD 2013-14 TOGETHER WITH THE DETAILS OF SALES TO M/S.GULF ASIA CONTRACTING COMPANY SUBMITTED BY THE PETITIONER.** - **ANNEXURE-K COPY OF THE SALES STATEMENT SHOWING THE DETAILS OF SALES TO M/S.GULF ASIA CONTRACTING COMPANY.** - **ANNEXURE-L : COPY OF THE FORM NO.18 SUBMITTED BY THE PETITIONER FOR COMPOUNDING UNDER SECTION 8 OF THE KVAT ACT FOR THE YEAR 2013-14.** OTRev.129/15 -11- **ANNEXURE-M COPY OF THE LEDGER ACCOUNT SHOWING THE DETAILS OF THE MOBILIZATION ADVANCE OF RS.3,90,00,000/RECEIVED BY THE PETITIONER FROM M/S.GULF ASIA CONTRACTING COMPANY.** ## **[TRUE COPY]** **jg**