M/S Ayodhiya Jewellers, M.O. Road, Thrissur v. Intelligence Officer, Squad No. IV, Department of Commercial Taxes, Thrissur & State of Kerala

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT:- THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN TUESDAY, THE 2ND DAY OF SEPTEMBER 2014/11TH BHADRA, 1936 ## **W.P.(C).No.696 of 2010 (J)** ----------------------------------------------- PETITIONER(S):- ------------------------ M/S.AYODHYA JEWELLERS, M.O.ROAD, THRISSUR, REPRESENTED BY VIRENDRA S.PAWAR, PARTNER. BY ADVS.SRI.HARISANKAR V. MENON SMT.MEERA V.MENON. RESPONDENT(S):- --------------------------- ## 1. INTELLIGENCE OFFICER, SQUAD NO.IV, DEPARTMENT OF COMMERCIAL TAXES, THRISSUR. ## 2. STATE OF KERALA, REPRESENTED BY ITS SECRETARY, TAXES DEPARTMENT, GOVT.SECRETARIAT, THIRUVANANTHAPURAM. R1 & R2 BY SENIOR GOVERNMENT PLEADER SMT.SHOBA ANNAMMA EAPEN. THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 21.08.2014, THE COURT ON 02-09-2014 DELIVERED THE FOLLOWING:- W.P.(C).NO.696 OF 2010-J ## **APPENDIX** PETITIONER'S EXHIBITS:- ------------------------------------EXT.P1 COPY OF SHOP INSPECTION REPORT PREPARED BY THE 1ST RESPONDENT DATED 17.01.2009. EXT.P2 COPY OF NOTICE ISSUED BY THE 1ST RESPONDENT DATED 09.06.2009. EXT.P3 COPY OF NOTICE ISSUED BY THE 1ST RESPONDENT DATED 13.06.2009. EXT.P4 COPY OF PETITION FILED BY THE PETITIONER DATED 18.06.2009. EXT.P5 COPY OF LETTER SUBMITTED BY THE PETITIONER BEFORE THE 1ST RESPONDENT DATED 18.06.2009. EXT.P6 COPY OF RECEIPT ISSUED BY THE 1ST RESPONDENT. RESPONDENT'S EXHIBITS:- ---------------------------------------- NIL. Vku/( true copy ) K.Vinod Chandran, J. **-------------------------------** W.P.(C).No.696 of 2010-J **--------------------------------** Dated this the 02[nd] day of September, 2014 ## **JUDGMENT** The petitioner, a registered dealer under the Kerala Value Added Tax Act, 2003 [for brevity “KVAT Act”], conducting jewellery business, impugn the compounding fee imposed at Rupees Four Lakhs under Section 74 of the KVAT Act. A shop inspection, led to the detection of offence of tax evasion; on which notice was issued by the Department, was permitted to be compounded, on an application filed by the petitioner. 2. The shop inspection [Exhibit P1], which led to the detection of the offence, was conducted on 17.01.2009 and the notice [Exhibit P2], pursuant to that, was issued on 09.06.2009. A revised notice [Exhibit P3] was also issued on 13.06.2009. By Exhibit P4, dated 18.06.2009, the petitioner sought for compounding under Section 74. The petitioner was directed to pay Rupees Four Lakhs, since the maximum limit for compounding was Rupees Four Lakhs and the offence detected showed tax evasion beyond the said limit, provided under the statute. - 2 - WP(C).No.696 of 2010 3. The petitioner's contention is that, for the assessment year 2008-09, the maximum limit provided was Rupees Two Lakhs and the demand of Rupees Four Lakhs was pursuant to an amendment brought about in the assessment year 2009-10. The shop inspection, which led to the detection of offence, having occurred when the compounding fee as per the statute had a maximum limit of Rupees Two Lakhs, the petitioner is obliged to pay only that amount for enabling compounding of the offence, is the contention. 4. The learned Senior Government Pleader, however, would contend that the issue is no longer res integra, since a learned Single Judge of this Court has considered it and negatived a similar contention in W.P.(C).No.38740 of 2010 dated 20.07.2012. It was held so: “It is actually an option given to the assessee to get rid of the penal consequences by opting for such compounding. In the case at hand the petitioner had opted for compounding on 18.12.2009 and remitted the compounding fee at the enhanced rate. The law which was prevalent as on the date of exercise of that option is the amended provision. It is obviously clear that the petitioner was aware of the - 3 - WP(C).No.696 of 2010 amendment and he had exercised the option by paying the enhanced rate of compounding fee. That being the position, the petitioner cannot be permitted to turn around and seek declaration that the compounding fee applicable is the rate prevailing prior to the amendment. Compounding of an offence is an option exercisable by the petitioner. It is a distinct procedure from imposition of penalty. Such option is provided in order to facilitate the assessee to get rid of the penal consequences. Therefore the law which is applicable with respect to compounding is the law which is prevalent as on the date of exercising such option”. 5. The learned counsel for the petitioner, however, would contend that the above proposition is wrong and places a number of decisions before this Court to urge this Court to take a different view. They are - **C.G.T. v. Muthukumaraswamy Mudaliar [(1975) 98 ITR 540 (Mad.)], Intelligence Officer, C.I. Squad v. Hotel Ambassador [(1980) 45 STC 425 (Ker.)], W.T.Commissioner, Amritsar v. Suresh Seth [AIR 1981 SC 1106], Maya Rani Punj v. Commissioner of Income Tax [(1987) 65 STC 416 (SC)]** and **Sudhi v. Intelligence Officer [(1992) 85 STC 337 (Ker.)** - 4 - WP(C).No.696 of 2010 6. The learned counsel for the petitioner would also contend that the compounding fee is directly relatable to the tax payable and, hence, determination of such fee has to be relatable to the date on which the evasion is alleged to have occurred. There can be no dispute on such proposition. When an offence is detected and tax evasion is alleged, the compounding fee also has to be calculated on the rate of tax applicable on the date of commission of the offence. If there is a subsequent revision of rates and the penalty proceedings are taken subsequent to such revision, neither on the imposition of penalty or in the determination of compounding fee can the enhanced rate be taken into consideration. But, that is not the question which arises herein. 7. Specifically the issue is with respect to the maximum limit prescribed. In the instant case, at the time of commission of offence as also the inspection, the maximum limit was Rupees Two Lakhs, which, later, was enhanced to Rupees Four Lakhs. The petitioner's evasion and the tax element so determined as evaded, was beyond Rupees Four Lakhs; which is admitted. The petitioner would have to pay the enhanced fees, since the legislature has - 5 - WP(C).No.696 of 2010 sought to enhance the maximum limit from Rupees Two Lakhs to Rupees Four Lakhs in the assessment year 2009-10. The inspection in the assessment year 2008-09 led to a notice issued in the assessment year 2009-10. Hence, the maximum limit prescribed cannot be enhanced to the prejudice of the petitioner, is the essential contention. 8. Section 74(1) is extracted hereunder; as it stood in 2009-10: **“74. Composition of offences.-** (1) The assessing authority or other officer or authority authorized by the Government in this behalf may accept from any person who has committed or is reasonably suspected of having committed an offence against this Act, other than those specified under clause (e) of sub-section (1) of clauses (b), (c) or (d) of sub-section (2) of section 71, by way of compounding of such offence,- (a) where the offence consists of the evasion of any tax payable under this Act, in addition to the tax so payable a sum of money equal to the amount of tax so payable subject to a minimum of rupees five hundred and maximum of rupees four lakh; and - 6 - WP(C).No.696 of 2010 Provided that the maximum compounding fee collectable against a single offence spread over several return periods in a financial year shall be two lakhs rupees. **==> picture [243 x 12] intentionally omitted <==** Sub-clause (a) is what is relevant herein, in which enhancement was made from Rupees Two Lakhs to Rupees Four Lakhs. 9. **Hotel Ambassador** (supra) was a case in which inspection of the premises was conducted on 08.08.1975 and notices were issued on 17.02.1976, demanding to show cause as to why penalty should not be imposed for the assessment years 1973-74 and 1974-75. Since Section 45A of the Kerala General Sales Tax Act, 1963 [for brevity “KGST Act”], under which penalty was sought to be issued, came into force only on 27.10.1975, the assessee contended that the imposition of penalty authorized by Section 45A was not available in the years 1973-74 and 1974-75, for which years the imposition of penalty was threatened, based on an inspection conducted on 08.08.1975. A Division Bench of this Court found that the grounds of action on which penalty was sought to be imposed were contraventions which took place in the year 1973-74 and - 7 - WP(C).No.696 of 2010 1974-75, at which point of time Section 45A was not available in the statute book. On an interpretation of Section 45A, it was found that, for imposition of penalty there are two necessary ingredients, one being the contravention by the assessee and the other being the satisfaction of the officer. The satisfaction to be arrived at, is on the contravention, which contravention had taken place before the commencement of the Section, was the reasoning on which Section 45A was held to be inapplicable on the facts revealed in the said case. 10. **Suresh Seth** (supra) considered the issue of levy of penalty in accordance with the various amendments brought to the provisions in the subsequent years, for the default in filing the return for an earlier assessment year. The Supreme Court found that the default occurred at the time when the period provided for filing the return expired and the liability to penalty would be as per the law that existed at that point of time and that the principle of a continuing offence would not be applicable, when the default was with respect to the filing of a return; the last date for which was specified in the statute and the offence would be completed on the expiry of such period. The later Larger Bench decision in **Maya Rani Punj** (supra) - 8 - WP(C).No.696 of 2010 overruled **Suresh Seth** (supra). The learned counsel for the petitioner would contend that the principle in **Suresh Seth** (supra) that an act of commission or omission; statutorily deemed to be an offence, becomes completed as soon as it is committed or the time prescribed for performance expires; has been upheld even in **Maya Rani Punj** (supra). That again would be applicable only when there is a dispute as to the actual date of commission or omission. Herein, undoubtedly the offence was of the year 2008-09 and the compounding was applied for in 2009-10. The necessary ingredients of penalty dilated upon in the reference to Section 45A of the KGST Act in **Sudhi** (supra) also would not be relevant here. 11. This Court is not persuaded to differ, from the finding of the learned Single Judge in W.P.(C).No.38740 of 2010. The judgments which were cited above, are distinguishable on facts. Those were all judgments on which penalty was sought to be imposed on the strength of a provision which came into the statute book later to the contravention; on which, the penalty was to be imposed. The proposition with respect to a continuing offence is also not relevant herein. The argument of the learned counsel for the - 9 - WP(C).No.696 of 2010 petitioner that the imposition of penalty would be relatable to the tax liability as on the date of contravention has to be accepted. 12. However, in this case there is no such dispute with respect to a different rate being applied; or a provision being made applicable which was unavailable at the time of contravention. The dispute raised herein is with respect to the maximum limit of the compounding fee payable. This Court is not, on the facts brought out from the records in the present case, inclined to decide upon when actually the detection of offence occurred; whether it be on the date of inspection or date of notice. This Court would observe so, only in the context of the notice having been issued, not much later to the inspection. In any event, the offence relates to the period prior to the assessment year in which the maximum limit of compounding fee was enhanced. 13. The inspection occurred on 17.01.2009 and notice was issued on 09.06.2009. The provision which was invoked, was Section 67, which was available in the statute book. Compounding is an option available to the petitioner. The petitioner definitely cannot take up a contention that he had committed the offence only in the hope - 10 - WP(C).No.696 of 2010 that he would have to pay maximum penalty of Rupees Two Lakhs alone. If such a view is taken, that would be against the spirit of the statute and would be conferring a premium on defaulters to resort to contraventions, which result in higher tax evasion. 14. Penalty, as is trite, is not only to compensate the revenue loss, but also a deterrent measure. The State, in ensuring such deterrence, also has the power to take penal proceedings against such offenders. It is to release the assessee/defaulter of such rigorous consequences, but however to deter recurrence of such offences and for ensuring some compensation to the State, that a compounding provision has been brought into the statute. 15. An assessee, who opts for the composition, would relieve himself of the rigour of penalty being imposed at twice the amount of tax evaded, as is provided in Section 67; and would also be absolved from any penal consequences. The State too plugs revenue loss by considering the crime file in assessment proceedings, wherein the admission of commission of offence, by virtue of the compounding made, enables the assessing authority to make estimations on the best of his judgment. - 11 - WP(C).No.696 of 2010 16. The assessee could very well assert the assessee's innocence, in the penal proceedings as also the penalty proceedings under Section 67. It cannot be presumed that merely on an inspection conducted and suspicion of evasion of tax having been notified; the same would end in imposition of penalty or conviction under the penal provision. The guilty assessee and one who is unsure, is given an option by way of composition. No claim of accrual of rights, for composition of an offence as the statute provides, on the date of commission of the offence, can be raised successfully by the assessee. As was noticed by the learned Single Judge in the aforesaid decision, it is the option of the assessee and the assessee could choose not to compound the offence. If the assessee were of the opinion that he would have compounded only if the fees were below Rupees Two Lakhs, such an assessee would have the option to defend the penalty proceedings. 17. The exercise of option, in the present case, was admittedly made after the amount was enhanced. The assessee cannot seek that, the option also has to relate back to the date of the offence. Though the compounding fee is relatable to the quantum of - 12 - WP(C).No.696 of 2010 tax evasion, the legislature has enhanced the maximum fee payable with effect from 01.04.2009 and any compounding, enabling the defaulter/assessee from being proceeded with penal consequences; would then thenceforth be only on the payment of fees subject to the maximum prescribed. The assessee filed the application for compounding; of the offence detected on inspection, with eyes open, consciously understanding that the amount for composition would be at the maximum limit of Rupees Four Lakhs. This Court would respectfully follow the findings of the learned Single Judge in W.P.(C). No.38740 of 2010. In the result, the writ petition would stand dismissed. Parties are left to suffer their respective costs. Sd/K.Vinod Chandran, Judge vku. ( true copy )