M/S.NEW KURUVATTOOR JEWELLERY, KOZHIKODE v. The Intelligence Officer, IB-II, Office of the Deputy Commissioner (Intelligence), Commercial Taxes, Sales Tax Complex, Kozhikode; The Commercial Tax Officer, 2nd Circle, Kozhikode; The State of Kerala

## **IN THE HIGH COURT OF KERALA AT ERNAKULAM** ## **PRESENT:** ## **THE HONOURABLE MR. JUSTICE A.K.JAYASANKARAN NAMBIAR** **TUESDAY, THE 20TH DAY OF JUNE 2017/30TH JYAISHTA, 1939** ## **WP(C).No. 31801 of 2014 (A)** **----------------------------** **PETITIONER(S): -------------** **M/S.NEW KURUVATTOOR JEWELLERY, KAMMATH LANE, KOZHIKODE 673001, REPRESENTED BY ITS MANAGING PARTNER, SHRI SALAHUDIN C.K** **BY ADVS. T.M.SREEDHARAN (SR.) V.P.NARAYANAN DIVYA RAVINDRAN** **RESPONDENT(S):** **--------------** **1. THE INTELLIGENCE OFFICER, IB-II, OFFICE OF THE DEPUTY COMMISSIONER (INTELLIGENCE), COMMERCIAL TAXES, SALES TAX COMPLEX, JAWAHAR NAGAR COLONY, KOZHIKODE-673006.** **2. THE COMMERCIAL TAX OFFICER, 2ND CIRCLE, KOZHIKODE-673001.** **3. THE STATE OF KERALA, RERPESENTED BY THE CHIEF SECRETARY TO GOVERNMENT, GOVERNMENT SECRETARIAT, THIRUVANANTHAPURAM-695001.** **R1 BY GOVERNMENT PLEADER JASMIN M.M.** **THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 20-06-2017, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:** **rvs.** _**WP(C).No. 31801 of 2014 (A)**_ ## **APPENDIX** **PETITIONER(S)' EXHIBITS : ----------------------EXHIBIT P1 TRUE COPY OF THE NOTICE NO IBM/II/31/14-15/F DATED 23-08-2014 ISSUED BY THE IST RESPONDENT EXHIBIT P2 TRUE COPY OF THE REPLY DATED 24-09-2014 SUBMITTED BY THE PETITIONER BEOFRE THE IST RESPONDENT EXHIBIT P3 TRUE COPY OF THE ORDER NO IB/11/E/31/14-15/F DATED 28-10-2014 ALONG WITH DEMAND NOTICE 28-10-2014 ISSUED BY THE IST RESPONDENT. EXHIBIT P4 TRUE COPY OF THE ORDER PASSED BY THE ASSESSING OFFICER DATED 13/09/2012 FOR AY-2012-13. EXHIBIT P5 TRUE COPY OF THE ORDER PASSED BY THE ASSESSING OFFICER DATED 27/09/2013 FOR AY 2013-14.** **RESPONDENT(S)' EXHIBITS: -----------------------** **EXHIBIT R1(A) TRUE COPY OF THE LETTER DATED 27/03/2014 ISSUED BY THE INCOME TAX DEPARTMENT TO IAC (INVESTIGATION BRANCH), KOZHIKODE.** **/TRUE COPY/** **P.A.TO JUDGE** **rvs.** **“CR”** ## **A.K.JAYASANKARAN NAMBIAR, J.** - - - - - - - - - - - - - - - - - - - - - - - - - - ## **W.P.(C) No.31801 of 2014** - - - - - - - - - - - - - - - - - - - - - - - - - - Dated this the 20[th] day of June, 2017 ## **JUDGMENT** The petitioner has approached this Court aggrieved by Ext.P3 order of penalty, passed against him, under Section 67(1) of the Kerala Value Added Tax Act. By the said order, the Intelligence Officer has imposed a penalty of Rs.50,93,312/- on the petitioner, which represents the maximum penalty of twice the tax sought to be evaded by the petitioner for the assessment year 2013-14. The facts in the writ petition would indicate that the petitioner, who is doing business in Jewellery at Kozhikode, and is a registered dealer under the KVAT Act, had opted to pay tax on compounded basis in terms of Section 8(f) of the Act, for the assessment year 2013-14, as in the previous years . As per the provisions of Section 8(f) of the Kerala Value Added Tax Act, as it then stood, the petitioner was obliged to pay tax at the rate of 115% of the annual turnover of the goods, for the preceding year. The petitioner had declared the turnover for the immediately preceding year(2012-13) as Rs.28,72,843/- and paid tax at the compounded rate, for the year 2013-14 on that basis. Subsequently, the respondents came to know of proceedings initiated by the Income Tax authorities, pursuant to a search conducted in the premises of the petitioner, W.P.(c).No.31801 of 2014 : 2 : and it was found that the petitioner had voluntarily declared an income of Rs.56,80,000/- for the financial year 2012-13, before the Income Tax authorities, as part of a scheme of settlement. The enquiries made by the respondents with the Income Tax Officer revealed that, as per the computer data that was seized by the Income Tax authorities, the actual sales effected by the petitioner for the financial year 2012-13, up to 11.12.2013 was in an amount of Rs.23,36,57,238/-. The intelligence officer, therefore, issued Ext.P1 notice dated 23.08.2014 to the petitioner, asking him to show cause as to why a penalty should not be imposed on him, for suppressing the real turn over for the year 2012-13, which formed the basis for the payment of taxes at compounded rate, for the year 2013-14. In Ext.P1 notice, that was issued under Section 67(1)(b) and (c) of the KVAT Act, reference was made to the proceedings before the Income Tax authorities and it was demonstrated that, based on the reported profits of Rs.56,80,000/- before the income tax department, the corresponding sales turn over for the year 2012-13 would be in an amount of Rs.23,42,36,210/- and consequently the differential compounding tax, that had to be paid for the assessment year 2013-14 was Rs.26,93,716/- as against Rs.1,47,060/-, that was actually paid by the petitioner, pursuant to the order accepting his application for payment of tax on compounded basis. W.P.(c).No.31801 of 2014 : 3 : 2. In reply to Ext.P1 notice, the petitioner, through Ext.P2 communication, took a stand that the income shown in the return filed with the income tax authorities (Rs.56,80,000/-) represented not only the income from business, but also the income from allied transactions carried out by the firm, as also personal transactions conducted by the partners of the firm in their individual capacity, including the commission and brokerage received and also the labour charges received on making gold ornaments, which was reflected in their individual income tax returns. It is significant to note that, apart from making a bland statement, that the income that was declared in the return represented not only come from the sales turn over but also income from other allied transactions, there was no material or accounts, that were produced by the petitioner to give the breakup of the said income that was declared voluntarily before the income tax department. The petitioner did not furnish any material, even at the time of hearing before the intelligence officer, although ample opportunity was given to the petitioner to produce such documents before the said officer. In adjudication proceedings, the intelligence officer proceeded to confirm the proposal in Ext.P1 notice, and taking note of the suppression, that was found in the case, decided to impose the maximum penalty of twice the tax sought to be evaded. In the W.P.(c).No.31801 of 2014 : 4 : writ petition, the petitioner impugns Ext.P3, on various grounds. 4. Firstly, it is contended that, since the petitioner had opted to pay tax on compounded basis in terms of Section 8(f) of the KVAT Act, the provisions of Section 67 of the KVAT Act would not be attracted so as to justify the imposition of the penalty on the petitioner. It is further contended that inasmuch as the returns submitted by the petitioner to the Income Tax authorities was pursuant to a negotiation with the said department, and the declaration was made, and payments of tax effected, in order to purchase peace with the said department, the declaration of income before the said authorities could not automatically have been the basis for the computation of the sales turn over for the purposes of levy of penalty under the KVAT Act. The learned Senior counsel would also contend that in the matter of imposition of penalty under Section 67, it is not open to the Intelligence Officer to embark upon a process of estimation of turn over, since the process of estimation is more appropriately done by an assessing officer, at the time of completion of an assessment under the Act. Reliance is placed on the decision of a Division Bench of this Court in **M/s. U.K.Monu Timbers v. State of Kerala [2012 (3) KHC 111]** . Relying on the decisions of Supreme Court in **Girdhari Lal Nannelal v. The Sales Tax Commissioner, MP[(1977) 39 STC 30], P.C. Itty Mathew &** W.P.(c).No.31801 of 2014 : 5 : **Sons v. DC of Sales Tax(Law) [ 2001 121 STC 1(SC)]** , the learned Senior Counsel would contend that, merely because an assessment has been done under the Income Tax Act, and certain income found to exist in the hands of the assessee, the Sales Tax authorities could not, without adducing independent evidence to show that the income represented the sales turn over, proceed to infer that the entire amount assessed by the Income Tax authorities, represented the profit from sales for the purposes of assessment under the KVAT Act or imposition of penalty under the said Act. The decision of the Supreme Court in **Haleema Zubair, Tropical Traders v. State of Kerala** **[(2009) 19 VST 142 (SC)]** is also relied upon to contend that, whereas income tax is levied on income under the Income Tax Act, irrespective of the sources from which such an income had been derived, sales tax is levied only on the quantum of sales and, therefore, the element of a transaction of sale is a pre-requisite for levy of sales tax. The decision is relied upon to contend that, in the instant case, the Intelligence Officer had not independently arrived at a finding that the profit amount declared by the petitioner before the income tax authorities for the financial year in question, was entirely attributable to sales transactions that had been effected by the petitioner during the assessment year in question. W.P.(c).No.31801 of 2014 : 6 : 5. A statement has been filed on behalf of the 1[st] respondent. Therein, the respondent would contend that the petitioner, who had opted to pay tax on compounded basis, was liable to pay compounded tax at the rate of 1.15% of the sales turnover of the previous year. The actual turnover of the dealer for the year 2012-13 was found to be Rs.23,42,36,207/-, including the sales turn over for the period from 01.04.2012 to 11.02.2013 detected by the Income Tax Department. Inasmuch as the petitioner had not disclosed the actual turnover while filing the application for payment of compounded tax under Section 8 (f) of the KVAT Act, it was a case of short levy of tax and therefore the Intelligence Officer was justified in imposing a penalty equal to double the amount of tax evaded. As regards the contention that an assessee opting for payment of tax on compounded basis is not required to maintain books of accounts, it is the case of the respondents that the provisions of Section 40 of the KVAT Act mandate that every registered dealer should maintain books of accounts for the purposes of reconciling the figures therein with the figures reported to the department. It is stated that as per the letter dated 27.03.2014 of the income tax officer, produced along with the counter affidavit as Annexure R1(a), the sales figures were detected from the computer data of the petitioner, and the petitioner had paid Rs.19,61,080/- as income tax for the year 2012-13 on the income from business W.P.(c).No.31801 of 2014 : 7 : quantified at Rs.56,80,000/-. It is further stated that the petitioner had not produced any material to show that the income from business was from sources other than the sales that were shown in the trading account for the year 2012-13. 6. I have heard the learned Senior Counsel Sri.T.M.Sreedharan, duly assisted by Sri.V.P.Narayanan for the petitioner, and the learned Government Pleader for the respondents. 7. On a consideration of the facts and circumstances of the case and the submissions made across the bar, I am of the view that for the reasons stated below, the challenge in the writ petition against Ext.P3 order of penalty must necessarily fail. At the very outset, it must be noted that the proposal for imposition of penalty, as contained in Ext.P1 notice, clearly indicated to the petitioner that the proposal was to impose penalty on the basis of the return that the petitioner had voluntarily filed before the Income Tax authorities for the financial year in question. In the said return, the petitioner had clearly indicated that from his business activities, he had obtained a profit of Rs.56,80,000/-, which he declared as the income from business and paid tax of Rs.19,61,080/-. If, as the petitioner contends, the business income declared by the petitioner before the income tax authorities W.P.(c).No.31801 of 2014 : 8 : represented the income from sources other than sales transactions also, then it was incumbent upon the petitioner to produce material and accounts to indicate that at least a part of that income was attributable to other transactions, such as the personal transactions of the partners of the firm as also commission and brokerage received, as also the labour charges stated to have been received from making gold ornaments. Despite numerous opportunities granted to the petitioner by the intelligence officer, the petitioner did not produce any material to show that the business income, that was voluntarily declared by him pertained to any source of income other than sales transactions. Under the said circumstances, I am of the view that the intelligence officer cannot be faulted for having taken the figures, that had been voluntarily declared by the petitioner as income before the Income Tax authorities, as representing income from sales transactions, and computing the taxable sales turnover for the financial year in question, on that basis. 8. As regards the contention of the learned Senior Counsel that the provisions of Section 67 of the KVAT Act cannot be invoked in cases where a dealer has paid tax on compounded basis under Section 8(f), I am afraid, I cannot accept the said contention. Section 67 of the KVAT Act begins with a non-obstante clause and makes it clear W.P.(c).No.31801 of 2014 : 9 : that, on an authority empowered under the Act being satisfied that any person has, inter alia, failed to keep true and complete accounts, or has submitted untrue or incorrect returns, or has acted in contravention of any provisions of the act or rule made thereunder, the authority can direct that such person pay by way of penalty, an amount not exceeding twice the amount of tax or amounts evaded or sought to be evaded, where it is practicable, to quantify the evasion. In the case of dealers opting to pay tax on compounded basis, it is trite that the payment of tax on compounded basis being an alternative means of assessment in lieu of the regular mode of assessment under Section 6(1), the interpretation of the word 'return' in Section 67 has to be in the context of the scheme which permits a payment on compounded basis. When thus viewed, a declaration made by a dealer for the purposes of payment of tax on compounded basis assumes the nature of a return that is otherwise filed by an assessee, who does not opt for payment of tax on compounded basis. The submission of untrue or incorrect returns, in the case of an assessee who chooses to pay tax on compounded basis, would be the submission of an incorrect or untrue application. In the instant case, it is apparent, going by the returns voluntarily filed by the petitioner before the Income Tax authorities, that the declaration that he filed before the authorities under the KVAT Act, for the purposes of paying W.P.(c).No.31801 of 2014 : 10 : tax on compounded basis, was erroneous, in respect of the turnover reported for the financial year 2012-13. I am therefore, of the opinion, that the Intelligence Officer was well within his jurisdiction to initiate penalty proceedings against the petitioner for the offence of submitting untrue or incorrect return and confirming the same on the petitioner. As regards the contention of the learned Senior counsel, placing reliance on the decisions in **M/s. U.K.Monu Timbers v. State of Kerala [2012 (3) KHC 111]** and relying on the decisions of Supreme Court in **Girdhari Lal Nannelal v. The Sales Tax Commissioner, MP[(1977) 39 STC 30], P.C. Itty Mathew & Sons v. DC of Sales Tax(Law) [ 2001 121 STC 1(SC)]** , and in **Haleema Zubair, Tropical Traders v. State of Kerala [(2009) 19 VST 142 (SC)]** , I find that in all those cases, the Supreme Court was dealing with a situation where additions had been made under the Income Tax Act to the income declared by an assessee and the issue to be considered was, whether the mere addition by the tax authorities under the Income Tax Act, to the income of an assessee under the said Act, would enable the authorities under the Sales Tax Act, to adopt the same figures for the purposes of assessment under the Sales Tax Act. It is in that context that the Supreme Court found that the mere finding that additional amounts representing income were to be added to the declared income of an assessee under the Income Tax W.P.(c).No.31801 of 2014 : 11 : Act, could not, without any independent finding as to whether the income detected pertained to sales transaction, be considered for the purposes of inclusion in the turnover of an assesee under the Sales Tax Act. The facts in the instant case are clearly distinguishable, from those in the decisions referred above, since it is going by the assessee's own voluntary declaration under the Income Tax Act that the figure of Rs.56,80,000/- representing income, was taken by the Intelligence Officer as representing the sales turnover. Although the petitioner had contended that the income from business included income from certain allied transactions which were carried out by the partners of the firm in their individual capacity as also other sources of income, such as, commission and brokerage, the petitioner was not able to establish the same through relevant material or accounts. Under the said circumstances, I see no reason as to why the intelligence officer could not have adopted the entire figure that was declared by the petitioner voluntarily as representing business income as attributable to income generated from sales activities, which admittedly was the business activity of the petitioner. I must also deal with the contention advanced by the learned Senior Counsel for the petitioner, placing reliance on the decision of this Court in **Malabar Gold v. Asst.Commissioner, Commercial Taxes [2015(2) KLT SN110]** and the decision of Supreme Court in **Bhima Jewellery v.** W.P.(c).No.31801 of 2014 : 12 : ## **Assistant Commissioner (Assessment), Kerala and another** **[(2014) 71 VST 110]** that, when an assessee pays tax on the basis of a permission granted by the statutory authorities to opt for payment of tax on compounded basis, there comes into existence a binding contract between the assessee and the Department, from which neither party can resile. The contention advanced by the learned Senior Counsel, relying upon the aforesaid decisions, is essentially that once the compounding application is accepted, then it is not permissible for an Intelligence Officer to look behind the permission granted and impose a penalty, based on a finding of suppression, which even the assessing authority had not found. Attractive though the submission may appear at first blush, I am not persuaded to accept the same, since this is a case where the Intelligence Officer has imposed the penalty after finding that the declaration of the petitioner before the Income Tax authority itself indicated that he had suppressed the actual turnover for the financial year 2012-13, while preferring the application for payment of tax on compounded basis, under the KVAT Act, for the assessment year 2013-14. The declaration of the petitioner, which formed the basis of the permission granted to him to pay tax on compounded basis, was itself incorrect in that the turnover declared in the application was significantly lower than the turnover that was found, based on the declaration made W.P.(c).No.31801 of 2014 : 13 : before the Income Tax authorities. I note in this connection that an explanation to Section 8(f) of the KVAT Act itself makes it abundantly clear that, tax payable as conceded in the accounts includes the tax payable on suppressed or assessed turnover, subsequently detected. In this case it is apparent that, consequent to the detection of the undisclosed income by the Income Tax authorities, and the voluntary declaration of un-accounted income by the petitioner, the credibility of the application submitted by him for the purposes of payment of tax on compounded basis was lost. Under the said situation, the contract that came into existence was vitiated by a mistake that rendered the contract void, and it is on that principle that the petitioner becomes liable to penal action in cases where suppression of turnover is established, in an application submitted by the petitioner for payment of tax on compounded basis. Lastly, I must also deal with the contention of the learned Senior Counsel with regard to the propriety of an Intelligence Officer resorting to an estimation for the purposes of levying penalty. As was already noted by a Division Bench of this Court in **M/s. U.K.Monu Timbers v. State of Kerala [2012 (3) KHC 111],** an intelligence officer while exercising his jurisdiction under Section 67 is not expected to embark upon a process of estimation, which is more appropriately done by an assessing officer while completing a best judgment assessment against an assessee. In W.P.(c).No.31801 of 2014 : 14 : the instant case, in the light of the fact that the Intelligence Officer relied only on the voluntary declaration by the assessee, that indicated what his actual income for the relevant financial year was, I am of the view that the Intelligence Officer did not resort to any estimation, but has only gone by the actual figures reported by the assessee himself, as representing his business income. In the absence of any material adduced by the petitioner, to show that the income was derived from activities other than sales transactions, I am of the view that the Intelligence Officer was justified in taking the income amount declared by the assessee, as representing income from sales transactions. Thus, I find that, Ext.P3 order of the Intelligence Officer does not call for any interference by this Court in these proceedings under Article 226 of the Constitution of India. The writ petition therefore fails, and is accordingly dismissed. The petitioner shall pay the penalty amount confirmed against him by Ext.P3 order, within a period of one month from the date of receipt of a copy of this judgment. Sd/- ## **A.K.JAYASANKARAN NAMBIAR JUDGE** sm/