OT.Rev No. 79 of 2015 & WP(C) 25085 of 2015 v. State of Kerala & Others

# **IN THE HIGH COURT OF KERALA AT ERNAKULAM** ## **PRESENT** **THE HONOURABLE MR.JUSTICE S.V.BHATTI** **&** ## **THE HONOURABLE MR.JUSTICE BASANT BALAJI** **TUESDAY, THE 8[TH] DAY OF FEBRUARY 2022 / 19TH MAGHA, 1943** ## **OT.REV NO. 79 OF 2015** **AGAINST THE ORDER/JUDGMENT IN TAVAT 1156/2011 OF KERALA VAT APPELLATE** ## **TRIBUNAL, ERNAKULAM** ## **REVISION PETITIONER/S:** - **1 K.C. ABRAHAM M/S.KUNNATH PHARMACEUTICALS, VII/318-B, JANASAKTHI ROAD, MUDAVOOR P O, MUVATTUPUZHA** ***2 W/O. LATE DR. K.C.ABRAHAM, AGED 60 YEARS, RESIDING AT KUNNATH HOUSE, JANASHAKTHI ROAD, MUDAVOOR P.O., MUVATTUPUZHA, ERNAKULAM - 686 669.** ***(LEGAL HEIR OF THE DECEASED REVISION PETITIONER IS IMPLEADED VIDE ORDER DATED 1/3/2021 IN IA 1/2021 IN OTREV.79/2015)** **BY ADVS.** **SRI.M.GOPIKRISHNAN NAMBIAR SRI.K.JOHN MATHAI SRI.P.BENNY THOMAS SRI.JOSON MANAVALAN SRI.KURYAN THOMAS SRI.PAULOSE C. ABRAHAM SRI.RAJA KANNAN** ## **RESPONDENT/S:** ## **STATE OF KERALA** **REPRESENTED BY THE SECRETARY TAXES DEPARTMENT, THIRUVANANTHAPURAM** **BY ADVS. GOVERNMENT PLEADER** ## **OTHER PRESENT:** **SR GOVERNMENT PLEADER V.K. SHAMSUDHEEN** OTREV. 79 OF 2015 & WP(C) 25085 OF 2015 -2- **THIS WRIT PETITION (CIVIL) HAVING COME UP FOR ADMISSION ON 08.02.2022, ALONG WITH WP(C).25085/2015, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:** OTREV. 79 OF 2015 & WP(C) 25085 OF 2015 -3- # **IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT** **THE HONOURABLE MR.JUSTICE S.V.BHATTI** **&** **THE HONOURABLE MR.JUSTICE BASANT BALAJI TUESDAY, THE 8[TH] DAY OF FEBRUARY 2022 / 19TH MAGHA, 1943** **WP(C) NO. 25085 OF 2015** ## **PETITIONER/S:** - **1 M/S.KUNNATH PHARMACEUTICALS AGED 58 YEARS DOOR A NO.VII/791(318 A&B), MUDAVOOR P.O., MUVATTUPUZHA686 669 REPRESENTED BY ITS PROPRIETOR, MR. ABRAHAM K.C.** **BY ADVS. SRI.M.GOPIKRISHNAN NAMBIAR SRI.P.BENNY THOMAS SRI.K.JOHN MATHAI SRI.JOSON MANAVALAN SRI.KURYAN THOMAS SRI.RAJA KANNAN PAULOSE C. ABRAHAM** ## **RESPONDENT/S:** - **1 STATE OF KERALA REPRESENTED BY ITS SECRETARY TO GOVERNMENT, TAXES DEPARTMENT, SECRETARIAT, THIRUVANANTHAPURAM-695001.** - **2 THE KERALA VALUE ADDED TAX APPELLATE TRIBUNAL ADDITIONAL BENCH, COMMERCIAL TAX COMPLEX, PERUMANOOR P.O., KOCHI-682016, REPRESENTED BY ITS SECRETARY.** - **3 THE DEPUTY COMMSSIONER APPEALS COMMERCIAL TAXES, COMMERCIAL TAX COMPLEX, PERUMANOOR P.O., KOCHI-682016.** - **4 THE INTELLIGENCE OFFICER IB** OTREV. 79 OF 2015 & WP(C) 25085 OF 2015 -4- **COMMERCIAL TAXES, MINI CIVIL STATION, MATTANCHERRY, ALUVA-683101.** - **5 INSPECTING ASSISTANT COMMISSIONER DEPARTMENT OF COMMERCIAL TAXES, MUVATTUPUZHA-686 669.** **BY ADV GOVERNMENT PLEADER** **SR GOVERNMENT PLEADER VK SHAMSUDHEEN** **THIS WRIT PETITION (CIVIL) HAVING COME UP FOR ADMISSION ON 08.02.2022, ALONG WITH OT.Rev.79/2015, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:** OTREV. 79 OF 2015 & WP(C) 25085 OF 2015 -5- ## **O R D E R** ## S.V.Bhatti,J. Heard Mr. Kuryan Thomas and Mr.V.K Shamsudheen for parties. 2. M/s. Kunnath Pharmaceuticals represented by the first petitioner is engaged in the manufacture and sale of the ‘Musli Power X-tra’. Kunnath Pharmaceuticals is the petitioner in the O.T.Revision and the Writ Petition. The petitioner is a registered dealer under the Kerala Value Added Tax Act, 2003 (for short, ‘the Act) on the rolls of the Assistant Commissioner-I, Special Circle, Commercial Taxes, Perumbavoor. The primary issue is dealt with in O.T.Rev No.79 of 2015. The petitioner filed writ petition challenging Ext.P5 order dated 31.03.2015 imposing penalty under Section 67(1) of the Act. Ext.P5 order dated 31.03.2015 is consequent to the order of the Deputy Commissioner (Appeals) dated 23.12.2010 in Ext.P2. The counsel OTREV. 79 OF 2015 & WP(C) 25085 OF 2015 -6- have made submissions treating O.T.Revision No.79/2015 as the lead case and a decision thereon would have an effect on the writ petition as well. 3. This Court in the _U.K. Monu Timbers (M/s.) v. State of Kerala_[1] case decided whether the penalty under Section 67 of the Act could be levied on the estimate of the suppressed turnover etc., as the case may be or not. The principle laid down in the reported judgment in the _U.K. Monu Timbers_ case for convenience is excerpted hereunder: "8. The question first to be considered is with respect to the estimation of the turnover made by the Intelligence Officer based on the rates prescribed in the circular. The circular is held by us to be indicative or determinative of the actual price for which the goods are sold, the question posed is as to whether in penalty proceedings estimation can be adopted. The provision authorizing imposition of penalties, coming up for consideration in the instant case, is Section 67 of the KVAT Act. Clauses (a) to (1) of Section 1 2012 (3) KHC 111 (DB) OTREV. 79 OF 2015 & WP(C) 25085 OF 2015 -7- 67 enumerates the various offences that attract imposition of penalty. If any authority empowered under the Act is satisfied that any person has committed any or all of the offences enumerated in clauses (a) to (1): "Such authority may direct that such person shall pay, by way of penalty, an amount not exceeding twice the amount of tax or other amount evaded or sought to evade where it is practicable to quantify the evasion or an amount not exceeding ten thousand rupees in any other case." When action is initiated under Section 67 of the KVAT Act for defects/offences mentioned in clauses (a) to (I), it is to be noticed that the authority is clothed with the power to impose, by way of penalty, an amount not exceeding twice the amount of tax or other amount evaded or sought to be evaded, where it practicable to quantify the evasion or in any other case, Rs.10,000/-. It is pertinent that in imposing a penalty at twice the tax evaded or sought to be evaded, it should be practically possible to determine and quantify the amount evaded or sought to be evaded. This does not contemplate any estimation, however reasonable it may be, since the same would be in OTREV. 79 OF 2015 & WP(C) 25085 OF 2015 -8- the realm of "best judgment", of, an individualauthority. 9. The multi-point levy as contemplated under the KVAT Act provides for assessment under Chapter V. Section 21 provides for self assessment by filing of a return under Section 20 in the prescribed manner and accompanied by the prescribed documents. This is in consonance with the scheme of multi-point levy providing set off of the tax paid at any prior point of sale; which is to be claimed by the assessee in its returns. However, the authorities under the KVAT Act have been conferred with powers of assessment in the event of any failure on the part of the dealer/assessee. The KVAT Act thus provides for such assessment by Sections 22, 23, 24 and 25. Sections 22(3), 23(6), 24(1) and 25(1) all provide for 'best of judgment assessment in the event of the contingencies specified in the respective sections. Section 67 does not provide for any best judgment of turnover to be made for arriving at the tax evaded or sought to be evaded. At the risk of repetition, we notice that what is to be determined under Section 67 is the tax actually evaded or sought to be evaded and not what according to the officer initiating proceedings under Section 67 thinks in the best of OTREV. 79 OF 2015 & WP(C) 25085 OF 2015 -9- his judgment has been the assessee's attempt to evade. A Division Bench of this Court had, in the decision reported in Paisons v. The Intelligence Officer and Others', while upholding the constitutionality of Section 45A in the Kerala General Sales Tax Act, 1963; similar to Section 67 of KVAT Act, held: "The discretion vested in the officer under Section 45A of the Act is not an unexaminable or unfettered discretion. Decisions are legion to hold that when the exercise of discretionary power is vested in a statutory authority on his being "satisfied" of certain facts, there should be material on record to substantiate the same. It is true that the language used in Section 45A(1) is "subjective". Though literally, the language is so, the practical approach of the Courts has been to insist on objective evaluation." 10. In penalty proceedings the offences indicated under Section 67 should be evidenced by the materials recovered on inspection or otherwise and the enquiry is pointedly against any actual suppression or omission in the course of the business transactions, which would lead to the definite conclusion of evasion or attempt to evade. On detection of such offences; in the event of the OTREV. 79 OF 2015 & WP(C) 25085 OF 2015 -10- tax evaded or sought to be evaded being determinable, the officer initiating penalty proceedings is perfectly justified in imposing a penalty at the maximum rate of twice the rate of tax actually evaded or sought to be evaded. Such officer conducting penalty proceedings cannot exceed his jurisdiction by finding out as to whether the evasion detected would in fact lead to an inference of earlier or subsequent evasion. Nor can such inferences the earlier or regarding subsequent conduct be reflected in the penalty proceedings by way of estimation of turnover based on such inferences. This, going by the clear words employed in the Statute, is within the realm of the assessment proceedings." The said decision holds the field as on date. In the background of a binding principle, the controversy that arises for consideration for resolution in the instant Revision is in a very narrow The circumstances relevant therefore are as under: compass. The Intelligence Officer, Department of Commercial Taxes, Mattancherry, in proceedings initiated under Section 67 of the Act, made the following order in Ext.P5: OTREV. 79 OF 2015 & WP(C) 25085 OF 2015 -11- “In exercise of the powers conferred on me under section 67(1) of the KVAT Act 2003 and rules made thereunder, I hereby impose a penalty of ₹1,75,13,275/(Rupees One Crore Seventy Five Lakhs Thirteen Thousand Two Hundred and Seventy Five only) being double the amount of tax sought to be evaded on M/s. Kunnath Pharmaceuticals, Mudavoor, Muvattupuzha for the offences detailed above committed during the year 2005-06. The amount shall be remitted as per the demand notice enclosed.” 4. The principal objection of the dealer against the levy or demand of penalty are completely based on the rough estimate or cut and dried details taken note of by the Intelligence Officer. Therefore, being aggrieved by the penalty order, the dealer filed statutory appeal before the Deputy Commissioner (Appeals). The Appellate Authority through Annexure-B order dated 23.12.2010 allowed the appeal as held as follows; “I have found some force in all the above arguments and the documents produced to substantiate the appellants claim and therefore the proceedings now appealed require a re-examination with proper notice to the appellant to explain his case before the Intelligence Officer. The appeal therefore partly allowed for the purpose of re-examination of the defects pointed out in the order imposing penalty and the clear mistake in taking into consideration the dried safed musly and the resultant estimation of the capsules. **Therefore the Intelligence Officer is directed to re-calculate the estimation if at all required after verifying the** OTREV. 79 OF 2015 & WP(C) 25085 OF 2015 -12- **documents produced** . The appellant shall produce all rethe documents produced before me at the time of examination by the Intelligence Officer. The appeal is therefore disposed accordingly. The order stands modified to the extent discussed above and is ordered accordingly.” (Emphasis supplied) 5. The order of the Appellate Authority was the subject matter of the appeal and cross-objection before the Tribunal. The Tribunal through Annexure-E order dated 29.09.2014 dismissed the appeal filed by the State and also cross-objection filed by the dealer. Hence the O.T.Revision. 6. Adv. Kuryan Thomas appearing for the dealer argues that the First Appellate Authority has rightly appreciated and held that the penalty cannot be imposed on the basis of the estimate by the Intelligence Officer. The order imposing penalty has been set aside, matter remitted to the Intelligence Officer for fresh consideration. While remitting the matter, the direction by the Appellate Authority to recalculate the estimation if at all required, after the documents are produced suffers from contradiction and begs the question. The Intelligence Officer as OTREV. 79 OF 2015 & WP(C) 25085 OF 2015 -13- could be discerned from Ext.P5 in W.P.(C) No.25085 of 2015 cannot give an effect to the principle laid down in the _U.K. Monu Timbers_ case but has passed a laconic order again on the basis of directions contained in Annexure-B order. Therefore, the Tribunal in the cross-objection filed by the dealer ought to have independently considered whether the direction issued by the First Appellate authority warrants interference or not and should have pronounced its view. The order of the Tribunal is completely silent on the grounds raised by the dealer. The dealer receives the order of dismissal without reason. Therefore, he prays for setting aside the order of the Tribunal in so far as the cross-objections are concerned and also expunges the lines in Annexure-B order viz. “Therefore the Intelligence Officer is directed to recalculate the estimation if at all required after verifying the documents produced.” The matter needs to be reexamined strictly conforming to the rigour of Section 67 of the Act by the Intelligence Officer. OTREV. 79 OF 2015 & WP(C) 25085 OF 2015 -14- 7. Mr.V.K Shamsudheen does not dispute that the principle laid down by this Court vis-à-vis the discretion available to the officers to resort to the estimation while passing orders under Section 67 of the Act. It is also difficult for anyone to contend that the Tribunal considered the cross-objection and rendered its conclusion. According to him, clarification is not necessary and Ext.P5 order in W.P.(C) No.25085 of 2015 would meet the ends of the requirements of law. 8. We have perused the record and noted the contentions made on behalf of both sides. It is appreciated that without any reservation the First Appellate Authority accepted the grounds of appeal raised by the dealer against Annexure-A order dated 17.06.2010. The said view resulted in setting aside the order in Annexure-A. The primary reason which weighed with the Appellate Authority is that estimation constituted the basis for levying penalty and such power is unavailable. As excerpted above, while agreeing with the grounds of the dealer, OTREV. 79 OF 2015 & WP(C) 25085 OF 2015 -15- the Appellate Authority further directed to recalculate the estimate if at all required. In fact, when this objection is brought to the notice of the Tribunal, the Tribunal ought to have remedied the situation by making suitable modifications to the order in Annexure-B. As already noted, that has not happened while making the order in Annexure-E. The prejudice suffered by the dealer is appreciated after going through the order in Ext.P5. A mere blush at the order which is assailed in W.P.(C) No.25085 of 2015 clearly demonstrates that the apprehension with which the dealer has been endeavouring for expunging the sentence noted above, for an objective determination after remand is found to be correct. The principle in the U.K. _Monu Timbers_ case is accepted by the Deputy Commissioner (Appeals). The one-line observation in our view while remanding the case to the Intelligence Officer is an avoidable observation. As noted above, the Tribunal ought to have rectified through appropriate directions the said anomalous situation. Hence the failure to do OTREV. 79 OF 2015 & WP(C) 25085 OF 2015 -16- so vitiates the order of the Tribunal as well. Though an attempt has been made to remit the matter to the Tribunal, we are of the view that in the final analysis the outcome of the objections is limited to expunging the sentence which is considered as adversely affecting the interest of the dealer. We are not convinced to remit the matter to the Tribunal to consider the cross-objection. For the above reasons, we are of the view that the sentence “Therefore the intelligence Officer is directed to recalculate the estimation if at all required after verifying the documents produced” is expunged from the order in Annexure-B. Ext.P5 order, we are of the view is definitely guided by the totality of observations including what is expunged by this Court through the instant judgment. Ext.P5, hence in W.P.(C) No. 25085 of 2015 is set aside. Consequently, the Intelligence Officer, Department of Commercial Taxes, Mattancherry is directed to proceed with the penalty proceedings in accordance with law, and the dealer is OTREV. 79 OF 2015 & WP(C) 25085 OF 2015 -17- given the opportunity of hearing. The dealer, if so advised, places further replies and documents within six weeks from the date of receipt of the copy of this judgment. The O.T.Revision and Writ Petition is ordered as indicated above. Sd/- **S.V.BHATTI JUDGE** Sd/- **BASANT BALAJI JUDGE** JS OTREV. 79 OF 2015 & WP(C) 25085 OF 2015 -18- ## **APPENDIX OF O.T. REV. NO.79 OF 2015** ## **ANNEXURE A** **TRUE COPY OF THE PENALTY ORDER DATED 17.06.2010 ISSUED TO THE PETITIONER BY THE INTELLIGENCE OFFICER (IB) MATTANCHERRY AT ALUVA** ## **ANNEUXRE B** - **TRUE COPY OF THE ORDER DATD 23.12.2010 ISSUED TO THE PETITIONER PASSED BY THE DEPUTY COMMISSIONER (APPEALS)-(ON DEPUTATION) COMMCERCIAL TAXES, ERNAKULAM IN KVATA NO.2511 OF 2010** ## **ANNEXURE C** - **TRUE COPY OF THE APPEAL MEMORANDUM (NUMBERED AS TA VAT NO 1156/2011) DATED 16.09.2011 FILED BY THE STATE OF KERALA THORUGH DEPUTY COMMISSIONER (INT.) DEPARTMENT OF COMMERCIAL TAXES, ERNAKULAM, BEFORE TEH SALES TAX APPEALLTE TRIBUNAL, ERNAKULAM** - **ANNEXURE D TRUE COPY OF THE CROSS OBJECTION DATED 26.07.2013 (NUMBERED AS CO NO.24/2013) FILED BY THE PETITIONER BEFORE THE HON'BLE APPELLATE TRIBUNAL, ERNAKULAM** ## **ANNEXURE E** - **TRUE COPY OF THE COMMON ORDER DAT ED 29.09.2014 ISSUED TO THE PETITIONER/RESPONDENT BY THE KERALA VALUE ADDED TAX APPELLATE TRIBUNAL (ADDITIONAL BENCH, ERNAKULAM, IN TA VAT NO.1156/2011 & CO NO.24/2013)** OTREV. 79 OF 2015 & WP(C) 25085 OF 2015 -19- ## **APPENDIX OF WP(C) NO.25085 OF 2015** - **EXHIBIT P1** **THE TRUE COPY OF THE PENALTY ORDER DATED 17.06.2010 PASSED BY THE 4TH RESPONDENT U/S.67(1) OF THE KVAT ACT, 2003, PERTAINING TO THE YEAR 2005-06** - **EXHIBIT P2 THE TRUE COPY OF THE ORDER DATED 23.12.2010 PASSED BY THE 3RD RESPONDENT IN KVATA NO.2511 OF 2010** - **EXHIBIT P3 THE TRUE COPY OF THE CROSS OBJECTION DATD 26.07.2013 (NUMBERED AS CO NO.24/2013) FILED BY THE PETITIONER BEFORE THE 2ND RESPONDENT** - **EXHIBIT P4 THE TRUE COPY OF THE COMMON ORDER DATED 29.09.2014 PASSED BY THE 2ND RESPONDENT, IN TA VAT NO.1156/2011 & CO NO.24/2013** - **EXHIBIT P5 THE TRUE COPY OF THE ORDER OF PENALTY DATED 31.03.2015 PASSED BY THE 4TH RESPONDENT US. 67(1) OF THE KVAT ACT, PERTAINING TO THE YEAR 2005-06** - **EXHIBIT P6 THE TRUE COPY OF THE ORDER DATED 01.07.2015 PASSED BY THE 4TH RESPONDENT U/S. 66 OF THE KVAT ACT.** - **EXHIBIT P7 THE TRUE COY OF THE JUDGMENT DATED 02.07.2013 IN WA NO.937/2013 PASSED BY THIS HON'BLE COURT** **EXHIBIT P8 THE TRUE COPY OF THE DEMAND NOTICE DATED 11.08.2015 ISSUED BY THE 5TH RESPONDENT PERTAINING TO THE PENALTY IMPOSSED FOR THE YEAR 2005-06**