South Malabar Trading Company Hotel Diana v. State of Kerala

## **IN THE HIGH COURT OF KERALA AT ERNAKULAM** ## **PRESENT** **THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN** **&** **THE HONOURABLE MR. JUSTICE T.R.RAVI** **WEDNESDAY, THE 18TH DAY OF NOVEMBER 2020 / 27TH KARTHIKA, 1942** **ST.Rev..No.23 OF 2016** **AGAINST THE ORDER IN TA 13/2016 DATED 30-04-2016 OF AGRL.INCOME TAX AND SALES TAX APPELLATE TRIBUNAL, ADDITIONAL BENCH,PALAKKAD** ## **PETITIONER/APPELLANT IN TA:** **M/S.SOUTH MALABAR TRADING COMPANY HOTEL DIANA, VADAKKENCHERRY P.O., PALAKKAD-678 683.** **BY ADVS. SRI.M.GOPIKRISHNAN NAMBIAR SRI.P.BENNY THOMAS SRI.K.JOHN MATHAI SRI.JOSON MANAVALAN SRI.KURYAN THOMAS SRI.RAJA KANNAN** ## **RESPONDENT/RESPONDENT IN TA:** **STATE OF KERALA REPRESENTED BY THE SECRETARY TAXES DEPARTMENT,THIRUVANANTHAPURAM-695 001.** **BY SENIOR GOVT.PLEADER SRI.MOHAMMED RAFIQ** **THIS SALES TAX REVISION HAVING BEEN FINALLY HEARD ON 18.11.2020, ALONG WITH ST.Rev..24/2016, THE COURT ON THE SAME DAY PASSED THE FOLLOWING:** ST.Rev..No.23 & 24 OF 2016 2 # **IN THE HIGH COURT OF KERALA AT ERNAKULAM** # **PRESENT** **THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN** **&** **THE HONOURABLE MR. JUSTICE T.R.RAVI** **WEDNESDAY, THE 18TH DAY OF NOVEMBER 2020 / 27TH KARTHIKA, 1942** **ST.Rev..No.24 OF 2016** **AGAINST THE ORDER IN TA 14/2016 DATED 30-04-2016 OF AGRL.INCOME TAX AND SALES TAX APPELLATE TRIBUNAL, ADDITIONAL BENCH,PALAKKAD** ## **PETITIONER/RESPONDENT IN TA:** **M/S.SOUTH MALABAR TRADING COMPANY HOTEL DIANA, VADAKKANCHERY P.O., PALAKKAD - 678 683.** **BY ADVS. SRI.M.GOPIKRISHNAN NAMBIAR SRI.P.BENNY THOMAS SRI.K.JOHN MATHAI SRI.JOSON MANAVALAN SRI.KURYAN THOMAS SRI.RAJA KANNAN** ## **RESPONDENT/APPELLANT IN TA:** **STATE OF KERALA REPRESENTED BY THE SECRETARY TAXES DEPARTMENT, THIRUVANANTHAPURAM.** **BY SENIOR GOVT.PLEADER SRI.MOHAMMED RAFIQ** **THIS SALES TAX REVISION HAVING BEEN FINALLY HEARD ON 18.11.2020, ALONG WITH ST.Rev..23/2016, THE COURT ON THE SAME DAY PASSED THE FOLLOWING:** ST.Rev..No.23 & 24 OF 2016 3 **K.VINOD CHANDRAN & T.R. RAVI,JJ. -----------------------------------------------ST.Rev.Nos.23 & 24 of 2016** **--------------------------------------------------** ## **Dated this the 18[th] day of November, 2020** ## **ORDER** ## **T.R.RAVI, J.** The revision petitions relate to the assessment year 2011-12 and arise from a common order of the Tribunal in appeals filed by the State and the assessee. The petitioner who is engaged in the activity of running a bar attached hotel at Palakkad, filed his return for the year 2011-12 conceding a total and taxable turnover of Rs.4,82,32,780/-, for taxation under the provisions of the KGST Act. The Intelligence Officer, Squad No.VII, Commercial Taxes, Palakkad inspected the business premises of the petitioner on 15.12.2011 and noticed that there was a stock difference and that gross profit shown was not correct. The stock variation quantified was worth Rs.2,530/-, compared to the huge volume of business that was being done by the petitioner. On an analysis of sale bills and sale statements recovered during inspection, the Intelligence Officer noted that the dealer was selling IMFL at an average gross profit of 86.58% but that he has reported only 75.10% as gross profit. Making that as basis, it was concluded that the dealer has suppressed sales turnover. The ST.Rev..No.23 & 24 OF 2016 4 Intelligence Officer imposed a penalty of Rs.4,42,192/- on the petitioner. The assessee filed an appeal before the First Appellate Authority. The Appellate Authority reduced the penalty to an equal amount of tax sought to be evaded which has to be fixed by re-fixing the gross profit at 78%. The penalty on stock variation was upheld. 2. The assessee and the Revenue filed appeals before the Tribunal. The Tribunal by Annexure B common order re-fixed the penalty at 1½ times of the tax effect determined by the Intelligence Officer. The appeal filed by the assessee was dismissed and the appeal filed by the Revenue was allowed in part. The assessee has filed these revision petitions challenging the orders in the appeals filed by the assessee and the Revenue. The assessee has raised several questions of law and we re-frame the same as follows; - (i) Whether the authorities were right in imposing penalty under Section 45A of the KGST Act solely based on estimated evasion of tax? (ii) Whether the Appellate Tribunal was justified in not following the law declared by this Court in **U.K.Monu Timbers v. State of Kerala** reported in **(2012 (3) KHC 111)** ? 3. Heard Sri Raja Kannan on behalf of the revision petitioner and Sri Mohammed Rafiq, Senior Government Pleader on behalf of the ST.Rev..No.23 & 24 OF 2016 5 Revenue. 4. The counsel for the petitioner relied on the decisions of this Court in **U.K.Monu Timbers v. State of Kerala** reported in **(2012 (3) KHC 111)** and **M/s. Vysakh International Hotel Pvt. Ltd. v. State of Kerala (S.T.Rev.No.77 of 2003).** In **U.K. Monu Timbers** **(supra)** this Court in paragraphs 10 and 12 held as follows; "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 tax evaded or sought to be evaded being determinable, the officer initiating penalty proceedings is perfectly justified in imposing penalty at the maximum rate of twice the rate of tax 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 lead to an inference of earlier or subsequent evasion. Nor can such inferences regarding the earlier or 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. ## xxxxxxxxxxx xxxxxxxxxxx xxxxxxxxxxx 12. Section 67 does not confer the power to make a reasonable estimate. The suppression or omission must be disclosed from the materials available and there should be evidence of the amounts sought to be suppressed from the turnover. In cases ST.Rev..No.23 & 24 OF 2016 6 where the same is not discernible, the only option is to make an order of imposition of fine not exceeding Rs.10,000/-. Any suppression detected or rather any file generated on a crime so detected and penalised necessarily gives the assessing authority the power to make estimations to compensate the State against probable omissions and suppressions. Such exercise, as is mandated by the statute, has to be regulated by the best judgment of the individual officer which is subject to the principles of reasonableness, proportionality, and of course natural justice. Such estimation on best judgment would have to be done with due notice and after affording a personal hearing. Such estimation should be reasonable and should have a nexus with the gravity and frequency of the commission of offences as also the quantum of loss suffered by the State. This exercise, in our opinion, cannot be undertaken by the officer empowered with the power to impose a penalty under Section 67 of the Act. Section 67 contemplates the imposition of penalty on proof of commission of offences as a measure of deterrence; best judgment assessments are made to compensate the loss caused to the State. The first question hence is answered against the Revenue and in favour of the assessee." 5. In **Vysakh International Hotel Pvt. Ltd. (supra)** , this Court was considering a case where the Intelligence Officer added 80% of the purchase price of the goods sold during the year up to the date of inspection to estimate the total sales turnover and twice the tax payable on such sales turnover was imposed as penalty. The Tribunal had in that case modified the gross profit to 65%. The question of law raised was whether the authority exercising power to ST.Rev..No.23 & 24 OF 2016 7 impose penalty under Section 45A of the KGST Act has the power to estimate the turnover to determine the penalty. The Division Bench noted that Section 67 of the KVAT Act was considered in the decision in **U.K. Monu Timbers (supra)** is in _pari materia_ with Section 45A of the KGST Act, and held that no estimation can be made by an Officer imposing penalty. We are in complete agreement with the dictum laid down in the above-said decisions. In Annexure A order, the Intelligence Officer has proceeded to levy penalty by estimation of the total turnover, fixing average gross profit of 86.58%. Appellate Authority made another estimation based on gross profit of 78%. The Tribunal did not interfere with how the penalty was arrived at but held that reduction of penalty by the Appellate Authority was not correct. 6. The proceedings of the Intelligence Officer concluded long after the assessment year in the year 2016. The stock variation detected was very nominal and the gross profit was arrived at on the basis of the sale bills recovered at the time of inspection. Hence the exercise carried out by the Intelligence Officer was to estimate the Gross Profit on the basis of what was recovered at the time of inspection and to spread it over the year. The Intelligence Officer on the basis of the defects detected ought to have determined the tax evaded if any or otherwise imposed the fixed penalty and referred the matter to the assessing oficer to carry out best judgment assessment. ST.Rev..No.23 & 24 OF 2016 8 In the light of the decisions in **U.K. Monu Timbers (supra)** and **Vysakh International Hotel Pvt. Ltd. (supra)** , the orders of the statutory authorities are not legally sustainable and are hence set aside to the extent that they arrived at the penalty based on estimation of turnover. The revision petitions are allowed. The questions of law are answered in favour of the assessee. The parties will bear their respective costs. ## Sd/- **K. VINOD CHANDRAN JUDGE** Sd/- **T.R. RAVI JUDGE** dsn ST.Rev..No.23 & 24 OF 2016 9 ## **APPENDIX OF ST.Rev. 23/2016** **PETITIONER'S/S EXHIBITS:** **ANNEXURE A A TRUE COPY OF THE PENALTY ORDER No.IPD VII/10/2011-12 DATED 03.03.2015 ANNEXURE B THE TRUE COPY OF THE ORDER DATED 05.01.2016 PASSED BY THE DEPUTY COMMISSIONER (APPEALS)-1, COMMERCIAL TAXES, ERNAKULAM IN STA NO.24/2015. ANNEXURE C A TRUE COPY OF THE APPEAL MEMORANDUM DATED 11.03.2016 FILED BY THE PETITIONER BEFORE THE APPELLATE TRIBUNAL.** **ANNEXURE D A TRUE CERTIFIED COPY OF THE COMMON ORDER DATED 30.04.2016 PASSED BY THE KERALA AGRICULTURAL INCOME TAX AND SALES TAX APPELLATE TRIBUNAL, ADDITIONAL BENCH PALAKKAD IN T.A. Nos. 13/2016 AND 14/2016.** |**ANNEXURE**|**D**|**A TRUE CERTIFIED COPY OF THE COMMON ORDER DATED**<br>**30.04.2016 PASSED BY THE KERALA AGRICULTURAL**<br>**INCOME TAX AND SALES TAX APPELLATE TRIBUNAL,**<br>**ADDITIONAL BENCH PALAKKAD IN T.A. Nos. 13/2016**<br>**AND 14/2016.**| |---|---|---| |**ANNEXURE**|**E**|**TRUE COPY OF ASSESSMENT ORDER DATED 23.1.2016**| |||**ISSUED**<br>**BY**<br>**THE**<br>**ASSISTANT**<br>**COMMISSIONER**| |||**(ASSESSMENT), SPECIAL CIRCLE, COMMERCIAL TAXES,**| |||**PALAKKAD FOR THE YEAR 2011-12 (KGST).**| |**ANNEXURE**|**F:**|**TRUE COPY OF ORDER DATED 13.3.2017 ISSUED BY THE**| |||**DEPUTY COMMISSIONER (APPEALS) COMMERCIAL TAXES,**| |||**PALAKKAD.**| ST.Rev..No.23 & 24 OF 2016 10 ## **APPENDIX OF ST.Rev. 24/2016** **PETITIONER'S/S EXHIBITS:** **ANNEXURE A A TRUE COPY OF THE PENALTY ORDER No.IPD VII/10/2011-12 DATED 03.03.2015** **ANNEXURE B THE TRUE COPY OF THE ORDER DATED 05.01.2016 PASSED BY THE DEPUTY COMMISSIONER (APPEALS)-1, COMMERCIAL TAXES, ERNAKULAM IN STA NO.24/2015.** **ANNEXURE C A TRUE COPY OF THE APPEAL MEMORANDUM DATED 23.03.2016 FILED BY THE STATE BEFORE THE APPELLATE TRIBUNAL.** **ANNEXURE D A TRUE CERTIFIED COPY OF THE COMMON ORDER DATED 30.04.2016 PASSED BY THE KERALA AGRICULTURAL INCOME TAX AND SALES TAX APPELLATE TRIBUNAL, ADDITIONAL BENCH PALAKKAD IN T.A. Nos.13/2016 AND 14/2016.**