State of Kerala v. M/S Hotel Diana South Malabar Trading Co.

## **IN THE HIGH COURT OF KERALA AT ERNAKULAM** ## **PRESENT** **THE HONOURABLE MR. JUSTICE A.K.JAYASANKARAN NAMBIAR** **&** **THE HONOURABLE MR.JUSTICE MOHAMMED NIAS C.P.** **TUESDAY, THE 6[TH] DAY OF JUNE 2023 / 16TH JYAISHTA, 1945** **WA NO. 2351 OF 2016** **AGAINST THE JUDGMENT DATED 21.10.2016 IN WP(C).NO. 25005/2012** **OF HIGH COURT OF KERALA** ## **APPELLANTS/PETITIONER IN THE WP(C):** **STATE OF KERALA REPRESENTED BY DEPUTY COMMISSIONER [LAW], COMMERCIAL TAXES, ERNAKULAM.** **BY ADV GOVERNMENT PLEADER SMT.M.M.JASMINE** ## **RESPONDENT/RESPONDENT IN THE WP(C):** **M/S. HOTEL DIANA SOUTH MALABAR TRADING CO., VADAKKANCHERRY-678683** **BY ADV HARISANKAR V. MENON(B/O) SMT.KRISHNA** **THIS WRIT APPEAL HAVING COME UP FOR ADMISSION ON 06.06.2023, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:** :2: W.A.No.2351 of 2016 ## **JUDGMENT** ## **A.K.Jayasankaran Nambiar, J.** The State is in appeal against the judgment dated 21.10.2016 of the learned Single Judge in WP(C).No.25005 of 2012. 2. The brief facts necessary for the disposal of this Writ appeal are as follows: The Writ Petition was filed by the State challenging an order passed by the Appellate Tribunal under the Kerala Tax on Luxuries Act, 1976, that set aside orders of assessment as well as penalties passed against the respondent assessee for the assessment years 2004-2005 and 2005-06 under the Kerala Tax on Luxuries Act. The respondent, who was conducting a bar attached hotel, had filed returns under the Kerala Tax on Luxuries Act for the assessment years in question but had not included in the said returns amounts of Rs.1,65,718/- and Rs.1,77,098/- for the assessment years 2004-05 and 2005-06 respectively towards service charges received in connection with the supply of alcohol to customers in a room situated in the first floor of the :3: W.A.No.2351 of 2016 hotel building. The assessing authority found, on a scrutiny of the returns, that the said charges had also to be included in the return and brought to tax under the Kerala Tax on Luxuries Act. Accordingly, it proceeded to complete the assessment by raising an additional demand on the respondent assessee for the said assessment years. By separate orders passed for the two assessment years, penalties were also imposed on the respondent assessee under Section 17A, quantified at double the tax amount demanded from the assessee for those years. 3. In the appeals preferred by the respondent assessee against the said assessment and penalty orders, while the Appellate Authority dismissed the appeals against the assessment orders, he modified the penalty orders and confirmed the penalty only to the extent of an amount equal to the tax amount demanded for the assessment years in question. In the further appeal carried by the assessee before the Appellate Tribunal, however, the Appellate Tribunal found that there was no justification for including the service charges collected by the assessee for the supply of liquor in rooms for the purposes of levy of tax under the Kerala Tax on Luxuries Act, and accordingly, set aside the assessment orders as also the penalty orders. 4. In the Writ Petition, the State impugned the order of the :4: W.A.No.2351 of 2016 Tribunal that set aside the assessment and penalty orders in relation to the respondent for the assessment years 2004-05 and 2005-2006, respectively. The learned Single Judge, who considered the Writ Petition found that a mere reading of the statutory provision under the Kerala Tax on Luxuries Act, 1976, clearly revealed that luxury tax could be levied on the service charge collected by the respondent assessee from customers to whom liquor was supplied in rooms situated in the first floor of the hotel. The learned Judge, however, found that since the respondent assessee had not deliberately refrained from paying the tax and the nonpayment of tax had occurred only on account of a mistaken understanding of the assessee of the aspect of taxation, there was no necessity to impose a penalty on the respondent assessee. The Writ Petition was thus partly allowed by restoring the assessment orders against the respondent assessee but confirming the orders of the Tribunal that set aside the penalty orders passed against the assessee for the said assessment years. As already noticed, the State is in appeal against that part of the judgment of the learned Single Judge that set aside the penalty orders against the respondent assessee. 5. We have heard Smt.M.M.Jasmine, the learned Government Pleader appearing on behalf of the appellant State and Smt.Krishna, the learned counsel appearing for the respondent assessee. :5: W.A.No.2351 of 2016 6. The learned Government Pleader would rely on the judgment in **Chairman, SEBI v. Shriram Mutual Fund and Another [(2006) 5 SCC 361]** and **Union of India v. Dharmendra Textile Processors [(2008) 13 SCC 369]** to contend that under Section 17A of the Kerala Tax on Luxuries Act, the imposition of penalty is automatic once the assessing authority satisfies himself that any person has submitted an untrue or incorrect return. It is argued that inasmuch as the respondent assessee had not included the service charge collected from customers to whom liquor was supplied in rooms in the first floor of the hotel building, the assessee had submitted an untrue or incorrect return and, therefore, attracted the penal provisions of the Act. The learned counsel, however, admits that the statutory provision does not mandate that a penalty equivalent to twice the amount of tax sought to be avoided has necessarily to be imposed in all cases and that there is a discretion conferred on the assessing authority to impose a lower amount by way of penalty. 7. Per contra, it is the submission of Smt.Krishna, the learned counsel for the respondent assessee that inasmuch as there was no deliberate attempt at filing an incorrect or untrue return and the noninclusion of the service charge in question in the returns was solely on :6: W.A.No.2351 of 2016 account of a genuine and bonafide misunderstanding of the statutory provision, the assessing authority could not have proceeded to impose any penalty on the assessee much less the maximum penalty envisaged under the statute. She submits that the impugned judgment of the learned Single Judge, to the extent it confirms the order of the Tribunal setting aside the penalty imposed on the assessee, does not require any interference by this Court. 8. On a consideration of the rival submissions and on a perusal of the statutory provision (Section 17A of the Kerala Tax on Luxuries Act,1976), we are of the view that the provision does not contemplate the mandatory imposition of a penalty de hors a consideration of the circumstances that led to the submission of an incorrect or untrue return. As observed by the Supreme Court in **Commissioner of Sales** **Tax, U.P v. Sanjiv Fabrics & Another & Hari Oil & General Mills v.** **Commissioner of Sales Tax, U.P [(2011) 19 KTR 1 (SC)]** , in examining whether mens rea is an essential element of an offence created under a taxing statute, regard must be had to the following factors, namely, (i) the object and scheme of the statute (ii) the language of the Section and: (iii) the nature of penalty. On an application of the said test to the statutory provision in question, namely, Section 17A of the Kerala Tax on Luxuries Act, 1976, as it then :7: W.A.No.2351 of 2016 stood, we are of the view that an innocent mistake on the part of the assessee which led to the filing of a technically incorrect return, cannot attract the penal provision under the Act for a genuine mistake consequent to an erroneous understanding of the statutory provision is not a punishable offence contemplated under the Act. We might, in this connection, also refer to the observations of the Supreme Court in **E.I.D. Parry (I) Ltd. v. Assistant Commissioner of Commercial Taxes and Another [(2000) 117 STC 457]** , where at paragraph 23 it is stated as follows: “23. But so far as levy of penalty is concerned, we do not think that the Sales Tax Authorities were justified in levying it. Till the judgment of the Madras High Court, on 15.7.1991, in Perambalur Sugar Mills Ltd v. State of Tamil Nadu (1992) 86 S.T.C. 17, the correct position of law within the State of Tamil Nadu was not free from doubt. Even thereafter, the Sales Tax Tribunal had in subsequent orders held that transport subsidy was not includible in the taxable turnover. Such a view held by the Tribunal till 19.3.1993. It appears that on bona fide belief that planting and transport subsidies were not includible in the taxable turnover, the appellants had not included those amounts in their turnover and for that reason non- inclusion of these two items in the turnover do not seem to be intentional. Though we have now held that the appellants were not right in not including the amounts of planting subsidy and transport subsidy in the taxable turnover, considering the facts and circumstances of the case, it would not be correct to say that they had acted deliberately in defiance of law or that their conduct was dishonest or they had acted in conscious disregard of their obligation under the Sales Tax Act. The Sales Tax Authorities were, therefore, wrong in passing the orders of penalty and upholding the :8: W.A.No.2351 of 2016 same. The High Court also, in our opinion, committed an error in upholding the orders of penalty. In the result, these appeals are partly allowed. The order of the High Court and the orders of the Sales Tax Authorities imposing and upholding levy of penalty are set aside. Only to that extent the appellants succeed and their appeals are allowed. The judgment of the High Court in respect to the planting subsidy and transport subsidy is upheld. In the facts and circumstances of the case, there shall be no order as to costs.” 9. Also relevant are the observations of the Supreme Court in the case of **Hindustan Steel Ltd. v. The State of Orissa [(1970) 25 STC 211]** , where in the context of imposition of penalty under Orissa Sales Tax Act, the Supreme Court observed as follows: “Under the Act penalty may be imposed for failure to register as a dealer : section 9(1) read with section 25(I) (a) of the Act. But the liability to pay penalty does not arise merely upon proof of default in registering as a dealer. An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions :9: W.A.No.2351 of 2016 of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute. Those in charge of the affairs of the company in failing to register the company as a dealer acted in the honest and genuine belief that the company was not a dealer. Granting that they erred, no case for imposing penalty was made out.” In the result, taking note of the nature of the omission occasioned by the assessee in the instant case, we are of the view that the impugned judgment of the learned Single Judge to the extent impugned herein does not require any interference. We, therefore, dismiss the Writ Appeal but without any order as to costs. Sd/- **A.K.JAYASANKARAN NAMBIAR JUDGE** Sd/- **MOHAMMED NIAS C.P. JUDGE** mns