WP(C) No.10228 of 2016: A-ONE HANDLOOMS AND READYMADE SYRIAN BANK v. THE COMMERCIAL TAX OFFICER, COMMERCIAL TAXES, ERNAKULAM AND THE INTELLIGENCE OFFICER, SQUAD NO.VIII, DEPARTMENT OF COMMERCIAL TAXES, ERNAKULAM

## **IN THE HIGH COURT OF KERALA AT ERNAKULAM** ## **PRESENT** ## **THE HONOURABLE MRS. JUSTICE ANU SIVARAMAN** **THURSDAY, THE 8[TH] DAY OF JUNE 2023 / 18TH JYAISHTA, 1945** ## **WP(C) NO. 10228 OF 2016** ## **PETITIONER:** A-ONE HANDLOOMS AND READYMADE SYRIAN BANK, MARKET ROAD, ERNAKULAM, COCHIN - 11 REPRESENTED BY ITS MANAGING PARTNER, S.S.SIKKU. BY ADV SRI.R.MURALEEDHARAN ## **RESPONDENTS:** 1 THE COMMERCIAL TAX OFFICER COMMERCIAL TAXES, CLAS TOWER, OLD RAILWAY STATION ROAD, ERNAKULAM, PIN - 682 031. 2 THE INTELLIGENCE OFFICER SQUAD NO.VIII DEPARTMENT OF COMMERCIAL TAXES, ERNAKULAM - 682 015. BY SRI.SAYED MURTHALA THANGAL-GP THIS WRIT PETITION (CIVIL) HAVING COME UP FOR ADMISSION ON 08.06.2023, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: WP(C) No.10228 OF 2016 2 ## **ANU SIVARAMAN, J.** ========================= **W.P.(C) No.10228 of 2016** ========================= Dated this the 8[th] day of June, 2023 ## **JUDGMENT** This writ petition is filed challenging the penalty imposed on the petitioner under Section 67(1) of the Kerala Value Added Tax Act (KVAT) for non payment of turnover tax under Section 6A for the period 2014-15. 2. It is submitted that the petitioner is a registered wholesale and retail dealer of handloom textile items and readymade garments. It is contended that by virtue of the Finance Act, 2014, a new provision viz. Section 6A had been introduced in the KVAT Act, requiring every dealer whose total turnover for the previous year in textile articles is above Rupees One Crore, to pay turnover tax @ 2% on the turnover of sale of textile articles included in the First Schedule. It is stated that the levy came into force on 01.04.2014 and was omitted from the statue with effect from 01.04.2015. WP(C) No.10228 OF 2016 3 3. A batch of writ petitions had been filed challenging the levy of turnover tax, which were pending before this Court. On 25.11.2015, by a common judgment the writ petitions were disposed of upholding the constitutional validity of Section 6A. However, this Court has held that Section 6A contemplated turnover tax only in respect of textile articles specified in Entries 17A, 46A and 51 of the First Schedule to the Act. It is submitted that since the question as to liability to pay turnover tax on textile goods was in dispute and under challenge, the petitioner had filed returns showing the sales, but the turnover tax had not been paid, though the total turnover for the previous year had crossed the threshold limit of one Crore. 4. It is submitted that Exhibit P1 notice was issued and that the petitioner had submitted Exhibit P2 request to grant some more time to segregate the sale in respect of the textiles covered by Entries 17A, 46A and 51 of the First Schedule to the Act. Thereafter, on 19.11.2015, notice was issued under Section 25(1), proposing to re-open the self assessment under Section 21. Reply was submitted to the WP(C) No.10228 OF 2016 4 same and thereafter, assessment order was passed on 18.12.2015. On 23.12.2015, the petitioner remitted the entire amount of turnover tax as demanded under Exhibit P5 together with interest, receipt for which is produced as Exhibt P6. 5. However, the 2[nd] respondent issued notice in Form 17 on 05.01.2016 calling for production of books of accounts. The petitioner had filed objections to the same and requested the dropping of penalty proceedings pointing out the reasons for non payment of tax and specifically stating there was no attempt to evade tax. However, without considering Exhibit P9 objections, Exhibit P10 order was passed on 09.02.2016, imposing penalty of Rs.18,59,820/-, stating it to being equal to the amount of tax sought to be evaded by filing untrue and incorrect returns concealing tax liability under Section 6A for the year 2014-15. 6. Learned counsel for the petitioner submits that he had submitted true and correct returns and there was no attempt to evade any tax and the finding of filing of the incorrect returns was factually incorrect. He contends that he WP(C) No.10228 OF 2016 5 had not paid the turnover tax for the year in question only because of the pendency of the writ petitions and immediately after the writ petitions were disposed of, the turnover tax was also paid as is evidenced by Exhibit P6. It is submitted that the finding that any penalty was due for evasion of tax is, therefore, completely illegal and unsustainable. 7. Learned counsel for the petitioners relies on the decision of the Supreme Court in **E.I.D.Parry (I) Ltd. v. Assistant Commissioner of Commercial Taxes and Another** [2000 (117) STC 457] and **Sree Krishna Electricals v. State of Tamil Nadu and Another** [2009 (23) VST 249], decision of the Karnataka High Court in **Xerox India Ltd. v. State of Karnataka** [2014 (71) VST 201 KAR] and a decision of this Court in **P.D.Sudhi v. Intelligence Officer, Agricultural Income Tax and Sales Tax, Mattancherry and Others** [1992 (85) STC 337]. It is submitted by the learned counsel for the petitioner that the settled position of law is that for the imposition of penalty, there must be one of the ingredients as provided in the Section present. It is submitted that in the instant case, the WP(C) No.10228 OF 2016 6 petitioner had neither filed incorrect returns nor acted in contravention of the provisions of the Act, nor was there any attempt to evade tax. It is submitted that the petitioner had filed true and correct returns, but had not paid the tax only because the question whether the turnover tax is to be paid was pending consideration before this Court at the relevant time. It is submitted that immediately on the question being decided by this Court, the assessment had been completed and the petitioner had paid the turnover tax as well. It is submitted that in view of the fact that there is no deliberate attempt to evade tax, the imposition of the penalty without considering the contentions of the petitioner was incorrect. 8. The learned Government Pleader would submit that the petitioner was completely aware of his liability under Section 6A to pay the tax. He had willfully opted not to discharge the said statutory obligation. It is submitted that therefore, the attempt to evade the turnover tax is the only justifiable assumption that the authority could have arrived at. It is stated that subsequent payment of tax, after the penal proceedings have been initiated, for evading payment of tax WP(C) No.10228 OF 2016 7 detected by the Government, will not absolve him from penal liability. 9. I notice that the petitioner had all along contended that there was never any attempt to evade tax. In reply to the first notice itself, the petitioner had contended that the question with regard to liability to turnover tax under Section 6A being under consideration of this Court, was the reason for the non payment of the tax. It is submitted that immediately after the dismissal of the writ petition, challenging the constitutional validity of Section 6A, the assessment was completed against the petitioner and the turnover tax at 2% had also been paid by the petitioner with interest. 10. Section 67 of the KVAT Act reads as follows: _“67. Imposition of penalty by authorities.- (1) Notwithstanding anything contained in Section 71 if any authority empowered under this Act is satisfied that any person,-_ _(a) being a person required to register himself as a dealer under this Act, did not get himself registered; or_ _(b) has failed to keep true and complete accounts; or_ _(c) has failed to submit any return as required by the provisions of this Act or the Rules made thereunder; or_ _(d) has submitted an untrue or incorrect return; or_ _(e) has made any bogus claim of [input tax credit, special_ WP(C) No.10228 OF 2016 8 _rebate or refund]; or_ _(f) has continued the business during the period of suspension of registration; or_ _(g) has failed to return the unused statutory Forms and Declarations under the Act after the cancellation or suspension of the registration; or_ _(h) has not stopped any vehicle or vessel when required to do so; or_ _(i) has failed to comply with all or any of the terms of any notice or summons issued to him by or under the provisions of this Act or the rules made thereunder; or_ _(j) has acted in contravention of any of the provisions of this Act or any rule made thereunder for the contravention of which no express provision for payment of penalty or for punishment is made by this Act; or_ _(k) has abetted the commission of the above offences, or_ _(l) has abetted or induced in any manner another person to make and deliver any return or an account or a statement or declaration under this Act or rules made thereunder, which is false and which he either knows to be false or does not believe to be true, 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 be evaded where it is practicable to quantify the evasion or an amount not exceeding [Ten thousand rupees] in any other case:_ _Provided that in the case of item (c) above, a minimum penalty of rupees One thousand shall directed to be paid”_ _(2) Notwithstanding anything contained in sub-section (1), where on completion of an assessment in relation to a dealer under Sections 22, 23, 24 or 25, it is found that the tax so_ WP(C) No.10228 OF 2016 9 _determined on such assessment was not paid by the dealer, the assessing authority may direct such dealer to pay, in addition to the tax so determined, a penalty, in the case of a dealer who has made part payment, [at twice the balance amount of tax] the balance amount of tax so determined and in the case of a dealer who has not paid any amount, [twice the complete amount so assessed]._ _**- Explanation.** The burden of proving that any person is not liable to the penalty under sub-section (1) shall be on such person._ _(3) No order under sub-sections (1) or (2) shall be passed unless the person on whom he penalty is proposed to be given an opportunity of being heard in the matter.”_ 11. In **E.I.D.Parry (I) Ltd. v. Assistant** **Commissioner of Commercial Taxes and Another** [2000 (117) STC 457], the Apex Court clearly held that bonafide failure to pay tax due to doubtful position in law, without any corresponding concealment of turnover, would not lead to a situation where penalty would be leviable. The same view has been reitrated by the Apex Court in **Sree Krishna Electricals v. State of Tamil Nadu and Another** [2009 (23) VST 249], where the dealer had claimed exemption, but the claim was rejected and the dealer assessed on the sale of wet grinders on the finding that the claim that the sales were only of parts of wet grinders was not justified. The question involved a WP(C) No.10228 OF 2016 10 finding of fact and while tax can be imposed, penalty would not be leviable as the sales of items were incorporated in the account books, though they were not included in the turn over. 12. In **Xerox India Ltd. v. State of Karnataka** [2014 (71) VST 201 KAR], a Division Bench of the Karnataka High Court held that where the dealer disputed the liability to pay tax on the basis of a judgment and the Supreme Court subsequently held that the tax was payable, but the Department did not pass assessment orders on returns filed by the dealer till the Supreme Court decision, the nonpayment of tax cannot be held to be willful, deliberate or contumacious and therefore penalty would not be leviable. 13. In **P.D.Sudhi v. Intelligence Officer, Agricultural Income Tax and Sales Tax, Mattancherry and Others** [1992 (85) STC 337], a Division Bench of this Court had considered the necessary ingredients for the imposition of an order of penalty under the KGST Act, it was held that use of the words 'evaded' and 'sought to be evaded' would indicate that _Mens rea_ is a condition precedent for the levy of penalty. The power to impose penalty is conditional on WP(C) No.10228 OF 2016 **==> picture [14 x 8] intentionally omitted <==** the existence of the intention to evade tax or the other ingredients of the Section. In the instant case also, in the absence of any contention that the petitioner had filed incorrect returns for concealing the turnover from the sale of textiles or had attempted to evade tax, the imposition of the penalty, under Section 67(1) would be unjustified. The writ petition is, therefore, allowed. Exhibit P10 order is set aside. **Sd/ANU SIVARAMAN JUDGE** SSK/08/06 WP(C) No.10228 OF 2016 12 ## **APPENDIX** PETITIONER EXHIBITS Exhibit-P1 EXHIBIT P1: TRUE COPY OF THE NOTICE ISSUED BY THE 2ND RESPONDENT DATED 25.9.2015. Exhibit-P2 EXHIBIT P2: TRUE COPY OF THE OBJECTION FILED BY THE PETITIONER BEFORE THE 2ND RESPONDENT AGAINST EXT.P-1 DATED 9.10.2015. Exhibit-P3 EXHIBIT P3: TRUE COPY OF THE NOTICE ISSUED UNDER S.25(1) BY THE IST RESPONDENT DATED 19.11.2015. Exhibit-P4 EXHIBIT P4: TRUE COPY OF THE OBJECTION FILED BY THE PETITIONER AGAINST EXT.P-3, DATED 24.11.2015. Exhibit-P5 EXHIBIT P5: TRUE COPY OF THE ASSESSMENT ORDER PASSED BY THE IST RESPONDENT DATED 18.12.2015. Exhibit-P6 EXHIBIT P6: TRUE COPY OF THE COVERING LETTER AND DEMAND DRAFT SUBMITTED TO DISCHARGE THE LIABILITY, DATED 23.12.2015. Exhibit-P7 EXHIBIT P7: TRUE COPY OF THE NOTICE IN FORM 17 ISSUED BY THE 2ND RESPONDENT DATED 5.1.2016. Exhibit-P8 EXHIBIT P8: TRUE COPY OF THE NOTICE ISSUED BY THE 2ND RESPONDENT DATED 25.1.2016. Exhibit-P9 EXHIBIT P9: TRUE COPY OF THE OBJECTION FILED BY THE PETITIONER AGAINST EXT.P-8, DATED 27.1.2016. Exhibit-P10 EXHIBIT P10: TRUE COPY OF THE PENALTY ORDER PASSED BY THE 2ND RESPONDENT, DATED 9.2.2016.