1996 (1) TMI 396 - HC - VAT and Sales Tax

Summary

Issues: Levy of penalty under section 8-D(6) for assessment years 1987-88, 1988-89, and 1989-90 on a hospital owned by the State of U.P. for failure to deduct tax at source from payments made to contractors engaged in works contracts.

Analysis:
The judgment deals with revision petitions challenging the Sales Tax Tribunal's order imposing penalties under section 8-D(6) of the U.P. Sales Tax Act on a hospital owned by the State of U.P. The hospital had not deducted tax at source from payments made to contractors for works contracts involving minor repairs, white and color washing, and painting and polishing. The assessing officer initiated penalty proceedings based on non-deduction. The hospital contended that they were unaware of the requirement to deduct amounts and had started doing so upon learning of the provision. The Tribunal upheld the penalties, leading to the present challenge.

The legal framework involved the interpretation of sections 3-F and 8-D of the U.P. Sales Tax Act. Section 3-F, inserted in 1985, made the transfer of property in goods under works contracts taxable. Section 8-D, enacted in 1987, mandated a 4% deduction at source for certain works contracts. However, the Government's notification under section 3-F specified only certain works as taxable, excluding activities like minor repairs and white washing. A prior Division Bench decision had held that deductions under section 8-D were not applicable to works not mentioned in the notification, aligning with the hospital's case.

The judgment emphasized that penalties under section 8-D(6) are discretionary and should not be imposed mechanically. It highlighted that the hospital, being a State entity, would burden the State exchequer with the penalty, contrary to the fiscal purpose of the Sales Tax Act. The court noted that the hospital's lack of awareness of the law was a valid explanation, especially since section 8-D was relatively new. It suggested administrative actions rather than penalties when the State itself is the defaulter.

Ultimately, the court allowed the revision petitions, setting aside the Tribunal's order and quashing the penalties imposed on the hospital. The judgment underscored the importance of considering the circumstances of the case, the entity involved, and the fiscal implications before levying penalties under tax laws, especially when the State is the party affected.