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2009 (12) TMI 907 - HC - VAT and Sales TaxWhether the KAT was justified in observing that the expression manufacturing unit employed under section 5A of the Act should not be construed in strict sense? Whether the Tribunal was justified in setting aside the levy of penalty imposed under section 5A(2) and (3) of the KST Act? Held that - In the facts and circumstances of the case, we find that the authorities were themselves under doubt as to the applicability or category under which respondent-assessee was to be categorized. Hence, we do not find that there has been any misdeclaration by the assessee in availing of the benefit of the notification. In these circumstances, we are of the opinion that substantial questions of law which have been framed hereinabove is with regard to categorizing the activity of the respondentassessee, we answer question No. 2 in favour of the assessee and against the Revenue. In so far as question No. 1 as to whether the expression manufacturing unit employed under section 5A of the Act Revision petition is dismissed and question No. 1 is answered in favour of the Revenue
Issues Involved:
1. Interpretation of the term "manufacturing unit" under Section 5A of the Karnataka Sales Tax Act. 2. Justification of the penalty imposed under Section 5A(2) and (3) of the Karnataka Sales Tax Act. Issue-wise Detailed Analysis: 1. Interpretation of the Term "Manufacturing Unit" under Section 5A of the Karnataka Sales Tax Act The primary question was whether the Karnataka Appellate Tribunal (KAT) was justified in observing that the expression "manufacturing unit" under Section 5A of the Act should not be construed in a strict sense. The Revenue argued that the respondent-assessee's activity of cutting and polishing granite stones did not constitute manufacturing, citing the case of Padmavathi Marbles, where it was held that mere polishing of stones does not result in the manufacture of new articles. The Tribunal, however, had set aside the penalty by interpreting the term "manufacturing unit" in a broader sense. The High Court concluded that the Tribunal was in error in its interpretation. The court emphasized that the term "manufacturing unit" should be construed as per the decision in Padmavathi Marbles, which stated that polishing stones does not amount to manufacturing. Consequently, the question of law was answered in favor of the Revenue. 2. Justification of the Penalty Imposed under Section 5A(2) and (3) of the Karnataka Sales Tax Act The second issue was whether the Tribunal was justified in setting aside the penalty imposed under Section 5A(2) and (3) of the Act. The Revenue contended that the respondent-assessee had misdeclared its activity to avail a reduced tax rate, which warranted a penalty. The assessee argued that there was no misdeclaration as the authorities themselves were unclear about the categorization of their activity, evidenced by a circular issued on November 11, 2003, which showed ambiguity in the classification of polished granite stones. The High Court examined the provisions of Section 5A(2) and (3), which impose penalties for misdeclaration and non-compliance with prescribed procedures. The court noted that the authorities had accepted the assessee's activity as manufacturing for the assessment years in question. It also highlighted that the judgment in Poonam Stone Processing Industries, which initially held that polishing granite was not manufacturing, had been set aside on appeal. Given the authorities' own doubts and the lack of a clear directive, the court found no justification for the penalty. The High Court concluded that there was no ulterior or dishonest motive by the assessee, and thus, the Tribunal was correct in annulling the penalty. The question of law regarding the penalty was answered in favor of the assessee. Conclusion The High Court dismissed the revision petition, answering the first question of law in favor of the Revenue, asserting that the term "manufacturing unit" should be strictly construed as per the Padmavathi Marbles decision. The second question was answered in favor of the assessee, holding that the penalty imposed under Section 5A(2) and (3) was not justified due to the authorities' own uncertainties and the absence of misdeclaration by the assessee.
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