2011 (6) TMI 694 - HC - VAT and Sales Tax

Whether the specified manufacturer avails of the benefit of exemption in respect of one product only or in respect of all products manufactured by him, the limit of exemption would remain the same, being based upon the total capital investment made by him in establishing the new industry? Held that - The Tribunal was, therefore, justified in holding that the sale against forms 17B or 20, as the case may be, defeats the spirit and purpose of the Scheme and the same is in violation of the conditions of the tax exemption certificate and conditions of the Scheme. The record of the case indicates that no action has been initiated against the petitioner under condition No. 5 of entry 175 for breach of any of the conditions under the Scheme or any of the provisions the Act or the Rules made thereunder. Thus, even the respondents do not appear to have considered the breach committed by the petitioner to be of such serious nature so as to entail the consequences provided under condition No. 5 of entry 175. In the circumstances, the penalty levied by the revisional authority cannot be sustained. The impugned order of the Tribunal to the extent it upholds the demand for sales tax and interest thereon is confirmed. However, to the extent the impugned order confirms the penalty levied on the petitioner, the same is quashed and set aside. Appeal partly allowed.

Issues Involved:
1. Validity of the exemption certificate issued under the Gujarat Sales Tax Act, 1969.
2. Applicability of condition 9 of entry 175 to the sales of cotton.
3. Levy of penalty for alleged breach of condition 9 of entry 175.

Detailed Analysis:

1. Validity of the Exemption Certificate:
The petitioner, a firm engaged in the business of cotton and cotton seeds, was registered under the Gujarat Sales Tax Act, 1969 and was issued an eligibility certificate for sales tax exemption under the "Special Incentive for Pioneer Unit-86" scheme. The eligibility certificate granted benefits for both cotton and cotton seeds. However, the petitioner applied for and was granted an exemption certificate only for cotton seeds to the extent of Rs. 2,41,000. The petitioner availed of this exemption from 1990-91 to 1993-94. The assessment for 1993-94 was completed and accepted without claiming exemption for cotton sales.

2. Applicability of Condition 9 of Entry 175:
The revisional authority initiated proceedings under section 67 of the Act, revising the assessment order and disallowing the exemption claimed for cotton seeds, stating that the petitioner should have claimed exemption for cotton as well. The Tribunal upheld this view, stating that the sales tax authorities should not have granted an exemption certificate that did not align with the eligibility certificate, thus defeating the purpose of the scheme. The petitioner argued that it had the option to avail benefits under the scheme for cotton seeds and under regular provisions for cotton, and that condition 9 of entry 175 did not apply as the exemption certificate was only for cotton seeds.

3. Levy of Penalty:
The revisional authority and the Tribunal imposed a penalty on the petitioner for the alleged breach of condition 9 of entry 175. The petitioner contended that the exemption certificate was valid and covered only cotton seeds, and therefore, it was entitled to sell cotton against form 17B under section 13 of the Act. The petitioner argued that there was no monetary loss to the Revenue as the subsequent purchaser paid more tax on the sale in Gujarat due to value addition.

Court's Findings:
- The court found that the scheme's benefit is granted to a new industrial unit, and the exemption applies to goods manufactured by the specified manufacturer, which in this case included both cotton and cotton seeds.
- The exemption limit of Rs. 2,41,000 was based on the total capital investment in the new industry, and the conditions under entry 175 applied to all goods manufactured by the specified manufacturer.
- The court held that the petitioner's argument that condition 9 did not apply to cotton sales was contrary to the scheme's provisions. The conditions applied to all goods manufactured in the new industry, irrespective of whether the exemption was claimed for one or all products.
- The court observed that the petitioner had committed a breach of condition 9 by selling cotton against form 17B, as the sales of the specified manufacturer were wholly exempted under the scheme.
- However, the court found that the petitioner acted on a bona fide belief based on the exemption certificate granted only for cotton seeds and did not have any mala fide intention or mens rea. Consequently, the penalty imposed was not justified.

Conclusion:
The petition was partly allowed. The court upheld the demand for sales tax and interest but set aside the penalty imposed on the petitioner. The court ruled that the petitioner could not be penalized for acting in accordance with the exemption certificate granted by the respondent-authorities.

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