2012 (6) TMI 795 - HC - VAT and Sales Tax

Imposition of penalty u/s 67 of the KVAT Act - the Department alleged that the sale of timber being at rates lesser than that prescribed in the aforesaid circular; leads to undervaluation and consequent evasion of tax - petitioner s case is that the authority under the said provision suffers from an inherent lack of jurisdiction to make an attempt to estimate the turnover; which power and jurisdiction is conferred only on the officer conducting assessment proceedings. Does the provision enumerating the offences and conferring the power for imposition of penalty in cases where tax is actually evaded or sought to be evaded more specifically Section 67 of the KVAT Act clothe the authority with the power to make an estimation of the turnover for the purposes of determining the penalty? - Held that - Any suppression detected or rather any file generated on a crime so detected and penalised necessarily gives the assessing authority the power to make estimations to compensate the State against probable omissions and suppressions. Such exercise as is mandated by the statute has to be regulated by the best judgment of the individual officer which definitely is subject to the principles of reasonableness proportionality and of course natural justice. Such estimation on best judgment would definitely have to be done with due notice and after affording a personal hearing. Such estimation should be reasonable and should have a nexus with the gravity and frequency of the commission of offences as also the quantum of loss suffered by the State. This exercise in our opinion cannot be undertaken by the officer empowered with the power to impose penalty u/s 67 of the Act. Section 67 contemplates imposition of penalty on proof of commission of offences as a measure of deterrence; best judgment assessments are made to compensate the loss caused to the State - question answered against the Revenue and in favor of the assessee. Scope of Circular No.28/2008 dated 19.06.2008 - Would the prescription of rates for the purpose of collecting advance tax in the case of evasion prone commodities; bind and restrict the dealers from claiming sale of such commodities at a lesser rate resulting in tax liability only for such lesser amounts? - Held that - The first appellate authority as well as the Tribunal was considerably swayed by the possibility of the dealer claiming refunds of input tax credit. It ought to have been noticed that the circular was issued as a measure to plug evasion of tax and the same was not intended to augment revenue but to ensure collection of tax due to the State. On the sale price being lesser than that prescribed in the circular refund of input tax is a natural consequence and that alone cannot be a reason to claim tax for amounts higher than that for which the goods were sold - the Intelligence Officer cannot apply his judgment at the reasonable best for inferring suppression and thereby estimating turnover for the simple reason that such power has not been conferred by Section 67 of the KVAT Act. Revision allowed - decided against the Revenue and in favor of the assessee.

Summary

Issues Involved:
1. Scope and ambit of circulars issued to prevent tax evasion.
2. Authority and jurisdiction to estimate turnover for penalty purposes under Section 67 of the KVAT Act.
3. Binding nature and implications of Circular No. 28/2008 on dealers' sale prices.

Issue-wise Detailed Analysis:

1. Scope and Ambit of Circulars Issued to Prevent Tax Evasion:
The judgment addresses the purpose and limitations of circulars issued by the Commissioner of Commercial Taxes, specifically Circular No. 28/2008. The circular mandates advance tax payment at the entry check post for timber consignments based on floor rates. The court emphasized that such circulars are intended to prevent tax evasion and are not determinative of the actual sale prices within the state. The circular's purpose is to ensure tax collection at the point of entry, not to dictate market prices or tax liabilities on subsequent sales.

2. Authority and Jurisdiction to Estimate Turnover for Penalty Purposes Under Section 67 of the KVAT Act:
The court examined whether Section 67 of the KVAT Act empowers authorities to estimate turnover for determining penalties. Section 67 enumerates specific offences and allows penalties up to twice the amount of tax evaded. The court clarified that this section does not permit estimation of turnover, as it requires clear evidence of tax evasion. Estimation falls under "best judgment assessment," which is applicable during assessment proceedings, not penalty proceedings. The court cited the Supreme Court's principles in Commissioner of Sales Tax, M.P. v. H.M Esufali, emphasizing that estimation involves guesswork and should be rational, not vindictive or capricious.

3. Binding Nature and Implications of Circular No. 28/2008 on Dealers' Sale Prices:
The court analyzed the binding nature of Circular No. 28/2008, issued under Section 47 of the KVAT Act, which deals with inspection of goods in transit. The circular prescribes floor rates for advance tax collection but does not restrict dealers from selling below these rates. The court referenced the Supreme Court's decision in State of Kerala v. Kurian Abraham (P) Ltd., which held that such circulars bind departmental officers but not courts or assessees. The circular's floor rates are for advance tax purposes and do not determine the actual sale prices or tax liabilities. The court reiterated that tax can only be levied on the actual sale price, and any under-valuation must be proven by the assessing officer during assessment proceedings.

Conclusion:
The court concluded that the circular's floor rates are not binding on dealers' sale prices and cannot be used to estimate turnover for penalty purposes under Section 67 of the KVAT Act. The judgment emphasized that penalties require clear evidence of tax evasion, and estimation of turnover is beyond the scope of Section 67. Consequently, the court set aside the orders imposing penalties based on the circular's floor rates, ruling in favor of the assessee.