2014 (6) TMI 974 - HC - VAT and Sales Tax

Levy of penalty - classification of goods - Fryums - classified as Papads under Entry 36 of the 1st schedule or as food products like pickles and corn flakes as included in Entry 49 of the 3rd schedule or under Entry 103-residuary entry - Held that - this Court finds that no penalty proceedings can be initiated on the basis of a mere dispute in classification; which, as noticed above, according to the assessee, the Assessing Authority and the Intelligence Officer are under three different entries. Such a debatable issue definitely cannot lead to a presumption of any contumacious conduct on the part of the assessee or a finding of attempt to evade tax. The assessee has made a claim, in turn, which can be rejected or accepted in assessment proceedings - Even on rejection, sufficient grounds do not exist for attracting penalty. Efficacious alternate remedy - Court would not exercise the discretionary jurisdiction under Article 226 of the Constitution of India in cases where there are efficacious alternate remedies; the two well recognized exceptions being violation of principles of natural justice and a proceeding taken under a provision of law which is ultra vires. One another exception would be when the proceeding itself is an abuse of process of law. This Court has not gone into the issue of classification at all, which is best left to the Assessing Officer - petition allowed - decided in favor of petitioner.

Summary

Issues:
Classification under Kerala Value Added Tax Act, 2003 (KVAT Act) and penalty under Section 67.

Classification Issue:
The case involved a debate on the classification of a product known as "Fryums" by the assessee, claiming it to be exempt as "Papads" under Entry 36 of the 1st schedule. However, the Assessing Officer sought to classify it as "food products" under Entry 49 of the 3rd schedule, subject to 4% tax. The court decided not to intervene in the classification issue, stating it should be left to the assessment proceedings. The petitioner had filed a return claiming exemption, and the Assessing Officer issued a notice seeking classification under item No. 49. The court emphasized that the assessment under the KVAT Act is a self-assessment process, and the Assessing Officer could modify it based on classification. The court refrained from preempting the Assessing Authority's consideration of the classification issue.

Penalty Issue:
The court analyzed the imposition of penalty under Section 67 of the KVAT Act. The petitioner argued that penalty cannot be maintained without contumacious conduct or mens rea, citing legal precedents. The court referred to cases where penalties were set aside when items not included in turnover were disclosed in the dealer's account books. The court held that a mere dispute in classification, without evidence of contumacious conduct or tax evasion attempt, does not warrant a penalty. It emphasized that penalties are penal in nature and require a guilty mind for imposition. The court set aside the penalty orders (Exts.P13 and P14), stating they were illegal proceedings and clarified that the issue of classification should be decided by the Assessing Officer.

Conclusion:
The court allowed the writ petition, directing parties to bear their costs. It highlighted that penalties should not be imposed solely based on a classification dispute and emphasized the importance of a guilty mind for penalty imposition. The court refrained from interfering in the classification issue, leaving it to the Assessing Officer.