2015 (9) TMI 1633 - HC - VAT and Sales Tax

Imposition of penalty - Section 67 of the KVAT Act - misclassification of the product - Held that - In the instant case inasmuch as the petitioner was justified in adopting a classification of the product based on the classification adopted by the supplier of the product to the petitioner the orders passed by the 3rd respondent confirming a penalty on the petitioner merely because it was the view of the 3rd respondent that a classification of the product ought to have been under a different entry cannot be legally sustained. Impugned order set aside - petition allowed.

Summary

Issues:
Classification of product under KVAT Act, imposition of penalty for misclassification, jurisdiction of assessing authority.

Analysis:
The petitioner, a registered dealer under the KVAT Act, classified an item as a Multi-Function printer for assessment years 2012-13 and 2013-14, declaring a 5% tax rate under Entry 69(22)(c)(i) of the 3rd Schedule. The supplier of the item also classified it under the same entry. However, the 3rd respondent proposed classifying the item as a photocopier under a different entry, attracting a 14.5% tax rate, leading to penalty notices (Exts.P3 and P4) for misclassification. The petitioner argued that the penalty was unjust as the classification was based on the supplier's classification. The court noted that penalty under Section 67 of the Act requires willful evasion of tax, and since the petitioner's classification was based on the supplier's, the penalty for alleged misclassification was unwarranted. The court referred to a precedent where penalty proceedings could only be initiated after a decision on correct classification by the assessing authority. Thus, the court quashed the penalty orders (Exts.P7 and P8) as illegal, allowing the writ petition while maintaining the respondents' right to question classification in assessment proceedings.

The learned Government Pleader contended that the petitioner's item was correctly classified as a photocopier, citing evidence from the manufacturer's brochure indicating the item's nature. However, the court found that the penalty orders were based on an alleged contravention of Section 67 of the KVAT Act, which requires willful evasion of tax. Since the petitioner's classification was based on the supplier's, and the assessing authority had not questioned it, the penalty for misclassification was deemed unjustified. The court referenced a previous judgment to support its decision that penalty proceedings should only follow a decision on correct classification by the assessing authority. Consequently, the court quashed the penalty orders (Exts.P7 and P8) as illegal, allowing the writ petition.

In conclusion, the court ruled in favor of the petitioner, quashing the penalty orders (Exts.P7 and P8) as they were deemed illegal due to the lack of willful evasion of tax by the petitioner. The judgment emphasized the importance of a proper classification decision by the assessing authority before initiating penalty proceedings for misclassification. The respondents were permitted to challenge the classification in assessment proceedings for the relevant years, ensuring due process in determining tax liabilities.