2018 (12) TMI 481 - HC - VAT and Sales Tax

Deletion of penalty - Jurisdiction - power of Appellate Authority to delete penalty - Estimation of taxable turnover on the basis of electricity consumed - First Appellate Authority deleted the estimation made finding that penalty has been imposed merely on technical reason of non-production of books of accounts - whether deletion of penalty on this ground is sustainable? Held that - An Intelligence Officer invoking his power under Section 45 A of the KGST Act or Section 67 of the KVAT Act (in pari materia provisions) has been held to have no power to carry out an estimation. Estimation is a reasonable and rational reckoning of taxable turnover; which necessarily is a guess work based on various factors, aspects and activity of the concerned dealer, arriving at a probabilistic approximate determination of the taxable turnover; on the best of judgment of the taxation officer. There could be no estimation carried out in penalty proceedings and the evasion attempted has to be based on the clear materials or particulars, revealed at an inspection or offence detected otherwise. If the taxable turnover sought to be evaded cannot be clearly determined and quantified going by the provision, there can be only an imposition of penalty of ₹ 10,000/-. However, that would not preclude the Assessing Officer from proceeding for best judgment assessment based on any of these factors relevant to the activity of the dealer; on there being no production of books of accounts or even when there is production; by rejection of the same. In that event, the Assessing Officer could make an estimation which is the power and authority conferred by the statute for best judgment. On detection of an offence or any other defect on inspection or otherwise where the tax or other amounts sought to be evaded is not practicable of quantification; the Intelligence Officers should immediately transfer the files to the Assessing Officer after imposing a penalty not exceeding ₹ 10,000/-. When that is not done it is a clear reflection of the lack of team work insofar as the functioning of the Department. The questions of law framed is answered in favour of the assessees and against the revenue.

Summary

Issues Involved:
1. Validity of turnover estimation based on power consumption.
2. Authority of Intelligence Officer under Section 67 of the KVAT Act to estimate turnover.
3. Delay in finalization of proceedings.
4. Applicability of precedents in U.K Monu Timbers and Khadeeja Makkar cases.

Issue-wise Detailed Analysis:

1. Validity of turnover estimation based on power consumption:
The State contended that estimating turnover based on electricity consumption is an accepted method, especially when no books of accounts are produced. The respondents, Metal Crusher Units, were inspected, and their turnover was estimated based on power consumption. The First Appellate Authority and the Tribunal found the estimation improper, stating that there was no proper verification of the books of accounts. The court referenced the case of U.K Monu Timbers, which held that estimation should be based on materials recovered during inspection and not on mere assumptions.

2. Authority of Intelligence Officer under Section 67 of the KVAT Act to estimate turnover:
The court examined whether the Intelligence Officer had the power to estimate turnover under Section 67 of the KVAT Act. It was held that Section 67 does not confer the power to make a reasonable estimate. The suppression or omission must be clearly evidenced by materials available. The court emphasized that estimation is within the realm of assessment proceedings and not penalty proceedings. The judgment in U.K Monu Timbers was upheld, which categorically stated that estimation of turnover based on inferences is beyond the jurisdiction of the officer conducting penalty proceedings.

3. Delay in finalization of proceedings:
The respondent in O.T Revision No. 206/2014 argued that there was an unreasonable delay in finalizing the proceedings. The inspection was conducted in 2007, but the first notice was issued in 2009, and further actions were delayed until 2010. The court noted this delay but focused on the legal principles regarding the authority and process of estimation.

4. Applicability of precedents in U.K Monu Timbers and Khadeeja Makkar cases:
The court discussed various precedents, including U.K Monu Timbers and Khadeeja Makkar. It was reiterated that U.K Monu Timbers held that penalty proceedings should be based on clear materials and not on estimations. The court also referenced other cases like Hotel President and M.K. Jibin Sha, which dealt with similar issues but did not specifically address the power of the Intelligence Officer to estimate turnover. The court concluded that the principles in U.K Monu Timbers should be followed, and any estimation should be done by the Assessing Officer through best judgment assessment.

Conclusion:
The court held that the Intelligence Officer does not have the authority to estimate turnover under Section 67 of the KVAT Act. Estimation should be based on clear materials and conducted by the Assessing Officer. The revisions were dismissed, and the court directed the Registry to send a copy of the judgment to the Commissioner of State Taxes.