2018 (12) TMI 770 - HC - VAT and Sales Tax

Imposition of penalty - receipt of amounts towards a contract, which the assessee had not disclosed in the returns - KVAT Rules - Held that - On the mere ground of receipt of certain amounts towards mobilisation advance of a contract, there can be no penalty imposed alleging evasion of tax under Section 67, since there is no taxable activity carried out as such by the assessee as is detected by the Intelligence Officer. This is a clear case in which the assessee, though failed to disclose the amounts in the return, had however entered the same in the books of accounts and no work having been carried out in the subject year. The Intelligence Officer also did not conduct any enquiry as to the incidence of tax, which is the execution of the works contract - the penalty could only be of ₹ 10,000/- for not disclosing the receipt in the returns. A mere receipt of money, may attract liability to income tax, but sales tax could be levied only if there is a transaction of sale; which the Department has not proved in this case. The receipt alone cannot raise a presumption of taxable transaction or a computation of tax evaded. Unless there is a specific incidence of levy of tax shown, which is the initial burden cast on the Department itself, the Explanation casting only a reverse burden on the assessee cannot be resorted to. The question of law in favour of the assessee and against the Revenue - penalty of ₹ 10,000/- retained - appeal allowed in part.

Summary

Issues:
1. Imposition of penalty on the assessee-dealer for non-disclosure of contract receipts.
2. Interpretation of the Kerala Value Added Tax Rules, 2005 regarding the incidence for levy of tax on contract amounts received.
3. Application of penalty under Section 67 of the Kerala Value Added Tax Act, 2003.

Issue 1: Imposition of Penalty on the Assessee-Dealer

The judgment revolves around the imposition of a penalty on the assessee-dealer for not disclosing the receipt of amounts related to a contract. The Intelligence Officer discovered a contract receipt from a contracting company, which the assessee had not revealed in their returns. The assessee argued that the received amounts were mobilization advances, not related to a contract. However, the Intelligence Officer proceeded with the penalty based on non-disclosure.

Issue 2: Interpretation of Kerala Value Added Tax Rules, 2005

The court analyzed Rule 9 of the Kerala Value Added Tax Rules, 2005, particularly clause (1) (c), which states that the total turnover includes contract amounts received for works contracts. The court emphasized that the levy of tax on contract amounts is contingent upon the actual execution of the works contract and the accretion of goods. Mere receipt of amounts without execution does not attract tax liability under the rules.

Issue 3: Application of Penalty under Section 67 of the Kerala Value Added Tax Act, 2003

The court deliberated on the application of penalty under Section 67 of the Kerala Value Added Tax Act, 2003. It was argued that the penalty should not be imposed as there was no execution of the works contract during the subject year, and no taxable activity was carried out by the assessee. The court emphasized that the burden of proving the penalty is not leviable lies with the Department, and mere receipt of money does not automatically imply a taxable transaction.

In conclusion, the court ruled in favor of the assessee, stating that there was no quantifiable evasion of tax due to the non-disclosure of contract receipts. While retaining a penalty of ?10,000, the court held that the penalty could not be imposed solely based on the receipt of mobilization advances without the actual execution of the works contract. The judgment highlights the importance of establishing the incidence for levy of tax and the burden of proof in tax-related matters.