2021 (3) TMI 844 - HC - VAT and Sales Tax

Levy of penalty under Section 72(2) of KVAT Act - Wrong classification of goods - aluminum castings - whether classifiable as 'non-ferrous castings' under Entry 66 of the Third Schedule to the Act or would fall under unscheduled goods and are liable to be taxed at the rate of 12.5%? - HELD THAT - From perusal of Section 72(2) of the Act, it is evident that when dealer has filed the returns in the prescribed form and he understates his liability to tax or overstates his entitlement to a tax credit by more than 5% of the actual liability to pay tax, he is liable to pay penalty equal to 10% of the amount of such tax under or overstated. However, the provision requires that before levy of penalty, the dealer has to be given an opportunity to show-cause in writing against the imposition of penalty. It is only after consideration of the cause shown by the dealer, the penalty can be imposed - It is graphically clear that the discretion is with the matter of imposition of penalty and not with regard to the rate of penalty. Thus, it is evident that the levy of penalty under Section 72(2) of the Act is neither automatic nor mandatory. In the instant case, First Appellate Authority, after detailed examination of the material available on record, has found that there is a scope for ambiguity in classification of 'aluminum castings' as 'non-ferrous castings' and according to the Authority, the 'aluminum castings' may be classified under Entry 66 as 'non-ferrous castings' and are liable to tax only at the rate of 4%. The First Appellate Authority has also found that there was a scope for ambiguity and in any case, the transactions were revenue neutral and therefore no mala fide intention would be attributed to the dealer. It is relevant to mention here that the sine qua non that the condition precedent for exercising powers under Section 64 of the Act is that the order of the Authority should be prejudicial in the interest of the Revenue - in this case, both the aforesaid conditions are not fulfilled as the order passed by the First Appellate Authority is well considered which is passed with meticulous appreciation of the material available on record. Therefore, the condition precedent for invoking the powers under Section 64 of the Act, is not fulfilled. Appeal allowed - decided in favor of appellant.

Summary

Issues:
1. Classification of aluminum castings for taxation under the Karnataka Value Added Tax Act, 2003.
2. Imposition of penalty under Section 72(2) of the Act.
3. Exercise of revisional powers under Section 64 of the Act.

Analysis:
1. Classification of Aluminum Castings:
The appellant, engaged in the business of manufacturing auto parts, supplied aluminum castings to a sister concern. The dispute arose regarding the classification of these castings for tax purposes. The appellant believed they fell under 'non-ferrous castings' and should be taxed at 4%, while the Revenue argued they were unscheduled goods taxed at 12.5%. The First Appellate Authority found ambiguity in classification and held the transaction was revenue neutral. Citing HINDUSTAN STEEL LIMITED, the Authority set aside the penalty under Section 72(2) of the Act. The appellant argued that mens rea is not essential for penalty, but subsequent decisions clarified this point. The court noted that the First Appellate Authority's decision was well-considered and not erroneous, thus ruling in favor of the appellant.

2. Imposition of Penalty:
Section 72(2) of the Act outlines penalties for understating tax liability, requiring an opportunity for the dealer to show cause in writing before imposition. The court clarified that the imposition of penalty is not automatic but subject to the assessing authority's discretion. Referring to ELECTRO OPTICS (P) LTD., it emphasized that penalties are not mandatory and should be imposed judiciously based on circumstances. In this case, the First Appellate Authority's decision to set aside the penalty was upheld due to ambiguity in classification and revenue neutrality, indicating no mala fide intent by the dealer.

3. Exercise of Revisional Powers:
The Additional Commissioner of Commercial Taxes sought to revise the First Appellate Authority's order, leading to this appeal. The court emphasized that for revisional powers under Section 64 of the Act to be invoked, the order must not only be erroneous but also prejudicial to revenue. As the First Appellate Authority's order was well-considered and not prejudicial, the court quashed the Additional Commissioner's order and restored the Authority's decision. The appeal was allowed in favor of the appellant.

In conclusion, the court's detailed analysis focused on the classification of aluminum castings, the discretionary nature of imposing penalties under the Act, and the conditions for exercising revisional powers. The judgment clarified the legal principles governing tax classification, penalty imposition, and revision proceedings under the Karnataka Value Added Tax Act, 2003.