FRAUD BY CONSULTANT

[Mr. M. GOVINDARAJAN]

The compliance of tax provisions either in direct tax or indirect taxes is difficult for any individual or a business entity at all times following the changes occurred now and then.  For this purpose the professionals or consultants in the particular area are appointed for the purpose of compliance of the provisions i.e., calculation of taxes, payment, filing returns, maintenance of records, rendering advices etc.,   Such people are appointed on the bona fide belief that they would act diligently and they will not act against them.  In some cases it is found that they have misguided their clients or indulges in fraudulent activities.   In such nature the liability of payment of tax still lies on the assessee and also the payment of interest.

The issue to be discussed in this article is whether the assessee is liable to pay penalty on the fraud by consultant in nonpayment of tax/duty with reference to the decided case laws.

In ‘Commissioner V. Ganesh Enterprises’ – [2015 (9) TMI 162 - CESTAT MUMBAI] it was held that no penalty could be imposed for the fraudulent act on the part of a consultant and appellant was under bona fide belief that the Consultant has deposited an amount towards service tax liability. 

In ‘Hemangi Enterprises V. Commissioner of Central Excise, Pune – I’ – 2015 (10) TMI 1732 - CESTAT MUMBAI the appellants are rendering services under ‘Manpower Recruitment or Supply Agency Services’.  The Department found out that during the period from June 2005 to March 2015 there was an evasion of service tax to the tune of ₹ 1.13 crore due to fabrication/alteration of TR-6 challans and bogus challans.  Show cause notice was issued to the appellant and the Adjudicating Authority after following due process of law, confirmed the tax liability with interest and imposed equivalent penalty.

The appellants filed the present appeal before the Tribunal against the order.  The appellants submitted the following:

• The appellant appointed one Shri Deepak Joshi as their consultant to look into the regular activities of discharge of service tax and also for payment of the service tax;
• The appellant paid various amounts in cash by withdrawing from the bank and giving it to the Consultant;
• The consultant used to file service tax returns with its challans indicating proper payment of tax liability;
• The consultant played fraud on the appellant and used to fabricate challans by showing more amounts paid towards the service tax and use to pocket the difference amounts;
• The appellant has discharged the entire service tax liability and the interest;
• The appellant is contesting the penalty imposed on them on the ground that they are hurt by the action of their Consultants;

The appellant produced copies of cash book for the relevant period for the proof of withdrawal of cash from the bank for paying service tax and duly certified by the Chartered Accountant.

The Revenue submitted the following:

• The appellant was in the knowledge of the activity undertaken by the Consultant;
• The statement of the consultant clearly indicated that the appellant had paid only 50% of the amount as has been recorded in the said statement;
• The cash book and the certificate of the Chartered Accountant cannot be considered as they were not before the authorities and the withdrawals from the banks was not on record;
• No criminal complaint has been filed by the appellant against the consultant;
• It is incomprehensible that the appellant had entrusted the payment of service tax by cash instead of by cheque;
• There is no reasonable cause shown for setting aside the penalties imposed;
• The vicarious liability of any payment of service and interest shall lie on the appellant;
• The service tax returns were signed by the appellant indicating that the tax liability has been discharged.

The Tribunal considered the issue that the imposing penalty on the appellant for the fraudulent act on the part of the consultant who had pocketed the amounts of service tax which has been paid by the appellant to him to credit to the Government account.  The Tribunal found the following:

• The appellant insisted the consultant to pay the amount of service tax by cheque but the consultant convinced them that the time taken for realization of cheque is more while in the case of cash payment;
• The appellant withdrew cash from the bank and given them to the consultant for discharging the service tax which is proved by the cash book produced by the appellants;
• The consultant had been playing fraud of these amounts in respect of various other assessees also.

The Tribunal held that the fraudulent act of the consultant seems to be driven by the greed to enrich him.   It cannot be attributable to the appellant as nothing is brought on record that the appellant had knowledge of such an activity undertaken by the Consultant.  It is also not on record that the appellant had not paid any amount to the consultant for the payment of service tax to the department.  The Tribunal found that the Consultant has defrauded the appellant by breaching TR-6 challans.  The appellant had discharged the entire service tax liability and interest thereon. 

The Tribunal considered the submissions of the Revenue that the consultant has been appointed as an agent and reading of Section 238 of the Contract Act, he becomes liability on the action of the Consultant.  The said section talks about the vicarious liability only in the case of the principal is authorized an agent to do an act in the course of business for the principals.   In this case the appellant had appointed an agent to discharge the appropriate service tax liability and had not appointed him for making any representation or to commit fraud that also for the consultant’s own benefit.  Therefore the question of vicarious liability does not arise.  The Tribunal further held that the argument of the Revenue that the service tax returns were signed by the appellant will also not carry the case.  It is on record that such reports were prepared by the Consultant and signed by the appellant that they were correct.

The Tribunal held that the appellant being unaware of the fraudulent activity of the consultant and having discharged the service tax liability and interest thereof on being pointed out have made out a justifiable reason for setting aside the penalties imposed on them.

The case laws discussed as above makes it clear that when the assessee is unaware of the fraud caused by the consultant on him and if he is ables to prove the same then no penalty is imposable on the assessee for nonpayment of tax/duty,

Discussions to this article

[Ganeshan Kalyani]

Nice topic, nice article sir.

[CA. Varun Arora]

Knowledge enriching article Sir, but i have a doubt regarding this in case of any fraud done by consultant like raising the sale invoice without knowledge of assessee and no sales was there but fake invoices were raised and so many cases are there then in this particular case penalty can not be imposed on the assessee but whether duty can be demanded from assessee.

please answer this with relatinig the case with your article as whether duty or tax can be demanded by the assessee in case it is proved that consultant has done the fraud.

Thank you..!!

[MARIAPPAN GOVINDARAJAN]

If it is proved that the invoices are fake one no tax liability arises on the assessee.