2008 (11) TMI 613 - AAAR - VAT and Sales Tax

Summary

Issues Involved:
1. Whether the alleged stock transfers were in fact inter-State sales.
2. Legality of the penalty imposed u/s 9(2A) of the CST Act read with section 12(3)(b) of the TNGST Act.

Issue 1: Alleged Stock Transfers as Inter-State Sales

This is an appeal u/s 20 of the Central Sales Tax Act, 1956 read with section 24. The appellant, a firm engaged in the manufacture and sale of "tor steels," had its factory inspected by the Enforcement Wing officials of Tamil Nadu on July 1, 1998, leading to the seizure of certain records. The assessing authority issued a show-cause notice and finalized the assessment for the year 1997-98 under the CST Act, rejecting the appellant's claim of stock transfers to its head office-cum-sale depot at Bangalore and treating them as inter-State sales. A turnover of Rs. 3,04,43,525 was subjected to tax at eight per cent in the absence of C forms, and a penalty was levied. The appellant's appeals to the Appellate Assistant Commissioner and the Tamil Nadu Sales Tax Appellate Tribunal were dismissed, leading to this appeal.

For the year 1998-99, the assessing authority similarly treated stock transfers of Rs. 6,19,53,768 as inter-State sales and subjected them to tax, along with a penalty. The Appellate Assistant Commissioner allowed the appeal, commenting that the assessing officer had not considered relevant aspects pointed out by the assessee. However, the Tribunal allowed the State's appeal against this order.

The key question is whether the alleged stock transfers were in fact inter-State sales. To qualify as an inter-State sale u/s 3(a) of the CST Act, it must be proved that the movement of goods from one State to another was occasioned by a contract of sale. The Tribunal relied on several points, including the presence of sale invoices at the factory, the signing of stock transfer delivery challans and sale invoices by the same person, and the immediate sale of goods by the Bangalore office. The Tribunal concluded that direct inter-State sales were camouflaged as stock transfers.

However, the assessing authority committed an error by treating the entire stock transfers for the years 1997-98 and 1998-99 as inter-State sales, despite the Enforcement Wing's findings on the quantum of turnover attributable to disguised inter-State sales. The taxable turnover under the CST Act for 1997-98 was Rs. 1,60,23,984, and the assessment for 1998-99 should be sustained to the extent of Rs. 1,35,15,592. The appeals are allowed to the extent of the turnover of Rs. 1,18,63,245 for 1997-98 and Rs. 4,74,38,176 for 1998-99, with the tax demand set aside for these amounts.

Issue 2: Legality of the Penalty Imposed

Penalty was levied u/s 9(2A) of the CST Act read with section 12(3)(b) of the TNGST Act. The relevant provisions of section 12 were examined, and it was noted that an assessment to the best of judgment is what is contemplated by section 12(2). In the case of Siddhartha Apparels (P) Ltd. v. Secretary, Commercial Tax Department, Chennai, it was held that penalty cannot be levied in the absence of such assessment. The Supreme Court in State of Madras v. S.G. Jayaraj Nadar & Sons explained that best judgment assessment must be based on an estimate made on settled principles of justice.

In this case, the total turnover returned by the appellant and computed by the assessing authority was the same, with the difference only in relation to taxable turnover due to the rejection of the stock transfer exemption claim. The assessment was based on the books of account and records kept in the regular course of business, with no estimate involved. Hence, there was no best judgment assessment, and the levy of penalty cannot be legally sustained. The penalty is set aside.

Accordingly, the appeals against the assessment of tax are allowed partly, and the appeals against the levy of penalty are fully allowed.