2012 (11) TMI 835 - HC - VAT and Sales Tax

Input - Input tax credit - Whether tax paid on the inputs for generating power can be set off against the tax payable on sale of aluminum, aluminum ingot and sheet etc when electrical energy is necessary to produce/manufacture and sale of aluminum, aluminum ingot and sheet etc Held that - The process of manufacturing of aluminum reveals that energy is required in such process of manufacturing. Electrical energy which is generated with the use of coal and other materials is only an intermediate product which is used in the process of manufacturing of final product viz. aluminum, aluminum ingots and sheets etc. Coal, alum, caustic soda and other consumables purchased from market on payment of tax and used for generation of electrical energy in the Captive Thermal Plant of the petitioner which is used in the process of manufacture of finished product viz. aluminum, aluminum ingots and sheets etc. taxable under the OVAT Act. are input as defined under Section 2(25) of the OVAT Act and the tax which has been paid on such purchases can be claimed as input tax credit under Section 2(27) of the OVAT Act against the tax payable on sale of finished products i.e. aluminum, aluminum ingots and sheets etc. - Decided in favor of assessee. Whether imposition of penalty under Section 43(2) of the OVAT Act can only be levied if the escapement is without any reasonable cause - held that - VAT is indirect tax on consumption of goods. It is the form of collecting sales tax under which tax is collected in each stage on the value added to the goods. The basic object of VAT Scheme is to provide voluntary and self-compliance. It goes without saying that to plug the leakage of revenue, the Legislature enacted law authorizing imposition of penalty for infraction of any statutory provision. penalty proceedings are quasi-judicial in nature. Quantification of penalty under Section 43 of the OVAT Act is dependent upon the tax assessed under that Section. Once the Assessing Officer comes to the conclusion that the dealer is indulged in fraudulent activities and assesses him under Section 43 of the OVAT Act, there is no need for the Assessing Officer to make further investigation to find out whether the escapement is without reasonable cause for the purpose of imposition of penalty under Section 43(2) of the OVAT Act. The Hon ble Supreme Court in the case of Union of India & Others vs Dharamendra Textile Processors 2008 (9) TMI 52 - SUPREME COURT held that wilful concealment is not an essential ingredient for attracting civil liability or penalty - In the result, writ petitions are allowed.

Issues Involved:
1. Whether coal, alum, caustic soda, and other consumables used for generation of electricity qualify as "input" under Section 2(25) of the OVAT Act, allowing the petitioner to claim input tax credit.
2. Whether the imposition of penalty under Section 43(2) of the OVAT Act requires the escapement to be without any reasonable cause.

Detailed Analysis:

Issue 1: Qualification of Coal, Alum, Caustic Soda, and Other Consumables as Input

The petitioner, a Central Government Public Sector Undertaking, sought to quash the assessment orders disallowing input tax credit on coal, alum, caustic soda, and other consumables used for generating electricity in its Captive Power Plant, which is then used in the manufacturing of aluminum products.

The Court examined whether these consumables qualify as "input" under Section 2(25) of the OVAT Act. The petitioner argued that these consumables are integral to the manufacturing process of aluminum, as electricity generated is essential for the electrolysis process in aluminum production. The petitioner relied on various judgments, including *Reliance Industries Limited vs. Assistant Commissioner of Sales Tax* and *J.K. Cotton Spinning & Weaving Mills Co. Ltd. Vs. Sales Tax Officer*, to support their claim that the entire manufacturing process, including generating electricity, should be considered.

The Court noted that the petitioner is not engaged in selling electricity but uses it in manufacturing aluminum. The assessment orders treated electricity as a finished product exempt from tax, thus disallowing input tax credit under Section 20(8)(k) of the OVAT Act. However, the Court found that coal and other consumables used to generate electricity, which is essential for aluminum production, qualify as "input" under Section 2(25).

The Court emphasized that "input" includes goods directly used in manufacturing, even if they do not directly go into the composition of the finished product. The Court cited the *Reliance Industries Ltd.* case to clarify that consumables used in manufacturing qualify as input, and the tax paid on these can be set off against the output tax on the final product.

The Court concluded that coal, alum, caustic soda, and other consumables used for generating electricity in the Captive Power Plant, which is essential for manufacturing aluminum, qualify as input. Therefore, the petitioner is entitled to claim input tax credit on these consumables.

Issue 2: Imposition of Penalty Under Section 43(2) of the OVAT Act

The petitioner contended that penalties under Section 43(2) could only be imposed if the escapement of tax was without reasonable cause. The Court examined whether the Assessing Officer must determine if the escapement was without reasonable cause before imposing a penalty.

The Court noted that VAT is an indirect tax on consumption, collected at each stage on the value added to goods. Penalties are intended to prevent tax evasion. The Court referenced the *Dharamendra Textile Processors* case, where the Supreme Court held that wilful concealment is not necessary to attract civil liability or penalty.

The Court concluded that once the Assessing Officer determines that the dealer engaged in fraudulent activities leading to tax escapement, there is no need for further investigation into whether the escapement was without reasonable cause. The imposition of penalty is warranted based on the tax assessed under Section 43.

Conclusion:

The writ petitions were allowed to the extent that the assessment orders disallowing input tax credit on coal, alum, caustic soda, and other consumables were quashed. The Court upheld the imposition of penalties under Section 43(2) of the OVAT Act, affirming that further investigation into the reasonableness of the escapement is unnecessary once fraudulent activities are established.

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