2018 (3) TMI 977 - HC - VAT and Sales Tax

Penalty u/s 40(2) of the TNVAT Act - TDS amount recovered and remitted by the contractee - adjustment of TDS towards penalty - Held that - when the assessment proceedings were made, the petitioner was able to convince that the Assessing Officer by records that the transaction done by the petitioner is entitled for exemption which plea was accepted and assessment was completed. Therefore, the respondent could not have levied penalty at the first instance and could not have adjusted the tax which was deducted at source by the contractee and remitted to the respondent towards the petitioner s account - In fact, the respondent should have refunded the amount to the petitioner as a consequence of holding that the petitioner is eligible for exemption of the contract receipt. The levy of penalty and the adjustment of TDS towards the said penalty is illegal - petition allowed - decided in favor of petitioner.

Summary

Issues:
Assessment under TNVAT Act and CST Act for works contract in Special Economic Zone, Penalty under Section 40(2) of TNVAT Act, Refund of TDS amount deducted by contractee.

Analysis:

Assessment under TNVAT Act and CST Act for works contract in Special Economic Zone:
The petitioner, a registered dealer under TNVAT Act and CST Act, undertook a works contract for a developer in a Special Economic Zone. The petitioner claimed exemption on the contract receipt as zero-rated sales due to the location of the contractee in the SEZ. The respondent initially accepted this claim but later imposed a penalty under Section 40(2) of the TNVAT Act, citing TDS amount recovery and remittance by the contractee. However, it was highlighted that the petitioner did not deduct tax at source; it was the contractee who did so. The petitioner's non-deduction of tax at source does not render them liable for the penalty. The respondent's action in levying the penalty and adjusting the TDS amount towards it was deemed unsustainable.

Penalty under Section 40(2) of TNVAT Act:
Section 40(2) of the TNVAT Act deals with the imposition of penalties for illegal tax collections. The Act prohibits unregistered dealers from collecting tax and mandates penalties for contraventions. In this case, the petitioner did not deduct tax at source, and the contractee was responsible for the TDS. The respondent's decision to impose a penalty under Section 40(2) was found to be unjustified as the petitioner's non-involvement in tax deduction absolved them from penalty liability. The absence of a proposal to levy a penalty in the revision notice further weakened the respondent's position. The petitioner's eligibility for exemption on the contract receipt further invalidated the penalty imposition, making it illegal.

Refund of TDS amount deducted by contractee:
The court directed the respondent to refund the penalty amount of ?1 lakh to the petitioner within six weeks. The refund was ordered due to the unsustainable nature of the penalty imposition, the petitioner's non-involvement in tax deduction, and their eligibility for exemption on the contract receipt. The judgment emphasized the respondent's obligation to refund the TDS amount deducted by the contractee and remitted to the respondent, given the petitioner's exemption eligibility and non-liability for tax deduction.

In conclusion, the court allowed the writ petition, set aside the impugned order, and directed the respondent to refund the penalty amount to the petitioner, highlighting the unsustainable nature of the penalty imposition and the petitioner's non-liability for tax deduction.