Tax Law; M/s. U.K. Monu Timbers Vs. State [Kerala High Court, 15-06-2012]

Kerala Value Added Tax Act, 2003 – Scope and ambit of circulars issued with the purpose of plugging evasion, in deciding the question of tax liability and the invocation of powers of estimation of turnover and the resultant quantification of tax evaded for the purposes of determining penalty – Discussed.

# 2012 (4) KLT SN 17 (C.No.19) : 2012 (3) KHC 111


Thottathil B.Radhakrishnan & K.Vinod Chandran, JJ.

Dated this, the 15th day of June, 2012

M/s. U.K. Monu Timbers Vs. State of Kerala

O.T.Rev.No.30 of 2012




K.Vinod Chandran,J:

Interesting questions regarding the scope and ambit of circulars issued with the purpose of plugging evasion, in deciding the question of tax liability and the invocation of powers of estimation of turnover and the resultant quantification of tax evaded for the purposes of determining penalty are raised in the above revision.

2. The facts are not in dispute and suffice it to say that the dealer, engaged in the business of purchase and sale of timber, imports the same into the State of Kerala and sells it within the State. At the entry check post, as is prescribed by Circular No.28/2008 dated 19.06.2008 of the Commissioner of Commercial Taxes, each consignment is required to be cleared after payment of advance tax at the floor rate prescribed therein for each variety of timber. The assessee having paid the same, brought it to the business premises/yards from where subsequent sales were effected within the State of Kerala, attracting tax under the

# Kerala Value Added Tax Act, 2003

(hereinafter referred to as “the KVAT Act”).

3. The controversy in the instance case arose from an inspection conducted by the Intelligence Wing of the Commercial Taxes Department in the business premises of the assessee. The books of accounts having been verified, the Department alleged that the sale of timber being at rates lesser than that prescribed in the aforesaid circular; leads to undervaluation and consequent evasion of tax, warranting an imposition of penalty under Section 67 of the KVAT Act. That the advance tax was paid as per the circular and sales were effected at rates below the floor rate prescribed under the circular are admitted.

4. We have heard learned counsel Sri.Harisankar V.Menon for the revision petitioner and Sri.Bobby John, learned Senior Government Pleader for the State.

5. The counsel for the revision petitioner would urge before us that going by binding precedents, the circular aforementioned has been issued as has been the time honoured practise of the department; with the intention to plug evasion of tax, specifically with respect to those commodities which the Department, by experience, identifies as being evasion prone. It is equally time honoured that the same would not decide the tax liability or the rates at which the products are sold within the State. Further, it is the contention of the learned counsel that in any event the instant proceedings being under Section 67 of the KVAT Act dealing with imposition of penalty on actual or attempted evasion of tax, there can be no estimation of turnover to determine the quantum of tax sought to be evaded or actually evaded. The authority; under the said provision, suffers from an inherent lack of jurisdiction to make an attempt to estimate the turnover; which power and jurisdiction is conferred only on the officer conducting assessment proceedings. “Best judgment assessment” as is in vogue in fiscal legislations cannot be stretched or extended to penalty proceedings, is the vehement contention.

6. The learned Government Pleader would emphatically contend that under-valuation is a method by which tax evasion is practised and the prevailing market value is the only reliable index on which such under-valuation could be detected and the tax drain of the State compensated; by imposition of penalty, which also serves the purpose of deterrence. Referring to the facts of the instant case, the learned Government Pleader points out that the circular issued by the Commissioner of Commercial Taxes has been issued after due deliberations and also in consultation with the dealers’ associations, taking the prevalent market conditions into account. The circular having prescribed the floor rate per cubic feet for the variety of timber available in the market; it can be presumed that no sale within the State occurs below the rates so prescribed in the circular. The assessee on the strength of the sale invoices, has been found to be blatantly invoicing the sales effected within the State, below the rates prescribed in the circular and this can only lead to the inference and conclusion of evasion of tax attracting the penal provisions under Section 67 of the KVAT Act.

7. The questions of law framed by the assessee in the revision are re-framed by us as hereunder:

(i) Does the provision enumerating the offences and conferring the power for imposition of penalty in cases where tax is actually evaded or sought to be evaded, more specifically Section 67 of the KVAT Act, clothe the authority with the power to make an estimation of the turnover for the purposes of determining the penalty?

(ii) Would the prescription of rates for the purpose of collecting advance tax in the case of evasion prone commodities; bind and restrict the dealers from claiming sale of such commodities at a lesser rate resulting in tax liability only for such lesser amounts?

8. The question first to be considered is with respect to the estimation of the turnover made by the Intelligence Officer based on the rates prescribed in the circular. The circular if held by us to be indicative or determinative of the actual price for which the goods are sold, the question posed is as to whether in penalty proceedings estimation can be adopted. The provision authorizing imposition of penalties, coming up for consideration in the instant case, is Section 67 of the KVAT Act. Clauses (a) to (l) of Section 67 enumerates the various offences that attract imposition of penalty. If any authority empowered under the Act is satisfied that any person has committed any or all of the offences enumerated in clauses (a) to (l):

“such authority may direct that such person shall pay, by way of penalty, an amount not exceeding twice the amount of tax or other amount evaded or sought to be evaded where it is practicable to quantify the evasion or an amount not exceeding Ten thousand rupees in any other case”.

When action is initiated under Section 67 of the KVAT Act for defects/offences mentioned in clauses (a) to (l), it is to be noticed that the authority is clothed with the power to impose, by way of penalty, an amount not exceeding twice the amount of tax or other amount evaded or sought to be evaded, where it is practicable to quantify the evasion or in any other case, Rs.10,000/-. It is pertinent that in imposing penalty at twice the tax evaded or sought to be evaded, it should be practically possible to determine and quantify the amount evaded or sought to be evaded. This does not contemplate any estimation, however reasonable it may be, since the same would be in the realm of “best judgment”, of, an individual-authority.

9. The multi-point levy as contemplated under the KVAT Act provides for assessment under Chapter V. Section 21 provides for self assessment by filing of a return under Section 20 in the prescribed manner and accompanied by the prescribed documents. This is in consonance with the scheme of multi-point levy providing set off of the tax paid at any prior point of sale; which is to be claimed by the assessee in its returns. However, the authorities under the KVAT Act have been conferred with powers of assessment in the event of any failure on the part of the dealer/assessee. The KVAT Act thus provides for such assessment by Sections 22, 23, 24 and 25. Sections 22(3), 23(6), 24(1) and 25 (1) all provide for ‘best of judgment assessment’ in the event of the contingencies specified in the respective sections. Section 67 does not provide for any best judgment of turnover to be made for arriving at the tax evaded or sought to be evaded. At the risk of repetition, we notice that what is to be determined under Section 67 is the tax actually evaded or sought to be evaded and not what according to the officer initiating proceedings under Section 67 thinks in the best of his judgment has been the assessee’s attempt to evade. A Division Bench of this Court had, in the decision reported in

# Paisons Vs. The Intelligence Officer & Others [(1992) 1 KTR 143 (Ker)]

while upholding the constitutionality of Section 45A in the Kerala General Sales Tax Act, 1963; similar to Section 67 of KVAT Act, held:

“The discretion vested in the officer under section 45A of the Act is not an unexaminable or unfettered discretion. Decisions are legion to hold that when the exercise of discretionary power is vested in a statutory authority on his being “satisfied” of certain facts, there should be material on record to substantiate the same. It is true that the language used in section 45A(1) is “subjective”. Though literally, the language is so, the practical approach of the courts has been to insist on objective evaluation”.

10. In penalty proceedings the offences indicated under Section 67 should be evidenced by the materials recovered on inspection or otherwise and the enquiry is pointedly against any actual suppression or omission in the course of the business transactions, which would lead to the definite conclusion of evasion or attempt to evade. On detection of such offences; in the event of the tax evaded or sought to be evaded being determinable, the officer initiating penalty proceedings is perfectly justified in imposing penalty at the maximum rate of twice the rate of tax actually evaded or sought to be evaded. Such officer conducting penalty proceedings cannot exceed his jurisdiction by finding out as to whether the evasion detected would in fact lead to an inference of earlier or subsequent evasion. Nor can such inferences regarding the earlier or subsequent conduct be reflected in the penalty proceedings by way of estimation of turnover based on such inferences. This, going by the clear words employed in the statute, is within the realm of the assessment proceedings.

11. The principles to be followed in best judgment assessments have been succinctly stated in the oft quoted and followed judgment of the Supreme Court in

# Commissioner of Sales Tax, M.P. v. H.M Esufali [(1973) 2 SCC 137].

While accepting the position that estimation necessarily involved an amount of guess work the court cautioned the authority from being vindictive and capricious. The availability of material to prove the exact turnover was held to be unnecessary and the only requirement was that the estimate should be on a rational basis having reasonable nexus with the allegations; which necessarily should be something more than a mere suspicion. The Court also distinguished an assessment made on the basis of accounts and on ‘best judgment’. While the former is on the basis of the facts and figures disclosed in the books of accounts, the latter rejects the books of accounts and makes a reasonable estimation on the basis of the facts disclosed and detected. This distinction is equally applicable in penalty proceedings too.

12. Section 67 does not confer power to make a reasonable estimate. The suppression or omission must be clearly disclosed from the materials available and there should be evidence of the amounts sought to be suppressed from the turnover. In cases where the same is not discernible, the only option is to make an order of imposition of fine not exceeding Rs.10,000/-. Any suppression detected or rather any file generated on a crime so detected and penalised necessarily gives the assessing authority the power to make estimations to compensate the State against probable omissions and suppressions. Such exercise, as is mandated by the statute, has to be regulated by the best judgment of the individual officer which definitely is subject to the principles of reasonableness, proportionality and of course natural justice. Such estimation on best judgment would definitely have to be done with due notice and after affording a personal hearing. Such estimation should be reasonable and should have a nexus with the gravity and frequency of the commission of offences as also the quantum of loss suffered by the State. This exercise, in our opinion, cannot be undertaken by the officer empowered with the power to impose penalty under Section 67 of the Act. Section 67 contemplates imposition of penalty on proof of commission of offences as a measure of deterrence; best judgment assessments are made to compensate the loss caused to the State. The first question hence is answered against the Revenue and in favour of the assessee.

13. The next question is regarding the scope of Circular No.28/2008, dated 19.06.2008. The powers to issue orders, directions and instructions for the proper administration of the Act is contained in Section 3(2)(c) of the KVAT Act. Section 3(2) confers on the Commissioner the power of superintendence over all officers and persons employed in the execution of the said Act and the power to issue orders, etc., for the proper administration of the Act, is a necessary corollary to the power of superintendence. The Hon’ble Supreme Court in

# State of Kerala v. Kurian Abraham (P) Ltd. [(2008) 3 SCC 582]

considered the scope of the powers and the ambit of the orders issued under in pari materia provisions of the Kerala General Sales Tax Act, specifically Section 3(1A) of the said Act. Considering tax administration to be a complex subject consisting of several aspects, the said power was held to be reflecting the need of the Government to strike a balance in the imposition of tax between collection of revenue on one hand and business friendly approach on the other. In the said case, a circular was issued by the Board of Revenue by which centrifuged latex and field latex, in the opinion of the Board, were not separate and distinct items and hence could not be treated separately for the purpose of taxation. This was in the context of the jurisdictional High Court finding that centrifuged latex is a manufactured product of field latex. Hence, to avoid the evil of double taxation and to give administrative relief to the business, a circular was issued wherein the two items were treated as one and the same commodity for the purpose of taxation. Before the Supreme Court, the State contended that the Board of Revenue was not conferred with such authority and that the circular in fact granted an exemption. The power to grant such exemption is exclusively within the competence of the State Government. Rejecting the contentions of the State, it was held that the Board has not acted beyond its authority while issuing the circular and affirmed the position that the subordinate officers of the department are bound to follow them. Of course, such circulars though held to be binding on the department and its officers, it was held to be not so on the courts and the assessees.

14. In the instant case, the subject circular has not been issued invoking the powers under general superintendence and administration as noticed above. The said circular has been issued specifically under Section 47 of the KVAT Act, which provides the procedure for inspection of goods in transit. Section 47 provides for inspection so as to detect the transport of goods without proper and genuine documents or with the intention or attempt to evade payment of the tax due under the Act. Sub-section (16A) of Section 47 has been introduced as an overriding provision with a non-obstante clause empowering the Commissioner to direct the payment of tax, with respect to any commodity which is deemed to be evasion prone; before the date prescribed for payment under the Act. The said provision empowers the Commissioner to pass orders mandating advance payment of tax even before the liability to pay occurs, i.e., even before the sale which attracts the liability happens. It is under this provision that the subject circular in the instant case has been issued.

15. We are not concerned with the validity of the circular so issued which, in any event, has been upheld by a Division Bench of this Court in

# KMP Timbers & Saw Mills v. Commercial Tax Inspector and another [(2012) 50 VST 195 (Ker)].

Upholding the validity of the statutory provision, i.e. Section 47(16A), as also the circular issued under the said provision, this Court held:

“Further, advance tax is only a provisional deposit towards tax and nothing in the Act requires the appellant or any party to pay tax except on actual sale price. The value fixed under the circular for payment of advance tax does not reflect the basis for actual liability. In fact, tax is payable only on actual sale price and the appellant is absolutely free to claim refund of advance tax paid, if it is in excess over tax liability. If there is allegation of under-invoicing, it is for the assessing officer to establish the same in adjudication proceedings”.

Hence, there can be no doubt that the value fixed under the said circular was only for the purpose of deciding advance tax liability and does not fetter the assessee from selling at any price depending upon the market conditions and trade practises. Recognising the often reiterated proposition that tax can be levied only on the apparent or real consideration paid on the transfer of the property in goods, this Court also recognised the right of the assessee to claim refund, if the advance tax paid was found to be in excess of the tax liability. The issue of under-valuation also was found to be one which ought to be established by the assessing officer in assessment proceedings and that too only on materials available.

16. Article 265 of the Constitution of India provides that no tax shall be levied or collected except by authority of law. No tax can be levied by the Government in the absence of specific authorisation by statute. Taxation necessarily takes within its fold four aspects or components, being (i) the taxable event, (ii) the person on whom the levy is imposed, (iii) the rate of tax, and (iv) the measure or value to which the rate is applied. These four aspects being the essential components of taxation, necessarily falls within the exclusive jurisdiction of the legislature. Briefly stated, these components are to be decided by the legislature and spelt out in the statute. There cannot be any delegation on this aspect and the source of such power cannot at all be thrown or left to sprout within the thickets of subordinate legislation. The mandate under Article 265 read with Article 245 and the words employed in Entry 54 in List II of the Seventh Schedule empowers the State Legislature to impose and collect tax on sale of goods and the imposition shall be only in such manner and none other.

17. In

# State of Rajasthan and another v. Rajasthan Chemists Association [(2006) 6 SCC 773]

the question arose before the Supreme Court as to whether the measure to which the rate of rate was applied could be a notional value rather than the actual value covered by the transaction at the point of sale which attracts the levy of tax. The subject of challenge therein was Section 4-A of the Rajasthan Sales Tax Act, 1994, which provided for levy of tax on the Maximum Retail Price (MRP), though the first point of sale by the wholesale distributor to the retailer; attracting the levy, was lesser than the MRP. Section 4-A, which was included in the statute itself, sought to bring in an artificial sale price being the ‘Maximum Retail Price’ for the purposes of levy of tax, by a legal fiction. Having considered the entire line of decisions on the issue of levy of sales tax on the sale of goods, the Hon’ble Supreme Court held:

“By substituting the assumed quantity of goods or a price which is not the subject-matter of that contract of completed sale for the purpose of measuring tax, the legislature assumes existence of contract of sale of drugs by legal fiction which has not taken place and which cannot be considered to be a sale in the manner stated in the Sales Act, which alone can be the subject of tax under Entry 54 in List II. Substitution of assumed price or the assumed quantity in place of actual price/quantity in a completed sale transaction, for the purpose of levy of tax on the subject-matter of tax results in taking away from it the character of “sale of goods” as envisaged under the Sales Act”.

The subject of tax being sale, it was held, the measure of tax for the purpose of quantification must retain the nexus with sale which is the subject of tax. Hence, the measure of tax cannot be determined on a notional basis and cannot at all be on a hypothetical value. Section 4A was held to be designed to bring the levy on a value which was divorced from the sale (first point sale) and subjecting such value to tax under the Act and hence was held to be beyond the legislative competence under Entry 54 of List II of the Seventh Schedule. The consequent notification to the extent it intended levy of tax on first point sale with reference to the price which could be charged in respect of a subsequent sale was also held to be unsustainable.

18. In the instant case, the object of the entire exercise, evidenced by the proceedings that led to imposition of penalty was the determination of the “sale price” as notified in the circular by the Commissioner of Commercial Taxes. The Commissioner of Commercial Taxes either under the general power of superintendence or administration or under the powers to issue orders to plug evasion of tax with respect to named commodities; cannot decide the measure or value of tax. As noticed above, deciding the taxable event, identifying the person on whom the levy is to be imposed, the rate of tax to be imposed as also the measure of tax to which the rate is made applicable are in the exclusive realm of the powers of the legislature, the intention of which is manifested by the clear words in the statute. The taxable event with respect to the assessee is the point of sale by the assessee within the State of Kerala, as is provided under Section 6 of the KVAT Act. Section 6 imposed the levy inter alia on every dealer whose turnover is above rupees 10 lakhs on the sales of goods and hence squarely determines the petitioner herein as the person on whom the levy is imposed. The rate is fixed at 12.5% by Section 6(d) and the same falls under Entry 91 of SRO 82 of 2006 being the list of goods notified invoking the powers under the above provision. The value on which tax is to be applied has also been specified as “the taxable turnover” of the dealer by Section 6(1).

19. Section 2(xliv) defines “sale price” and sub-sections (l), (li) and (lii) respectively defines “taxable turnover”, “total turnover” and “turnover”. Shorn off the frills of a diverse inclusive definition, “turnover” means, the aggregate amount for which goods are either bought or sold for cash, deferred payment or other valuable consideration and “sale price” means the amount of valuable consideration received or receivable by a dealer for the sale of any goods. “Total turnover” is the aggregate turnover in all goods of a dealer, including purchase and sale, whether or not such turnover is liable to tax. “Taxable turnover” means the turnover of the dealer which is liable to tax in accordance with the KVAT Act. It is also to be noticed that “prevailing market price” has been defined under Section 2(xxxviA). The definition refers to the publication with respect to wholesale price by the Economics and Statistics Department of the State or any other authorised agency and in the absence of such publication, the price at which similar goods are sold by the Kerala State Civil Supplies Corporation or any other similar agency. Apart from the fact that no such record or publication has been subjected to scrutiny in the instant case, it is also pertinent that there is nothing in the statute to enable adoption of such published rates as the actual price on which tax is to be paid. The above provisions would indicate that the legislature thought it fit to levy tax on the actual price received by the seller on the sale of goods at the seller’s hands. The circular of the Commissioner cannot and does not decide the value on which the tax is to be imposed. Circulars issued under the powers of superintendence or for proper administration of the Act or to prevent evasion cannot at all be law. Evidently, as is discernible from the specific words employed in Section 47(16A) as also the object disclosed from the words employed in the circular, the value fixed by the circular only indicates the tax to be paid in advance at the time of entry into the State for the purposes of sale within the State; as a measure to prevent evasion of tax with respect of named commodities.

20. The value so prescribed by the Commissioner, as contended by the Government Pleader, might have been after taking into consideration the market conditions and also after holding discussions with the dealers’ association. This, however, does not create a prohibition in so far as the dealers are concerned to sell the goods at a rate in variance with the rates so prescribed. The actual sale price may be lesser or greater than that prescribed by the circular. When it is lesser, the dealer definitely gets a right to claim a refund of the tax paid in advance, but however, subject to any incriminating material as to under-valuation detected and established by the assessing authority. When the price is higher, it goes without saying that the tax liability also gets increased and the dealer is obliged to pay the amounts in excess of that paid as advance, at the time of filing of returns as prescribed by the Act. The circular is only for the purpose of collecting tax in advance and cannot be considered as an unassailable document of universal application with respect to the price at which the goods are to be sold. There can be no other interpretation possible and the second question raised by us is also answered against the Revenue and in favour of the assessee.

21. In the instant case, there were no discrepancies in the books of accounts, the stock found on inspection and the other documents indicating the sale of goods within the State. The books of accounts were found to be not acceptable for the sole reason that the rates for which timber was sold as evidenced by sales invoices were below the rates prescribed by the Commissioner of Commercial Taxes in Circular No.28/2008. Annexure-A order also speaks about the market rate adopted by the petitioner being lesser than that adopted by other similar dealers. However, the various rates said to have been adopted by the other dealers detailed in the order does not seen to have been put to the dealer. There is also an allegation of fictitious billing, which again has not been put to the dealer. If at all evidences were available with respect to specific under-valuation regarding any variety of timber or regarding the sales not having been effected and property in goods not having been transferred; then it was for the Intelligence Officer to specifically put such instances to the dealer so as to determine the tax sought to be evaded or attempted to be evaded. The entire proceeding is founded on the fact that the dealer had been selling imported timber logs at a lower rate than the minimum price fixed by the circular, thereby paving way for claim for refund of input tax. The under-valuation as a result of wilful suppression of a sales turnover was deduced only on the above reasoning. The Intelligence Officer in fact proceeds on the assumption that the floor rate fixed by the circular is to reflect the market rate and not for the levy of advance tax at the entry check post. This is contrary to the specific words employed by the Commissioner in the circular – “All concerned are directed to note the above values for the levy of advance tax” (sic.).

22. The first appellate authority as well as the Tribunal was considerably swayed by the possibility of the dealer claiming refunds of input tax credit. It ought to have been noticed that the circular was issued as a measure to plug evasion of tax and the same was not intended to augment revenue, but to ensure collection of tax due to the State. On the sale price being lesser than that prescribed in the circular, refund of input tax is a natural consequence and that alone cannot be a reason to claim tax for amounts higher than that for which the goods were sold.

23. The assessing officer, definitely on an independent consideration of the materials recovered by the Intelligence Officer, may be entitled to go in for a ‘best judgment assessment’, if the sale consideration disclosed in the books of accounts are found to be ostensible. However, as noticed by the Division Bench in KMP Timbers & Saw Mills case [(2012) 50 VST 195 (Ker)], the same would be possible only in assessment proceedings and that too on the basis of materials evidencing such practice of under-valuation and consequent suppression of turnover. As noticed above, the Intelligence Officer cannot apply his judgment at the reasonable best for inferring suppression and thereby estimating turnover, for the simple reason that such power has not been conferred by Section 67 of the KVAT Act.

In the above circumstances, the above revision is allowed, setting aside Annexure-A order as confirmed by Annexure B and C orders. The questions of law raised by us are answered against the Revenue and in favour of the assessee.