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):