Nice Chemicals Pvt. Ltd. vs Commercial Tax Officer (Int)-18 … on 19 January, 2006

Karnataka High Court
Nice Chemicals Pvt. Ltd. vs Commercial Tax Officer (Int)-18 … on 19 January, 2006
Equivalent citations: 2006 148 STC 296 Kar
Author: D S Kumar
Bench: D S Kumar


D.V. Shylendra Kumar, J.

1. The Karnataka Sales Tax Act, 1957 (for short, “the Act”) was undoubtedly a piece of legislation providing a major source of revenue to the State.

2. Though many of the products which were being subjected to tax in the course of sales transaction have now been taken out of the purview of levy of tax under this Act and have been made subject-matter for levy of tax under the Karnataka Value Added Tax Act, 2003 (See [2005] 139 STC (St.) (Suppl.) 169), the Karnataka Sales Tax Act, 1957 continues to be current and is made use of for levy of tax in respect of some items still covered under this Act.

3. Quite naturally, the Legislature had taken care to provide for many protective/preventive provisions to ensure that there is no leakage of revenue and had provided for deterrent provisions to instil a sense of fear or obedience in the minds of the evaders and even provisions for prosecution in case of chronic defaulters, etc.

4. Section 29 of the Act is one such provision which has provided for meeting situations where dealers or persons roped within the net of the Act, can be charged if they have committed an offence as provided therein and also provided for penalties to be levied in respect of such offences.

5. The present writ petition involves a situation wherein provisions of Section 29(1)(e) of the Act which provides for punishing any person who fails to keep true and complete accounts ; and Section 29(2)(e) of the Act which provides for any person who fraudulently evades the payment of any tax or other amount payable by him under this Act being prosecuted and shall on conviction be made to undergo simple imprisonment which may extend to twelve months or with a fine which shall not be less than Rs. 5,000 or with both, but which may extend to Rs. 25,000 or with both in addition to recovery of any tax that could have been evaded.

6. Section 31 of the Act is a palliate for the rigour of Section 29 of the Act whereunder the erring dealer instead of being subjected to prosecution and possible imprisonment is offered an olive branch by giving him an option to compound the offence instead of facing the prosecution. It is this section which had been pressed into service by the respondent as against the petitioner in terms of a proposition notice dated July 10, 2003. That is how the proceedings have come before the court in the second round.

7. The petitioner is a dealer registered under the provisions of the Act. The version of the petitioner is that it deals with buying and selling of chemical products. It is also the version of the petitioner that it supplies chemical products for the laboratories of schools and colleges where such chemical products are used for experiments, etc., in the laboratory. In respect of the assessment years 2000-01, 2001-02 and 2002-03, the petitioner, it appears, has filed his returns and the assessment had been concluded in terms of the assessment orders dated April 7, 2001, May 31, 2002 and June 21, 2003, respectively.

8. It is thereafter that the respondent-Commercial Tax Officer (Intelli-gence-18), had an occasion to search and inspect the premises of the petitioner on July 4, 2003 and followed up the search/inspection by issue of proposition notice dated July 10, 2003 invoking Section 29(1)(e) and 29(2)(e) of the Act. What can be gathered from this notice is that the petitioner had been accused of not maintaining true and correct books of account, the offence is punishable under Section 29(1)(e) of the Act, that the petitioner had also virtually evaded the tax leading to an offence punishable under Section 29(2)(e) of the Act and before launching prosecution as against the petitioner in respect of such offences, show cause notice was issued with an option offered to the petitioner in case the petitioner is willing to compound the offence within seven days from, the date of receipt of the notice, failing which, further action as per rules will be resorted to.

9. It appears, the petitioner had not responded to such an offer and the respondents did launch prosecution in CC No. 266 of 2004 on the file of the Special Judicial Magistrate First Class, Special (Sales Tax), Bangalore and the assessee did receive the summon for appearance as an accused person indicating the date of hearing to be on February 22, 2004. The petitioner got alerted by this and promptly filed Writ Petition Nos. 11811, 12020-21 of 2004 before this Court questioning the legality of such action as one without jurisdiction, etc.

10. However, in terms of the order dated March 23, 2002, the writ petitions were dismissed as one not warranting interference whereafter, the petitioner filed Writ Appeal Nos. 2657-59 of 2004 which was disposed of after notice to the respondent in terms of the order dated November 3, 2004 (copy at annexure G), inter alia, directing the respondent to offer an opportunity of hearing to the petitioner and permitting the petitioner to file objections to the notice treating it as the show cause notice and to pass orders with regard to the course of action that is required to be taken thereafter depending upon the outcome of such consideration of the objections of the petitioner and that the prosecution case is to be deferred pending such action.

11. Thereafter, the petitioner did file his objections dated November 10, 2004, copy at annexure H, and the respondent passed the order dated November 22, 2004 whereunder the objections raised have all been rejected and the respondent opined that the petitioner in fact has committed an offence punishable under Section 29(1)(e) that is leading to Section 29(2)(e) of the Act during the periods 1999-2000, 2000-01 and 2001-02. The portion of the order is as under:

It is strange to note that the dealer-company is selling the petroleum products in question by their name and it is being documented as such in their sale bills. However, while accounting their turnover from the sale bills the petroleum products were transformed into chemicals for not any adequate reasons. In the circumstances, I cannot hold the act of company to declare the petroleum products as chemicals is a bona fide mistake. Hence, in view of the above findings, I have every reason to hold that the company has committed an offence under Section 29(1)(e) leading to an offence under Section 29(2)(e) during the periods 1999-2000 to 2001-02.

It is subsequent to this development, the present writ petitions have been filed by the petitioner, inter alia, questioning the order dated November 22, 2004 and also the prosecution proceedings in CC No. 266 of 2004.

12. I have heard Sri Shivayogiswamy, learned Counsel for the petitioner and Smt. Niloufer Akbar, learned Additional Government Advocate appearing for the respondents.

13. The respondents have also filed the statement of objections, inter alia, defending the action pursued, defending the order dated November 22, 2004 as also the validity of the prosecution proceedings and have urged for dismissal of the writ petition. It is also urged this Court having held that the respondents have jurisdiction to take such action and the petitioner having failed in its attempt to get over the proceedings by filing writ petition earlier and the same having been dismissed, the present writ petitions are also not maintainable, etc.

14. Submission of Sri Shivayogiswamy, learned Counsel for the petitioner, is that the respondent, particularly the first respondent, has misused his powers ; that it is not the domain of the first respondent to either call upon the petitioner to make good any deficient tax liability or to quantify the amount; that the very proposition for launching prosecution as against the petitioner is defective when the very basis on which the proposition notice had been issued is not available ; that the offer for composition was also vague and incorrect and there was, in fact, no offer under the notice and therefore, prosecution could not have been launched at all, etc.

15. It is also alternatively contended that invoking the powers not only under Section 29, but also under Section 31 of the Act, is a clear abuse of the provisions ; that it is a case of misuse of the power ; that the first respondent could not have used these powers as a substitute for a power which was required to be exercised in terms of Section 12-A of the Act, i.e., provision for reopening concluded assessment in the case of any escapement of tax liability and such proceedings having in fact not been taken against the petitioner, the present proceedings are nothing but a clear abuse of the provisions and therefore, entire proceedings including the notice deserve to be quashed.

16. Per contra, learned Government Advocate has vehemently contended that the respondents are well within their powers in invoking these provisions, when the petitioner had indulged in suppression and misrepresentation ; that the petitioner had, in fact, mislead the authorities by indicating the product that was being marketed by them to be a chemical product whereas it was a petroleum product and it should have been subjected to tax under entry No. 5(ii), Part P of the Schedule II of the Act and not under entry 10-A of Part C, Schedule II of the Act.

17. The significance is, whereas the petroleum products were subjected to tax in the range of 10 to 20 per cent, i.e., for the relevant years 1999-2000 to 2001-02, chemical products were being subjected to tax in the range of four to eight per cent depending upon the period.

18. Learned Government Advocate submits that it is for this reason there has been a determination by the respondent that there is evasion on the part of the petitioner and as such prosecution was launched invoking Section 29(1)(e). The petitioner had indicated the product as chemical product in the books of account whereas, the product was a petroleum product which amounts to suppression in the books of account and accordingly, the prosecution in terms of Section 29(1)(e) of the Act was also invoked.

19. The learned Additional Government Advocate also submits that even if the precise tax liability had not been determined but the approximate liability had been arrived at and if the option for composition had been made with reference to this amount, it will be a sufficient compliance as it gives an option or choice to the petitioner to compound the offence instead of facing prosecution and therefore, mentioning of the precise tax liability after the same is determined in terms of assessment order is not necessary for invoking the provisions of Section 31 of the Act and in this regard he has also placed reliance on the decision reported in Phasalkar Liquor Agency v. Commercial Tax Officer, Intelligence-II [1999] 114 STC 9 (Karn). Particular reliance is placed on the observation in para 11 of this order. On the other hand, the counsel for the petitioner relies on the judgment of this Court reported in Shreyas Papers Private Limited v. Assistant Commissioner of Commercial Taxes (Intelligence) [2004] 56 Kar LJ. 281 (Karn) (dated June 25, 2001 in Writ Petition No. 16957 of 2001) and Assistant Commercial Tax Officer (Intelligence) v. N.N. Jariwala [1992] 86 STC 229 (Karn).

20. It is no doubt true that for the purpose of issue of a proposition notice in terms of Section 31 of the Act and for giving an option to compound the offences, it can be even at a stage where the precise tax amount is not fully quantified. Even if it is found that the offence is not one necessarily linked to quantification of the tax liability but in respect of some other act which in turn can constitute an infraction leading to an offence under the Act such a proposition notice could be issued. This argument can definitely hold good in the case of maintenance of false accounts as the act of maintaining of the false account can be made good by itself and not necessarily linked to the amount of tax sought to be evaded though ultimately the purpose may be only to evade or lessen tax liability but when an offer for composition is made, the offer should be in terms of the precise amount, which is the actual tax liability of the dealer on payment of which the dealer or the assessee is provided the relief from prosecution. If the amount is not mentioned then there is no scope for composition in the eye of law. Also, the prosecution under Section 29(1)(e) and 29(2)(e) is not in any way linked to an offer for composition and they work independently. If the proposition notice under annexure E, dated July 10, 2003 is examined in the light of such statutory background, it is obvious that the notice by itself does not mention any precise amount on payment of which composition of the offences could have been made. In such a situation there is no offer at all for composition in the eye of law. The notice does not make any sense for the purpose of putting the assessee on notice that he is likely to be prosecuted for certain offences, as it is not a statutory requirement that before launching prosecution under Section 29 of the Act, the assessee should have been put on notice or his explanation sought for.

21. In the present case, the action is consequent upon the inspection conducted on July 4, 2003 at the premises of the petitioner and following close on the heels of the completion of the assessment order, dated June 21, 2003 for the year 2001-02. For the three years 1999-2000, 2000-01 and 2001-02, the assessee had filed its return and the assessing authority had quantified the tax liability. The assessee, in fact, had declared the turnover, classified the product as a chemical product and based on the books of account which had been perhaps verified when the assessment had been concluded. In such a fact scenario, if even as per the proposition notice, the loss of revenue is only because of the factum of classifying the product sold by the assessee as a chemical product instead of being classified as a petroleum product even as per the version of the respondent, it is obvious it is a mistaken classification and not any deliberate attempt on the part of the assessee to suppress or evade tax liability. At any rate, the proposition that the books of account for the earlier period, namely 1999-2000, 2000-01 and 2001-02 had been maintained falsely or incorrectly, can never be based on an inference that can be drawn by an inspection conducted on July 4, 2003 after such books of account had been produced before the regular assessing authority and the authority had concluded the assessment on a thorough inspection of the books of account. The fact of suppression can never be attributed to the assessee in such circumstances and if at all there was any scope for the revenue to set right any possible loss of revenue, it could have been by reopening the assessment for these three years by invoking provisions under Section 12-A of the Act which is not the domain of the intelligence officers whose work is only to check evasion and to take such action as is permitted and not to usurp the jurisdiction of the other authorities and to substitute his own authority for them.

22. It is obvious that instead of reopening the concluded assessment, the respondents have resorted to the gimmick of issuing a proposition notice under Section 31 on the premise that the assessee had committed an offence under Section 29(1)(e) and 29(2)(e) of the Act.

23. In my view, this is not only a clear case of abuse of the powers but is even a case of colourable exercise of power as the power available under Section 12-A is sought to be used in the guise of invoking provisions of sections 29 and 31 of the Act, by an officer not competent to reopen the assessment.

24. Here again, when the actual tax liability has not been determined in a manner provided under the Act, calling upon the assessee in the guise of giving him an option for compounding the offence by making good the liability is also a case of colourable exercise of power as what is resorted to, in fact, amounts to resorting to recovery proceedings even before quantification of the tax liability. A recovery proceeding begins only after the conclusion of the assessment proceeding and after the crystallisation of the tax liability and not, even before that liability is determined unless any provision of the Act expressly provides for the same. The prosecution launched on such erroneous presumption is obviously a harassment to an assessee or dealer and not for any bona fide purpose.

25. Though normally this Court does not examine in detail the action and the facts in such situation as it had been found that the respondents have been invoking the powers under Section 29 coupled with the provisions of Section 31 of the Act as a routine matter and in the light of repeated complains on the part of the dealers, the matter has been examined in this writ petition.

26. Often the dealers are intimidated and if I may use the expression, blackmailed into submission, by the officials of the respondent-Commercial Tax Department by holding out the threat of prosecution and therefore it has become necessary for this Court to put them in their place and to frown upon misuse and abuse of the powers under the Act, particularly when the respondents have indulged in colourable exercise of powers.

27. I am of the clear opinion that the instant case exemplifies such abuse of the power very vividly. The Intelligence Officer has clearly exceeded his powers. One another striking feature is, even after all these developments as of now, the respondents having not taken any steps for reopening the concluded assessment for realisation of any tax which according to them has escaped assessment. This conduct also exposes the respondents in very poor light and the real intention appears to be not to net the tax that had escaped assessment but to flex the muscle to victimise the dealer.

28. This is a clear case where this Court has to necessarily interfere and it is not merely the proceedings initiated for composition in terms of the notice dated July 10, 2003 which is required to be quashed but also the criminal prosecution which has been launched in CC No. 264 of 2004 which is require to be quashed as the prosecution is nothing but a harassment to the petitioner-assessee and not for any bona fide purpose at all.

29. In the result, this writ petition is allowed, the proposition notice as also the order dated November 22, 2000 is quashed by issue of a writ of certiorari without prejudice to any of the action that can be taken against the petitioner either for quantification of any escaped tax liability or for other purposes in accordance with the provisions of the Act. Liberty is reserved to the respondent to take such action.

30. Likewise, the proceedings in CC No. 262 of 2004 pending before the court of Magistrate is also quashed by issue of a writ of certiorari.

31. Writ petition is allowed with costs quantified at a sum of Rs. 5,000 payable by the respondents. If costs are not paid within a period of eight weeks from today, it is open to the petitioner to apply for issue of a certificate from the registry indicating that this amount could be recovered in terms of a decree passed by a civil court. However, liberty is reserved to the respondent to take such action. Rule made absolute.

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