Penalty for misuse of concessional raw materials requires proof of actual diversion, with liability limited to the proved balance.

Penalty under section 8(2) of the M.P. General Sales Tax Act, 1958 turns on proof that concessional raw materials purchased under section 8(1) were diverted to an impermissible use, and the department bears that burden. For 1971-72, the dealer's outside-State purchases were sufficient to account for the goods sold outside the State, so the presumption of lawful use was not displaced and penalty was unsustainable. For 1972-73, the penalty had been computed on an incorrect assumption that the entire locally purchased quantity was misused; liability, if any, was confined to the proved balance after excluding outside-State purchases, so reassessment on the correct factual basis was required.

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Issues: (i) Whether penalty under section 8(2) of the M.P. General Sales Tax Act, 1958 was sustainable for the period 1971-72 when the department alleged that locally purchased raw materials under section 8(1) were used in goods sold outside the State. (ii) Whether penalty under section 8(2) was fully sustainable for the period 1972-73 or required reassessment on the basis of the actual quantity of locally purchased raw materials so utilised.

Issue (i): Whether penalty under section 8(2) of the M.P. General Sales Tax Act, 1958 was sustainable for the period 1971-72 when the department alleged that locally purchased raw materials under section 8(1) were used in goods sold outside the State.

Analysis: Penalty under section 8(2) depends on proof that raw materials purchased under section 8(1) were used for a purpose other than manufacture of goods for sale within the State, in inter-State trade or commerce, or for export. The department bore the burden of proving such contravention. On the facts found, the dealer had sufficient raw materials purchased from outside the State to account for the goods sold outside the State, and the estimated consumption of such goods was below that external purchase value. In that situation, the presumption of lawful conduct was not displaced and no basis remained to attribute the outside-State sales to the locally purchased concessional raw materials.

Conclusion: Penalty for 1971-72 was not sustainable and was liable to be quashed.

Issue (ii): Whether penalty under section 8(2) was fully sustainable for the period 1972-73 or required reassessment on the basis of the actual quantity of locally purchased raw materials so utilised.

Analysis: For 1972-73, the record showed that the total raw materials used in goods sold outside the State exceeded the quantity attributable to outside-State purchases. After excluding the outside-State purchases capable of accounting for those goods, only the balance of locally purchased raw materials could be treated as having been used in the prohibited manner. The penalty was therefore computed on an incorrect basis, because it proceeded on the assumption that the entire quantity of locally purchased raw materials valued at Rs. 8,00,000 was so utilised, whereas the material findings supported liability only to the extent of the balance quantity.

Conclusion: The penalty order for 1972-73 could not stand as assessed and had to be quashed with reassessment directed on the correct basis.

Final Conclusion: The writ petition succeeded in part. The penalty order for 1971-72 was set aside outright, and the penalty for 1972-73 was set aside for fresh quantification in accordance with law on the proper factual basis.

Ratio Decidendi: In penalty proceedings for misuse of concessional raw materials, the department must prove that the specific locally purchased materials were in fact diverted to an impermissible use; where the dealer's lawful outside-State purchases can account for the goods sold outside the State, penalty cannot be imposed on mere assumption, and assessment must be confined to the proved balance.

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