Kerala High Court: Revisions Remitted for Fresh Disposal, Emphasizes Legal Principles

Hindustan Petroleum Corporation Ltd. Versus Assistant Commissioner (Assessment) I, Special Circle II, Ernakulam and others

Hindustan Petroleum Corporation Ltd. Versus Assistant Commissioner (Assessment) I, Special Circle II, Ernakulam and others - [2002] 125 STC 470 (Ker) Issues Involved:
1. Justifiability of the penalty imposed under section 45A of the Kerala General Sales Tax Act, 1963.
2. Inclusion of excise duty in the purchase turnover for tax purposes.
3. Mens rea and the requirement to prove intent to evade tax.
4. Validity and quantum of penalty imposed by the sales tax authorities.

Detailed Analysis:

1. Justifiability of the Penalty Imposed Under Section 45A of the Kerala General Sales Tax Act, 1963:

The primary issue in these petitions is the justifiability of the penalty imposed by the sales tax authorities under section 45A of the Kerala General Sales Tax Act, 1963. The petitioners argued that the imposition of penalty is unjustified because section 45A can only be invoked where there is an established attempt to evade tax, which involves a certain element of mens rea. They contended that the non-inclusion of excise duty in their returns was due to the uncertainty of law arising from conflicting judicial decisions, and they paid the tax voluntarily once the Supreme Court clarified the law on October 9, 1996. The Government Pleader, however, argued that the law was clear since the Second McDowell's case in 1985, and the petitioners' delay in payment justified the penalty.

2. Inclusion of Excise Duty in the Purchase Turnover for Tax Purposes:

The question of whether excise duty paid by the petitioners formed part of the purchase turnover for tax purposes was initially settled by the Supreme Court in the Second McDowell's case (1985), which held that excise duty paid by companies like the petitioners directly to the Central Excise Department at the stage of removal from bonded warehouses formed part of the taxable turnover. This decision was reaffirmed by a three-member Bench of the Kerala High Court in 1992 and finally by the Supreme Court in 1996. Despite this, the petitioners did not pay the purchase tax during the period of uncertainty, leading to the imposition of penalties.

3. Mens Rea and the Requirement to Prove Intent to Evade Tax:

The petitioners argued that the imposition of penalty requires proof of intent to evade tax (mens rea). They cited various judicial decisions, including Hindustan Steel Ltd. v. State of Orissa (1970), which held that penalty should not be imposed unless the party acted deliberately in defiance of law or was guilty of dishonest conduct. The Kerala High Court in P.D. Sudhi v. Intelligence Officer (1992) also held that the term "evade" implies some blameworthy or objectionable conduct, and mere default does not justify penalty. The petitioners claimed that their actions were based on a bona fide belief and not an attempt to evade tax.

4. Validity and Quantum of Penalty Imposed by the Sales Tax Authorities:

The sales tax authorities initially imposed penalties at twice the amount of tax due, which were later reduced by the Commissioner to an amount equal to the tax due. The petitioners argued that even this reduced penalty was unjustified given the circumstances. The Kerala High Court in St. Michael's Oil Mills v. State of Kerala (1988) held that the levy of penalty is permissive and not compulsive, and the quantum of penalty should depend on the gravity of the offence. The Supreme Court in E.I.D. Parry (I) Ltd. v. Assistant Commissioner of Commercial Taxes (2000) stated that penalty should not be imposed if the non-inclusion of taxable items was due to a bona fide belief and not intentional defiance of law.

Conclusion:

The Kerala High Court set aside the orders of the revisional authority (Commissioner) and remitted the revisions for fresh disposal, directing the Commissioner to consider the legal principles and relevant case law. The court emphasized the need to evaluate whether the imposition of penalty was justified and, if so, whether a nominal penalty would be appropriate given the circumstances. The collection of the disputed penalty amount was stayed until fresh orders are passed by the Commissioner. The original petitions were disposed of accordingly.