Debatable product classification cannot justify KVAT penalty without wilful intent or tax evasion.

Penalty under the Kerala Value Added Tax Act could not be sustained for a debatable product classification where the dealer had disclosed the turnover, followed the supplier's classification, and the return was not disturbed in assessment. Section 67 requires an untrue or incorrect return together with wilful conduct and a resulting possibility of tax evasion; those elements were not established on the materials. A mere difference of opinion on classification must be resolved in assessment proceedings, and it does not by itself justify a presumption of contumacious intent. The penalty orders were therefore quashed in favour of the assessee.

---

---

Issues: Whether penalty under Section 67 of the Kerala Value Added Tax Act, 2003 could be imposed for alleged misclassification of a product when the dealer had disclosed the turnover and adopted a classification followed by the supplier.

Analysis: Section 67 authorises penalty only where there is an untrue or incorrect return accompanied by an element of wilful conduct and a resulting possibility of evasion of tax. The dealer had disclosed the turnover, adopted a classification reflected in the supplier's own treatment, and the return had not been disturbed in assessment. A mere dispute as to whether the product fell under one entry or another raised a debatable classification issue. In such circumstances, penalty cannot be founded merely on a different view of classification, as the proper course is to decide classification in assessment proceedings first. The materials did not justify a presumption of guilty intent or contumacious conduct.

Conclusion: The penalty orders were unsustainable and were quashed. The finding is in favour of the assessee.

Final Conclusion: A disputed classification, by itself, does not justify penalty under the KVAT Act when the return is otherwise disclosed and no wilful attempt to evade tax is shown; classification may still be examined in assessment proceedings.

Ratio Decidendi: Penalty for filing an incorrect return cannot be imposed on a mere debatable issue of classification unless the statutory requirement of wilful conduct leading to evasion of tax is established.

---