2018 (9) TMI 1780 - HC - VAT and Sales Tax

Court rejects power consumption estimates for penalties under KVAT Act; stresses proper verification and jurisdiction.

State of Kerala Versus Joemon Rajan

The court ruled that estimating turnover based on power consumption is not legally permissible in penalty proceedings under Section 67 of the KVAT Act. ... Estimation of sales turnover - demand based on the details of the electricity consumed - Held that:- In the event of non-production of books of accounts, the Intelligence Officer could only find out the evaded turnover on the basis of other materials available like electricity consumption use of LPG and so on and so forth. The Intelligence Officer faced with the prospect of achieving his target, sacrifices the interest of the State, to achieve the same; by acting beyond the powers conferred on him and in that process lets limitation set in as far as the assessment proceedings are concerned. If such individual gratification is avoided and the interest of the State is considered as paramount, necessarily there would be team work and the Assessing Officer would be facilitated to carry out proper proceedings for estimation of the taxable turnover on best of judgment - revision dismissed. Issues Involved:1. Legality of turnover estimation based on power consumption.2. Validity of penalty imposition under Section 67 of the KVAT Act.3. Authority of Intelligence Officers in making estimations.Detailed Analysis:1. Legality of Turnover Estimation Based on Power Consumption:The State contended that estimating turnover based on electricity consumption is an accepted method, especially when no books of accounts are produced. This method was challenged by the respondents, who argued that such estimations are not permissible under Section 67 of the KVAT Act. The court referred to the precedent set in U.K. Monu Timbers, which held that estimation of turnover based on power consumption is not within the purview of penalty proceedings under Section 67. The court concluded that estimation of turnover based on power consumption is not legally permissible in penalty proceedings as it exceeds the jurisdiction of the officer conducting such proceedings.2. Validity of Penalty Imposition Under Section 67 of the KVAT Act:The court examined whether penalties imposed under Section 67 were valid. The respondents argued that penalties were imposed without proper verification of the books of accounts and that estimation of turnover is not allowed under Section 67. The court reiterated the principles established in U.K. Monu Timbers, stating that Section 67 does not confer the power to make a reasonable estimate. The court emphasized that any suppression or omission must be clearly evidenced by materials recovered during inspection. If the evaded tax cannot be determined, the penalty should not exceed Rs. 10,000. The court found that the penalties imposed were not justified as they were based on estimations, which is beyond the scope of Section 67.3. Authority of Intelligence Officers in Making Estimations:The court addressed whether Intelligence Officers have the authority to make estimations of turnover in penalty proceedings. It was argued by the State that Intelligence Officers could determine evaded turnover based on materials like electricity consumption. The court, however, held that Intelligence Officers do not have the power to carry out estimations as this is within the realm of assessment proceedings, not penalty proceedings. The court cited the Supreme Court's decision in Commissioner of Sales Tax, M.P. v. H.M. Esufali, which distinguishes between assessments based on accounts and best judgment assessments. The court concluded that estimation should be conducted by the Assessing Officer during assessment proceedings, not by the Intelligence Officer during penalty proceedings.Conclusion:The court dismissed the revisions filed by the State, upholding the principle that Intelligence Officers cannot make estimations of turnover in penalty proceedings under Section 67 of the KVAT Act. The court emphasized the need for proper team work within the Department to ensure that Assessing Officers, not Intelligence Officers, conduct estimations based on best judgment. The judgment reiterated that penalties under Section 67 should be based on clear evidence of suppression or omission, and if not determinable, should not exceed Rs. 10,000. The court directed the Registry to send a copy of the judgment to the Commissioner of State Taxes to ensure compliance with these principles.