Preservation of accounts under tax rules expired before notice, so demand for old books and penalty proposal failed.

Rule 32(21) of the KGST Rules required preservation of accounts and connected records for two years from completion of final assessment, or from disposal of any connected appeal, revision or other proceeding, whichever was later. As the assessments had attained finality and no pending connected proceeding was shown, the compulsory preservation period had expired before the notices were issued. The notices demanding production of the old books of account were therefore unsustainable, and the penalty proposal based on those notices could not survive. The department was, however, left free to gather information and proceed in accordance with law if material existed to reopen the assessments.

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Issues: Whether the petitioners were bound to preserve the books of account for the assessment years 1994-95 and 1995-96 when the notices were issued, and whether the notices demanding production of accounts and the consequential penalty proposal were sustainable.

Analysis: Rule 32(21) of the KGST Rules required preservation of accounts and connected records for two years from the date of completion of final assessment, or from the date of disposal of any appeal, revision, or other proceeding connected with such assessment, whichever was later. The assessments having attained finality and no appeal, revision, or other connected proceeding being shown to be pending, the period for compulsory preservation had expired before the notices were issued. In those circumstances, the demand to produce the old books could not be enforced, and the penalty proposal founded on the same notices could not survive. The Court also clarified that the department remained free to gather information and proceed in accordance with law if any material existed to revisit the assessments.

Conclusion: The notices requiring production of books of account for 1994-95 and 1995-96 were held unsustainable, and the penalty proposal was quashed.

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