2024 (3) TMI 791 - HC - VAT and Sales Tax

Penalty under Section 54(1)(2) VAT Act requires proof of willful tax evasion, not mere best judgement assessment

The Allahabad HC held that penalty under Section 54(1)(2) of U.P. VAT Act, 2008 cannot be imposed when assessment is made under best judgement provisions ... Levy of penalty u/s 54(1)(2) of the U.P. VAT Act, 2008 - men-rea on the part of the assessee is an essential pre-requisite condition for imposition of penalty or not - penalty can be imposed upon assessment is made on the basis of Best Judgement Assessment or not - imposition of penalty of 7 times the total tax imposed towards alleged concealed turnover was justified when the express provision of Section 54(1)(2) of the Act provides for imposition of a maximum penalty of 3 times of concealed turnover. HELD THAT:- A perusal of Section 28(2) of the Act 2008 would indicate that where after examination of books, accounts and other records referred to in Section 28(1) of the Act, 2008 the assessing authority is satisfied about correctness of sale or purchase or both, it may the assess the amount of tax payable by the dealer - A further perusal of Section 28(2) of the Act 2008 indicates that the power of assessment of the amount of tax payable by the dealer on such turnover and for determining the amount of input tax credit admissible to the dealer has been given to the assessing authority and further where the assessing authority is of the opinion that turnover of sale or purchase or both disclosed by the dealer is not worthy of credence it may determine to the best of its judgement the turnover of sale or purchase or both and assess the tax payable on such turnover. The assessment order dated 30.10.2010 would indicate that the same has been passed considering the provisions of Section 28(2) of the Act, 2008 on the basis of best of its judgement meaning thereby that it is an assessment which has been made by the assessing authority. The jurisdiction of the assessing authority while taking recourse to the 'best judgement assessment' is well settled. Hon'ble Supreme Court in the cases of State of Kerala vs C. Velukutty [1965 (12) TMI 32 - SUPREME COURT], The Commissioner of Income Tax, Calcutta v. Padamchand Ramgopal [1970 (4) TMI 2 - SUPREME COURT], M/s Joharmal Murlidhar and co. v. Agricultural Income Tax Officer, Assam and others [1970 (8) TMI 5 - SUPREME COURT] and Shri S. M. Hasan, S.T.O. Jhansi and another v. M/s New Gramophone House, Jhansi [1975 (9) TMI 177 - SUPREME COURT], has categorically held that while assessing on the basis of 'best judgement' the assessing authority has to make the assessment honestly and on the basis of intelligent well grounded estimate rather than pure surmises i.e. the assessment so made while taking recourse to the 'best judgement assessment' should be on reasonable guess based upon the material available before the assessing authority. The order of penalty passed under Section 54(1)(2) of the Act, 2008 is based on the order of the assessing authority as passed under Section 28(2) of the Act, 2008. The assessment order under Section 28(2) of the Act, 2008 is on the basis of well grounded estimate or reasonable guess as held by Hon'ble Supreme Court meaning thereby that the said order does not indicate the willful attempt to defeat or circumvent the tax law to reduce the tax liability. Once the sine qua non to imposition of penalty is evasion of payment of tax and for evasion there has to be a willful act consequently the Court will have to examine as to whether there has been willful act on the part of the revisionist in evasion of tax. The revisionist has already paid the tax as assessed after modification by the learned Tribunal vide the order dated 22.06.2016. At no stage is there any finding of any willful evasion of tax by the revisionist or a finding of there being any deliberate attempt on the part of the revisionist in avoiding the payment of tax. It is for the authorities to specifically prove the evasion of payment of tax on the part of the revisionist where the evasion has been defined as a willful attempt i.e. the authorities would have to prove a willful attempt on the part of the revisionist to evade tax. In absence thereto the order imposing penalty on the revisionist based on the assessment order passed under Section 28(2) of 2008 cannot be said to fall within the ambit of any of the eventualities as provided under Section 54(1)(2) of the Act 2008 more particularly it cannot be considered to be an evasion of payment of tax by the dealer / revisionist so as to attract the penalty as has been imposed on the revisionist. The judgement and order dated 06.04.2021 passed by learned Commercial Tax Tribunal, Lucknow in Second Appeal No. 50 of 2017 is set aside - revision allowed. Issues Involved:1. Whether mens rea is an essential pre-requisite for imposition of penalty under Section 54(1)(2) of the U.P. VAT Act, 2008.2. Whether penalty under Section 54(1)(2) of the Act can be imposed where the assessment is made on the basis of Best Judgement Assessment.3. Whether imposition of penalty of 7 times the total tax imposed towards alleged concealed turnover was justified when the express provision of Section 54(1)(2) of the Act provides for imposition of a maximum penalty of 3 times of concealed turnover.Summary:Issue 1: Mens Rea as Essential Pre-requisiteThe Court examined whether mens rea is an essential element for imposing a penalty under Section 54(1)(2) of the U.P. VAT Act, 2008. It was argued that for the penalty to be imposed, a specific finding must be recorded that the dealer has concealed particulars of turnover, deliberately furnished inaccurate particulars, submitted a false tax return, or evaded payment of tax. The Court referred to various judgments, including *Sanjiv Fabrics*, which emphasized that mens rea is necessary for imposing penalties under taxing statutes. The Court concluded that mens rea is indeed an essential pre-requisite for the imposition of a penalty under Section 54(1)(2).Issue 2: Best Judgement AssessmentThe Court considered whether penalties could be imposed based on assessments made under the 'Best Judgement Assessment' as per Section 28(2) of the Act. It was noted that the assessment was based on a reasonable guess or well-grounded estimate, not a willful attempt to evade tax. The Court held that penalties could not be imposed solely based on Best Judgement Assessments since they do not inherently indicate a willful attempt to evade tax.Issue 3: Imposition of Penalty Beyond Statutory LimitThe Court noted that the penalty imposed was seven times the total tax, while Section 54(1)(2) of the Act provides for a maximum penalty of three times the concealed turnover. The Court left this issue open to be decided in appropriate proceedings, indicating that the imposition of penalties beyond the statutory limit was not justified in this specific case.Conclusion:The revision was allowed, and the judgment and order dated 06.04.2021 passed by the Commercial Tax Tribunal, Lucknow, in Second Appeal No. 50 of 2017, was set aside. The Court emphasized the necessity of proving mens rea for imposing penalties and invalidated penalties based on Best Judgement Assessments without evidence of willful tax evasion.