2015 (3) TMI 1448 - HC - VAT / Sales Tax

Penalty dismissed for undisclosed mustard oil stock due to procedural violations under Rule 50 and unreliable survey evidence

Commercial Taxes Officer, Anti Evasion, Bharatpur Versus M/s. Krishna Oil Industries

The Rajasthan HC dismissed a revision petition challenging penalty u/s 77(8) of the Rajasthan Sales Tax Act, 1994 for possession of undisclosed mustard ... Levy of penalty u/s 77(8) of the Rajasthan Sales Tax Act, 1994 - possession of undisclosed stock of mustard oil - procedural safeguards prescribed under Rule 50 of the Rajasthan Sales Tax Rules - HELD THAT:- It is an admitted fact that the stock register was available at the site and while mustard and Khal were found matching with the stock register & books of accounts viz a viz the actual stock found at 384 Quintals of mustard and 252 Quintals of Khal but there was a difference in the stock of mustard oil whereas as per stock register and books it was 395 Quintals but was found at 442 Quintals 44 Kgs, therefore, in excess by 46 Quintals 54 Kg. The revenue has placed the working of the stock so found but how and what method was adopted has not been 6 specified nor the counsel for the revenue on the basis of the survey note prepared was able to satisfy how such a huge quantity of about 1078 Quintals (384 Quintals mustard, 442 Quintals mustard oil and 252 Quintals of Khal) could be weighed/measured on the same day on 02/05/1997 and even the assessment order was passed on 02/05/1997 by the CTO, AE, Bharatpur when the factory/business premises of the assessee is at Maniya District Dholpur. Admittedly at the time of survey there were no independent witnesses when Rule 50 prescribes about two independent witnesses, therefore, there is clear cut violation of Rule 50, which also vitiates the survey. Therefore, no credence can be placed on the survey report which prima facie appears to be on estimate basis and the Tax Board as well as Dy. Commissioner (Appeals) after going through the material on record have rightly discarded the survey report and such a finding, is finding of fact on the basis of material on record and in my view no substantial question of law can be said to arise out of the order passed by the Tax Board & there are no infirmity, illegality or perversity in the order which is being assailed in the present petition. Conclusion - The penalty imposed u/s 77(8) is not sustainable due to procedural lapses and unreliable evidence of undisclosed stock. The revision petition being devoid of merit is hereby dismissed in limine. 1. ISSUES PRESENTED and CONSIDERED- Whether the penalty imposed under Section 77(8) of the Rajasthan Sales Tax Act, 1994 on the assessee for possession of undisclosed stock of mustard oil is justified and legally sustainableRs.- Whether the survey operation conducted on 02/05/1997 complied with the procedural safeguards prescribed under Rule 50 of the Rajasthan Sales Tax Rules, particularly regarding the presence of independent witnesses during search and seizureRs.- Whether the findings of the Assessing Officer regarding the quantity and valuation of undisclosed stock are supported by proper evidence and methodologyRs.- Whether the appellate authorities erred in deleting the penalty imposed by the Assessing Officer and upholding the assessee's explanationRs.- Whether any substantial question of law arises from the order of the Rajasthan Tax Board dismissing the revenue's appealRs.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Legality and Justification of Penalty under Section 77(8)Relevant legal framework and precedents: Section 77(8) of the Rajasthan Sales Tax Act empowers the assessing authority to impose a penalty on a dealer for possession of goods not accounted for, equal to five times the tax leviable or 30% of the value of such goods, whichever is less. The penalty can be imposed after giving the dealer an opportunity of being heard and conducting further enquiry.Court's interpretation and reasoning: The Court noted that the Assessing Officer found a discrepancy of 46 Quintals 54 Kg of mustard oil in excess of stock register entries and imposed penalty accordingly. However, the appellate authorities found the explanation of the assessee satisfactory and held that the penalty was improper and illegal.Key evidence and findings: The Assessing Officer relied on the survey report showing undisclosed stock valued at Rs.1,25,658/-. The appellate authorities observed that the stock verification was not properly conducted, and the method of measurement was not specified or justified.Application of law to facts: Since the penalty under Section 77(8) requires a proper enquiry and reliable evidence of undisclosed stock, the absence of a clear methodology and credible measurement undermined the Assessing Officer's findings.Treatment of competing arguments: The revenue contended that the stock was physically weighed and measured in the presence of the partner and independent witnesses, justifying the penalty. The Court rejected this, noting the absence of independent witnesses as per Rule 50 and the lack of clarity on measurement methods.Conclusions: The penalty imposed under Section 77(8) was not sustainable due to procedural lapses and unreliable evidence of undisclosed stock.Issue 2: Compliance with Rule 50 - Procedure for Search and SeizureRelevant legal framework and precedents: Rule 50 prescribes detailed procedural safeguards for search and seizure under Section 77, including the presence of two independent witnesses, preparation and signing of seizure memos, and issuance of copies to the dealer and Commissioner.Court's interpretation and reasoning: The Court emphasized that the survey operation lacked the presence of two independent witnesses as mandated by Rule 50. This procedural violation vitiates the entire survey and any evidence derived therefrom.Key evidence and findings: It was admitted that only the partner of the firm was present during the survey, with no independent witnesses. The revenue failed to produce any evidence of compliance with Rule 50's requirements.Application of law to facts: Non-compliance with Rule 50 is fatal to the validity of the survey report and subsequent penalty proceedings, as it breaches statutory safeguards designed to ensure fairness and transparency.Treatment of competing arguments: The revenue argued that the presence of the partner and two independent witnesses was sufficient. The Court rejected this, noting the absence of independent witnesses and the statutory requirement under Rule 50.Conclusions: The survey was vitiated by non-compliance with Rule 50, rendering the penalty based on the survey report invalid.Issue 3: Reliability of Stock Measurement and ValuationRelevant legal framework and precedents: The burden lies on the revenue to establish the quantity and value of undisclosed stock through credible evidence and proper methodology.Court's interpretation and reasoning: The Court observed that the method of weighing or measuring the stock was not specified by the Assessing Officer or in the survey note. The total quantities of mustard, mustard oil, and Khal found on the survey date were unusually large and unexplained.Key evidence and findings: The stock register showed 395 Quintals of mustard oil, while physical stock was recorded as 442 Quintals 44 Kg, an excess of 46 Quintals 54 Kg. However, the Court noted the lack of clarity on how such large quantities were measured on the same day and the absence of any documented methodology or independent verification.Application of law to facts: Without a clear and reliable method of measurement, the alleged undisclosed stock cannot be conclusively established.Treatment of competing arguments: The revenue maintained that the stock was physically weighed in the presence of the partner and witnesses. The Court found this unsubstantiated due to the lack of independent witnesses and procedural compliance.Conclusions: The measurement and valuation of the alleged undisclosed stock were not reliable, undermining the basis for penalty.Issue 4: Legality of Appellate Authorities' Orders Deleting PenaltyRelevant legal framework and precedents: Appellate authorities have the jurisdiction to examine the material on record and delete penalties if the imposition is found unjustified or illegal.Court's interpretation and reasoning: The Dy. Commissioner (Appeals) and the Rajasthan Tax Board both examined the survey report, stock registers, and procedural compliance, concluding that the penalty was improperly imposed and deleting it accordingly.Key evidence and findings: Both appellate authorities noted the absence of independent witnesses, unclear measurement methods, and failure of the Assessing Officer to justify the huge stock quantities.Application of law to facts: Given the procedural irregularities and lack of credible evidence, the appellate authorities acted within their jurisdiction to delete the penalty.Treatment of competing arguments: The revenue challenged the appellate orders as erroneous and contended that substantial questions of law arise. The Court disagreed, holding that the appellate authorities' findings were based on factual and legal grounds.Conclusions: The appellate authorities rightly deleted the penalty, and their orders are legally sustainable.Issue 5: Whether Substantial Questions of Law AriseCourt's interpretation and reasoning: The Court found no substantial question of law arising from the Tax Board's order. The issues were primarily factual and procedural, relating to the adequacy of evidence and compliance with statutory safeguards.Conclusions: No substantial question of law arises to warrant interference with the Tax Board's order.3. SIGNIFICANT HOLDINGS- 'Admittedly at the time of survey there were no independent witnesses when Rule 50 prescribes about two independent witnesses, therefore, there is clear cut violation of Rule 50, which also vitiates the survey.'- 'No credence can be placed on the survey report which prima facie appears to be on estimate basis and the Tax Board as well as Dy. Commissioner (Appeals) after going through the material on record have rightly discarded the survey report.'- 'Such a finding, is finding of fact on the basis of material on record and in my view no substantial question of law can be said to arise out of the order passed by the Tax Board.'- The Court upheld the principle that procedural compliance under Rule 50 is mandatory for the validity of search and seizure operations under Section 77 of the Rajasthan Sales Tax Act.- The Court confirmed that penalty under Section 77(8) cannot be imposed without reliable evidence of undisclosed stock and proper enquiry.- The final determination was to dismiss the revision petition, thereby affirming the appellate authorities' orders deleting the penalty imposed by the Assessing Officer.