National Aluminium Company Limited vs Deputy Commissioner of Commercial Taxes, Bhubaneswar III, Circle, Khurda

B.N. Mahapatra, J.—The above two writ petitions have been filed with a prayer to quash the assessment order dated October 31, 2011 (annexure 1) passed by the sole opposite party-Deputy Commissioner of Commercial Taxes, Bhubaneswar-III Circle, Bhubaneswar, District Khurda and to issue a direction to the said opposite party to treat coal, alum, caustic soda, and other consumables as input for manufacturing of aluminium, ingots and sheets, etc., and to allow the petitioner to take input-tax credit on such inputs. Annexure 1 attached to W.P. (C) No. 1597 of 2012, is an order of assessment passed by the opposite party-Deputy Commissioner of Commercial Taxes, Bhubaneswar Circle III, Bhubaneswar, Khurda u/s 43 of the Orissa Value Added Tax Act, 2004 (for short, "the OVAT Act") for the period April 1, 2011 to June 30, 2011, raising a demand of Rs. 11,32,49,874 which includes penalty of Rs. 7,54,99,916 levied u/s 43(2) of the OVAT Act.

Similarly, annexure 1 attached to W.P. (C) No. 1686 of 2012 is the assessment order passed by the opposite party-Deputy Commissioner of Commercial Taxes, Bhubaneswar Circle III, Bhubaneswar, Khurda, u/s 43 of the OVAT Act for the period July 1, 2011 to September 30, 2011, raising a demand of Rs. 14,68,62,843 which includes penalty of Rs. 9,79,08,562 levied u/s 43(2) of the OVAT Act.

Since the issues involved in both the writ petitions are identical, they are dealt with together.

The petitioners'' case is that the petitioner-company is a Central Government public sector undertaking under the Administrative Control of the Ministry of Mines, Government of India, having its Corporate Office at NALCO, Plot No. P/1, NALCO Bhawan, Nayapalli, Bhubaneswar, District Khurda. It is an integrated establishment consisting of the following three units, namely :

(a) Aluminium refinery plant at Damanjodi in the district of Koraput, having (8 lakh tons per annum). Presently, enhanced to 21 lakhs MT per annum.

(b) Aluminium smelter plant at Angul in the district of Angul having (2.15 lakhs MT per annum). Presently enhanced to 4.60 MT per annum.

(c) Captive thermal power plant of 720 megawatt meant for smelter plant at Angul. Presently, enhanced to 1, 200 megawatt.

For the aforesaid activities, the petitioner is registered under the Central Sales Tax Act, 1956 vide registration certificate No. BHC-1113 dated September 16, 1981 whereas separate and individual registration number had been allowed under the Orissa Sales Tax Act, subsequently replaced with the OVAT Act in respect of the aforesaid three manufacturing units of the petitioner. Thereafter the petitioner has been granted the centralized registration certificate under the OVAT Act with effect from April 1, 2011 by declaring its corporate office at Bhubaneswar as the principal place of business. It has filed its statutory monthly returns for the impugned tax period, by claiming input-tax credit in respect of inputs, namely, coal, alum, caustic soda, consumables (lubricants, gas) used for generation of electricity in its captive power plant which in turn used in the continuous process of manufacturing of aluminium. After scrutiny of the returns, the sole opposite-party issued a notice in form VAT-307 on August 16, 2011 by initiating assessment proceeding u/s 43 of the OVAT Act and completed the assessment raising aforesaid demands. Hence the writ petition.

Dr. Devi Pal, learned senior advocate appearing for the petitioners submitted that the opposite-party without communicating the reasons as asked for by the petitioner has reopened the assessment proceeding and passed the order of assessment disallowing the input-tax credit in respect of purchase of coal, alum, caustic soda, consumables (lubricants, gas) used for its captive power plant for generation of electricity which in turn is used in continuous process of manufacturing of aluminium by treating the electricity so generated by the petitioner in its captive power plant as its finished product which is exempted from tax under Schedule A of the OVAT Act. It was submitted that the impugned orders of assessment were passed u/s 43 of the OVAT Act without informing/communicating the information to the petitioner which was in the possession of the assessing officer. The said information was also not indicated on the body of the order while completing the assessment proceeding u/s 43 of the OVAT Act.

Dr. Pal, learned senior advocate, emphatically submitted that the input-tax credit on the purchase of coal, etc., is to be set off and/or adjusted against the output tax under the OVAT Act on the final products, i.e., aluminium, aluminium ingot, etc., which are sold in the market. Referring to section 2(25) of the OVAT Act, it was submitted that "input" means any goods purchased by a dealer in the course of his business for resale or for use in the execution of the works contracts or in the processing or manufacturing where such goods directly goes into composition of finished product or packing of goods for sale and includes consumables directly used in such processing or manufacturing. Further referring to sections 20(1) and 20(8)(k) of the OVAT Act, Dr. Pal, submitted that no input tax credit shall be claimed by or be allowed to a registered dealer in respect of input or capital goods other than those covered under Schedules A, C and D in manufacturing of goods where the finished products are exempted from tax either in whole or in part under the OVAT Act or under the CST Act, 1956.

Dr. Pal, further submitted that the contentions of opposite-party that since the materials like coal, alum, caustic soda, etc., which are purchased from market on payment of tax and used as input in the manufacture of electrical energy in the captive power plant of the petitioner and the said electrical energy being the finished product exempted from tax under item No. 13 of Schedule A, input-tax credit on such materials cannot be allowed as a set off is totally misconceived and not sustainable in law. It is further submitted that coal along with other materials are used for generation of electrical energy which is subsequently used in continuous process of manufacturing of finished products, viz., aluminium, aluminium ingots and sheets, etc. After coal is being purchased from Mahanadi Coalfields Limited on payment of tax, the said goods are being fed into a boiler where it is burnt with the help of thermal heat and water is being converted into super saturated steam and after attending at a particular temperature and pressure, steam enters into a turbine which in turn rotates the shaft of turbo-generator from where electricity is being generated. Aluminium metal is produced in smelter plant by adopting the hall-heroult process in a large carbon lined steel container called a reduction pot. Such pots lined up in long rows, are called pot lines. The key to the chemical reaction necessary to convert the alumina to metallic aluminium is by running high magnitude of electricity current through the cryollite/alumina mixture in the pot. This process requires huge quantity of electricity. This electrolysis process takes place in electrolytic cells (or pots), where carbon cathodes from the bottom of the pot act as the negative electrode. The smelting of aluminium in a pot is a continuous process and therefore, the potline is kept in operation for 24 hours a day without any interruption of power supply. A smelter plant cannot be easily stopped and restarted. If the production is interrupted by a power failure of more than four hours, the aluminium metal in the pots will be solidified which requires an expensive rebuilding process.

Dr. Pal, submitted that without electric energy the pot lines cannot function. Huge quantity of electrical energy is required during electrolysis process and then only the aluminium which is a commercial product saleable in the market is produced. Therefore, the electrical energy generated in the captive power plant is not the final product which is sold in the market. Aluminium, aluminium ingots and other aluminium products are sold at four per cent as provided under Sl. No. 9 of Part II of Schedule B under the OVAT Act and input-tax credit can be allowed only against the sale of aluminium, aluminium ingots, etc., which are taxable under the OVAT Act. Generation of electrical energy in its own captive power plant is neither meant for sale in the market and necessarily are not sold in the market but are used ranging from 95 to 99 per cent only in the process of manufacture of aluminium, aluminium ingots, etc., by using such energy in the smelter plant through electrolysis process.

Placing reliance on the judgment of this court in the case of Reliance Industries Ltd. Vs. Asst. Commissioner of Sales Tax and Others, Dr. Pal submitted that disallowance of input-tax credit as made by the assessing officer is not correct.

Placing reliance on the judgment of the honourable Supreme Court in the case of J.K. Cotton Spinning and Weaving Mills Co. Ltd. Vs. Sales Tax Officer, Kanpur and Another, ), it is submitted that the expression "in the manufacture of goods" should normally encompass the entire process carried on by the dealer of converting raw materials into finished goods.

In support of the contention, Dr. Pal, has also relied upon the judgment of the honourable Supreme Court in the case of Collector of Central Excise, New Delhi Vs. Ballarpur Industries Ltd., and submitted that the opposite-party while granting registration certificate under the OVAT Act has treated coal under the heading of fuel.

Further, placing reliance upon the judgment of the honourable Supreme Court in the case of Commercial Taxation Officer Vs. Rajasthan Taxchem Ltd., Dr. Pal, submitted that diesel in that case was termed as raw material and not otherwise and the benefit of deduction had been allowed.

It is further submitted that if the test of essentiality or the test of dependency will be applied in the present case, it would be appreciated that without the use of coal and other goods, the electricity cannot be generated in the captive power plant of the petitioner. Therefore, it will come under the definition of "input" as provided u/s 2(25) of the OVAT Act.

Dr. Pal submitted that where a question involved is pure interpretation of law, that question should be decided and settled by the High Court.

It was further submitted by Dr. Pal that penalty can be levied only if the escapement is without any reasonable cause. In support of the contention, Dr. Pal, further relied upon the decisions of the honourable Supreme Court in the cases of Hindustan Steel Ltd. Vs. State of Orissa, , Cement Marketing Co. of India Ltd. Vs. Assistant Commissioner of Sales Tax, Indore and Others, and the decision of this court in the case of National Aluminium Co. Ltd. v. State of Orissa [1994] 93 STC 529 (Oris.).

Dr. Pal also submitted that the decision of the honourable Supreme Court in the case of Collector of Central Excise Vs. Solaris Chemtech Limited and Others, relied upon by the opposite-party supports the case of the petitioner as the petitioner adopts electrolysis process for manufacture of aluminium which requires huge quantity of electricity and therefore, the potline is kept in operation for 24 hours a day without any interruption of power supply. It is further submitted that the decision of the honourable Supreme Court in the case of Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam Vs. Thomas Stephen and Co. Ltd., Quilon, has no application in the present case as the definition of "input" appearing in section 2(25) of the OVAT Act includes consumables directly used in such processing or manufacturing.

Mr. R.P. Kar, learned standing counsel appearing for the Revenue, sub-mitted that there is no infirmity or illegality in the order passed by the sole opposite party-Deputy Commissioner of Commercial Taxes, Bhubaneswar Circle III, Bhubaneswar, in disallowing input-tax credit under the OVAT Act in respect of purchase of coal, alum, caustic soda, and other consumables, etc., used for manufacture of electrical energy in captive power plant.

Placing reliance upon the judgment of the honourable Supreme Court in; the case of Collector of Central Excise Vs. Solaris Chemtech Limited and Others, , Mr. Kar submitted that any operation in course of manufacture, only if integrally connected with the operation which results in the emergence of manufactured goods, would come within the term "manufacture". But in the case at hand, electricity generated is a finished product itself and it is not integrally connected with manufacturing of aluminium and aluminium ingots. Mr. Kar, further placing reliance on the decisions of the honourable Supreme Court in the case of Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam Vs. Thomas Stephen and Co. Ltd., Quilon, , submitted that "consumption" as contemplated by section 2(25) of the OVAT Act must be in the manufacture as raw material or of other components which go into the making of the end-product. Goods used for ancillary purposes, like fuel, in the process of manufacture, do not fall within section 2(25) of the OVAT Act. Further placing reliance upon the judgment of the honourable Supreme Court in the case of Union of India (UOI) and Others Vs. Dharamendra Textile Processors and Others, , Mr. Kar, submitted that wilful concealment is not an essential ingredient for attracting civil liability or penalty.

On the rival contentions advanced by the parties, the following questions fall for consideration by this court :

(i) Whether coal, alum, caustic soda, and other consumables used for generation of electricity is to be treated as an "input" as defined u/s 2(25) of the OVAT Act and the tax which has been paid on purchase of coal, alum, caustic soda and other consumables, etc., can be claimed as input-tax credit u/s 2(27) of the OVAT Act against the tax payable on sale of finished product, i.e., aluminium, aluminium ingots and sheets, etc.

(ii) Whether imposition of penalty u/s 43(2) of the OVAT Act can only be levied if the escapement is without any reasonable cause ?

So far as question No. (i) is concerned, the case of the opposite party-Revenue is that the finished product of captive power plant is electrical power or electrical energy which finds place at Sl. No. 13 of Schedule A of the OVAT Act. As per section 17 of the OVAT Act, the goods specified in Schedule A are exempted from levy of tax and as such the electrical energy is exempted from tax under the OVAT Act. Coal is used for manufacturing of electrical energy, which is a finished product. Therefore, no input-tax credit could be allowed in terms of section 20(8)(k) of the OVAT Act.

On the other hand, the petitioner''s case is that it has set up an integrated establishment consisting of three units, namely, (a) aluminium refinery plant, (b) aluminium smelter plant, and (c) captive thermal power plant. These three plants have been set up to manufacture the finished product, i.e., aluminium, aluminium ingots and sheets, etc.

The opposite party-Deputy Commissioner of Commercial Taxes in the assessment order has observed as follows :

In the instant case the assessee-company is carrying business in manufacturing and selling of alumina and aluminium ingots and sheets, etc. This assessee-company has three numbers of units in the State of Odisha, they are involved in mining and refining of the mineral from which alumina is produced at Damanjodi units and transferred to second unit, i.e., smelting plant at Angul. The third unit is captive power plant, power generating unit at Angul, which supplies electricity power to smelting plant for manufacturing aluminium ingots, wires and sheets for sale.

It is nobody''s case that the petitioner is engaged in producing and selling of electricity. The admitted case is that the petitioner is carrying on business in manufacturing and selling of aluminium, aluminium ingot and sheet, etc., and to manufacture the finished products the power plant has been set up to manufacture/generate electrical energy.

The relevant portion of section 20(8)(k) of the OVAT Act, reads thus :

(8) No input-tax credit shall be claimed by or be allowed to a registered dealer,-

(k) in respect of input or capital goods other than those covered under Schedules A, C and D used in manufacture of goods where the finished products are exempted from tax either in whole or in part under this Act or under the Central Sales Tax Act, 1956 (74 of 1956).

Section 17 of the OVAT Act envisages that the sale of all goods specified in Schedule A shall be exempted from tax subject to conditions and exceptions set out therein. Therefore, sale of electrical energy which appears under item No. 13 of Schedule A is exempted from levy of value added tax under the OVAT Act. Consequently, no input-tax credit shall be claimed by or allowed to a registered dealer in respect of tax paid on input of purchases by a dealer in course of his business for use in producing or manufacturing of electrical energy in terms of section 20(8)(k) of the OVAT Act. It is the admitted fact that the petitioner-company is carrying on the business of manufacturing and selling of aluminium, aluminium ingot and sheet, etc. It is not the case of opposite party-Revenue that the petitioner is carrying on business of generating/producing electrical energy for sale.

The next question arises whether the tax paid on the inputs for generating power can be set off against the tax payable on sale of aluminium, aluminium ingot and sheet, etc. Undisputedly, electrical energy is necessary to produce/manufacture and sale of aluminium, aluminium ingot and sheet, etc.

"Input" has been defined in section 2(25) to mean that any goods purchased by a dealer in the course of his business for resale or for use in the execution of works contract, in processing or manufacturing, where such goods directly goes into composition of finished products or packing of goods for sale, and includes consumables directly used in such processing or manufacturing. Section 2(26) defines "input tax" to mean tax collected and payable under this Act in respect of sale to a registered dealer of any taxable goods for use in the course of his business, but does not include tax collected on the sale of goods made to a commission agent purchasing such goods on behalf of such dealer. "Input-tax credit" as defined u/s 2(27) of the OVAT Act means the setting off of the amount of input tax or part thereof u/s 20 against the out put tax, by a registered dealer other than a registered dealer paying turnover tax u/s 16.

On a conjoint reading of section 2(25), section 2(26) and section 2(27) of the OVAT Act, it is amply clear that a registered dealer under the OVAT Act shall be entitled to set off the tax paid on the purchase of goods effected by such dealer either for resale or for use in execution of works contract or for manufacture and processing against the out put tax, that is the tax payable on sale of any taxable goods.

In the present case, the petitioner is engaged in manufacturing of aluminium, aluminium ingot and sheet, etc., and in order to manufacture the above goods the electrical energy is required. The process of manufacturing of aluminium reveals that energy is required in such process of manufacturing. To generate energy/power, coal, alum, caustic soda and other consumables, etc., are necessary which the petitioner purchases on payment of tax.

It is not disputed that huge quantity of electrical energy is required during electrolysis process to produce aluminium which is a commercial product. Thus, the electrical energy generated in the captive power plant of the petitioner is not the final product which is sold in the market. Electrical energy which is generated with the use of coal and other materials is only an intermediate product which is used in the process of manufacturing of final product, viz., aluminium, aluminium ingots and sheets, etc.

The honourable Supreme Court in the case of J.K. Cotton Spinning and Weaving Mills Co. Ltd. Vs. Sales Tax Officer, Kanpur and Another, , held that the expression "in the manufacture of goods" should normally encompass the entire process carried on by the dealer of converting raw materials into finished goods. Where any particular process is so integrally connected with the ultimate production of goods but for that process, manufacture or processing of goods would be commercially inexpedient, goods required in that process would fall within the expression "in the manufacture of goods". Undisputedly, in the present case, the generation of electrical energy in the captive power plant is integrally connected with the ultimate production of finished goods. Therefore, the goods required in the process of generation of electrical energy would fall within the expression "in the process of manufacturing".

Power/energy is one of the primary and essential commodities which has a direct relation in the manufacturing process. Direct relation means without which manufacture of any product is not possible at all. In that view of the matter, we are of the considered view that coal, alum, caustic soda and other consumables, etc., used by the petitioner in the process of manufacture of power/energy without which production of the finished products, viz., aluminium, aluminium ingots and sheets, etc., is not feasible which is nothing but an input in terms of section 2(25) of the OVAT Act.

It is not at all necessary that coal, alum, caustic soda and other consumables, etc., purchased on payment of tax and used in manufacturing of electrical energy in order to qualify as input should directly go into composition of the finished products, what is required is that those goods should be directly used in manufacturing and processing for production of finished goods. The expressions "directly go into composition of finished product" and "directly used for manufacturing or processing of finished products" are not one and the same thing. There is a clear distinction between the two. In the former, while the goods directly go into the composition of finished products, in the latter the goods are directly used in manufacturing/processing of the finished products. Therefore, coal, alum, caustic soda and other consumables, etc., which are used for manufacturing/generating of electrical energy, are inextricably connected with the manufacturing process of aluminium and aluminium ingots; they are nothing but input and tax paid on purchase of such input shall qualify for set off against output tax paid/payable on sale of finished products. There is no dispute that coal, alum, caustic soda and other consumables, etc., are used to generate electricity through captive power plant which is admittedly used for the purpose of manufacturing the end/finished products, viz., aluminium, aluminium ingots and sheets, etc. Therefore, coal, alum, caustic soda and other consumables, etc., can only be termed as input in terms of section 2(25) of the OVAT Act.

In the case of Reliance Industries Ltd. Vs. Asst. Commissioner of Sales Tax and Others, , this court held as under (pages 241, 248 and 249 in 15 VST) :

Now the question that arises for consideration is whether the furnace oil is a ''consumable'' within the meaning of section 2(25) of the OVAT Act. The expression ''consumable'' has not been defined in the OVAT Act. In the absence of any such statutory definition the expression has to be understood in the meaning assigned to it by various dictionaries and how it is understood in trade and commerce. ''Consumable'', according to Webster Dictionary means that which can be consumed, a consumable commodity. ''Consume'' means to eat, use up, and destroy. According to Shorter Oxford Dictionary ''consumable'' means capable of being consumed by fire. The term ''fuel'' according to Webster Dictionary means any material as coal, oil, gas, wood, etc., which is burnt to supply heat or power. According to Shorter Oxford Dictionary ''fuel'' means material for burning combustible matter for fires. According Micropaedia Britannica, Volume 5, oil is also called fuel oil and it is used primarily for steam boilers in power plants, on board ship, and in industrial plants.

...

In view of the proposition of law laid down by the honourable apex court, different High Courts and the views taken by Taxation Tribunals, the contention of the opposite parties that furnace oil used by the dealer is to produce flame and therefore it is fuel and not consumable which is directly used in processing or manufacturing of finished product is totally misconceived and not sustainable in law. On the other hand, it boils down to an irresistible conclusion that furnace oil is one of the primary and essential commodities which has a direct relation in the manufacturing process and ''direct relation'' means without which the manufacturing of end-product is not possible at all. In that view of the matter, we are of the considered view that furnace oil used by the petitioner in the process of manufacture without which production of PSF is not feasible is nothing but consumable.

Now it is to be examined whether section 2(25) requires that furnace oil, in order to be treated as input, should directly go into the composition of finished product. In the definition of ''input'' u/s 2(25), the Legislature has included various types of articles. ''Input'' has been defined to mean any goods purchased by a dealer in the course of his business for resale or for use in the execution of works contract, in processing or manufacturing, where, such goods directly goes into composition of finished products and includes consumables directly used in such processing or manufacturing. It will appear therefore that the definition of ''input'' comprises four different types of articles, viz., articles or goods for resale, goods used in the execution of works contract, goods used in processing or manufacturing, where such goods directly goes into composition of finished products and consumables directly used in such processing or manufacturing. Separately, by an inclusive definition, consumables which are directly used in such processing or manufacturing have been included. Therefore, the inclusive definition does not refer to any goods which must be used in processing or manufacturing, where such goods directly go into composition of finished products. As per inclusive definition, the only requirement is that the consumables are directly used in such processing or manufacturing. ''Consumables'' need not be required to directly go into composition of finished products. The very expression ''consumables'' postulates that such articles are destroyed or used upon the processing or manufacturing of goods. It is because of this reason that while consumable by an inclusive definition are included in the definition of ''input'' u/s 2(25) of the VAT Act the Legislature did not insist upon the requirement which appears in the earlier clauses that such goods must go into composition of finished products. When the Legislature does not insist upon such requirement, the insistence by opposite-party No. 1 that consumables must go directly into composition of finished products is totally misconceived and runs contrary to the very definition of ''input'' u/s 2(25) of the VAT Act.

In the case of Commercial Taxation Officer Vs. Rajasthan Taxchem Ltd., the question was whether diesel can be called raw material in the manufacture of polyster yarn. In that case the assessee is engaged in the business of manufacture of polyster yam and for the said purpose it purchased diesel and used it for manufacturing of electricity by G.D. sets. The assessee in that case claimed the benefit of sales tax on the ground that diesel purchased is a raw material for the manufacture of the ultimate final product, viz., polyster yarn although diesel was used for generation of electrical energy by D.G. sets. The honourable Supreme Court observed that there is no dispute in the instant case that diesel and lubricant is used to generate electricity through DG sets which is admittedly used for the purpose of manufacturing yarn. In view of the above facts diesel is being used for the purpose of running the generator set for the production of the ultimate product which is also required for the purpose of manufacturing the end-product. The diesel therefore can only be termed as raw material and not otherwise and the benefits of deduction have been allowed.

In the case of Maruti Suzuki Ltd. Vs. Commissioner of Central Excise, Delhi-III, , the honourable Supreme Court held that electricity generation is more of a process having its own economics. When the electricity generation is a captive arrangement and the requirement is for carrying out the manufacturing activity, the electricity generation also forms part of the manufacturing activity and the input used in that electricity generation is an input used in the manufacture of final product.

Further in the case of State of Gujarat and Another Vs. AMI Pigments Pvt. Ltd. and Others etc., the issue before the honourable Supreme Court was, whether the fuel such as natural gas, furnace oil, diesel oil and naphtha to generate electricity which was then used in the manufacturing process of the finished products like caustic soda, industrial chemicals, etc., would come under meaning of the expressions "raw materials", "processing materials" or "consumables stores" for the purpose of section 15B of the Gujarat Sales Tax Act, 1969 and while remanding back the said batch of cases to the honourable High Court of Gujarat, the honourable Supreme Court further observed that whether for determining this question the test to be applied would be the "test of essentiality" or the "test of dependency" laid down by the honourable Supreme Court in the case of Collector of Central Excise, New Delhi Vs. Ballarpur Industries Ltd., and in J.K. Cotton Spinning and Weaving Mills Co. Ltd. Vs. Sales Tax Officer, Kanpur and Another, or the test laid down by the honourable Supreme Court in Coastal Chemicals Ltd. etc. Vs. Commercial Tax Officer, A.P. and Others etc., ).

The High Court of Gujarat in the case of AMI Pigments Pvt. Ltd. and Others Vs. State of Gujarat and Another, by applying the "test of essentiality" and the "test of dependency" as laid down by the honourable Supreme court in the case of Collector of Central Excise, New Delhi Vs. Ballarpur Industries Ltd., and J.K. Cotton Spinning and Weaving Mills Co. Ltd. Vs. Sales Tax Officer, Kanpur and Another, has come to the conclusion that goods like natural gas, furnace oil, diesel oil and naphtha when used as fuel for generation of electricity which was then used in the manufacturing process of the finished products like caustic soda, industrial chemicals, etc., will come under the meaning of the expression "raw materials", "processing materials" or "consumables stores".

In view of the above, we are of the considered view that coal, alum, caustic soda and other consumables purchased from market on payment of tax and used for generation of electrical energy in the captive thermal plant of the petitioner which is used in the process of manufacture of finished product, viz., aluminium, aluminium ingots and sheets, etc., taxable under the OVAT Act are "input" as defined u/s 2(25) of the OVAT Act and the tax which has been paid on such purchases can be claimed as input-tax credit u/s 2(27) of the OVAT Act against the tax payable on sale of finished products, i.e., aluminium, aluminium ingots and sheets, etc. Hence, the demand raised in the assessment orders dated October 31, 2011, passed under annexure 1 in both the writ petitions disallowing the input-tax credit in respect of tax paid on coal, alum, soda, and other consumables used for generation of electrical energy is quashed.

Question No. (ii) is as to whether imposition of penalty u/s 43(2) of the OVAT Act can only be levied if the escapement is without any reasonable cause.

VAT is indirect tax on consumption of goods. It is the form of collecting sales tax under which tax is collected in each stage on the value added to the goods. The basic object of VAT Scheme is to provide voluntary and self compliance. It goes without saying that to plug the leakage of revenue, the Legislature enacted law authorizing imposition of penalty for infraction of any statutory provision. We are conscious that generally penalty proceedings are quasi-judicial in nature. Quantification of penalty u/s 43 of the OVAT Act is dependent upon the tax assessed under that section. For the purpose of assessing tax, opportunity of hearing was afforded to the assessee, the explanation of the assessee and its books of account were examined and considered. Penalty is only quantified on the basis of the tax assessed. No discretion is left with the assessing officer for levying any lesser amount of penalty. Penalty is not independent of the tax assessed. If the tax is assessed, imposition of penalty u/s 42(5) is warranted.

The matter may be looked at from different angle. Section 43 of the OVAT Act deals with escaped assessment. As stated above, imposition of penalty is dependent upon the quantum of tax assessed u/s 42 of the OVAT Act. If such a penal provision is not provided then fraudulent dealers would seriously venture to evade tax and whenever they will be caught hold of they will simply pay the tax and escape. Therefore, the provision for imposing penalty twice the amount of tax assessed, u/s 43 of the OVAT Act has been made so that a dealer-assessee would refrain himself from taking any step to avoid payment of legitimate tax. If, however, any dealer indulges himself in any fraudulent activities to evade tax, then in addition to tax assessed he would pay penalty which is twice the amount of tax assessed.

Against the assessment of tax and penalty, there is a provision for appeal. In appeal, if the amount of tax assessed u/s 43 of the OVAT Act is reduced, the quantum of penalty will also be reduced automatically.

In view of the above, once the assessing officer comes to the conclusion that the dealer is indulged in fraudulent activities and assesses him u/s 43 of the OVAT Act, there is no need for the assessing officer to make further investigation to find out whether the escapement is without reasonable cause for the purpose of imposition of penalty u/s 43(2) of the OVAT Act.

The honourable Supreme Court in the case of Union of India (UOI) and Others Vs. Dharamendra Textile Processors and Others, held that wilful concealment is not an essential ingredient for attracting civil liability or penalty.

In the result, the writ petitions are allowed to the extent indicated above.

V. Gopala Gowda, C.J.

I agree.