Shree Renuka Sugars Ltd. vs State of Karnataka

Ram Mohan Reddy, J.—Since common questions of law and that of fact arise for decision making, petitions are clubbed together and with the consent of the learned counsel, though listed for admission, are finally heard and disposed of by this common order. These two petitions are filed invoking section 23(1) of the Karnataka Sales Tax Act, 1957, for short, "the KST Act", calling in question the common order dated October 10, 2012 in STA Nos. 2196-2197 of 2011 of the Karnataka Appellate Tribunal at Bangalore, for short, "the KAT".

Facts briefly stated are: The petitioner claims to be a company incorporated under the Companies Act, 1956 and registered under "the KST Act" and the Central Sales Tax Act, for short, "the CST Act", carrying on business of manufacture and sale of sugar in the State of Karnataka with manufacturing unit at

(i) Munavalli with 2500 tonne crushing capacity per day;

(ii) Aland taken on lease;

(iii) Haveri taken on lease;

(iv) Havalga owned by the petitioner; and

(v) Burlatti owned by the petitioner.

According to the petitioner, the State of Karnataka, in terms of its policy relating to incentive and concession to entrepreneurs starting new industries in the State, extended concession to new sugar factories permitting conversion of purchase tax into interest-free loan, pursuant to which a new unit certificate dated April 19, 2001 was issued in the name of M/s. Sree Renuka Sugars Limited, for its new manufacturing unit at Munavalli, Savadatti Taluk, Belgaum District, registered with the Government of India, vide No. IL/253/ILS/98 dated July 16, 1998 for the manufacture of sugar with installed capacity of 2500 TC, having commenced production on November 22, 1999, as evident from the first sale invoice, i.e., bill issued by the unit, which had the approval of the Commissioner for Industrial Development and Director of Industries and Commerce, annexure A.

It is the assertion of the petitioner that the leased units at Aland and Haveri and owned units at and Burlatti, commenced production much later, since new acquisitions of the petitioner-company. According to the petitioner, the purchase of sugarcane liable to tax under section 25B of "the KST Act" at the rate prescribed was declared in the returns of turnover filed declaring the quantity of sugarcane purchased from growers both within and outside the State, and sought the benefit of conversion of the purchase tax due for the assessment years 2006-07; 2007-08 to interest-free loan, on the premise that all the five units being new industrial units were eligible for the said tax incentive, hence did not pay any tax due under section 25B of the KST Act.

The assessing authority, accepted the return recording a finding that the appellant was eligible for the tax incentive in terms of the certificate annexure A as if applicable to all the five units. The assessing authority exercising powers of rectification under section 25A of the KST Act, by order dated January 23, 2010, rectified its earlier order recording a finding that from out of the five units, only one unit at Munavalli was entitled to the benefit and accordingly, on the same day, issued a demand notice in form No. 7. The petitioner is said to have paid the total taxes due though in respect of the four units, on February 15, 2010.

The non-payment of the purchase tax in respect of the four units, led to a notice dated April 20, 2011 invoking section 12B(4) of the KST Act proposing penalty as under:

The said proposition notice was confirmed by order dated June 25, 2011, aggrieved by which, the petitioner preferred W.P. Nos. 64639-640 of 2011, whence, by order dated August 12, 2011, the petitions were permitted to be withdrawn with liberty to file an appeal.

The petitioner preferred appeal before the Joint Commissioner of Commercial Taxes (Appeals), Belgaum, under section 20(5) of the KST Act. The appellate authority, having considered the explanation for not paying the purchase tax in respect of purchase of sugarcane by the four units, regard being had to the minimum penalty stipulated under section 12B(4) of the KST Act, by order dated August 19, 2011, reduced the penalty for the assessment year:

Aggrieved by that order, the petitioner preferred two separate appeals registered as STA Nos. 2196-2197 of 2011 before the KAT, whence by the common order dated October 10, 2012, impugned, the appeals were dismissed.

The learned counsel for the petitioner submits that the State Government, having issued a "new unit certificate" dated April 19, 2001 certifying that the petitioner had with effect from November 22, 1999 commenced commercial production of manufacture of sugar in its unit at Munavalli having installed crushing capacity of 2,500 tonnes was entitled to incentive and concession by conversion of purchase tax payable into interest-free loan on purchase of sugarcane for manufacture of sugar at the four other units operating at Aland, Haveri, Havalga and Burlatti in addition to the unit at Munavalli. Learned counsel''s submission is that though the rectification order permitted the concession for the unit at Munavalli, nevertheless, the assessing authority having concluded that the petitioner committed a mistake in assuming the certificate extended concession to all the units, since "company specific" and not "unit centric" and the payment of tax on February 15, 2010, pursuant to the demand notice dated January 23, 2010 hence established bona fides. According to the learned counsel, there was no intention to make unlawful gain to itself or avoid payment of tax. Learned counsel hastens to add that in several reported opinions of this court and that of the apex court, it is held that section 18A of the KST Act and section 12B(4), permits exercise of discretion in the matter of imposition of penalty by the assessing authority in which case, two factors are to be kept in mind, viz., bona fides of the petitioner in not paying the purchase tax within time and its conduct after having done so.

The learned Government Advocate for the respondent/Revenue seeks to sustain the orders of the appellate authority and the KAT as being well merited, fully justified and not calling for interference. Learned counsel submits that the appellant when issued with the new unit certificate, annexure-A, specifying its applicability to the unit at Munavalli with installed crushing capacity of 2,500 tonne, there can be no mistake in understanding that the said certificate was inapplicable to other units of the petitioner hence, "unit centric" and not "company specific". Even otherwise, as on April 19, 2001, the new unit certificate, annexure A when issued, was in respect of Munavalli unit, since the four other units at Aland, Haveri, Havalga and Burlatti were not commissioned.

According to the learned Government Advocate, despite lack of bona fides, the first appellate authority exercised its discretion to reduce the penalty to its minimum to modify the order of the assessing authority, petitioner cannot be heard to have a grievance.

Having heard the learned counsel for parties, perused the pleadings and examined the orders impugned, the common point for consideration in these petitions is:

"Whether the Joint Commissioner of Commercial Taxes (Appeals), Belgaum, was not justified in imposing penalty of Rs. 1,38,39,402 for the year 2006-07 and Rs. 59,24,969 for the years 2007-08 under section 12B(4) of the KST Act and sequentially the KAT was not justified in confirming the imposition of penalty by dismissing the appeals?"

The crux of the matter lies in the new unit certificate dated April 19, 2001, annexure A issued by the Joint Director of Industrial Development of the State of Karnataka, which reads thus:

"Government of Karnataka Department of Industries and Commerce No. IDF.F2.71.BGM.SF.I. & C. 99-00

Office of the Director Khanija Bhavan, Race Course Road, Bangalore-1, Dated 19.04.01

NEW UNIT CERTIFICATE

Sub: Incentives and concessions to entrepreneur starting of new industries in the State--Grant of concessions to sugar factories--conversion of purchase tax payable by new sugar factories into interest free loan to M/s. Sree Renuka Sugars Ltd., Munavalli, Savadatti Taluk, Belgaum District--Reg.

Ref: 1. G.O. No. CI 140 FMI 71 dated June 6, 1973

G.O. No. FD. 373 CSL.73. dated January 17, 1975

G.O. No. CI. 200.SGF.84. dated March 30, 1988

Units representation dated December 15, 1999

Judgment and decree, DIC, Belgaum report No. BGM/DIC/DD(PTD)/Renuka/00-01/dated February 22, 2001 and March 29, 2001.

. . .

This is to certify that M/s. Sree Renuka Sugars Ltd., Munavalli, Savadatti Taluk, Belgaum District, is a new sugar industry registered with Government of India vide No. IL/253/FILS/98 dated July 16, 1998 for the manufacture of sugar with installed capacity of 2500 TC. The unit had started the commercial production on November 22, 1999 as evidenced from the first sale invoice, i.e., bill issued by the unit.

This issues with the approval of the Commissioner for Industrial Development and Director of Industries and Commerce.

Sd/- Joint Director (ID)

To:

M/s. Sree Renuka Sugars Ltd.,

Munavalli, Savadatti Taluk,

Belgaum District."

Apparently, in the preamble to the certificate, annexure A makes reference to the incentive and concession to entrepreneurs starting new industries in the State entitled to concessions by conversion of purchase tax payable into interest free loan. The certificate states that M/s. Renuka Sugars Limited, Munavalli, Savadatti Taluk, registered with Government of India for manufacture of sugar with installed capacity of 2,500 TC commenced commercial production on November 22, 1999, evident from the first sale invoice issued by the unit at Munavalli, with approval of Commissioner for Industrial Development and Director of Industries and Commerce. The only impression that any rational, prudent man could gather from the certificate is that, it was "unit centric" and not "company specific". In other words, concession was available to the petitioner''s unit at Munavalli, which commenced production on November 22, 1999. This certificate did not extend benefit to four other units since not commenced commercial production of sugar by the petitioner-company. It is not the case of the petitioner that the new unit certificate, annexure A, was either modified or a fresh certificate issued covering the other four units at Aland, Haveri, Havalga and Burlatti, or that similar such new certificates were issued to those four units on the commencement of commercial production in the said units. In the circumstances, it is unacceptable that the petitioner-company was under the bona fide mistaken belief that the new unit certificate, dated April 19, 2001 was applicable to all the units including unit at Munavalli.

The contention advanced by the petitioner as disclosed in the reply to the proposition notice is extracted in the order dated June 25, 2011 of the Deputy Commissioner of Commercial Taxes, Recovery-I, Belgaum, is that the petitioner was under a bona fide mistaken belief that the new unit certificate, annexure A was applicable to all its units including the unit at Munavalli. The assessing authority, having regard to section 12B(4) of the KST Act, as extracted in the said order, held that default on the part of the petitioner in the matter of payment of tax cannot be unintentional or due to ignorance, since they are immaterial and are not grounds for levy of penalty, and as the law invested a jurisdiction in the authority to levy penalty on the failure of the petitioner to make payment of purchase tax, by order dated June 25, 2011, hence the imposition of penalty for the year 2007-08 of an amount equal to the amount of tax not paid, finally assessed and confirmed. Similar such order was passed in respect of levy of penalty for the year 2006-07 by the assessing authority.

The appellate authority having regard to the very same plea of bona fide mistake, re-appreciated the said contention, framed points for consideration, more appropriately over whether the petitioner had any deliberate intention on its part in not paying the purchase tax in respect of four units, amongst other questions, answered the said points in the "negative" having regard to the new unit certificate, annexure A and its applicability to the unit at Munavalli alone. The first appellate authority observed that soon after the order dated January 23, 2010 rectifying the mistake in the assessment order, the petitioner on February 15, 2010 discharged the entire amount of purchase tax in respect of the four units ineligible for interest-free loan facility. The said authority, having noticed the opinion of this court in Mysore Kirloskar Ltd. Vs. State of Karnataka, , observing that, when once the Tribunal comes to the conclusion that the defiance was not deliberate and there was no dishonest intention on the part of the assessee in not acting in accordance with law in payment of advance tax and that the contravention had occurred because of circumstances beyond its control, opined that penalty for failure to deposit advance tax within the time-limit as provided under section 12B(4) is not automatic without considering facts and circumstances of the case. The said authority, further observed the opinion of the apex court in Hindustan Steel Ltd. Vs. State of Orissa, , as also Naren Constructions, Shimoga v. State of Karnataka [2000] 48 KLJ 34 (Mb.), in the light of which, held that imposition of the maximum penalty equal to the amount of tax is "too heavy" and it was reasonable to levy minimum penalty stipulated under section 12B(4) of the Act and accordingly by order dated 19th August 2011, reduced the penalty. The KAT too, on a re-appreciation of the entire material placed before it in a second appeal, concurred with the views of the first appellate authority to dismiss the appeals.

A co-ordinate Division Bench of this court in Gujarat Co-operative Milk Marketing Federation Limited v. State of Karnataka [1996] 103 STC 369 (Karn.), while interpreting sections 18 and 18A of the KST Act, opined that the commission of statutory offence would not require proof of mens rea as an essential ingredient and at paragraph 22, observed thus (pages 379 and 380 in 103 STC):

"22. In the case of section 18A of the State Act however there is no need for reading down the provision as was done by the Supreme Court, for the provision is couched in a language which lends itself to only the interpretation, namely, the imposition of the penalty is left to the discretion of the assessing authority. Discretion howsoever wide can never be exercised arbitrarily. On the contrary the wider the discretion, the more careful and objective has its exercise to be. And yet it is difficult for any court to enumerate let alone place in a straitjacket formula, as to what would be an appropriate penalty in a given case or class of cases. All that can be said is that the assessing authorities, shall be bound to take into consideration all the circumstances relevant to the question of imposition and the quantum of penalty imposed. Of these circumstances two factors shall have to be particularly kept in view, these are - the bona fides of the dealer in making the excess collection and his conduct after having done so. An order imposing penalty which is passed for no better reason than the proof of a contravention or is demonstrably oblivious of the relevant consideration would be liable to be interfered with in appeal, revision or even writ jurisdiction under article 226 of the Constitution. Assessing authorities exercising the statutory powers of imposing penalties would therefore do well to act fairly and objectively and let not their exuberance in collection of taxes overtake their onerous obligation of discharging their statutory powers along judicial lines. Ample support for this view is available from a Division Bench judgment of this court in Manilal Monaji Somayya Vs. The Commercial Tax Officer, Gokak and Another, ; where this court observed thus:

''The Act provides for imposition of penalty for failure to pay every month the advance tax on the dealer''s taxable turnover during the preceding month. But the liability to pay penalty does not arise merely upon proof of default in payment of tax in advance every month. As observed by the Supreme Court in Hindustan Steel Ltd. Vs. State of Orissa, , at page 214, an order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances''."

(emphasis Here italicised supplied.)

In Shanthi Industries Vs. Commissioner of Commercial Taxes in Karnataka, , a co-ordinate Division Bench, observed that it was well neigh impossible to lay down all tests for all cases but possible to lay down some tests as applicable to all cases. When discretion with duty is invested in the authority, the requirement is a consideration of all explanations offered in regard to the alleged breach of law inviting the penalty though the authority has the power to impose such penalty.

Section 12B(4) of the KST Act reads thus:

"If at the end of the year it is found that the amount of tax paid in advance by any dealer for any month or quarter or for the whole year in the aggregate was less than the tax payable for that month or quarter or the tax for the whole year as finally assessed, as the case may be, by more than fifteen per cent, the assessing authority may direct such dealer to pay, in addition to the tax, a penalty which shall not be less than one half of the tax so paid in short, but not exceeding one and half time the amount by which the tax so paid fall short of the tax payable for the month or quarter or for the whole year, as the case may be."

In terms of the said provision, if the assessee pays tax for the whole year, in advance, in the aggregate when found to be less than the tax payable for the year or month, as finally assessed, being more than 15 per cent of the difference in tax, the penalty should not be less than 50 per cent of the tax so paid in short, but not to exceed one and half times the amount by which the tax so paid falls short of the tax payable for the month or quarter or for the whole year as the case may be.

It is no doubt true that the assessing authority was not justified in recording a finding that in the matter of levy of penalty, it is immaterial to consider whether the non-payment of tax was unintentional or due to ignorance, while it is true that proof of "mens rea" in the levy of penalty in a taxing statute is unavailable is by and far well-settled. From the facts of these cases what is apparent is that the certificate dated April 19, 2001, annexure A, certifies its applicability to the petitioner''s unit at Munavalli, since registered with the Government, having crushing capacity of 2500 tonne and having commenced commercial production on November 22, 1999. As on the said date four other units of the petitioner were not commissioned, nor were in the offing. Hence, the petitioner cannot be heard to contend that it was under a bona fide mistake that the concession was applicable to the said four units, in addition to the unit at Munavalli, while in the face of the contents of annexure A, belies the petitioner''s assertion that the concession was "company specific" and not "unit centric".

The petitioner, though did not establish bona fides over the mistaken belief that all its five manufacturing units producing sugarcane were entitled to the conversion of purchase tax into interest-free loan, nevertheless, did discharge its liability immediately after issue of the demand notice dated January 23, 2010. The contention that at the first instance the assessing authority accepted the petitioner''s return for the years 2006-07 and 2007-08, claiming concession followed by the assessing authority rectifying the said order and issuing a demand notice pursuant to which the purchase tax was paid, is acceptable explanation, cannot be countenanced. The facts and circumstances are a pointer to the conscious disregard of the petitioner''s obligation to pay the tax, hence disentitled to a concession in the levy of penalty under section 12B(4) of the KST Act, by exercise of discretion. The first appellate authority in exercise of its discretion modified the order of the assessing authority by reducing the penalty to 50 per cent of the tax. The order admittedly is not challenged by the Revenue and is allowed to rest. In the facts and circumstances, the point raised for consideration is answered in the negative and against the petitioner, and these petitions devoid of merit, are accordingly dismissed.