Tata Tea Limited vs Agricultural Income Tax and Sales Tax Officer

G.H. Guttal, J.—Tata Tea Ltd., a company incorporated under the Companies Act, 1956 purchased the tea estates of (a) Kannan Deven Hills Produce Co. Ltd. (b) Anglo American Direct Tea Trading Co. Ltd. and (c) Amalgamated Tea Elates Ltd. These three companies registered in the United Kingdom, are for the sake of brevity, hereinafter referred to as the K.D.H.P., A.D.T. and A.T.E. respectively:

In this petition under Article 226 of the Constitution of India, Tata Tea Ltd., hereinafter referred to as the Petitioner, impugns the validity of various orders made by the Agricultural Income Tax and the Sales Tax Officer, Munnar, whereunder he imposed on the Petitioner a total penalty of over seven lakhs rupees for the offences u/s 10(a) and 10(d) of the Central Sales Tax Act, alleged to have been committed by the K.D.H.P., A.D.T. and A.T.E. between the years 1967 and 1973. The orders impugned in this petition were made on 5th July 1988, 6th July 1988, 7th July 1983 (in respect of K.D.H.P.) 22nd September 1988 (in respect of A.D.T.) and 10th July 1988 (in respect of A.T.E.)

The running business of the tea estates as going concerns, of the K.D.H.P., A.D.T. and A.T.E. was purchased by the Petitioner herein by three separate deeds of conveyance dated 31st December 1976 (Document No. 380/77) 31st December 1976 (Document No. 380/77) and 19th April 1977 (Document No. 824 of 1977) respectively. Each of these three business establishments comprised of tea growing estates and factories in which tea was processed.

The K.D.H.P., A.D.T. and A.T.E. held Registration certificates under the Central Sales Tax Act, hereinafter referred to for the sake of brevity as the C.S.T. Act issued on 1st July 1957. These certificates which covered all goods necessary for the business of tea estates specified that the holders could deal, inter alia, in goods under the head "cultivation" and "crop cultivation" which attracted concessional rate of sales tax u/s 8 of the C.S.T. Act.

In proceedings numbered as K-1/C the Sales Tax Officer, Devikulam, concluded that K.D.H.P. was not entitled to buy goods under the head "cultivation" and "crop protection" as they were not necessary for the business of tea estates. By his order dated 25th August 1966 he disallowed these goods for the purpose of Section 8 of the C.S.T. Act. The certificate of registration which allowed the purchase of these, goods ought to have been taken back from the K.D.H.P. and amended to bring it in conformity with this order. This was not done. The original certificate continued to remain with the K.D.H.P. and was indeed used subsequent to the aforesaid order. The Appeal No. S.T.A/961/66 by the K.D.H.P. was allowed by the Appellate Assistant Commissioner of Sales Tax on 5th February 1969 and the order dated 25th August 1966 made by the Sales Tax Officer, Devikulam, disallowing the goods under the head "cultivation" and "crop protection" was set aside. Thus the original certificate without the deletion of the heads "cultivation" and "crop protection" continued to be operative. However, on 15th July 1970 the Kerala State Sales Tax Appellate Tribunal set aside the Appellate Assistant Commissioner''s order dated 5th February 1969 and restored the order of the Sales Tax Officer dated 25th August 1966. The decision of the Kerala Sales Tax Tribunal was subsequently upheld by the High Court.

In the cases of the remaining two companies, A.D.T. and A.T.E., the Sales Tax Officer made similar orders on 23rd October 1973 and 10th June 1975 respectively, excluding from the certificates of registration the goods under the heads "crop protection" and "cultivation."

The A.D.T. had estates in the State of Tamil Nadu also. The Madras High Court had, meanwhile taken a view opposed to that of the Kerala High Court. The conflict was eventually settled by the Supreme Court by its judgment delivered on 11th October 1976. The effect of the Supreme Court''s, judgment is that the goods falling under the heads, "crop cultivation" and "cultivation" were not eligible for the concessional rate of sales tax u/s 8 of the C.S.T. Act. The decision of the Sales Tax Officer and the Appellate Authorities and the Kerala High Court on the one hand and the opposite view taken by the Madras High Court kept alive the uncertainty as to the eligibility of the goods for concessional rate of sales tax. The uncertainty of law was terminated by the Supreme Court on 11th October 1976.

After 1974, the Sales Tax Officer, Devikulam, issued notices to the K.D.H.P., A.D.T. and A.T.E. calling upon them to show cause why penalty should not be imposed u/s 10A of the C.S.T. Act for violation of Sections 10(b) and 10(d) thereof. The substance of his accusation was this:

C forms under the C.S.T. Act were issued by the K.D.H.P., A.D.T. and A.T.E. to the dealers for the purchase of goods not directly connected with the production manufacture or processing of tea. The issue of C forms which resulted in the collection of tax at concessional rates was a violation of Section 10(b) and 10(d) of the C.S.T. Act. Therefore he proposed the penalty of 15 per cent of the purchase value.

The alleged violations of the C.S.T. Act by the three companies were in respect of different years. In the case of K.D.H.P. notices referred to in the last paragraph related to the goods purchased during 1987-68 to 1972-73. In the case of A.D.T. they related to the periods 1968-69, 1971-72 and 1972-73. In the case of A.T.E. the period of the alleged violation was 1967-68 to 1971-72.

The Sales Tax Officer, Devikulam, by separate orders made on 15th August 1975 overruled the objections by the K.D.H.P., A.D.T. and A.T.E. and imposed a penalty of 15 per cent on the value of each year''s purchase of goods.

The orders imposing penalty for the alleged violation of Sections 10(a) and 10(b) of the C.S.T. Act were challenged by the K.D.H.P. in writ petitions O.P. 1147/76, 2235/76, 5300/76, 1675/77 and 2884/77. These petitions were allowed and the orders imposing penalty were quashed by orders of this Court dated 22nd January 1979, 30th July 1979, 22nd January 1979 and 21st December 1979 respectively. The orders directed the Sales Tax Officer to reconsider the cases and pass fresh orders after giving to the companies opportunity of being heard.

The A.D.T. challenged the orders imposing penalty in O.P. 5039/1975 and 3188/1977 which were allowed on 19th December 1977 and 15th January 1980 respectively. The directions were the same as in the case of K.D.H.P.

The A.T.E. filed similar O.Ps. 4524/1975 and 3189/1978 which were allowed on 19th, December 1977 and 15th January 1980.

Thereafter the Sales Tax Officer made fresh orders which are impugned in this petition.

The orders imposing penalty impugned in this petition were made on 4th July 1988, 5th July 1988, 6th July 1988, 7th July 1988 and 22nd September 1988; almost 10 years after the previous petitions were disposed off and 15 years after the offences are alleged to have been committed.

Before setting out the points which arise for consideration I will sketch a brief outline of the provisions of law relevant to this case.

A dealer, who, in the course of interstate trade or commence sells to the Government or to a registered dealer other than a Government, any goods, is liable to pay sales tax at the rate of 4 per cent of his turnover. The sale which falls outside this category attracts sales tax at a higher rate Section 8 of C.S.T. Act.

The central sales tax is levied by the Government of India. However, such tax is assessed and collected on behalf of the Central Government by the authorities of the concerned State empowered to assess and collect the sales tax of the State under its appropriate General Sales Tax Law Section 9 of C.S.T. Act. That is how the Respondent herein, the Sales Tax Officer of Kerala State, comes in the picture.

Section 10 of the C.S.T. Act prescribes penalties for certain offences. In the context of this case two such offences are relevant. They are:

(a) where a registered dealer falsely represents, when purchasing any class of goods, that the goods of such class are covered by the certificate of registration Section 10(b) of C.S.T. Act, or

(b) after purchasing any goods for any purpose, specified in the certificate of registration, fails without reasonable excuse, to make use of the goods for any such purpose Section 10(d) of C.S.T. Act. These offences attract punishment of six months imprisonment or fine or both Section 10 of the C.S.T. Act.

Section 10A has the marginal note "Imposition of penalty in lieu of prosecution". If a person is guilty, of the offences referred at (a) or (b) above, the authority is empowered to impose upon him a penalty "not exceeding" one and a half times the tax which would have been levied under Sub-section (2) of Section 8.

As already stated, u/s 9 of the C.S.T. Act the central tax is levied and collected by the agency of the Kerala General Sales Tax Act. Section 26 of the Kerala General Sales Tax Act provides for recovery of tax when, as in this case, the business is transferred. Where the ownership of business of a dealer liable to pay "tax" or "other amounts" payable under the Act is transferred, "any tax" or "other amounts" payable under the Act and remaining unpaid on the date of transfer, and any "tax" or "other amount" due upto the date of the transfer though unassessed may be recovered from the transferee as if he were the dealer liable to pay "tax" or "other amount".

On the basis of the facts and the provisions of law set out in the foregoing paragraphs learned Counsel for the Petitioner urged the following points:

(i) The impugned penalty has been imposed in 1988, 10-12 years after the earlier petition against similar orders were allowed and 16 years after the offences are alleged to have been committed. Therefore the penalty is unreasonable.

(ii) The essential ingredient of the offence of false representation created by Clause (b) of Section 10 of the Central Sales Tax Act is the guilty mental state-mens rea-of the offender. This was absent in this case. Therefore no offence was committed by the dealers.

(iii) The Petitioner is the transferee of the business of the dealers who are alleged to have committed the offences u/s 10 of the Central Sales Tax Act. The transferee cannot be penalised for the offences committed by the transferee.

(iv) In the case of K.D.H.P. the goods under the head "cultivation" and "crop protection" were disallowed on 25th August 1966. But the certificate of registration was not amended by the authority during 1967-1973. Therefore no offence was committed by K.D.H.P.

(v) The impugned orders suffer from nonapplication of mind by the Respondent.

The above submissions are examined in the following paragraphs.

The authorities under the laws relating to taxation are often called upon to initiate action on their own, such as reopening the escaped tax, imposition of penalty for wrongful acts and so on.

The cases in which law prescribes the period of time during which the action may be initiated present no difficulty. The cases in which law prescribes no period of time for initiation or commencement of discretionary action, raise a question as to the time frame within which action which affects the rights of citizens should be initiated.

In the context of revision or reopening of completed assessment of taxes there is a consensus of judicial opinion that the power to revise/reopen assessment of income tax should be exercised within reasonable time from the date of the completed assessment. In the case of Deputy Commissioner of Agrl. Income Tax and Sales Tax Vs. P.S.B. Paul Pandian, a revision of assessment initiated 10 years after the completed assessment and in the case of M/s Nelliyampathi Tea and Produce Co. Ltd. v. Commissioner of Agricultural Income Tax (1991) K.L.J. 36 the revision proposed after 12 years were held to be unreasonable. In K.P. Narayanappa Setty and Co. Vs. Commissioner of Income Tax, , 9 years delay was held fatal. It has been held M/s Nelliyampathi Tea and Produce Co. Ltd. v. Commissioner of Agricultural Income tax (1991) K.L.J. 36, that the power should not only be exercised within reasonable time but the revenue should demonstrate that the delay was caused by circumstances beyond their control and by insurmountable difficulties. It is thus well settled that the revision of assessment proposed beyond a reasonable period is unreasonable and that in such cases the burden to prove that the delay was justified by circumstances beyond their control, is on the authorities.

The validity of penalty imposed by tax authorities has also been subject matter of judicial decisions. The authorities are not bound to impose penalty but have a discretion, in the matter, the exercise of which depends upon various factors which bring out the circumstances relating to the commission of the offences or wrongs. Notice of penalty for which no period of limitation has been prescribed under the Income Tax Act, issued 12 years after the assessment, has been held not only unreasonable but an abuse of power Income Tax Officer Vs. Bisheshwar Lal, Allahabad.

The consensus of judicial opinion, therefore, makes it clear that discretionary action of this kind must be initiated within reasonable time. What is reasonable time naturally depends upon the circumstances of each case. Unless the authority,- in this case the Respondent is able to demonstrate that the delay was occasioned by circumstances beyond their control or by insurmountable difficulties, such delay is fatal to the order imposing penalty. The Respondent has not brought forth such circumstances.

The cases of K.D.H.P, A.D.T. and A.T.E. have some special features in the context of the discretion expected to be exercised by the authorities.

In the case of K.D.H.P., the certificate was not amended by the Respondent. The Respondent acquiesced in its use by the K.D.H.P. Therefore the Respondent himself contributed to its wrongful use by not amending it.

The penalty is sought to be recovered not from the wrong doer but from a transferee. Even if the tax is recoverable, imposition of penalty on a transferee demanded a better exercise of discretion.

The explanation of the delay is interesting. By letter dated 24th May 1978 the Petitioner requested that the matter be kept pending, as an appeal was pending. The appeal was disposed of on 14th December 1979. There is no explanation of the delay after 14th December 1979. The second explanation seems to be "want of direction". It is not clear as to whence directions were awaited. If it is the resolution of the controversy on the legal position, it was cleared by the Supreme Court''s judgment on 14th December 1979. There is thus no explanation of the unreasonable delay in .imposing the penalty.

It is hazardous to lay down what would be reasonable period of time in such cases. It would depend upon the circumstances of each case. But in this case no reason for the long and unjustified delay is discernible. No rational explanation has been offered. Therefore the impugned orders have to be quashed.

Since the Petitioner has been penalised for the offence under Clause (b) of Section 10 of the C.S.T. Act, it is necessary to know what constitutes the offence under that clause. I refer to the act, as offence because Section 10 which creates, the liability is captioned "penalties" and Section 10A has the marginal note "Imposition of penalties in lieu of prosecution."

Commission of the acts set out in Clause (b) and other clauses attract punishment of imprisonment which may extend to six months or fine or both. The essential ingredients of Clause (b) of Section 10 are:

(i) the offender is a registered dealer,

(ii) the registered dealer when purchasing goods falsely represents,

(iii) that the goods are covered by the certificate of registration.

In this case the dealers who purchased the goods were K.D.H.P., A.D.T. and A.T.E. and not the Petitioner:

The words "false representation" imply that the dealer made the representation that the goods were covered by the certificate, with the knowledge that they were not so covered. There is an element of fraud, deception, and representing something which the dealer did not believe to be true. This deceptive fraudulent representation involves a state of mind of the dealer. The maker of the representation does not believe in its truth. This fraudulent, dishonest deceptive state of mind is different from merely negligent representation of facts. Having regard to the true meaning of "falsely represents" used in Clause (b) of Section 10 of the C.S.T. Act, there is no doubt that the requisite mental state or mens rea is an essential ingredient of the offence under Clause (b) of Section 10 of the C.S.T. Act P.K. Varghese and Sons v. Sales Tax Officer, Special Circle, Ernakulam (1965) 26 S.T.C. 323.

I will now consider whether a transferee of the business of a dealer who may have committed the offences under Clauses (b) and (d) of Section 10, can be penalised for such offences.

When does a dealer become liable to penalty under Clause (b) of Section 10? As already stated, a dealer commits the offence if he makes the representation referred to in Clause (b) of Section 10, with the requisite mental state. Penalty can be imposed upon proof of the false representation that the goods were covered by the certificate. If the false representation is proved the authority "may" impose the penalty or he may not, if there exist reasons for not doing so. Until this decision is taken by the authority penalty cannot be imposed.

Imposition of penalty is not obligatory. It is discretionary. Therefore, circumstances relevant to a decision to impose penalty have to be considered. Consideration of circumstances relevant to the decision to impose penalty is a necessary part of the quasi-judicial function of the Sales Tax Officer. The offences under Clauses (b) and (d) of Section 10 may be committed in varied circumstances. Every offence irrespective of the circumstances of its commission, does not attract penalty or the same penalty. This is where the discretion of the Respondent comes in. There are varied shades of violation of law. The breach may be technical or the breach is the result of a bona fide belief by the dealer that he was acting under a valid certificate or the sales tax authority by passive acquiescence, contributes to the wrong doing, or the false representation was the result of a mistake-these are factors which influence the decision to impose penalty. These and other factors which influences the decision to impose penalty must be taken into account by the Hindustan Steel Ltd. Vs. State of Orissa, . If he does not, the exercise of discretion is vitiated.

Has the Respondent considered the factors relevant to, the imposition of penalty on a transferee of the business?

It should be remembered that the proceedings u/s 10A are quasi criminal. As the marginal note to the section indicates, penalty is the legislative alternative to prosecution. Therefore the Respondent ought to have considered whether transferee of business can be visited with quasi criminal action. There is no vicarious liability in respect of crimes. But it is urged on the basis of Section 26 of the Kerala General Sales Tax Act that a transferee of business is liable to pay tax or penalty as if he were a dealer. I will presently examine the validity of this argument.

Penalty can be imposed on "any person" guilty of the offence under Clauses (b) and (d) of Section 10A of the C.S.T. Act. "Any person" is not the transferee but the dealer or purchaser of goods which means the K.D.H.P., A.D.T. and A.T.E. Thus the C.S.T. Act conceives the dealer as the person liable to penalty. Under Sections 10 and 10A of the C.S.T. Act which are the substantive provisions in regard to offences and penalty, the transferee does not come in the picture as the person having the capacity to commit the offences. The offence of false representation Clause (b) or the wrongful use of the goods Clause (d) u/s 10 of the C.S.T. Act can be committed only by the dealer. In this case the Petitioner, the transferee was not the dealer, when the liability under Sections 10 and 10A of the C.S.T. Act arose.

But then the authorities under the Kerala General Sales Tax Act (K.G.S.T. Act for short) enter the scene as agents of the Central Government to "assess collect and enforce payment of tax including penalty Sub-section (2) of Section 9 of the C.S.T. Act.". All the provisions of the Kerala General Sales Tax Apt apply to such assessment collection and enforce payment Sub-section (2) of Section 9 of C.S.T. Act. All the provisions of the Kerala General Sales Tax Act apply to such assessment collection and enforcement Sub-section (2A) of Section 9 of C.S.T. Act. It there anything in Section 26 of the K.G.S.T. Act which makes the transferee of business of the dealer liable to penalty?

Recovery of tax when business of the dealer is transferred is dealt with in Section 26 of the K.G.S.T. Act. The transferee is liable to pay tax or "other amount" if the following ingredients are fulfilled Section 26 of K.G.S.T. Act.

(i) Ownership of the business of the dealer is transferred.

(ii) The transferor was liable to pay tax or other amounts "payable" under the Act.

(iii) At the time of the transfer, there remained unpaid any tax or "other amount" "payable" under the Act.

(iv) Tax or "other amount" due from the dealer upto the date of transfer remained unpaid.

(v) Such "other amount" referred to in the section may be unassessed amount.

The Respondents urge that the penalty imposed u/s 10A of the C.S.T. Act, though not "tax", falls within the meaning of "other amount" referred to in Section 26 of the K.G.S.T. Act. If the penalty imposed u/s 10A of the C.S.T. Act constitutes "other amount" referred to in Section 26 of the K.G.S.T. Act, the Respondent can recover the penalty from, the transferee of the dealer''s business.

The distinction between "penalty" and "other amount" needs to be borne in mind.

The amount of penalty, is not a certain sum. The amount of penalty is subject to the upper limit of one and half times of the tax leviable under the Act. It becomes a certain amount only when levied. Secondly there is no obligation on the authorities to impose penalty. Upon consideration of the circumstances in which the offence was committed and the nature of the offence, the authority may refrain from imposing penalty. That is why the word "may" has be used in Section 10A of the C.S.T. Act.

The tax on the sale of goods becomes payable upon the sale of goods, though the amount of tax is fixed by assessment. While the amount of tax is assessed, in the case penalty, there is no assessment. It is payable only when levied.

The words "other amount" have been qualified saying that such amount may be "unassessed". Assessment is a process connected with tax and not with penalty. After the tax is assessed, penalty may be levied. Therefore, the word "assessed" suggests that the "other amount" is the amount which is subject to the process of assessment. Since the amount of penalty is not "assessed", it is outside the meaning of the words "other amount."

There are specific provisions in the K.G.S.T. Act which impose liability to pay penalty on persons other the dealers. These provisions to which I will presently call attention indicate that wherever the legislature intended to make successors-in-interest of the dealer liable to penalty, it has done so in clear words. Since there is no such provision imposing penalty on the transferee of the owner business, the legislature did not intend to make transferees liable to penalty for an offence committed by the dealer. Now consider the effect of Sections 20 and 21A of the K.G.S.T. Act.

Executor, administrator or other legal representative a deceased dealer is deemed to be a dealer. In respect of any amount assessed, payable and levied on the deceased dealer, such legal representative is liable to the extent of the assets of the deceased in the hands of the legal representative Section 20 of K.G.S.T. Act.

A firm''s liability to pay penalty has been expressly carried forward to make the firm liable to penalty even after its dissolution Section 21A of K.G.S.T. Act.

Therefore, the liability of successors-in-interest to pay tax and penalty has been expressly provided, where they are intended to be liable. The cases of legal representative of a deceased dealer, and dissolved firm, illustrate this point. If the legislature intended that transferee of the business of a dealer, is liable to pay penalty for the offence committed by the dealer the legislature would not have failed to so provide. Therefore, the legislative intent is clear. It did not contemplate that transferee of the business of a dealer should be liable to pay penalty for the offence committed by the dealer.

I hold that a transferee of the business of a dealer is not liable to penalty. The summary of my reasons stated in paragraphs 17-20 is given below.

The imposition of penalty u/s 10A of the C.S.T. Act is a quasi-criminal function. The liability for a crime cannot be imposed vicariously. Transferee of a business can commit the offences u/s 10 of the C.S.T. Act only after he becomes a dealer. On the date on which the dealer committed the offence the transferee did not possess the capacity to commit the offence. Section 26 of the K.G.S.T. Act does not make a transferee liable to penalty, because the word "other amount" used in that section does not include the amount of penalty imposed u/s 10A of the K.G.S.T. Act.

The impugned orders are alleged to suffer from non-application of mind. Since the Petitioner succeeds on the first three points, it is unnecessary to decide this point.

In the case of K.D.H.P. the goods under the head "cultivation" and "crop protection", were disallowed. The authorities who ought to have amended the certificate did not do so with the result that the certificate which included the above goods continued to be used by the dealer. It is therefore urged by learned Counsel for the Petitioner that the K.D.H.P. committed no offence of false representation that the goods were covered by the certificate. This is apparently true, but not really true. The dealer aware of the order by which these goods were disallowed, continued to use the certificate. The certificate was not physically amended. But the order deleting the goods clearly means that the dealer knew that it was ordered to be amended. Therefore when he used the certificate ordered to be amended but not actually amended, he was representing that he was entitled to buy the goods a fact which he knew to be false. The argument is untenable.

Learned Counsel for the Respondent urged that the words "other amount" occurring in Section 26 of the K.G.S.T. Act include penalty imposed u/s 10A of the C.S.T. Act. I have already rejected this submission in paragraphs 19 and 20 above.

Counsel then urged that Sections 36 and 37 of the K.G.S.T. Act provide alternative remedies of revision applications before the Deputy Commissioner and the Board of Revenue respectively. According to him, this petition instituted without exhausting the alternative remedy should be dismissed. In Titaghur Paper Mills Co. Ltd. and Another Vs. State of Orissa and Others, writ petitions challenging the validity of the orders of assessment of sales tax were dismissed by the Orissa High Court. The Supreme Court dismissed the appeal on the short ground that the Petitioners have an equally alternative efficacious remedy by way of an appeal to the prescribed authority...." I do not think that this judgment assists the Respondents. There is a significant difference between the remedy of an appeal and the revision application. The existence of a chance of having the impugned orders revised is not adequate and efficacious remedy.

In A.S. Bava Collector of Customs and Excise, Cochin v. A.S. Bava 1967 KLT 935, the Supreme Court held that "the existence of a remedy by way of revision does not bar the jurisdiction of the High Court to entertain a petition under Article 226". In my opinion the remedy by way of revision is not adequate and efficacious. Secondly, on the authority of A.S. Bava, this Court''s jurisdiction is not affected by such remedy.

This petition has been pending in this Court for over four years. Is it right and just, at this distance of time, that the petition should be dismissed merely because the Petitioner has not resorted to a revision application? This question was rightly answered in the negative in Padmanabhan v. Kerala State Hundloom Development Corporation (1901) 2 KLT 55, 66. I am of the opinion that this petition should not be dismissed merely because the Petitioner has not exhausted the remedy of Revision Applications.

In view of my findings I allow the petition. The orders of the Respondent referred to in prayer Clause (ii) paragraph 11 of the petition are hereby quashed. The Respondent shall refund to the Petitioner the entire amount of penalty recovered from them pursuant to the orders referred to in prayer Clause (ii) of the petition. The Respondent shall pay interest at the fate of 6 per cent per annum from the date on which the Petitioner paid the penalty till the date of the refund of the amount to the Petitioner.