The word Penalty can be defined to mean a pecuniary punishment for any breach of law, rule or contract, any sum named in a bond as the amount to be forfeited by the obligor in case he does not comply with the condition of the bond, money recoverable by virtue of a penal statute, sum agreed to be paid on breach of an agreement or some stipulation in it. This is in short a meaning of penalty. Almost in all commercial laws, there is provision for imposition of penalty for defaults and breaches.
The doctrine of mens rea, biasness, malafide, subjective or objective mind, non-adherence of principles of natural justice, pecuniary and personal biasness, abuse of discretionary powers, satisfaction are few important and key matters which play a vital and important role in the levy of penalty. Penalty itself is a very wide subject when looked from the point of general principles of penalty and it is not my today’s subject.
I will confine myself only to the penal provisions contained in the Haryana VAT Act, 2003.
Consequent upon the introduction of VAT in the State of Haryana, the Legislature has attempted to curtail the discretionary powers of the Assessing Authorities with regard the quantum of penalty, compounding penalties with interest and prescribing minimum or maximum penalties. This has, perhaps, been done to leave much little for the enforcing authorities. Undoubtedly, in majority of the cases, the authorities tend to be subjective rather than to be objective while dealing with penal provisions. Yet, curtailing the discretionary powers means injury to few bona fide cases, where the dealers are prevented for sufficient cause to comply with the provisions of the Act. This surely is resulting into greater hardship to such dealers but the objective of the legislature could be different. In their wisdom, the Legislature decides what is good for the welfare of the State.
1 Penalty for failure to use goods for the purpose purchased – sub-section (5) of section 7 of the HVAT Act
According to the provisions of sub-section (5) of section 7 of the HVAT Act, if an “Authorized dealer” after purchasing any goods for any of the purposes specified in clause (a), (b) or clause (c) of sub-section 4 of s. 7 of the Act, fails to make use of the goods for any such purpose, without reasonable excuse, the Assessing Authority, may impose upon him a penalty not exceeding one and half times the tax which would have been levied additionally . The goods have been specified as goods used –
a) in the manufacture of goods for sale;
b) in the telecommunication network;
c) in mining; or
d) generation or distribution of electricity or any other form of power; and
e) packing materials specified in the certificate of registration,
Exception to this rule is that penal action would not be taken if the dealer voluntarily deposits the differential tax along with his returns.
The word “Authorized dealer” has not been defined either under the HVAT Act or Rules and the legislature has not used the words like dealer or registered dealer meaning thereby that such dealer not necessarily to be registered but must be competent to purchase such goods at the concessional rate of tax. It is expected that all manufacturer- dealers should submit a comprehensive list of items while obtaining registration certificates so as to cover their required items.
In this sub-section, the term “may” has been used meaning thereby that it is left to the Assessing Authority to impose or waive the penalty considering the explanation rendered by the assessee for his failure to use the goods for specified purpose. The satisfaction of the A.A. has essentially to be there. Needless to say that penal provision would apply only where the goods have been purchased at the concessional rate of tax against the specified declaration.
If a dealer uses his declaration to purchase goods at concessional rate of tax and partly uses the goods for the specified purpose i.e. manufacture of goods for sale and further sells some of the goods to other dealers at a concessional rate owing to non-use of goods, the Court held the penalty was lawful for misuse of declaration by the dealer. Bharjatiya Steel Vs. CST (2008) 13 VST 514 (SC).
Once a seller receives a completed declaration form against concessional sales, the selling dealer is not liable for ensuring the proper use of goods sold. It means if a dealer has sold certain goods to a manufacturer-dealer against proper declaration form, the selling dealer is not expected to keep track on manner in which goods have been used. Aditya Envirotech Pvt Ltd. Vs. CTO (2008) 16 VST 145 (MAD).
Where the dealer purchased formaldehyde for use in the synthetic resin against prescribed declaration and used the same in the manufacture of such resin. However, the sale of synthetic resin as goods not covered under any Schedule. Such action does not amount to failure to use goods for declared purpose attracting penalty for misuse of declaration, State of Karnatka Vs Ganpathy Ram (1992) 87-STC-329 (Kar).
Where an item is specified in the R.C of a dealer for the purpose u/s section 5-C of the RST Act, 1954, then so long as the entry is not deleted, the assessee is entitled to purchase goods covered by that entry without payment of tax or at concessional tax, CTO vs National Engg. Industries Ltd. (1992) 87-STC-144 (Raj) .
The dealer had acquired as a manufacturer of cement in the state and purchased earth moving machinery, bull dozers, dumpers & tipping wagons on concessional rate of tax. The Assessing Authority, however, imposed penalty for false representation. The court affirmed the decision of the H.C holding that so long the goods were written in the R.C, the penalty u/s 10A could not be imposed – State of Raj vs Jaipur Udyog (1972) – 30-STC- 565 (SC).
Wherever there is an infringement of any clause of section 10 of the CST Act, it does not automatically follow that the maximum penalty as provided must be imposed. A discretion, which is in the nature of judicial discretion must be exercised by the officer before determining the quantum of penalty. Rajalakshmi Textiles Finishing Mills vs STO (1976) 38-STC-302 (Ker).
The dealer purchased Plant & Machinery against ‘C’ form and run the factory for sometime. The Machinery was subsequently leased out but the Lessee too could not run the business. The dealer disposed of all the Machinery purchased against ‘C’ forms. The A.A imposed penalty for misuse of ‘C’ form. The Tribunal deleted the penalty holding that the dealer had shown sufficient cause for his conduct. The order of the Tribunal was held legal by the Allahabad High Court as no penalty is imposable where the dealer has a reasonable cause for his action. Commissioner of Sale Tax vs. Super Rubber Foam Products (1986) – 61- STC 325 (All).
2 Penalty for Non-apply for registration/ unregistered dealers
Section 16 of the HVAT Act, 2003 is identical to section 49 of the HGST Act, 1973. According to this section, if any information comes to the possession of the Assessing Authority and the Assessing Authority is satisfied that any dealer has been liable to pay tax in respect of any period but he has failed to apply for registration, an assessment can be framed in respect of such dealer within three years of the end of such period.
The Assessment so framed would be best judgment assessment and assessing authority will determine the tax due from him. The Assessing Authority would be competent to recover a penalty that would be equal to the amount found to be due from such dealer. A reasonable opportunity has to be extended to the defaulter before the penal action is taken against him.
The action envisaged in this section is mandatory as the provision uses the term “shall” for the Assessing Authority to take cognizance of the offence. Similarly for penalty also the same term “shall” has been used and according, the A.A. is expected to impose penalty equal to the amount of tax found to be due from such dealer. No term such as “willfully failed to apply” has been used in Haryana VAT Act and only term used is “ failed to apply”. A caution is required in this regard from unregistered dealers.
An order imposing penalty for failure to carry out a statutory obligation is the result of quasi criminal proceedings 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. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where such breach flows from a bonafide belief that the offender is not liable to act in the manner prescribed by statute., Hindustan Steel Ltd. Vs State of Orissa (1970) 25 STC 211 (SC). This judgement of the Apex Court has not lost items sheen and still hold goods as far as the concept of mens rea is concerned.
The expression ‘willfully failed to apply for registration, connotes a deliberate failure to apply for registration in order to avoid taxation Commissioner of ST Vs. Brijraj Rameshwar (1966) 17 STC 295 (SC). See also Sardar Mohinder Singh Vs. Dy. Com. (1971) 28 STC 427 (MP).
Where the assessee, dealers in strips stores imported goods from foreign countries, keep them in bonded warehouses and sell the same to outgoing ships the bonafide belief of the dealer was that their transactions are not liable to sales tax and they are not required to get themselves registered and file returns. The Hon’ble High Court held that the assessability of the transactions was in doubt and the assessee had bonafide belief, therefore, penalty cannot be levied. State of Madras Vs. Fairmacs Trading Co. (1975) 35 STC 176 (Mad.).
Since the dealer got himself registered under the Central Sales Tax Act, 1956 u/s 7(2) of that Act but conducted business in the nature of inter-state trade for which registration under section 7(1) is necessary. Registration under section 7(2) cannot be said to be a registration under section 7(1) and therefore penalty for failure to get registered is imposable. Com. Of ST Vs Amir Brother (1979) 44 STC 200 (MP).
Pending registration application confers the dealer status of registered dealer but failing to produce account books when called for by the assessing authority confer power to it make best judgement assessment as the basic evidence collected by it duly put to the assessee. Sewa Singh Sadhu Singh Vs. State of Haryana (1981) 48 STC 117 (P&H).
In the case of Commissioner of Sales Tax vs. Prakash Trading Co. (1982) 51 STC 342 (All.), the assessee did not get himself registered although he was filing returns, paying taxes, maintaining regular books of account. On receipt of penalty notice, applied for registration. It was held that the assessee had not applied for registration, yet he was complying with the provisions relating to filing of returns, payment of tax and no defect was found in the books of account in which no defect was observed and was not found to be flouting the provisions of law to evade the tax due, the penalty was lawfully deleted.
It was held in the case of STO Vs. Gupta & Co. (1975) 35 STC 427 (Bom) that it was not necessary that the same Officer who initiated the penalty should impose the penalty. There is no bar in succeeding officer imposing such a penalty.
3 Penalty for failure to deduct tax in respect of Works-contract.
Section 24 of the HVAT Act, 2003 has cast an obligation on the Contractee to deduct tax source at prescribed rate in respect of works contract involving transfer of property in goods, executed by a Contractor in the State. This obligation is in respect all contracts exceeding Rs.1.00 lac value in a year.
In the event of Contractee having failed to discharge this duty i.e. he either does not deduct the tax at source or after deducting does not deposit in the account of the Government, then under the provisions of sub-section (6) of s. 24 of the H.VAT Act, the Assessing Authority may, at any time within 5 years of the close of the year when the default was made, and after giving him a reasonable opportunity of being heard, order him in writing to pay by way of penalty a sum equal to the amount of tax which he failed to deduct or pay.
In this case, the Legislature has not used the word “shall” in the penal provisions and only the word “may” has been used. Obviously it is left to the discretion of the Assessing Authority whether or not to impose the penalty if the Contractee shows sufficient cause for not deducting the tax at source.
The vires of the provisions of TDS under the Sales-tax law have been upheld by the Punjab & Haryana High Court in the case of Tirath Ram Ahuja Ltd. vs. State of Haryana, STI-1991 (P & H High Court)-51.
No TDS on mobilization advance to be recovered from the running bills of the Contractor. Such advance cannot be termed as discharging of any liability for the valuable consideration payable for the execution of works contract involving transfer of property in goods, Hindustan Construction Co. Ltd. vs. State of Haryana (1998) 109-STC-660 (P & H ).
While the opinion of Haryana authorities under VAT Act that in the case of contractor taking services of sub-contractor for the same works contract, the TDS is to be deducted from both contractor and sub-contractor, the AP High Court has held it otherwise in the case of Larsen & Toubro – 148-STC-216.
4 Penalty for unaccounted taxable goods u/s 29 (7)
Under the provisions of sub section (7) of S.29 of the HVAT Act, if any taxing authority as referred to in sub-section (1) of S.29 of the HVAT Act, finds any taxable goods in any office, shop, godown or any other place of business or any building or place or goods carrier or vehicle of, or which for the time being is under the control of a dealer on whom the provisions sub-section (2) of section 14 apply but not accounted for by him or the person incharge of the goods carrier or vehicle in his books, accounts, register or other documents, the officer may after affording him a reasonable opportunity of being heard impose on him a penalty equal to three times of tax rate applicable or maximum 30% of the value of such goods. Besides, he would also direct such person to enter such goods in his books of account.
The taxing authority is also empowered to impose penalty under this section on the market value of goods, if it is found that the goods so detected are under-priced.
Since this section has reference from S.14 (2) of the Act, the penal provisions of section can be invoked in the case of un-registered as well as registered dealers, even if they are liable or not liable to pay the tax. The analogy which emerges from this is that penal action can be initiated in cases where liability to tax has been fixed or the dealers who have applied for registration but have not been granted the registration or the registered dealers who are liable to pay the tax according to the prescription in sub-section (3) or sub-section (4) of this section.
Through these provisions, the Legislature has intended to impose penalty in respect of unaccounted goods lying in any premises or carrier or vehicle which is in the control of a dealer – registered or unregistered. The term used in this sub-section is “ finds” and obviously it would be through inspection and the competent Officer will have to observe the conditions laid down in sub-section (5) for carrying out inspection.
In sub-section (7) the Assessing Authority has been directed to “ impose….” Penalty after giving such dealer a reasonable opportunity of being heard. No terms such as “may” or “shall” has been used. Obviously, no discretion is left to the A.A. for may or may not and he has only to arrive at the findings and figures and do his job.
5 Penalty u/s 31 in cases of Roadside checking
The provisions of S.31 are replica of S.37 of the HGST Act. This section is widely misused section as far as the Departmental Authorities are concerned. The vehicles are intercepted and detained on small and technical breaches and is a cause of great amount of harassment to the dealers, drivers and transporters. The provisions are so much stretched that even Professionals fail to satisfy the authorities legally and thus paves way for the illegal satisfaction.
A penalty equal to three times of the tax plus a provisional tax at the applicable rate or 30% of the value of goods on which tax is sought to be evaded is provided in sub-section (8) of s.31 of the Act. Further it also provides that penalty can also be levied on the price difference if the goods are found to be under-priced. In such a case the penalty is to be imposed on the differential value only.
Sub-section (2) of S.31 of the HVAT Act requires the owner or person incharge of the goods or driver carrying goods in a goods carrier –
shall carry with him – a goods carrier record, a trip sheet or log book
alongwith a sale invoice or tax invoice or delivery note as the case may be,
and a declaration containing the prescribed particulars in the prescribed form
obtained from the prescribed authority, duly filled in and signed by the
A plain reading of this sub-section would reveal that a driver or person incharge shall carry any one of the transport documents out of GR, a Trip sheet or log book alongwith a sale invoice or tax invoice or delivery note and a declaration which in Haryana is VAT D3 (Inward or Outward) as the case may while transporting goods. In Haryana each District has been made into a separate segment for the purpose of VAT D3 Challans. Carrying the above documents is mandatory as the term used is “shall” and is not optional.
The penal provisions of S.31 of the HVAT Act and S. 37 of the HGST Act are identical and are purported to be serving the same purpose. However, there is very important hidden matter between the two. Sub-section (5) of S.37 of the HGST Act used the words …….officer has reasons to suspect that the goods under transport are not covered by proper and genuine documents as mentioned in sub-section (2) or (4) or that the person transporting the goods is attempting to evade payment of the tax due under this Act, he may, for reasons to be recorded ….
On the contrary sub-section (6) of S.31 of the HVAT Act, which is on the same lines as S.37 (5) of the HGST Act, uses the word …that the person transporting the goods is attempting to evade payment of tax, he may, for reasons to be recorded…
While under the HVAT Act it has been specifically mentioned that the person transporting the goods is attempting to evade payment of tax, whereas under the old Act it mentioned that there is attempt to evade the tax due under the Act. Under the HGST Act, word “tax” was not defined either under the Act or Rules framed there under, whereas under the HVAT Act, word “tax” has been defined u/s 2 (zk) as – tax means the tax levied under this Act.
There appears some anomaly on this account because, if the word “ tax” means tax levied under this Act, then penalty could not be levied where a proper tax is charged on the Invoice in respect of goods under the transportation even if there could be some technical lapse in the other documents including VAT D3. Levied means already levied and not leviable. A tax already levied, cannot be evaded again.
Similar language has been used in sub-section (8) of section 31 of the HVAT Act where the term used is – that the person transporting the goods attempting to evade payment of tax.
As regards the penal proceedings under this section, there are numerous contrary judgements and it is the most controvercial section in the Sales Tax/VAT Acts causing considerable hardship to the genuine dealers. The goods are detained for technical or flimsy grounds by the Officer deputed for road side checking and is cause of harassment and breeds corruption.
However, some of the issues have been decided such as – Penalty under this section can be levied only on the owner of the goods and not the thirty party such as Commission Agent, Issues relating to branch transfer cannot decided at the Check-post or roadside, presumption of evasion of tax in the absence of statutory challan is rebutable presumption, verification of market rate is essential before treating the goods as under-priced, for technical breaches without proving the evasion, clerical mistakes, without proper enquiry and establishing the intention to evade the tax.
6 Penalty for failure to furnish Returns – S.37A
A new section 37-A was inserted in the HVAT Act with effect from 20.3.2009 through which penalty has been provided for non-filing of returns in the case of registered dealers. Prior to this there was no provision as such. The penalty provided is Rs.100/- per day for first 10 days and Rs.200/- per day thereafter until the default continues. There is, however, no penalty for dealers having nil turnover.
The quantum of penalty is extremely high and harsh. Under the repealed Act, HGST Act, 1973 it was Rs.10/- per day for the default period.
7 Penalty for failure to maintain correct accounts and for furnishing incorrect returns
Section 38 of the HVAT Act deals with penalty for maintenance of false or incorrect accounts or documents with a view to suppressing sales, purchases, imports into tate, exports out of State, exports out of State or stocks of goods by the dealers. It is pertinent to note that the term used is “dealer” and not “registered dealer”. Accordingly it would apply to both registered and unregistered dealer.
While the first part of the section deals with the maintenance of false accounts, the second part deals with furnishing or producing before any authority under the Act, any account, return, document or information which is false or incorrect in any material particulars, whereby the dealer is found to be avoiding the tax liability, then such dealer is liability for penalty equal to thrice the amount of tax which would have been avoided, if such account, return, document or information had been accepted as true and correct.
The Punjab & Haryana High Court in the case reported at (1967) 19-STC-153, Om Parkash Rajinder Kumar vs. K.K. Opal, ETO, held that the use of words “ false, suppressing or concealed” in section 10 (7) of the Act clearly shows that penalty is not intended to be imposed under the sub-section for honest mistakes or clerical errors or omissions but only for deliberate false entries or false evidence involving some like mens rea.
8 Penalty under section – 39 –illegal collection of tax
This section deals with penalty liable to be imposed on any person, who is not a registered dealer or is not authorised to collect tax. No person who is not registered dealer and not competent to collect the tax shall do so in respect of any sale of goods effected by him in the State and further a registered dealer is not authorised to collect any tax, which is not in accordance with the Act and rules framed thereunder.
Accordingly, if an unregistered dealer collects any tax in the State in respect of sale of goods or an authorised dealer collect any tax which he was legally not competent to collect, then the Assessing Authority, may after affording such person a reasonable opportunity of being heard, direct him to pay by way of penalty equal to the sum which may have been so collected.
Sub-section (2) of S.39 takes into its ambit the cases where a person willfully collects any amount by way of tax in contravention of the provisions contained in sub-sec. (1), the A.A. may after affording such a person an opportunity of being heard, impose a penalty equal to the amount of tax. The penalty would be in addition to the illegal collection.
In this section the term used are “Assessing Authority” and “may”, which means only the Assessing Authority can impose the penalty and again he may or may not impose the penalty after considering the explanation offered by the dealer in response to the show cause notice issued by him.
There is hardly any such dealer deliberately collecting higher tax than what is applicable. Only some bonafide omissions do take place here and there where there is some ambiguity on tax rates applicable to the commodity sold.
9 Penalty under section –40
This is a general penalty clause whereby it is provided that whosoever (means any person whether registered or unregistered dealer) contravenes or fails to comply with any provisions of this Act or Rules made thereunder or any direction given or made, shall be liable for imposition of penalty not exceeding rupees two thousand but not less than one thousand rupees.
However, an exception is provided whereby this section cannot be invoked where a specific penalty or levy of interest is provided, meaning thereby that penalty under this section cannot be initiated or imposed if any specific penalty for contravention is provided in any other section of this Act or levy of interest is provided.
The final portion of this section is fatal too as daily penalty of one hundred rupees is provided if the contravention or failure continues.
10 Penalty under section – 41 (Limitation for imposition of penalty)
This section provides that no penalty shall be imposed on a dealer by any “taxing authority” after the expiry of two years following the date when the assessment of tax becomes final for the period during which offence was committed. This limitation covers the penalties imposable under sub-section (5) of section (7), section (16), section 38 and section 39 of the Act.
While sub-section (5) of section 7 relates to misuse of goods purchased at concessional rate against VAT-D1, section 38 relates to failure to maintain correct books of account and furnishing of false or incorrect information and section 39 prohibits unlawful collection of tax and unregistered and registered dealer.
B.R. Bhalla, Advocate