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E.K Hajee Mohammed M... v. The Assistant Commis...
Factual and Procedural Background
The petitioner challenged two orders: exhibit P-1 (order of the 1st respondent dated 30 March 1977) and exhibit P-3 (order of the 2nd respondent dated 9 August 1977). Exhibit P-1 was issued under rule 31 of the Kerala General Sales Tax Rules, 1963 calling on the petitioner to pay penalty under section 23(3) of the Kerala General Sales Tax Act, 1963; exhibit P-3 affirmed exhibit P-1.
For the accounting year 1973-74: a pre-assessment notice dated 20 September 1973 was served on the petitioner and challenged in O.P. No. 3496 of 1973, on which an interim stay of collection of tax was obtained. The O.P. was dismissed by judgment dated 14 February 1975. A provisional order of assessment was served on 18 October 1973. The final order of assessment was passed on 14 April 1975. The tax due according to the final assessment was paid in full on 16 January 1976. Thereafter, on 30 March 1977, exhibit P-1 was issued levying penalty for non-payment of tax as per the provisional assessment.
Legal Issues Presented
- Whether a penalty under section 23(3) can be imposed after completion of final assessment and after adjustment under rule 20 when the demand is based on a provisional assessment.
- Whether imposition or demand of the penalty under section 23(3) must be preceded by a show cause notice or other compliance with principles of natural justice (including opportunity to show absence of mens rea or wilful default).
- Whether an interim stay of collection during the pendency of O.P. No. 3496 of 1973 prevented the accrual of penalty/interest for the period of the stay.
Arguments of the Parties
Petitioner's Arguments
- No penalty for non-payment of tax according to the provisional assessment can be imposed subsequent to completion of the final assessment because the provisional assessment merges into the final assessment and any amounts not taken into account after adjustment under rule 20 should not be recoverable.
- An order imposing penalty must be preceded by a show cause notice and the taxpayer must be given an opportunity to show absence of mens rea or wilful default; imposition of penalty is punitive and requires compliance with principles of natural justice.
- The view taken by this Court in Burmah Shell Oil Storage and Distributing Co. of India Ltd. v. Sales Tax Officer, Special Circle, Ernakulam (1973) ought to be reconsidered.
- A stay of collection operating during the pendency of O.P. No. 3496 of 1973 meant that no penalty could have accrued during that interim period.
The opinion does not set out detailed adversarial submissions from the respondents; only the petitioner's principal contentions are recorded in the text.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Burmah Shell Oil Storage and Distributing Co. of India Ltd., Madras-1 v. Sales Tax Officer, Special Circle, Ernakulam [1973] 32 S.T.C 429 | The Court's pronouncement that section 23(3) makes the penalty an absolute, automatic liability (described as interest by way of damages) and that no discretion is left to the assessing authority such as would attract rules of natural justice. | The present Court relied on and followed this decision to reject the petitioner's contention that penalty requires prior notice or compliance with natural justice; it treated the liability as absolute and not dependent on issuance of notice for its accrual. |
| Hindustan Steel Ltd. v. State of Orissa [1970] 25 S.T.C 211 S.C. | One of several Supreme Court decisions distinguished by Burmah Shell (as recorded in the opinion). | The decision was distinguished in the course of explaining why the rule of natural justice as applied in those Supreme Court cases did not apply to section 23(3) as interpreted in Burmah Shell; the Court held those decisions inapplicable to the facts and statutory language before it. |
| Commissioner Of Income Tax, West Bengal v. Anwar Ali [1970] 76 I.T.R 696 S.C. | Another Supreme Court decision distinguished by Burmah Shell (as recorded in the opinion). | The Court noted that Burmah Shell distinguished this decision and therefore concluded it did not apply to the construction of section 23(3) under consideration. |
| C.A Abraham v. Income-Tax Officer, Kottayam [1961] 41 I.T.R 425 S.C. | A further Supreme Court decision distinguished by Burmah Shell (as recorded in the opinion). | The Court recorded that Burmah Shell distinguished this authority and held it not applicable to the statutory scheme under section 23(3). |
| Union of India v. J.N. Sinha | Cited for the proposition that one cannot read into a statute the rules of natural justice where the statute's language excludes such application. | The opinion cites this authority in support of the position that the clear language of section 23(3) excludes application of the rules of natural justice to the obligation to pay penalty. |
Court's Reasoning and Analysis
The Court proceeded by textual and rule-based analysis of the statute and rules relied upon by the assessing authority:
- Statutory text: The Court examined section 23(3) of the Kerala General Sales Tax Act, 1963, which the opinion reproduces and interprets as creating an absolute liability. The section provides that if tax or any other amount due is not paid within the specified time, the dealer shall pay, by way of penalty, in addition to the amount due, a specified sum (the opinion records the rate language in the statute itself).
- Independence of penalty: The Court emphasized that the liability to pay penalty under section 23(3) is "in addition to and independent of the tax payable" and that rule 31 prescribes the mode of payment and contemplates issuance of notices in form 24 but contains an explanation that the dealer is liable to pay penalty whether or not such a notice is received.
- Interaction with rule 20 (adjustment after final assessment): The Court reviewed rule 20 which permits adjustment after final assessment — i.e., deduction of tax already paid on provisional assessment and refund or adjustment of excess if final assessment is lower. However, the Court held that rule 20 adjustments are "without prejudice to the right of the department to demand from the assessee the penalty payable" under section 23(3) read with rule 31. Therefore, the completion of final assessment and any adjustment under rule 20 does not extinguish or merge away liability for penalty if such liability has otherwise been incurred.
- Notice and accrual: The Court analyzed rule 31(2) and its Explanation to conclude that although the assessing authority may issue a notice for penalty, the liability arises under the statute itself and is not dependent on the issuance of a notice. The Court explicitly stated that the liability exists de hors (independent of) the notice.
- Natural justice and mens rea: Relying on this Court's earlier pronouncement in Burmah Shell (and the reasoning therein), the Court rejected the petitioner's claim that natural justice requires a prior show cause notice or an opportunity to negate mens rea or wilful default. The Court quoted and followed Burmah Shell for the principle that section 23(3) leaves no discretion to the assessing authority and that the penalty operates automatically as a statutory liability (characterised as interest by way of damages in that decision). Hence the mental element (mens rea/wilful default) is irrelevant to liability under section 23(3).
- Effect of interim stay: The Court held that an interim stay of collection does not prevent the accrual of interest or penalty due under the statute; such a stay merely fetters recovery while it subsists. Once the interim stay was vacated (on dismissal of the O.P.), the penalty/interest that had been accruing became recoverable.
- Overall conclusion: The Court concluded that the petitioner's contentions were unsustainable on statutory construction and precedent as applied; exhibits P-1 and P-3 were validly issued and the challenge to them failed.
Holding and Implications
Holding: The petition is DISMISSED.
Direct consequences for the parties:
- The attack on exhibits P-1 (30 March 1977) and P-3 (9 August 1977) failed; those orders standing for demand of penalty under section 23(3) were upheld.
- The Court held that penalty liability under section 23(3) is absolute, may be demanded notwithstanding completion of final assessment and adjustments under rule 20, and accrues independently of any notice; issuance of a notice is not a condition precedent to liability.
- The interim stay obtained during the pendency of O.P. No. 3496 of 1973 did not prevent accrual of penalty; it only restrained recovery while in force. On dismissal of the O.P., the penalty/interest that had accrued became recoverable.
- The Court made no order as to costs.
Broader implications:
The opinion applies and reiterates existing interpretation as recorded in earlier authority (notably Burmah Shell) that section 23(3) creates an absolute liability; the judgment does not announce or purport to create a novel legal principle beyond the application of that established construction. The opinion does not set out any broader or new precedent beyond applying the cited authorities to the facts before the Court.
The Judgment of the Court was delivered by
T. Kochu Thommen, J.:— The petitioner challenges exhibit P-1 order of the 1st respondent dated 30th March, 1977, and exhibit P-3 order of the 2nd respondent dated 9th August, 1977. Exhibit P-1 was made under rule 31 of the Kerala General Sales Tax Rules, 1963 (“the Rules”), calling upon the petitioner to pay the penalty in terms of section 23(3) of the Kerala General Sales Tax Act, 1963 (“the Act”). Exhibit P-1 was affirmed by exhibit P-3.
2. According to the petitioner, no penalty for non-payment of tax as per the provisional assessment can be imposed subsequent to the completion of the final assessment and, in any case, an order imposing penalty has to be preceded by a show cause notice.
3. For the year 1973-74, a pre-assessment notice dated 20th September, 1973, was served on the petitioner. This was challenged in O.P No. 3496 of 1973 and an interim order of stay of collection of tax was obtained. The O.P was dismissed by judgment dated 14th February, 1975. A provisional order of assessment for the year 1973-74 had been served on the petitioner on 18th October, 1973. On 14th April, 1975, the final order of assessment was passed. The tax due as per the final order of assessment was paid in full on 16th January, 1976. Subsequently, exhibit P-1 dated 30th March, 1977, levying penalty for non-payment of tax as per the provisional assessment in terms of rule 31 was issued to the petitioner. The petitioner's counsel submits that the provisional order of assessment merged into the final order of assessment, and it was not open to the department to demand penalty for non-payment of the tax as per the provisional assessment if no such amount was taken into account at the time of adjustment after the final assessment and determination of the amount payable towards it as per rule 20. The counsel further contends that at the relevant time the section as it stood did not postulate collection of penal interest for nonpayment of tax. What section 23(3) warranted was payment of penalty. No penalty can be imposed, it is pointed out, except after giving the assessee an Opportunity of showing absence of mens rea or wilful default. The counsel points out that penalty is a punishment, the imposition of which has to be in compliance with the principles of natural justice. The counsel further contends that the contrary view expressed by this Court in Burmah Shell Oil Storage and Distributing Co. of India Ltd., Madras-1 v. Sales Tax Officer, Special Circle, Ernakulam [1973] 32 S.T.C 429., requires reconsideration.
4. Section 23 deals with payment and recovery of tax. This section is wide enough to take in tax payable under section 17 as well as under section 18. sub-section (3) of section 23 reads:
“(3) If the tax assessed or any other amount due under this Act or any instalment thereof is not paid by any dealer or other person within the time specified therefor in the notice of demand or in the order permitting payment in instalments or within the time allowed for its payment by the appellate or revising authority, the dealer or other person shall pay, by way of penalty, in the manner prescribed, in addition to the amount due, a sum equal to—,…”
5. The liability to pay penalty at the prescribed rate is in addition to and independent of the tax payable by the assessee. Rule 20 allows adjustment after final assessment. This rule reads:
“20. Adjustment after final assessment.—After making the final assessment under sub-rule (4) or (5) of rule 18, the assessing authority shall examine whether any and if so what amount is due from the dealer towards the final assessment after deducting any tax already paid on the provisional assessment, with reference to rule 13 or 14 or 15 or at the time of submission of return in form 8 with reference to sub-rule (3) of rule 18. If any amount is found to be due from the dealer towards the final assessment, the assessing authority shall serve upon the dealer a notice in form 14A and the dealer shall pay the sum demanded within the time and in the manner specified in the notice. If the tax due on the final assessment is lower than the tax already paid, the assessing authority shall refund to the dealer the excess tax if no other amount is due from him or adjust the excess tax towards the recovery of any amount due on the date of adjustment, from the dealer as provided in section 44 after giving due notice to the dealer. If the tax due on the final assessment is exactly equal to the tax already paid, the assessing authority shall inform the dealer that no further amount is due from him towards it.”
6. If upon final assessment amounts are found to be due from the assessee he shall be called upon by notice in form 14A to pay the balance amount. If, on the other hand, he has paid as per the provisional assessment amounts in excess of what was determined to be due from him, upon completion of the final assessment such excess amount is repayable to him or adjustable after notice towards any other amount due from him. The adjustment contemplated under rule 20 is without prejudice to the right of the department to demand from the assessee the penalty payable by him in terms of section 23(3) read with rule 31. Rule 31 reads:
“31. Mode of payment of penalty.—(1) The penalty payable under subsection (3) of section 23 shall be remitted into the Government treasury or paid by means of crossed cheque or crossed demand draft in favour of the assessing authority concerned either separately or along with the tax.
(2) The assessing authority concerned may calculate the penalty payable under sub-section (3) of section 23 from time to time and may issue a notice in form 24. On receipt of the notice the dealer shall pay the penalty due in the manner specified in sub-rule (1).
Explanation.—The dealer or other person concerned shall however be liable to pay the penalty under sub-section (3) of section 23 whether he receives a notice under this sub-rule or not.”
7. The amount determined to be due from the assessee by way of penalty has to be notified to him and, on receipt of such notice, he is liable to pay such amount. The explanation however makes it clear that the liability of the assessee is not dependent upon the notice. The liability arises under the relevant provisions and de hors the notice. These provisions indicate that notwithstanding the completion of the final-assessment proceedings and the adjustment of the balance amounts in terms of rule 20, the liability for penalty, if incurred by the assessee, remains enforceable even subsequent to the completion of the final assessment. The argument that the provisional assessment is merged into the final assessment and, therefore, any amount payable pursuant to the provisional assessment is no longer recoverable from the assessee once the adjustment under rule 20 has been made is not sustainable.
8. The contention as regards non-compliance with natural justice has only to be stated to be rejected in the light of the categoric pronouncement of this Court on that point in Burmah Shell Oil Storage and Distributing Co. of India Ltd., Madras-1 v. Sales Tax Officer, Special Circle, Ernakulam. Distinguishing the decisions of the Supreme Court in Hindustan Steel Ltd. v. State Of Orissa†. [1970] 25 S.T.C 211 S.C., Commissioner Of Income Tax, West Bengal v. Anwar Ali [1970] 76 I.T.R 696 S.C. and C.A Abraham… v. Income-Tax Officer, Kottayam…. [1961] 41 I.T.R 425 S.C., this Court stated as follows:
“There cannot be any dispute regarding this proposition. But, the question for us to consider is whether these decisions can apply to the case before us. The language of section 23(3) appears to make the payment contemplated by the section an absolute liability on the assessee. If the tax assessed is not paid within the time allowed, whatever be the reason for the non-payment, the dealer or other person shall pay, by way of penalty, in the manner prescribed, in addition to the amount due, a sum equal to half per cent of such amount for each month or part thereof, for the first three months, and one per cent of such amount for each month or part thereof, subsequent to the three months. There is no question of the taxing authority exercising any discretion under the statute; no discretion is contemplated or vested in the authority; the penalty at the particular rate mentioned in the section automatically clinches on the failure to pay the amount within the time mentioned in the section. If there is no discretion left in the assessing authority by the statute itself, there is no question of the exercise of discretion being quasi-judicial and no question of giving notice to the assessee before the exercise of discretion. As we have stated already, the penalty is in the nature of interest by way of damages payable on the defaulted amount at the particular rate mentioned in the section itself. Therefore, the decisions cited by the counsel of the petitioner cannot have any application to the case. Looking at the case, once again, from the angle of natural justice, we would point out that the statutory provision, we mean section 23(3), excludes the application of the rules of natural justice and, in such cases, we cannot ignore the mandate of the legislature; the mandate of the legislature is clear in the language of the section; we cannot read into the concerned provision the rules of natural justice; that will not be consistent with the language of the section: vide Union of India v. J.N Sinha.”
9. In the light of that decision, the contention that the penalty did not and could not accrue until after due notice was issued to the petitioner has no merit. The mental element of mens rea or wilful default is irrelevant to the question, the liability being absolute.
10. The petitioner's counsel submits that that decision requires reconsideration. The only reason stated in support of that submission is that this Court read “penalty” as “imposed by way of damages”. The reason for so reading the expression is clearly stated; and I see no merit on the criticism against it.
11. The counsel further submits that at any rate a stay of collection operated during the pendency of O.P No. 3496 of 1973, which was disposed of only on 14th February, 1975, when the O.P itself was dismissed. The counsel says that until then no penalty could have accrued. I am not impressed by this argument, for the effect of an interim stay is not to prevent the accrual of interest or penalty that is due and payable under the statute, but to impose a fetter upon the recovery of such amounts. With the dismissal of the O.P and the removal of the fetter under the interim order, the interest which had been accruing as per the relevant provisions became recoverable. That being the position, interest which had accrued during the relevant period is payable by the assessee and recoverable by the department in terms of the statute. The attack on exhibits P-1 and P-3 fails. The O.P is dismissed. In the circumstances of this case, I make no order as to costs.
12. Petition dismissed.
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