P.P. Varkey and Co. vs The Sales Tax Officer and Others

J.B. Koshy, J.—The only question raised in this Original Petition is whether penalty can be imposed on a person u/s 45A of the Kerala General Sales Tax Act, 1963 (hereinafter referred to as ''the Act'') for the very same offence compounded u/s 47 of the Act. Sections 45A and 47 are covered under same Chapter VIII of the Act which deals with "offences and penalties". Petitioner in this case is a registered dealer under the Act. The business place of the Petitioner was inspected by the Intelligence Officer on 7th March, 1988 and detected certain irregularities in accounting. Petitioner applied for compounding u/s 47 and the authorised officer accepted the offer. The maximum compounding fee of Rs. 1 lakh was imposed on the Petitioner and that was paid. Once the compounding fee is paid and accepted, both parties, that is, neither the Revenue nor the Assessee can question the compounding order and that particular offence stands as compounded. Section 47 deals with compounding of offence which reads as follows:

Composition of offences.- (1) The assessing authority or other officer or authority authorised by the Government in this behalf may accept from any person who has committed or is reasonably suspected of having committed an offence against this Act, by way of composition of such offence.

(a) Where the offence consists of the evasion of any tax payable under this Act, in addition to the tax so payable a sum of money equal to the amount of tax so payable subject to a minimum of rupees one hundred and maximum of rupees one lakh.

The word ''compounding'' means ''to settle a debt or dispute by concession or special arrangement'' and in legal terms it means ''condone a liability or offence in exchange for money etc.'' as can be seen from Concise Oxford Dictionary. The Laxicon Webster Dictionary, Encyclopaedic Edition, defines ''compound'' as follows:

...To settle or adjust by agreement, esp. for a reduced amount, as a debt, to agree, for a consideration, not to prosecute a crime; ...To make a bargain; come to terms; compromise; settle a debt by compromise.

Strouds Judicial Dictionary defines ''compound'' as follows:

Compound.- (1) To ''compound'' a debt is to abate apart on receiving the residue (Haskins v. Newcomb 2 Johns, 408). ''If there is a binding arrangement for discharge of the debt from which neither party can recede and with which the creditor is satisfied, it is a compounding, though something still remains to be done'' (per Patteson, J., Pennell v. Rhodes 9 Q.B. 129) Cp. Composition; Compromise.

(2) ''Compounding felony, or theft-bote'', is where the party robbed, not only knows the felon but also, takes his goods again, or other amends, upon agreement not to prosecute'' (Jacob)....

''Compounding a felony'' under the English Law is an offence perverting public justice by bargaining to allow a criminal to escape. In tax matters it is different. Once the compounding is done the offencc is settled, no action can be taken against the Assessee for that particular offence and of course assessment or even best judgment assessment can be made as per law but no further penal action can be taken against that particular offence. But penalty was imposed on the Petitioner u/s 45A for the very same offence which was compounded u/s 47. It is not disputed that Section 45A is penal in nature.

It is the contention of the learned Government Pleader that compounding is only regarding criminal offence and against prosecution, and not against imposition of penalty. There is no such reservation u/s 47 of the Act. u/s 47 what is compounded is the offence committed by the Petitioner. Once the offence is compounded no penal action by way of penalty or prosecution proceedings can be taken against the Petitioner for the very same offence. As earlier noted, imposition of penalty u/s 45A as well as composition u/s 47 are all included in the same Chapter VIII of the Kerala General Sales Tax Act under the heading "Offences and Penalties". Once an offence is compounded it is agreed by both parties that no further action for that offence will be taken and concept of compounding envisages a bilateral agreement to condone the offence on payment of the amount fixed.

In the decision in S. Viswanathan, Sivaram Electricals, Trivandrum v. State of Kerala (1999) 7 K.T.R. 35 (Ker.) it was held that when the matter is compounded neither the Assessee nor the Department can challenge the compounding order, by that it is implied that the offence which was detected at the time of inspection by the Intelligence Officer and the amount fixed for compounding the same were accepted by the Assessee and authority and it cannot be re-opened again. This decision may not be on the point to help the Assessee. Here the question is when once the offence is compounded whether penalty proceedings can be taken against the Petitioner for the same offence. The wording of Section 47 is very clear that on payment of compounding fee fixed offence as such is settled. Therefore, after compounding no penalty or prosecution can be launched.

Learned Government Pleader cited the decision of the Madras High Court in Deputy Commissioner (C.T.), Coimbatore v. N. Pillar Chetty and Co. (2). But in that case an offence of failure to maintain true and correct accounts was compounded. Penalty was imposed for not filing the return in time and not for the offence of failure in maintaining correct accounts. The Madras High Court held that collection of compounding fee is with reference to an independent contravention of the Act while the imposition of penalty is with reference to an entirely different violation of the provisions of the Act. Therefore, that decision is different from this case. The Madras High Court held as follows:

...There is no question of any double taxation or double penalty. The provision contained in Section 12(3) in respect of the imposition of penally is in relation to failure to submit true and proper return and, on the other hand, the collection of compounding fee is with reference to the failure to maintain true and correct accounts as required by Section 40 of the Act. Consequently, the collection of compounding fee was with reference to an independent contravention of the Act while the imposition of penalty was with reference to an entirely different violation of the provisions of the Act.

Here the facts are entirely different. Exactly, for the same offence which was compounded no penalty proceedings can be initiated. Further, Section 46(2) of the Madras General Sales Tax Act which was considered in the Madras decision referred above at that time provides that on payment of such sum of money and the tax, if any, recoverable under the Act, no prosecution for an offence under the Act shall be instituted in respect of the same facts on which a composition has been allowed under that section. Therefore, payment of compounding fee under the then Madras Act only gave protection against prosecution. u/s 47 of the Kerala Act, offence itself is condoned once the offence is allowed to be compounded.

Learned Government Pleader also cited the decision in Sree Sastha Trading Co. v. State of Kerala 1991 (2) KLT 875 wherein the question considered was whether the proceedings of compounding is revisable or not and not the question whether after compounding, penalty orders can be imposed. The Division Bench observed as follows:

The language employed in Section 47 would indicate that the proceeding contemplated thereunder partakes of the character of a compromise between the parties. The section provides that the assessing authority or other officer or authority authorised by the Government in this behalf may accept from any person who has committed or is reasonably suspected of having committed an offence against this Act by way of composition of such offence a sum of money equal to the amount of tax attempted to be evaded subject to a minimum of rupees one hundred and maximum of rupees one lakh, where the offence consists of evasion of any tax (the levy is in addition to the tax payable) and in all other cases a sum of money not exceeding five thousand rupees. The proviso say that the Board can authorise any officer to compound the offence on payment of a reduced amount. These words clearly indicate that the person who has committed or is reasonably suspected of having committed an offence under the Act, can of his free will or volition make an offer for compounding the offence by paying the sum of money contemplated u/s 47. When once this offer is accepted and the dispute is compromised the parties thereto namely the person who has committed the offence or suspected of having commited the offence and the assessing authority or other officer or authority authorised by the Government in that behalf are bound by the said compromise evidenced by the proceedings....

The above observation was made to show that once the matter was compounded, no revision application will lie regarding the quantum of compounding fee etc. and the above decision did not lay down a proposition that only prosecution is waived by compounding.

A plain reading of Section 47 do not indicate that composition of offence is only a shield against prosecution. On well accepted principles to be followed while interpreting penal provision or taxing statute also I am not able to accept the contentions of the learned Government Pleader that after compounding an offence and accepting maximum compounding fee, for the very same offence penalty can be imposed. Therefore, I am of the opinion that when once the matter is compounded u/s 47 no prosecution or penalty proceedings can be initiated for the very same offence. Since Petitioner has compounded the offence and Department has accepted the maximum compounding fee of rupees one lakh, no further penalty u/s 47 can be imposed on the Petitioner. Therefore, Ext. P-1 penalty order and Exts. P-2 and P-3 revisional orders confirming the same are set aside.

The Original Petition is allowed.

*A reproduction from ILR (Kerala Series).