State of Karnataka vs Krishna Stone Tech Pvt. Ltd.

Aravind Kumar, J.—The Revenue is questioning the correctness and legality of the order passed by the Karnataka Appellate Tribunal in S.T.A. Nos. 2457-62 of 2004 dated August 23, 2005. The facts leading to the filing of this revision petition are as follows:--

The respondent-assessee engaged in the business of cutting and polishing of granite stones, for the period from April 1, 1998 to March 31, 1999 was assessed by the Assistant Commissioner of Commercial Taxes, I Circle, Bellary, by order dated April 25, 2000. Subsequently, after issuance of notice of proposal to levy penalty an order came to be passed u/s 5A(2) of the Karnataka Sales Tax Act 1957 levying penalty thereunder by order dated March 8, 2004. The said order of levying penalty was questioned by the assessee before the Joint Commissioner of Commercial Taxes (Appeals) who by order dated July 13, 2004 confirmed the order of levying penalty, and dismissed the appeals.

Aggrieved by the same, the respondent-assessee preferred appeals before the Karnataka Appellate Tribunal in S.T.A. Nos. 2457-62 of 2004. and penalty levied u/s 5A(2)/5A(3) of the KST Act for the assessment years 1997-98 to 2002-03 came to be set aside and the appeals came to be allowed by order dated August 23, 2005. The Revenue is questioning the said orders of the Tribunal in this revision petition.

We have heard Smt. Geetha Menon, the learned Additional Government Advocate appearing for the revision petitioner-Revenue and Sri M. N. Shankare Gowda, the learned counsel for the respondent-assessee.

We find that at the time of admission of this revision petition, the following substantial questions of law have been framed for consideration in this revision petition:--

(1) Whether the KAT was justified in observing that the expression ''manufacturing unit'' employed u/s 5A of the Act should not be construed in strict sense?

(2) Whether the Tribunal was justified in setting aside the levy of penalty imposed u/s 5A(2) and (3) of the KST Act?

The learned Government Advocate submitted that section 5A(1) provides that the tax payable by a registered dealer in respect of sales of industrial input liable to tax under the Act to another registered dealer for use by the latter as a component or raw material or taking material to any other goods which the assessee intends to manufacture inside the State for sale or in respect of sale of consumables liable to tax under the Act to another registered dealer for use in such manufacture shall be at the reduced rate of tax and contends that the respondent-assessee having purchased rough granites against the declarations and claiming reduced rate of tax on the sales turnover of polished granite slabs does not involve manufacturing activity to attract the provisions of section 5A(1) of the Act. She further contends that in the case of Padmavathi Marbles this court in S.T.R.P. Nos. 65 and 66 of 1992 decided on January 30, 1996 has held that mere polishing of stones does not result in the manufacturing of new articles. Hence she contends that penalty imposed by the appellate authority u/s 5A(2)/(3) of the KST Act was justifiable and the Tribunal committed an error in allowing the appeals and accordingly seeks for setting aside the order of the Tribunal.

Per contra, Sri M. N. Shankare Gowda, the learned counsel for the respondent-assessee, would submit that the cause for issuance of notice being the honourable single judge''s orders in Poonam Stone Processing Industries Vs. Deputy Commissioner of Commercial Taxes (Admn.), Gulbarga Division, Gulbarga and others, There was no justification for the authorities to levy penalty and the Tribunal having considered this fact has rightly set aside the levy of penalty. He further submits that the authorities themselves were under doubt as to the activity carried on by the granite stone dealers as to whether they are carrying on manufacturing activity or not and this is explicitly clear from the circular issued in Circular No. 19/2003-04 dated November 11, 2003 and when the authorities themselves were under doubt as to the activity of the assessee, the authorities were not justified in levying penalty on the premise that activity of cutting and polishing of granite stones is not a manufacturing activity. He elaborates his submission by contending that change of law would not give rise to levy penalty particularly in the background of the Revenue itself having accepted the activity of the assessee amounted to manufacturing and accordingly submits that order of the Tribunal in allowing the appeal and annulling the orders of levying penalty does not call for interference.

Having heard the counsel for the parties, the only question that arises for consideration in this revision petition is:--

Whether the Tribunal was justified in setting aside the penalty levied by the authorities for the assessment years in question on the ground that activity carried on by the assessee does involve manufacturing activity?

It is an undisputed fact that for the assessment years in question, i.e., 1997-98 to 2002-03, the assessing officer has assessed the dealer by accepting the contention that they carry on manufacturing activity and accordingly demanded tax also. The ground on which the jurisdictional officer initiated penalty proceedings was on the basis of the judgment of this court rendered by the learned single judge in the case of Poonam Stone Processing Industries Vs. Deputy Commissioner of Commercial Taxes (Admn.), Gulbarga Division, Gulbarga and others, holding that activity of cutting and polishing of granites is not a manufacturing activity. On consideration of the reply, said authority held that the judgment of the learned single judge would be applicable to the facts of the case also and levied penalty. It is the contention of the Revenue that cutting and polishing of granite stones is not a manufacturing activity and as such they are liable to be taxed at 20 per cent at the point of first sale in the State. Since cutting and polishing of granite stones is not a manufacturing activity the declaration given under form No. 37 and taking the benefit of concessional tax rate provided u/s 5A of the Act amounted to misdeclaration and penalty is to be levied for such misdeclaration is to be considered by this court as to whether the cutting and polishing of granite stones is/or is not a manufacturing activity. Though several contentions were attempted to be canvassed by the learned counsel appearing for the Revenue and the assessee,. we are of the opinion that the said issue is no more res integra in view of the decision in the case of Padmavathi Marbles v. State of Karnataka in S.T.R.P. Nos. 65 and 66 of 1992 dated January 30, 1996, wherein it has been held by this court as follows:--

The main contention is that the stones purchased by the petitioner and the polished stones are wholly different commodities and unpolished unsize stone cannot be equated to a polished stone. The question is whether polished stone is the result of any manufacturing activity. The principle should be governed by the decision of the Rajasthan High Court which we have already referred to Assistant Commercial Taxes Officer Vs. Sitaram Badrilal, Following the aforesaid decision, we hold that mere polishing of stones does not result in the manufacture of new article.

In view of the same, the Tribunal was in error in holding/observing that expression "manufacturing unit" employed u/s 5A of the Act should not be construed in strict sense and accordingly we answer the question of law in favour of the Revenue and against the assessee.

Now coming to question No. 2 formulated hereinabove, it would be necessary for us to examine whether there has been violation of section 5A of the Act by the assessee and if so whether the authorities were justified in levying penalty u/s 5A(2) and (3) of the Act. It is in this background, the provision of section 5A(2) and 5A(3) is to be looked into. The said provisions read as follows:--

5A : Taxation of industrial inputs.--(1)...

(2) If any person,

(i) not having his manufacturing unit inside the State and having purchased any inputs by furnishing a declaration under the first proviso to sub-section (1), sells away such inputs contrary to such declaration,

(ii) Omitted by Act No. 23 of 1983 with effect from April 1, 1983

(iii) Omitted by Act No. 9 of 1986, with effect from April 1, 1986

(iv) Having his manufacturing unit inside the State and having purchased any inputs by furnishing a declaration under the first proviso to sub-section (1), sells away such inputs contrary to such declaration,

the assessing authority, after giving such person a reasonable opportunity of being heard, shall, by order in writing, impose upon him by way of penalty a sum, which shall not be less than the amount of tax leviable (under section (5) on the sale of the inputs so purchased, but which shall not exceed double the amount of such tax;

(v) having his manufacturing unit inside the State and having purchased any inputs by furnishing a declaration under the first proviso to sub-section (1), uses such inputs contrary to such declaration, the assessing authority, after giving such person a reasonable opportunity of being heard, shall, by order in writing, impose upon him by way of penalty a sum which shall not be less than twice the amount of tax leviable u/s 5 but not exceeding thrice the amount of such tax on the inputs so purchased.

(3)(a) Every dealer who, during the course of the year, purchases any inputs by furnishing a declaration under the first proviso to sub-section (1), shall maintain in the prescribed manner a regular account of the receipt and issue of such declaration forms as and when the same are received or issued by him.

(b) Every such dealer shall also maintain in the prescribed manner a day to day account of the opening balance, purchases, consumption and closing balance of every input, which is purchased by him by furnishing a declaration under the first proviso to sub-section (1).

(c) If any dealer fails to maintain, in the prescribed manner, true and complete accounts as required by clause (a) or clause (b) of this sub-section, the assessing authority shall, after giving such dealer a reasonable opportunity of being heard pass an order:--

(i) disentitling such dealer from making use of any declaration forms prescribed under the first proviso to sub-section (1) and requiring him to surrender forthwith the declaration forms already issued to him, if any; and

(ii) imposing upon him a penalty not exceeding the amount of tax leviable under the provisions of (sections 5) on the sale value of the inputs already purchased by him against prescribed declaration forms up to the date of surrender of the unused forms by him.

(d) If any dealer, in respect of whom an order has been passed under clause (c) of this sub-section, pays the penalty and complies with other terms of such order, the assessing authority may, in his discretion, permit such dealer to obtain the prescribed declaration forms afresh and to make use of the same for the purchase of inputs in the State at concessional rates of tax.

The authorities below have levied penalty only on the premise of the applicability of Poonam Stone Processing Industries Vs. Deputy Commissioner of Commercial Taxes (Admn.), Gulbarga Division, Gulbarga and others, It is also not in dispute that the said judgment has been carried in writ appeal by the said assessee and the judgment of the learned single judge came to be set aside which is Poonam Stone Processing Industries Vs. Deputy Commissioner of Commercial Taxes (Admn.), Gulbarga Division, Gulbarga and others, It is no doubt true that as rightly contended by Smt. Geetha Menon that as regards the finding given by the learned single judge of this court with regard to manufacturing activity, no finding has been given by the Division Bench. The said decision cannot be pressed into service by the respondent-assessee. Be that as it may, the authorities themselves having issued a circular in the year 2003, i.e., on November 11, 2003 being in doubt as to under which category activity of polishing of granite stones is to be treated. Said notification dated November 11, 2003 reads as under:--

No. KSA. CR. 12800-01

Office of the Commissioner of Commercial Taxes in Karnataka, Bangalore, dated November 11, 2003.

Commissioner of Commercial Taxes Circular No. 19/2003-04

Sub : KST Act, 1957, availability of form 37 declarations facility to the dealers engaged in the process of cutting and polishing of rough granite stones into polished stones--Applicability of rate of tax on polished granite stones--Regarding.

Ref : The judgment of the honourable High Court of Karnataka in the case of Poonam Stone Processing Industries Vs. Deputy Commissioner of Commercial Taxes (Admn.), Gulbarga Division, Gulbarga and others,

The honourable High Court of Karnataka in the case referred above has held that the activity of cutting and polishing of granite stones is not a manufacturing activity. Further as per entries serial Numbers 17(1)(a) and 17(1)(b) of Part S of the Second Schedule to the Karnataka Sales Tax Act, 1959, polished and unpolished granite stones are liable to tax at 20 per cent at the point of their first sale in the State.

It has come to the notice of this office that certain assessing authorities are allowing dealers to purchase unpolished (rough) granite stones for use in conversion into cut and polished granite stones against form 37 declarations at the concessional tax rate provided u/s 5A of the Act. It has also come to notice that certain assessing authorities are treating sale of polished granite stones obtained from unpolished granite stones as subsequent sale of tax suffered polished granite stones.

The matter is examined and the following instructions are said:--

(1) As the process of cutting and polishing of granite stones is not a manufacturing activity as held by the honourable High Court of Karnataka. The activity of purchase of unpolished granite stones against form 37 declarations at the concessional tax as provided u/s 5A of the Act is not available to dealers engaged in such activity. Issue of any such declarations towards purchase of unpolished granite stones would be violation of the provisions of section 5A of the Act and attracts penalties provided therein.

(2) Sale of polished granite stones by any dealer which has been obtained out of unpolished granite stones subjected to the process of cutting and polishing is a first sale liable to tax u/s 5(3A) of the Act at the rate specified in entry Sl. No. 17(1)(a) of Part S of the Second Schedule to the Act. Such sale cannot be taken as subsequent sale of tax suffered polished granite stones.

(3) Accordingly, action shall be taken u/s 5A of the Act to levy penalties in cases where dealers have wrongly issued form 37 declarations towards purchase of unpolished granite stones for being used in conversion into polished granite stones.

(4) Similarly action shall be taken to levy tax on sale of polished granite stones obtained out of KST suffered unpolished granite stones as first sale at the applicable rate. Any assessment concluded treating such sale as second sale shall be reassessed u/s 12A or taken up in revision u/s 21 or 22A as the case may be.

(5) All the officers of the internal audit Joint Commissioner of Commercial taxes (Administration)/Additional Commissioners and Inspection Wing of this office shall specially review the cases falling under the above categories and also the action taken as per instructions issue.

(4) All the concerned shall note and follow the above instructions carefully. Any deviation shall be viewed seriously.

Hence, we do not find justification for the authorities in initiating penalty proceedings to a concluded proceedings particularly when the authorities themselves having accepted that the activity of the respondent-assessee was that of manufacturing. Thus, we find that both the assessing authority as well as the first appellate authority were in error in proceeding to levy penalty and confirm the same respectively only on the basis of the judgment of the learned single judge of this court in the case of Poonam Stone Processing Industries Vs. Deputy Commissioner of Commercial Taxes (Admn.), Gulbarga Division, Gulbarga and others,

The Appellate Tribunal having considered these aspects has proceeded to hold that there was no ulterior or dishonest motive on the part of asses-see so as to levy penalty. In fiscal statutes, question of establishing mens rea or motive does not arise. When the statute prescribes a particular thing or act to be done in a particular way, it requires to be done as such. Noncompliance of the same itself would attract penal provision in respect of fiscal statute. However, in the facts and circumstances of the case, we find that the authorities were themselves under doubt as to the applicability or category under which respondent-assessee was to be categorized. Hence, we do not find that there has been any misdeclaration by the assessee in availing of the benefit of the notification. In these circumstances, we are of the opinion that substantial questions of law which have been framed hereinabove is with regard to categorizing the activity of the respondent-assessee, we answer question No. 2 in favour of the assessee and against the Revenue.

In so far as question No. 1 as to whether the expression "manufacturing unit" employed u/s 5A of the Act is to be construed in the manner as per the decision rendered by this court in the case of Padmavathi Marbles v. State of Karnataka in S.T.R.P. Nos. 65-66 of 1992. Accordingly we hold that the Tribunal was in error in construing the same in strict sense. Accordingly, following order is passed:--

Revision petition is dismissed and question No. 1 is answered in favour of the Revenue and question No. 2 is answered in favour of the assessee. Ordered accordingly.