Penalty cannot be imposed stating that penal provisions are mandatory rules Karnataka High Court

Fact and Issue of the case

Facts leading to filing of this revision petition briefly stated are that the petitioner is a dealer registered under the provisions of the Act and is engaged in the activity of manufacture and sale of petroleum products. The petitioner is a public sector company. The petitioner is also a registered dealer under the provisions of Central Sales Tax Act. The petitioner has commenced its operations in the year 199 6 and has carried out the activities of expansion and modernization. The petitioner commenced the commercial production in the initial stage referred to as Phase I in the year 1995-96 with rated capacity of 3 MMTPA. Subsequently, the petitioner claimed additional investments for expansion of its manufacturing unit under second stage referred to as Phase II by which the rated capacity was enhanced to 9 MMTPA. The commercial production for Phase II commenced in the year 1999-2000. The petitioner thereafter made further investments and began expansion of Phase III in the year 2009-10 by which capacity was enhanced to 15 MMTPA. The petitioner linked the existing units to the new units undertaken after Phase III expansion project to form a continuous process plant with uninterrupted operations. The commercial production of Phase III commenced in March 2012. The petitioner, during the expansion of Phase III facilities, procured capital goods for use in Phase III expansion from registered dealers within the State of Karnataka with applicable value added taxes and availed and utilized input tax credit on the purchasers in the same month of purchase against the tax liability of the same month arising out of sales made out of the existing Phase I and Phase II facilities which continued to generate revenue / turn over / tax liabilities.

The re-assessment proceedings were initiated against the petitioner for the period 2009-10 and books of accounts, returns, etc. were verified. Thereafter, the proposition notice dated 29.02.2012 was issued under Section 39(1) of the Act for the periods August 2009, January 2010 and March 2010 proposing to disallow the input tax credit availed on the capital goods for Phase III on the ground that credit cannot be availed prior to commencement of production. In response to the aforesaid notice, the petitioner supplied reply on 13.03.2012 in which inter a/ia it submitted that the petitioner was eligible to avail input tax credit as the petitioner was effecting sales of taxable goods during the impugned period and has satisfied the conditions laid under Section 12(2) of the Act. In terms of the proposition notice, the Assessing Authority passed an order of re-assessment dated 13.06.2012 by which the credit availed by the petitioner was disallowed. The petitioner paid the entire amount of input tax credit under dispute. Thereafter, the petitioner, for a period from March 2013 to March 2016, made payment under liability. Thereafter, an order of rectification was passed on 25.06.2012.

The assessee thereupon filed an appeal before the Joint Commissioner of Commercial Taxes which was dismissed by an order dated 24.05.2017 inter a/ia holding that the petitioner purchased capital goods for expansion of Phase III and the eligibility to claim input tax credit under the Act is only after commencing of production or sale of goods from expansion Unit III of the petitioner. It was further held that the expression ‘or’ used in Section 12(2) of the Act is disjunctive and only relates to expansion unit of Phase III of the petitioner. Accordingly, it was held that the assessee has not fulfilled the conditions laid down under Section 12(2) of the Act and the appeal preferred by the petitioner was dismissed. In the aforesaid factual background, this appeal has been filed.

Observation of the Court

The court has considered the submissions made on both sides and have perused the record. It is well settled rule of statutory interpretation in relation to the taxing statute that the subject is not to be taxed unless the words of the taxing statute unambiguously impose tax on him. The proper course in construing revenue Acts is to give a fair and reasonable construction to their language without leaning to one side or the other but keeping in mind that no tax can be imposed without words clearly showing an intention to lay the burden and that equitable construction of the words is not permissible. (See: Principles of Statutory Interpretation Justice G.P.Singh 14th edition Page 882). It is equally well settled legal proposition that the word ‘or’ is normally disjunctive and the word ‘and’ is normally conjunctive. It is well settled rule of statutory interpretation that where the provision is clear unambiguous, the word ‘or’ cannot be read as ‘and’ and the expression ‘or’ is disjunctive.

In the instant case, the petitioner was effecting sale of taxable goods on payment of VAT / CST as applicable and was effecting sale of goods in the course of export out of the territory of India. Therefore, the petitioner had satisfied the conditions laid down in Section 12(2) of the Act namely sale of taxable goods / sale of goods in the course of export out of the territory of India and was eligible to avail of the credit under Section 12(2) of the Act. The finding recorded by the Joint Commissioner of Commercial Taxes as well as by the Tribunal that the petitioner, after expansion of Phase III, was eligible to claim input tax credit only after commencing of production or sale of goods from the expansion Unit III of the petitioner, cannot be sustained in the eye of law as the expression ‘or’ used in Section 12(2) of the Act is not pertinent to note that none of the conditions prescribed in Rule 133 provide that each unit of the petitioner has to be an independent unit to avail of the benefit of input tax. conjunctive but is disjunctive. Since the petitioner had input tax credit. There is no element of any mens rea that the petitioner had the intention to evade tax. The petitioner had paid taxes according to the information furnished in the return and therefore, it should not have been penalized subsequently after the assessment proceedings are finalized and the amount of tax is determined. It is well settled in law that penalty cannot be imposed merely because it is lawful to do so [See: ‘HINDUSTAN STEEL P. LTD. Vs. STATE OF ORISSA’ (1930) 25 STC 211 (SC) j. Since we have held that the petitioner was entitled to benefit of input tax credit, therefore, the question of levy of penalty and interest does not apply. It is also pertinent to mention here that the petitioner has deposited the amount of interest and penalty under protest and therefore, the petitioner is entitled to refund of the aforesaid amount.

For the aforementioned reasons, the substantial questions of law are answered in favour of the petitioner and against the respondent.

In view of preceding analysis, the impugned order dated 24.05.2017 passed by the Tribunal and order dated 27.09.2013 passed by the Joint Commissioner of Commercial Taxes cannot be sustained in the eye of law and the same are accordingly quashed. The appellant is held entitled to refund of interest paid under protest.