1 sta9.11.sxw IN THE HIGH COURT OF JDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION SALES TAX APPEAL NO. 9 OF 2011 The Addl. Commissioner of Sales Tax, VAT-III, Mumbai, having his office at 8th floor Sardar Balwant Singh Dhodi Marg, Vikrikar Bhavan, Mazgaon, Mumbai-400 010 ...Appellant. Vs. M/s Ankit International, Unit NO. 134, Bldg.No.6,M.V.Road, Mittal Industrial Estate, Andheri (E), Mumbai-400 059 ..Respondent. Ms. Uma Palsuledesai, AGP for the Appellant. Mr. C.B. Thakar for the Respondent. CORAM : DR. D.Y. CHANDRACHUD AND A.A. SAYED, JJ. DATE : 15 SEPTEMBER, 2011. ORAL JUDGMENT (PER. DR. D.Y. CHANDRACHUD, J.) 1. This Appeal filed by the Revenue raises a question as regards the 2 sta9.11.sxw interpretation of the provisions of Section 61(2) of the Maharashtra Value Added Tax Act, 2002, (" the MVAT Act"). The Commissioner of Sales Tax is in appeal against a decision of the Maharashtra Sales Tax Tribunal dated 5 October 2010, by which the Tribunal in an appeal filed by the assessee reduced the penalty imposed for the belated filing of an audit report for the year 2006-07 to Rs. 25,000/-. The submission of the Revenue is that under Section 61(2) while there is a discretion vested in the Commissioner whether or not to impose a penalty, once the Commissioner decides to impose a penalty it has to be in an amount equal to one tenth per cent of the total sales of the assessment year. In other words, the contention of the State is that while there is a discretion on whether or not a penalty should be imposed in the first place, no discretion is conferred by Section 61(2) to reduce the amount of penalty, once the Commissioner comes to the conclusion that a penalty is liable to be imposed. 2. We admit the appeal on the following substantial questions of law (as recast by the Court to bring out the nature of the controversy in the appeal): "(i) Does Section 61(2) of the MVAT Act confer a discretion on whether or not a penalty should be imposed as well as on the 3 sta9.11.sxw quantum of penalty? (ii) In the event that the Commissioner holds that a penalty has to be imposed under Section 61(2) upon the failure of a dealer to furnish an audit report within the prescribed period, does the Commissioner have the discretion to impose a penalty less than one tenth per cent of the total sales? (iii) Is the reduction in the quantum of penalty from Rs. 83, 013/- to Rs. 25,000/- justified in the facts and circumstances of the case?" 3. The Respondent is a registered dealer under the provisions of the MVAT Act, 2002. The Respondent filed an audit report under Section 61 in the prescribed form (form No.704) for the period 01 April 2006 and 31 March 2007 beyond the period prescribed. The Deputy Commissioner of Sales Tax (25), Business Audit Unit-4, Mumbai issued a notice to show cause to the Respondent as to why a penalty should not be imposed under Section 61(2) for a delay in filing the audit report. By an order dated 31 August 2009, the Deputy Commissioner of Sales Tax imposed a penalty of Rs. 83,013/-. This order was confirmed in appeal by the Joint Commissioner 4 sta9.11.sxw of Sales Tax on 17 May 2010. The Tribunal in Second Appeal reduced the penalty by its impugned order dated 5 October 2010 to Rs. 25,000/- holding that the delay on the part of the Respondent was not deliberate. The Tribunal accepted the explanation of the Respondent that the person who had conducted the audit for 2005-06 took up employment elsewhere and when this fact had come to the knowledge of the Respondent, a business audit for 2006-07 was conducted and an audit report was filed, though belatedly. The Tribunal held that the delay was not deliberate. In the circumstances, the penalty was remitted to the extent of 30%. The total penalty levied was in the amount of Rs. 25,000/-. 4. In support of the Appeal, Counsel appearing on behalf of the Appellant submits that (i) Under Section 61(2) the Commissioner has a discretion whether or not to impose a penalty in the first place but once he comes to conclusion that a penalty is liable to be imposed, he has no further discretion in regard to the extent of the penalty; (ii) The words used in the provision are "equal to" one tenth per cent of the total sales; (iii) The penalty must be equal to an amount representing one tenth per cent of the total sales and not any amount lower; and (iv) The decision of the Supreme Court in 5 sta9.11.sxw Union of India V Dharmendra Textile Processors 1 would advance this proposition. 5. On the other hand, Counsel appearing on behalf of the Assessee submitted that (i) the Legislature has conferred a discretion upon the Commissioner, whether or not to impose a penalty and the discretion also extends to the quantum of penalty to be imposed; (ii) The decision of the Supreme Court in Dharmendra Textile (Supra) turned on the provisions of Section 11AC of the Central Excise Act, 1944 in which the levy of the penalty is mandatory and hence the decision has no application to the provisions of Section 61(2) of the MVAT Act, 2002 in which the imposition of a penalty is not mandatory, but discretionary; (iii) In the event that two constructions are possible a construction which favours the Assessee should be adopted; (iv) The Tribunal has consistently taken the same position which has not been challenged by the Revenue; (v ) Unless a discretion were to be construed to have been granted to the Commissioner by Section 61(2) both in regard to the imposition of a penalty and in regard to the extent of the penalty the provisions would be confiscatory; and (vi) The Commissioner has passed orders imposing arbitrary penalties as high as Rs. 52.92 lakh in 1 2008 (231)E.L.T. 3(SC) 6 sta9.11.sxw one case, upon which reliance was placed. 6. The rival submissions now fall for determination. Section 61 provides for the audit of accounts in certain cases. In clause (1) of section 61 (as it stood at the material time), every dealer liable to pay tax, if his turnover of sales or as the case may be, of purchases exceeds rupees forty lakh in any year, is required to get his accounts in respect of such year audited by an accountant within the prescribed period from the end of that year and furnish within that period the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars and certificates as may be prescribed. Sub- section (2) of Section 61 provides as follows : " (2) If any dealer liable to get his accounts audited under sub- section (1) fails to furnish a copy of such report within the time as aforesaid. the Commissioner may, after giving the dealer a reasonable opportunity of being heard, impose on him, in addition to any tax payable, a sum by way of penalty equal to one tenth per cent, of the total sales. Provided that, if the dealer fails to furnish a copy or such report within the period prescribed under sub-section (1), but files it within one month of the end of the said period, and the dealer proves to the satisfaction of the Commissioner that the delay was on account of factors, beyond his control, then no penalty under this sub-section shall be imposed on him." Prior to its amendment by Maharashtra Act 25 in 2007, sub-section (2) of 7 sta9.11.sxw Section 61 provided for a sum by way of penalty equal to one tenth per cent, of the total sales or as the case may be, purchases or a sum of one lakh rupees, whichever is less. Upon amendment, the words “or as the case may be, purchases or a sum of one lakh rupees, whichever is less" came to be deleted. 7. The imposition of a penalty in sub-section (2) of Section 61 is not mandatory. The Commissioner has been conferred with the discretion to determine as to whether a penalty should or should not be imposed, if a dealer who is liable to get his accounts audited under sub-section (1), fails to furnish a copy of the report within the time prescribed. The Legislature has provided that the Commissioner "may" impose a penalty after giving the dealer a reasonable opportunity of being heard. The use of the word "may" is clearly suggestive of the fact that imposition of a penalty is not mandatory. The legislative intent has been emphasized in the requirement of furnishing to the dealer a reasonable opportunity of being heard before a penalty is imposed. The fact that the Legislature contemplated an opportunity of being heard is indicative of the intent of the Legislature that the explanation which the dealer may have, has to be considered before the Commissioner determines as to whether penalty should be imposed. That 8 sta9.11.sxw the imposition of the penalty under sub-section (2) of Section 61 is not mandatory has been emphasized in a judgment of a Division Bench of this Court in Nitco Paints Ltd. V. State of Maharashtra 2 in the following terms “ Section 61(2) clearly specifies that upon the failure of the dealer to get his accounts audited and to furnish a copy of the report within the time as prescribed, the Commissioner may after furnishing a reasonable opportunity of being heard, impose a penalty at the rate stipulated. The law provides that the penalty may be imposed and contemplates that a reasonable opportunity should be furnished to the dealer. Obviously there would be no occasion to furnish a reasonable opportunity of being heard if the liability to levy the penalty was automatic. Since the legislation has used the expression "may", the imposition of a penalty is discretionary. Undoubtedly, such a discretion has to be exercised in accordance with law and judiciously." 8. But the submission which has been urged on behalf of the Revenue is that once the Commissioner proceeds to hold that a penalty is liable to be imposed, he must necessarily impose a penalty equal to one tenth per cent of the total sales. In other words, it is urged that the discretion is whether or not a penalty should be imposed and not in regard to the extent of the penalty. As a matter of first principle there is no reason for the Court to restrict, by a process of construction the legislative intent in regard to the imposition of penalty by holding that the discretion would extend only to the imposition of a penalty and not with regard to the extent of the penalty. The legislature is 2 (2011) 42 VST 71 (Bom) 9 sta9.11.sxw undoubtedly empowered in its plenary jurisdiction to determine whether a penalty is or is not mandatory. For instance the provisions in Section 11AC of the Central Excise Act 1944 came up for construction before the Supreme Court in the decision in Dharmendra Textile (Supra). Section 11 AC stipulated that where any duty of excise has not been levied or paid or has been short levied or short paid or erroneously refunded by reasons of fraud, collusion or any willful mis-statement or suppression of facts, or contravention of any of the provisions of this Act or of the rules made thereunder with intent to evade payment of duty, the person who is liable to pay duty as determined under sub-section (2) of section 11A, shall also be liable to pay a penalty equal to the duty so determined. In this background, the Supreme Court observed as follows: "In Union Budget of 1996-97, Section 11AC of the Act was introduced. It has made the position clear that there is no scope for any discretion. In para 136 of the Union Budget reference has been made to the provisions stating that the levy of penalty is a mandatory penalty. In the Notes of Clauses also the similar indication has been given." The words used in sub-section (2) of Section 11A are "shall also be liable to pay a penalty equal to the duty so determined" 10 sta9.11.sxw 9. The decision in Dharmendra Textile was considered in a subsequent division Bench in Union of India V. Rajasthan Spinning & Weaving Mills 3 . The Supreme Court held as follows: "The decision in Dharmendra Textile must, therefore, be understood to mean that though the application of Section 11AC would depend upon the existence or otherwise of the conditions expressly stated in section, once the section is applicable in a case the concerned authority would have no discretion in quantifying the amount and penalty must be imposed equal to the duty determined under sub-section (2) of Section 11A. That is what Dharmendra Textile decides." In the case of State of Rajasthan V. D.P. Metals 4 , a three judge bench of the Supreme Court interpreted Section 78(5) of the Rajasthan Sales Tax Act, 1994 which read as follows: "The Incharge of the check-post or the officer empowered under sub-section (3), after having given the person incharge of the goods a reasonable opportunity of being heard and after having held such enquiry as he may deem fit, shall impose on him for possession or movement of goods, whether seized or not, in violation of the provisions of clause (a) of sub-section (2) or for submission of false or forged documents or declaration, a penalty equal to thirty percent of the value of such goods." There, the Court laid emphasis on the use of the word "shall" to hold that 3 2009 (238) ELT 3 (SC) 4 AIR 2001 SC 3076. 11 sta9.11.sxw "This provision cannot be read as to imply that the penalty of 30% is the maximum and lesser penalty can be levied. The legislature thought it fit to specify a fixed rate of penalty and not give any discretion in lowering the rate of penalty. The penalty so fixed is meant to be a deterrent and we do not see anything wrong in this5." Thus, the Supreme Court has held that where the legislature makes its intention clear through the use of the word "shall", the provision would be mandatory with regard to the quantum of penalty imposable. A similar ratio has recently laid down by a three judge bench of the Supreme Court in Commissioner of Central Excise V. Sunil Silk Mills 6 , where Rule 96ZQ(5) of the Central Excise Rules, 1944 was being interpreted. The penalty involved there was similarly held to be mandatory due to the use of the word "shall."7 10. In the present case, the State Legislature has in Section 61(2) clearly conferred a discretion on the Commissioner to impose a penalty. Once that is the position, the mere use of the words "equal to one tenth per cent of the total sale" cannot lead to the conclusion that there is no discretion in regard 5 Id. at 31 6 2011 (267) ELT 438 (SC). 7 See also Union of India V. Krishna Processors, (2009) 15 SCC 58; Carpenter Classic Exim P.Ltd. V. Commissioner of Customs (Imports), (2009) 11 SCC 293 12 sta9.11.sxw to the quantum of the penalty and that a penalty only in an amount equal to one tenth per cent of the total sales can be imposed. 11, Some guidance in this regard can be obtained from the judgment of the Supreme Court in State of Madhya Pradesh V. Bharat Heavy Electricals 8 . Section 7 of the relevant Entry Tax Act in the State of Madhya Pradesh provided that every registered dealer who, in the course of his business, manufactures, produces or grows any goods specified in Schedule II in a local area in such a manner that the goods become local goods in relation to that local area, shall on the sale of such goods to any other registered dealer, issue to him a bill, invoice or cash memo specifically stating in such a manner as may be prescribed, that the goods being sold are local goods in relation to such local area and that no entry tax has been paid on such goods. Section 7(5) provided that where a registered dealer in the course of his business, sold local goods to other registered dealers but failed to make the statement as referred in sub-section (1), it would be presumed that he has facilitated the evasion of entry tax on the local goods so sold and would be liable to pay a penalty equal to ten times the amount of entry tax payable on such goods as if they were not goods of local origin. The High 8 1998 (99) E.L.T. 33 (SC) 13 sta9.11.sxw Court had held that the presumption under Section 7(5) was not rebuttable and that the penalty of ten times of the amount of tax, which could not be reduced, was confiscatory. In appeal before the Supreme Court the State of Madhya Pradesh made a statement through Counsel that the State treated the provision for the levy of penalty equal to ten times of the amount of entry tax as a maximum penalty and not a fixed amount of penalty leaving no discretion for imposition of a lesser penalty. Undoubtedly, therefore, there was a concession before the Supreme Court by the State. Moreover, it was urged before the Supreme Court by the State that the presumption was rebuttable. After recording the submissions, the Supreme Court held as follows: "From the aforesaid it follows that Section 7(5) has to be construed to mean that the presumption contained therein is rebuttable and secondly the penalty of ten times the amount of entry tax stipulated therein is only the maximum amount which could be levied and the assessing authority has the discretion to levy lesser amount, depending upon the facts and circumstances of each case. Construing Section 7(5) in this manner the decision of the High Court that Section 7(5) is ultra vires cannot be sustained." (emphasis supplied) Now, no doubt, in that case a statement was made before the Supreme Court by the State of Madhya Pradesh that the levy of a penalty equal to ten times the amount of entry tax was the maximum and was not a fixed penalty. 14 sta9.11.sxw Equally, it was observed in paragraph 13 which has been noted earlier, that the penalty of ten times the amount of entry tax was only a maximum and the assessing authority has the discretion to levy a lesser amount, depending on the facts of each case. 12. The fundamental principle of law is that a penalty is not imposed merely because it is lawful to do so and that the authority has a discretion in that regard. The authority has to determine whether a penalty should be imposed and if it decides to impose a penalty what is the extent of the penalty liable to be imposed. The Supreme Court held in its decision in Hindustan Steel Ltd. V. The State of Orissa 9 as follows : "Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. 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 the breach flows from a bonafide relief that the offender is not liable to act in the manner prescribed by the statute." The legislature may of course take away that discretion and make 9 1970 Sales Tax Cases 211. 15 sta9.11.sxw the imposition of a penalty mandatory for certain violations. Whether a penalty is mandatory is a matter of construing the legislative provision. Here the State legislature by the use of the word "may" has not departed from the ordinary rule that a penalty is discretionary. The discretion must extend both to whether a penalty should be imposed and on the quantum. The legislature having used the word "may", a clear provision was required, if the Act intended to oust the discretion on the quantum, in a case where the Commissioner is of the view that a penalty has to be imposed. That is not the case. 13. Having therefore, considered the submission which has been urged on behalf of the Appellant, we are of the view that there is no reason to accept the contention that the discretion which is conferred by Section 61(2) does not extend also to the quantum of the penalty. Under the substantive part of sub-section (2) of Section 61 the State Legislature has conferred a discretion on the Commissioner before he imposes a penalty on the dealer for failing to furnish a copy of the audited report within the prescribed period. The proviso to sub-section (2) states that if the dealer fails to furnish a copy of the said report within the prescribed period but files it within one month of the end of the period, and the dealer proves to the satisfaction of the 16 sta9.11.sxw Commissioner that the delay was on account of factors beyond his control, then no penalty under this sub-section shall be imposed upon him. Hence, in the circumstances set out that the proviso to sub-section (2), no penalty can be imposed at all if the conditions therein are fulfilled. The proviso operates when (i) the dealer fails to furnish a copy of the report within the prescribed period but files it within one month of the end of the period; (ii) the dealer proves to the satisfaction of the Commissioner that the delay was for reasons beyond his control. Where the proviso applies, no penalty can be imposed on the dealer at all. The proviso is an exception and does not control the substantive part of Section 61(2). The substantive part of sub-section (2) of Section 61 also confers a discretion upon the Commissioner which is not diluted by the proviso to sub-section (2). 14. In any event, we are of the view that if two views in regard to the interpretation of Section 61 (2) are possible, the Court would be justified in adopting that construction which favours the assessee. ( see the decisions of the Supreme Court in The Commissioner of Income Tax V. Vegetable Product Ltd.10 and Mauri Yeast India Pvt. Ltd. V. State of U.P 11 ) 10 (1973) 88 ITR 192 11 (2008) 14 VST 259(SC) 17 sta9.11.sxw 15 On the facts of the case, the Sales Tax Tribunal has furnished adequate reasons for reducing the penalty from an amount of Rs. 83,013/- to Rs. 25,000/-. The Tribunal has found that the delay on the part of the assessee was not deliberate. That finding does not warrant any interference. 16. For these reasons, we answer the questions of law as formulated in the affirmative. 17. The appeal is accordingly disposed of. There shall be no order as to costs. ( A.A. SAYED, J. ) (DR. D.Y.CHANDRACHUD, J.)