IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 15-06-2010 CORAM: THE HONOURABLE MR. JUSTICE V. RAMASUBRAMANIAN W.P.No.8921 of 2009 And M.P.No.1 of 2009 M/s.P.R.N.Petroleum, No.58, Thirunallar Road, Karaikal-609 602. .. Petitioner vs. 1.The Union Territory of Pondicherry Represented by its Secretary (Finance), Puducherry. 2.The Commercial Tax Officer, Karaikal. .. Respondents Writ petition filed under Article 226 of the Constitution of India, praying for the issue of a Writ of Certiorari, calling for the records of the second respondent in his proceedings in PGST 403415/2005-06, quash the assessment order dated 9.4.2009 in so far as it relates to the levy of penal interest under Section 27(3) of the Pondicherry General Sales Tax Act, 1967. For Petitioner : Mr.R.L.Ramani, Senior Counsel for B.Raveendran For Respondents : Mr.R.Natarajan, Addl. Government Pleader (Pondy) O R D E R The petitioner has come up with the present writ petition, challenging the levy of penalty under Section 27(3) of the Pondicherry General Sales Tax Act, 1967. 2. Heard Mr.R.L.Ramani, learned Senior Counsel for the petitioner and Mr.R.Natarajan, learned Additional Government Pleader (Pondicherry). 3. The petitioner is a registered dealer under the Pondicherry General Sales Tax Act and Central Sales Tax Act, for the resale of petroleum products. The petitioner was filing sales tax returns on monthly basis in Form A-2, as provided under Section 18(2) of the Pondicherry General Sales Tax Rules, 1967. https://hcservices.ecourts.gov.in/hcservices/ 4. In respect of the assessment year 2005-2006, the Assessing Officer issued a pre-assessment notice dated 7.12.2007, on the basis that the verification of the supply details from Hindustan Petroleum Corporation Ltd., revealed suppression of actual turnover. Immediately the petitioner voluntarily remitted the tax due on the differential turnover. Therefore, an order of assessment was passed on 9.1.2009, confirming the proposals made in the pre-assessment notice. (actually the assessment order dated 9.1.2009 gives the date of the pre-assessment notice as 5.6.2007, though the affidavit of the petitioner in support of this writ petition and the counter affidavit of the respondents give the date as 7.12.2007). 5. Though even before the assessment order was passed, the petitioner had paid the entire differential tax and such payment was also reflected in the assessment order itself, the Assessing Officer levied a penalty of Rs.25,72,186/-. Therefore, the petitioner filed a writ petition in W.P.No.2724 of 2009, challenging the levy of penalty for the year 2005-2006. Simultaneously, the petitioner also filed another writ petition in W.P.No.2725 of 2009, challenging another assessment order in respect of the year 2006-2007. 6. Both the writ petitions were disposed of by me, by an order dated 12.2.2009, permitting the petitioner to file an application under Section 16(1) of the Pondicherry General Sales Tax Act. Accordingly, the petitioner filed an application under Section 16 on 16.2.2009. 7. It was the contention of the petitioner in that application under Section 16, that due to family circumstances, the father of the proprietrix of the petitioner could not concentrate on the business, resulting in the employees indulging in mal-practices and that after coming to know of the same, the petitioner started remitting the differential tax at the rate of Rs.2 lakhs per month and that the entire liability was so wiped out. 8. The second respondent took up the application for reassessment under Section 16(1) of the Pondicherry General Sales Tax Act, cancelled the earlier order of assessment dated 9.1.2009 and passed a fresh order dated 9.4.2009. Before doing so, the second respondent called for and checked the books of accounts in support of the revised return and found that the turnover reported in the revised return tallied with the figures indicated by the books of accounts. Therefore he accepted the total and taxable turnover reported in the revised return and ordered the waiver of penalty under Section 16(3). However the second respondent imposed penalty at 2% per month under Section 27(3) of the Act. Aggrieved by the imposition of such penalty, the petitioner has come up with the present writ petition. 9. The short ground on which Mr.R.L.Ramani, learned Senior Counsel for the petitioner, assails the imposition of penalty is that once a revised return is filed and the best of https://hcservices.ecourts.gov.in/hcservices/ judgment assessment earlier made was cancelled, there was no question of imposing penalty on the tax found due under the original assessment. 10. However, it is the contention of the respondents that the total and taxable turnover for the year ending 31-3-2006 was reported correctly in the revised return only on 18.2.2009 and that since the correct turnover was not reflected in the monthly returns filed in Form A-2, the levy of penalty under Section 27 (3) was in accordance with law. The respondents rely upon the provisions of Section 13(2) of the PGST Act, 1967 and Rule 18(3) of the PGST Rules, 1967. The respondents further contend that the waiver of penalty under Section 16(3), would not absolve the petitioner of the liability to penalty under Section 27(3). The penalty under Section 27(3) is nothing but charging of interest on that portion of the tax which remained unpaid due to incorrect monthly returns. The petitioner having retained the tax which ought to have otherwise been paid at the appropriate time, was obliged to pay it along with interest. 11. In order to appreciate the rival contentions, it is necessary to have a look at the scheme of the Pondicherry General Sales Tax Act, 1967. 12. Section 13(1) of the Act provides that the assessment of a dealer should be on the basis of the prescribed return relating to his turnover submitted in the prescribed manner within the prescribed period. Rule 18(2) requires every dealer to submit a return in Form A-2 showing the total and taxable turnover for each month and the amount or amounts collected by him by way of tax during that month. The return for each month is required to be submitted so as to reach the Assessing Authority on or before the 20th of the succeeding month. Along with the return, the assessee should also submit a receipt for having remitted the tax. 13. If no return is submitted by the dealer, in respect of any month on or before the date specified in Rule 18(2), or if the return submitted appears to be incomplete or incorrect, the Assessing Authority is empowered under Section 13(2) to assess the dealer to the best of his judgment. While making an order under Section 13(2), the Assessing Authority is competent to direct the dealer, by virtue of Section 13(3), to pay in addition to the tax assessed, a penalty not exceeding one and half times the amount of tax due on the turnover that was not disclosed in the return or one and half times the tax assessed, if no return had been filed. 14. Any dealer assessed under Section 13(2) is entitled to apply to the Assessing Authority for reassessment, under Section 16(1). Such application should be accompanied by the correct and complete return. If the Assessing Authority is satisfied about the bona fides of the assessee, he shall cancel the best of judgment assessment made under Section 13(2) and make a fresh assessment on the basis of the return submitted. https://hcservices.ecourts.gov.in/hcservices/ 15. While making a fresh assessment under Section 16(1), two contingencies may arise viz., (i) the tax already paid may be found to be in excess or (ii) the tax already paid may be found to be less. If the tax already paid is found to be in excess, the dealer is entitled to refund of the balance, without any interest. But if the amount already paid is found to be less, the difference is to be collected. Whether such collection should be together with penalty/interest or not, is the question that is raised in this writ petition. 16. Section 16 of the Act reads as follows:- "16. Fresh assessment in certain cases, - (1) Any dealer assessed under sub- section (2) of Section 13 may, within a period of thirty days from the date of service of the assessment order, apply to the assessing authority for re-assessment, along with the correct and complete return as prescribed. On such application the assessing authority shall, if it is satisfied that the failure to submit the return in time or the submission of the incorrect or incomplete return was due to reason beyond the control of the applicant, cancel the assessment made and make a fresh assessment on the basis of the return submitted: Provided that no application shall be entertained under this sub-section unless it is accompanied by satisfactory proof of the payment of tax admitted by the applicant to be due or any such instalment thereof as might have become payable, as the case may be. (2) If the amount of tax on the basis of the cancelled assessment has already been collected and if the amount of tax arrived at as a result of the fresh assessment is different from it, any amount overpaid by the dealer shall be refunded to him without interest, or the further amount of tax, if any, due from him shall be collected in accordance with the provisions of this Act, as the case may be. (3) Penalty, if any, imposed and collected under sub-section (3) of Section 13 shall be refunded to the dealer without interest on cancellation of the order of original assessment. 17. A careful reading of Section 16(2) would show that if the tax already paid was found upon fresh assessment, to be in excess, the dealer will be entitled only to the refund of the excess amount without any interest. This is on the logic that a https://hcservices.ecourts.gov.in/hcservices/ fresh assessment under Section 16(1) is actually necessitated on account of the dealer allowing a best of judgment assessment to be made under Section 13(2) due to his own failure either to submit a return or to submit a correct and complete return. Therefore, such a dealer is made entitled by Section 16(3) to the refund of the penalty paid under Section 13(3). But he is not made entitled to payment of any interest on the excess, since it was his mistake that led to an order under Section 13 (2) and to an order later under Section 16(1). 18. But the second limb of Section 16(2), which deals with a situation where the tax originally paid was less than what is found due in the assessment under Section 16(1), contains a riddle. The second limb does not merely say that the further amount of tax (differential amount) is to be collected. It says that the further amount of tax should be collected in accordance with the provisions of the Act, as the case may be. 19. Therefore, the collection of any differential amount of tax, has to be with reference to the other provisions of the Act. This is where Section 27 comes into play, after a fresh assessment is made under Section 16(1). Section 27(1) requires every tax assessed under the Act, to be paid within such time as may be specified in the notice of assessment, not being less than 21 days from the date of service of the notice. A charge is also created on the properties of the person, who commits a default in payment of the tax. Sub-section (2) of Section 27 prescribes the mode of recovery of any amount due under the Act and sub-section (3) imposes the penalty. Section 27(3) reads as follows:- "If the tax assessed under this Act or any instalment thereof is not paid by any dealer or person within the time specified therefor in the notice of assessment or in the order permitting payment in instalment, the dealer or person shall pay by way of penalty, in addition to the amount due, a sum equal to two per cent, of such amount for each month or part thereof after the date specified for its payment." 20. A plain reading of Section 27(3) shows that in order to attract liability to pay penalty, two conditions are to be satisfied viz., (i) the tax ought to have been assessed and (ii) the tax so assessed or any instalment thereof, should not have been paid within the time specified for such payment either in the notice of assessment or in the order permitting payment by instalment. 21. The first condition would stand satisfied by any of the modes of assessment viz.,:- (i) self-assessment under Section 13(1) read with Rule 18 (2) or (ii) best of judgment assessment under Section 13(2) or (iii) a fresh assessment under Section 16(1) or (iv) an assessment of escaped turnover under Section 18 https://hcservices.ecourts.gov.in/hcservices/ (1) or 18(2). Let us now see how the first condition prescribed in Section 27 (3) is satisfied in the case of each of these four types of assessments. 22. For a self-assessment under Section 13(1) read with Rule 18(2), a time limit is prescribed for payment of the amount reflected in Form A-2, by Rule 18(3) itself. Since Rule 18(3) makes it clear that no notice of demand is required, for making payment of the amount of tax reflected in Form A-2, the second condition prescribed in Section 27(3) viz., "within the time specified in the notice of assessment", becomes redundant. In other words, a person making a self-assessment under Section 13 (1) and filing Form A-2 in terms of Rule 18(2), is obliged to make payment of the admitted tax at the time of filing the return every month, on or before the 20th day of the succeeding month. If he fails to make payment, along with the return, the amount becomes liable to be recovered in terms of Rule 18(3) without any notice of demand. Consequently, one can possibly contend that Section 27(3) would come into operation even without a notice of assessment and hence the liability to pay penalty at the rate of 2% per month on such amount, would automatically arise. It is relevant to note that Section 27(3) uses the expression "within the time specified therefor in the notice of assessment" and not the expression "within the time specified therefor in the notice of demand". In the case of self-assessment, there cannot be a notice of assessment. However, if tax is not paid, there can be a notice of demand, but the same is also dispensed with by Rule 18(3). 23. In the case of a best of judgment assessment, the Assessing Authority is expected to conduct an enquiry under Section 13(2). Therefore, an order of assessment is naturally made, not only indicating the tax payable but also a penalty payable under Section 13(3). Hence, in such cases, the time for making payment begins from the date indicated in the notice of assessment. But it is pertinent to note that the penalty prescribed by Section 13(3) is different from the penalty prescribed by Section 27(3). The penalty prescribed under Section 13(3) is actually punitive in nature, in view of two things viz., (i) that what is prescribed is only the maximum (not exceeding one and half times) and (ii) that an element of discretion is conferred upon the Assessing Authority. 24. If a dealer accepts the best of judgment assessment under Section 13(2), he becomes obliged to pay the tax as assessed under Section 13(2) and the penalty as assessed under Section 13(3), within the period prescribed by the notice/order of assessment. It is only when the dealer fails to make payment of the amount of tax and penalty so assessed under Section 13(2) and 13(3) that Section 27(3) comes into operation. 25. The penalty under Section 27(3) is not punitive but compensatory in nature. This is why, a fixed rate of 2% per annum is prescribed, unlike Section 13(3) which prescribes only the maximum of one and half times. Moreover, Section 27(3) does https://hcservices.ecourts.gov.in/hcservices/ not confer any discretion upon the Assessing Authority to reduce or waive the penalty prescribed thereunder. Consequently, if a best of judgment assessment is passed under Section 13(2) requiring the dealer also to pay penalty under Section 13(3) and such dealer fails to make payment, but allows the assessment to become final, he becomes obliged by virtue of Section 27(3) to make 3 payments viz., (i) tax assessed under Section 13(2) (ii) penalty imposed under Section 13(3) and (iii) penalty imposed under Section 27(3). 26. If a fresh assessment is made under Section 16(1), the penalty imposed under Section 13(3) gets cancelled, by virtue of Section 16(3). In such cases, the order of assessment prescribes the amount of tax payable, the amount of tax already paid and the difference if any. If this different is not paid, within the time prescribed, the tax becomes payable together with penalty under Section 27(3). Therefore, two things happen when a fresh order of assessment is made under Section 16(1). They are (i) the best of judgment assessment under Section 13(2) gets replaced with the assessment under Section 16(1) and (ii) the penalty imposed under Section 13(3) also goes. 27. When an assessment of escaped turnover is made under Section 18(1), the Assessing Authority is empowered under Section 18(3) to impose a penalty not exceeding one and half times the tax assessed. The imposition of this penalty is permitted if the Assessing Authority is satisfied that the escape from assessment is due to wilful non-disclosure of assessable turnover. Akin to the penalty under Section 13(3), the penalty under Section 18(3) is also punitive in nature. It fixes the maximum limit of penalty, giving a leverage to the Assessing Authority. But the only difference between the penalty under Section 13(3) and the penalty under Section 18(3) is that the former is capable of getting annulled when a fresh order of assessment is passed under Section 16. On the other hand, the penalty imposed under Section 18(3) is capable of getting cancelled only on an appeal or revision. 28. Thus a reading of Sections 13, 16 and 18, together with Section 27 would show that the first condition prescribed under Section 27(3) may get satisfied in all types of assessments such as self-assessment, best of judgment assessment, fresh assessment and assessment of escaped turnover. In other words, the first condition that tax should have been assessed, for making a person liable to pay penalty under Section 27(3), is likely to get satisfied in all types of assessments. 29. In so far as the second condition is concerned, Section 27(3) gives an impression, by its plain language, that the liability to pay penalty arises only if payment is not made within the time prescribed in the notice of assessment. As I have pointed out earlier, there may not be a "notice of assessment" in a case of self-assessment. There may not even be a notice of demand in the case of self-assessment, on account of Rule 18(3). But in other types of assessments, there could be https://hcservices.ecourts.gov.in/hcservices/ notices of assessment. Therefore, the question that is raised in the writ petition is as to whether in those cases such as the one relating to fresh assessment under Section 16(1), a liability under Section 27(3) would arise, even after payment had been made within the period prescribed in the notice of assessment. 30. Before we find an answer to the above question, it is necessary to understand the essential difference between a levy which is purely punitive and a levy which is compensatory. As pointed out earlier, the levy under Section 13(3) and 18(3) are punitive, while a levy under Section 27(3) is compensatory. This is despite the fact that the word "penalty" is used loosely, in Sections 13(3) and 18(3) as well as in Section 27(3). None of these provisions use the word "interest", despite the fundamental difference in the nature of the levies prescribed therein. 31. The Tamil Nadu General Sales Tax Act, 1959 contains a similar provision in Section 24(3). Before its amendment under Tamil Nadu Act, 22 of 1982, Section 24 (3) of the TNGST Act, contemplated "by way of penalty" a sum calculated at the rate of one rupee for every hundred rupees, if the tax assessed was not paid within the time specified in the notice of assessment. After its amendment, the words "by way of penalty" was substituted with the words "by way of interest". When a batch of cases was filed, challenging the validity of Section 24(3) of the TNGST Act, 1959, a Division Bench of this Court considered in Sakthi Sugars Ltd vs. The Assistant Commissioner of Commercial Taxes {Vol. 59 STC 52}, the nature of the levy under Section 24(3) of the Tamil Nadu Act. In paragraphs 15-A and 20 of the said decision, the Division Bench held that on a true construction of Section 24(3) of the Act, the word "penalty" is to be understood only as "interest", because the amount of arrears of tax which should have gone to the coffers of the State was being retained by the dealer and that the same is actually by way of compensation, for the use by the assessee of that money which rightly belonged to the State. 32. Coming to the question as to when the liability to pay penal interest under Section 24(3) of the TNGST Act would commence, in the light of an obligation to file monthly returns and with reference to Rule 18, the Division Bench held in paragraph 35 as follows:- "35. We must first consider the provisions of rule 18(3) because one of the questions which falls for consideration in these petitions is, whether interest can be demanded by the State, if in the case of monthly returns to be filed by the dealer, he does not either deposit the entire tax due on the basis of the turnover as returned, or there is a shortfall in the amount of tax and that shortfall is made good later. The contention is and it seems to be clearly borne out by the plain words https://hcservices.ecourts.gov.in/hcservices/ of Section 24(3) that the payment of tax which is to be made under rule 18(3) along with the monthly returns is really in the nature of self-assessment and if the liability to pay interest by way of penalty is fastened only in a case where the tax assessed is not paid within the time specified therefor in the notice of assessment there will be no question of any notice of assessment in a case which is governed by rule 18(3) and the provisions of Section 24(3) cannot be attracted to such a case. .. .. .. .. .. The scheme of rule 18(3), therefore, is that, whatever is the correct tax payable, according to the dealer, on the basis of his monthly turnover submitted in the return in Form A-1, has to be deposited along with the monthly return. If this is not done, then the amount which the dealer should have paid is referred to as "the amount of tax payable". This amount of tax payable is statutorily made due on the date of the receipt of the return or on the last due date as prescribed in sub-rule (2) whichever is later. There is, therefore, no difficulty that the tax which is payable on the basis of the return becomes statutorily payable and it also becomes due on the date on which the return has been received or on the last due date under sub-rule (2). The question which arises, however, is, when rule 18(3) makes the tax payable on the date of the return and tax also becomes due on the date of the return, non-payment of the whole or part of the tax becoming payable and due under rule 18(3) will attract the provisions of Section 24(3). Undoubtedly, the return has to be provisionally accepted under the terms of sub-rule(3) of rule 18, but the liability under Section 24(3) would be attracted only if the case falls expressly within the words of Section 24(3). When Section 24(3) refers to a notice of assessment, that notice of assessment is the notice which is contemplated