Supreme Court Upholds Mandatory Penalty and Interest Under Gujarat Sales Tax Act: State of Gujarat vs. M/s Saw Pipes Ltd. (2023) INSC 355

LEGAL ISSUE: Whether penalty and interest under the Gujarat Sales Tax Act, 1969 can be waived based on a taxpayer’s bonafide belief and payment of the principal tax amount.

CASE TYPE: Tax Law

Case Name: State of Gujarat and Anr. vs. M/s Saw Pipes Ltd. (known as Jindal Saw Ltd.)

Judgment Date: 17 April 2023

Date of the Judgment: 17 April 2023

Citation: (2023) INSC 355

Judges: M.R. Shah, J. and B.V. Nagarathna, J.

Can a taxpayer avoid penalties and interest under the Gujarat Sales Tax Act, 1969, by claiming a bonafide belief in their tax liability? The Supreme Court of India recently addressed this question, clarifying the mandatory nature of penalties and interest under specific circumstances. This judgment underscores the strict interpretation of tax laws and the limited scope for discretionary waivers. The bench comprised Justices M.R. Shah and B.V. Nagarathna, with the judgment authored by Justice M.R. Shah.

Case Background

M/s Saw Pipes Ltd. (now known as Jindal Saw Ltd.), the respondent, is a company engaged in the business of applying coal tar and enamel coating on pipes. The company opted to pay a lump sum tax under Section 55A of the Gujarat Sales Tax Act, 1969. They initially paid tax at 2%, treating their work as a civil works contract under Entry-1 of a government notification dated 18 October 1993.

However, the Assessing Officer (AO) for the assessment year 2002-03 determined that the coating work was not a civil works contract and should fall under the Residuary Entry-8 of the same notification. Consequently, the AO raised a demand for additional tax, interest, and penalty.

The total demand raised by the AO was as follows:

Timeline

Course of Proceedings

The assessee initially appealed to the First Appellate Authority (Joint Sales Tax Commissioner), which was dismissed on 30 July 2005. Subsequently, the Gujarat Value Added Tax Tribunal also dismissed the assessee’s second appeal on 29 September 2006, upholding the demands for additional tax, interest under Section 47(4A), and penalty under Section 45(6) of the Gujarat Sales Tax Act, 1969.

The assessee then appealed to the High Court of Gujarat. Before the High Court, the assessee conceded that they were liable to pay tax at 12% based on the available material and expert opinion. However, they challenged the levy of penalty and interest, arguing that they had a bonafide belief that their works contract fell under Entry-1, requiring only a 2% tax payment. The High Court, relying on the case of Brooke Bond India Limited Vs. State of Gujarat; 1998 JX (Guj) 128, set aside the penalty and interest, stating that the assessee had acted under a bonafide belief.

Legal Framework

The key legal provisions under consideration are Section 45 and Section 47(4A) of the Gujarat Sales Tax Act, 1969.

Section 45 of the Gujarat Sales Tax Act, 1969, deals with the imposition of penalties in certain cases. Specifically, sub-section (5) states:

“(5) Where in the case of a dealer the amount of tax – (a) assessed for any period under section 41 or 50; or (b) reassessed for any period under section 44; exceeds the amount of tax already paid under sub-section (1), (2) or (3) of section 47 by the dealer in respect of such period by more than twenty five per cent of the amount of tax so paid, the dealer shall be deemed to have failed to pay the tax to the extent of the difference between the amount so assessed or reassessed as aforesaid and the amount paid.”

Sub-section (6) of Section 45 of the Gujarat Sales Tax Act, 1969, states:

“(6) [Where under sub-section (5) a dealer is deemed to have failed to pay the tax to the extent mentioned in the said sub-section, there shall be levied on such dealer a penalty not exceeding one and one-half times the difference referred to in sub-section (5).]”

Section 47(4A) of the Gujarat Sales Tax Act, 1969, pertains to the payment of interest on unpaid tax:

“(4A) (a) Where a dealer does not pay the amount of tax within the time prescribed for its payment under sub-section (1), (2) or (3), then there shall be paid by such dealer for the period commencing on the date of expiry of the aforesaid prescribed time and ending on the date of payment of the amount of tax, simple interest, at the rate of [eighteen per cent], per annum on the amount of tax not so paid or on any less amount thereof remaining unpaid during such period. (b) Where the amount of tax assessed or reassessed for any period, under section 41 or section 44, subject to revision if any under section 67, exceeds the amount of tax already paid by a dealer for that period, there shall be paid by such dealer, for the period commencing from the date of expiry of the time prescribed for payment of tax under sub-section (1), (2) or (3) and ending on date of order of assessment, reassessment or, as the case may be, revision, simple interest at the rate of [eighteen per cent] per annum on the amount of tax not so paid or on any less amount thereof remaining unpaid during such period.”

These provisions outline the conditions under which a dealer is deemed to have failed to pay tax, the imposition of penalties for such failure, and the levy of interest on unpaid tax amounts.

Arguments

Arguments on behalf of the State of Gujarat:

• The High Court erred in deleting the penalty and interest levied under Section 45(6) and Section 47(4A) of the Gujarat Sales Tax Act, 1969.
• The High Court did not consider sub-section (6) of Section 45 of the Gujarat Sales Tax Act, 1969, in its true spirit.
• The penalty under Section 45(6) of the Gujarat Sales Tax Act, 1969, is statutory and compulsorily leviable when the assessee falls under Section 45(5) of the Gujarat Sales Tax Act, 1969.
• The Commissioner has no discretion to levy a penalty other than that provided under Section 45(6) of the Gujarat Sales Tax Act, 1969.
• When the assessed or reassessed tax exceeds the tax already paid by more than 25%, the dealer is deemed to have failed to pay the tax, making them liable for a penalty not exceeding one and one-half times the difference.
• The phrase “shall be levied” in Section 45(6) of the Gujarat Sales Tax Act, 1969, indicates that the adjudicating authority has no discretion.
• The penalty under Section 45(6) of the Gujarat Sales Tax Act, 1969, is statutory, and the legislature consciously used the word “shall.” The same applies to interest under Section 47(4A) of the Gujarat Sales Tax Act, 1969.
• Non-payment of penalty has consequences under Section 45 of the Gujarat Sales Tax Act, 1969, and is recoverable as an arrear of land revenue, making the provision mandatory.
• There is no requirement to prove mens rea or consider the bonafide belief of the assessee when computing penalty and interest.
• The decision in Hindustan Steel Ltd. Vs. State of Orissa; 1969 (2) SCC 627 is not applicable as it pertains to criminal proceedings, and there is no evidence of a bonafide belief by the assessee.
• The decision in Union of India and Ors. Vs. Dharamendra Textile Processors and Ors.; (2008) 13 SCC 369 is not applicable because it interprets Section 11AC of the Central Excise Act, which includes elements of fraud, collusion, and intent to evade payment, unlike Section 45(6) of the Gujarat Sales Tax Act, 1969.
• The decision in Commissioner of Central Excise, Chandigarh Vs. Pepsi Foods Ltd; (2011) 1 SCC 601, which interprets Section 11AC of Central Excise Act, is also not applicable.
• The decision in Jyoti Overseas P. Ltd. Vs. State of Gujarat; 2017 SCC Online Guj 2511 is not applicable because it deals with Section 34(7) of the Gujarat VAT Act, which requires an intention to evade tax.

Arguments on behalf of the Respondent (M/s Saw Pipes Ltd.):

• The respondent is within their legal rights to argue that the quantum of tax demand is incorrect, even if it was not pressed before the High Court.
• Section 45(5) of the Gujarat Sales Tax Act, 1969, creates a rebuttable presumption.
• For imposing a penalty under Section 45(6) of the Gujarat Sales Tax Act, 1969, mens rea, blameworthy conduct, deliberate violation, evil doing, fraud, or suppression must be proved.
• Section 45(6) of the Gujarat Sales Tax Act, 1969, provides an upper limit for penalty but no minimum, indicating that the authority has discretion to impose no penalty in cases without mens rea.
• If the claim for a 2% composition amount is rejected, the dealer could pay tax on the actual value of goods, which would result in an additional tax of less than 25%, thus not attracting the penalty provision.
• No interest is payable under Section 47(4-A) of the Gujarat Sales Tax Act, 1969.
• The respondent can argue for a reversal of a finding against them in an appeal filed by the opposite party.
• Any concession in law made by counsel does not bind the parties, as advocates cannot throw away legal rights or enter into arrangements contrary to law.
• Section 45(5) of the Gujarat Sales Tax Act, 1969, creates a presumption that the dealer has failed to pay tax if the differential tax is more than 25%, but this presumption is rebuttable.
• The term “burden of proof” connotes the obligation to prove a fact, and the burden to prove mens rea lies with the revenue, although a statute can shift the burden to the dealer in certain circumstances.
• Section 45(5) of the Gujarat Sales Tax Act, 1969, shifts the burden of proof, but the presumption is not irrebuttable.
• The principle of “actus non facit reum nisi mens sit rea” (an act does not make a man guilty unless his mind is also guilty) applies, requiring proof that the assessee was aware of doing wrong.
• Section 45(6) of the Gujarat Sales Tax Act, 1969, uses “not exceeding,” indicating discretionary power to levy a penalty, and thus mens rea becomes a relevant factor.
• The interest levied under Section 47(4A) of the Gujarat Sales Tax Act, 1969, is also bad in law.

Submissions Table

Issues Framed by the Supreme Court

The core issue before the Supreme Court was:

1. Whether, while imposing/levying penalty and interest leviable under Section 45(6) and Section 47(4A) of the Gujarat Sales Tax Act, 1969, mens rea on the part of the assessee is required to be considered.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court overturned the High Court’s decision, holding that the penalty and interest under Section 45(6) and Section 47(4A) of the Gujarat Sales Tax Act, 1969, are mandatory and statutory. The Court emphasized that once the conditions under Section 45(5) are met (i.e., the difference between assessed and paid tax exceeds 25%), the penalty and interest are automatically applicable.

The Court stated that the phrase “shall be levied” in Section 45(6) leaves no discretion with the assessing officer to waive or reduce the penalty. The Court also distinguished the cases relied upon by the assessee, noting that those cases involved different statutory provisions with different language and requirements, particularly concerning the element of mens rea.

The Court rejected the argument that the assessee’s bonafide belief and subsequent payment of the tax could justify waiving the penalty and interest. The Court held that the statutory provisions are clear, and the penalty and interest are automatically triggered by the failure to pay the correct amount of tax.

The Court’s reasoning was based on the plain and unambiguous language of the statute. The Court emphasized that it cannot add or mend the deficiencies in the legislation.

The Court also highlighted that the penalty under Section 45(6) is directly connected to the order of assessment and the determination of tax liability. It is an automatic levy when the difference between the amount of tax paid and the amount of tax payable is more than 25%.

The Court stated, “From the language of Section 45(6) of the Act, it can be seen that the penalty leviable under the said provision is a statutory penalty. The phrase used is “shall be levied.” The moment it is found that a dealer is deemed to have failed to pay the tax to the extent mentioned in sub-section (5) of Section 45, there shall be levied on such dealer a penalty not exceeding one and one-half times the difference referred to in sub-section (5).”

The Court further added, “Therefore, the moment it is found that a dealer is to be deemed to have failed to pay the tax to the extent mentioned in sub-section (5), the penalty is automatic. Further, there is no discretion with the assessing officer either to levy or not to levy and/or to levy any penalty lesser than what is prescribed/mentioned in Section 45(6) of the Act, 1969. In that view of the matter, there is no question of considering any mens rea on the part of the assessee/dealer.”

The Court also observed, “Under the circumstances, on strict interpretation of Section 45 and Section 47 of the Act, 1969, the only conclusion would be that the penalty and interest leviable under Section 45 and 47(4A) of the Act, 1969 are statutory and mandatory and there is no discretion vested in the Commissioner/Assessing Officer to levy or not to levy the penalty and interest other than as mentioned in Section 45(6) and Section 47 of the Act, 1969.”

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the strict and unambiguous language of Section 45(6) and Section 47(4A) of the Gujarat Sales Tax Act, 1969. The Court emphasized that the legislature’s intent was clear: when the conditions for penalty and interest are met, they must be imposed without considering the taxpayer’s intent or bonafide belief. The Court’s reasoning was based on the following key points:

• Statutory Language: The use of the phrase “shall be levied” in Section 45(6) indicates a mandatory imposition of penalty, leaving no room for discretion.
• Automatic Trigger: The penalty and interest are automatically triggered when the difference between the tax assessed and the tax paid exceeds 25%, as specified in Section 45(5).
• No Discretion: The assessing officer has no discretion to waive or reduce the penalty or interest once the conditions are met.
• Rejection of Mens Rea: The Court held that mens rea (guilty mind) is not a necessary element for imposing penalties under these provisions, as they are civil in nature and not criminal.
• Strict Interpretation: The Court adhered to a strict interpretation of the statute, stating that it cannot add or mend deficiencies in the legislation.

Logical Reasoning

Impact of the Judgment

This judgment has significant implications for taxpayers under the Gujarat Sales Tax Act, 1969, and potentially for other similar tax laws. The key impacts include:

• Mandatory Penalties and Interest: Taxpayers cannot avoid penalties and interest by claiming a bonafide belief or by paying the principal tax amount after a delay.
• Strict Compliance: The judgment emphasizes the importance of strict compliance with tax laws and the need for accurate assessment and payment of taxes within the prescribed time.
• Limited Discretion: Tax authorities have limited discretion in waiving or reducing penalties and interest once the conditions for their imposition are met.
• No Escape Route: Taxpayers cannot escape penalties and interest by arguing that they had a genuine belief that they were not liable or that they were liable at a lower rate.
• Precedent for Other Cases: This judgment sets a precedent for similar cases where statutory provisions mandate penalties and interest for non-compliance.

Conclusion

The Supreme Court’s decision in State of Gujarat vs. M/s Saw Pipes Ltd. underscores the mandatory nature of penalties and interest under the Gujarat Sales Tax Act, 1969. The Court’s strict interpretation of the statutory provisions leaves little room for discretionary waivers, emphasizing the importance of accurate and timely tax payments. The judgment serves as a reminder that taxpayers must adhere to tax laws and cannot avoid penalties and interest by claiming a bonafide belief or by paying the tax amount after a delay.

The judgment also emphasizes the importance of legal counsel and the need for them to be thorough and accurate in their submissions.