Supreme Court Upholds Penalty and Interest Under Gujarat Sales Tax Act: State of Gujarat vs. M/s Saw Pipes Ltd. (2023) INSC 376

Case Background

M/s Saw Pipes Ltd., now known as Jindal Saw Ltd., is engaged in the business of applying coal tar and enamel coating on pipes. They opted to pay a lump-sum tax under Section 55A of the Gujarat Sales Tax Act, 1969. The company paid tax at 2% on their works contract, believing it to be a civil works contract as per a government notification dated 18.10.1993. However, the Assessing Officer (AO) determined that the coating of pipes did not qualify as a civil works contract. Instead, the AO categorized it under a residuary entry of the same notification, which attracted a higher tax rate. This resulted in a tax demand of ₹2,36,55,529/-, along with interest of ₹1,04,56,181/- and a penalty of ₹1,41,93,312/-, totaling ₹4,83,05,013/- for the assessment year 2002-03.

Timeline

Course of Proceedings

The assessee initially appealed the AO’s order to the Joint Sales Tax Commissioner, who dismissed the appeal on 30.07.2005. Subsequently, the assessee filed a second appeal before the Gujarat Value Added Tax Tribunal, which was also dismissed on 29.09.2006, thereby upholding the tax demand, interest, and penalty. The assessee then approached the High Court of Gujarat. Before the High Court, the assessee’s counsel conceded that the tax was payable at 12%, but challenged the imposition of penalty and interest, arguing that the assessee had a bonafide belief that the works contract fell under Entry-1 of the notification, attracting only 2% tax. The High Court, relying on the precedent in Brooke Bond India Limited Vs. State of Gujarat; 1998 JX (Guj) 128, set aside the penalty and interest, stating that the assessee had acted on a bonafide opinion. The State of Gujarat then appealed to the Supreme Court against the High Court’s decision to remove the penalty and interest.

Legal Framework

The key legal provisions in this case are Section 45 and Section 47(4A) of the Gujarat Sales Tax Act, 1969. Section 45 deals with the imposition of penalties in certain cases. Specifically, sub-section (5) states that if the tax assessed exceeds the tax already paid by more than 25%, the dealer is deemed to have failed to pay the tax to the extent of the difference. Sub-section (6) mandates that a penalty not exceeding one and a half times the difference shall be levied on such a dealer. Section 47(4A) stipulates that if a dealer does not pay the tax within the prescribed time, they are liable to pay simple interest at 18% per annum on the unpaid amount. The relevant extracts from the Act are as follows:

“45. Imposition of penalty in certain cases and bar to prosecution.
(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.
(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).]”

“47. Payment of Tax and Deferred Payment of Tax, etc.
(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.”

Arguments

Arguments by the State of Gujarat:

• ✓ The High Court erred in deleting the penalty and interest under Section 45(6) and Section 47(4A) of the Gujarat Sales Tax Act, 1969.
• ✓ The High Court did not consider the true spirit of Section 45(6), which mandates a statutory penalty.
• ✓ The penalty under Section 45(6) is compulsory and not discretionary, if the conditions of Section 45(5) are met. The Commissioner has no discretion to levy a penalty other than that provided under Section 45(6).
• ✓ Once it is found that the assessed tax exceeds the paid tax by more than 25%, the dealer is deemed to have failed to pay the tax, and a penalty not exceeding one and a half times the difference must be levied.
• ✓ The phrase “shall be levied” in Section 45(6) indicates that the adjudicating authority has no discretion, as held in Union of India and Ors. Vs. Dharamendra Textile Processors and Ors.; (2008) 13 SCC 369.
• ✓ The penalty under Section 45(6) is statutory, and the legislature consciously used the word “shall.” The same applies to interest under Section 47(4A).
• ✓ The non-payment of penalty has consequences under Section 45, 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, as held in State of Gujarat Vs. Arcelor Mittal Nippon Steel India Limited; (2022) 6 SCC 459, Chairman, SEBI Vs. Shriram Mutual Fund and Anr.; (2006) 5 SCC 361, and other cases.
• ✓ The court cannot add the requirement of intention or a guilty mind if the legislature has not prescribed it.
• ✓ The decision in Hindustan Steel Ltd. Vs. State of Orissa; 1969 (2) SCC 627 is not applicable as it pertains to criminal proceedings.
• ✓ The decision in Dharamendra Textile Processors (supra) is not applicable as it interpreted Section 11AC of the Central Excise Act, which includes elements of fraud and intent to evade, unlike Section 45(6).
• ✓ Similarly, the decision in Commissioner of Central Excise, Chandigarh Vs. Pepsi Foods Ltd; (2011) 1 SCC 601 is not applicable as it also interprets Section 11AC.
• ✓ The Gujarat High Court’s decision in Jyoti Overseas P. Ltd. Vs. State of Gujarat; 2017 SCC Online Guj 2511 is also not applicable as it dealt with Section 34(7) of the Gujarat VAT Act, which specifically requires an intention to evade tax.

Arguments by M/s Saw Pipes Ltd. (Respondent):

• ✓ The penalty and interest are not payable in the present case.
• ✓ The penalty is leviable only if the differential tax liability (difference between tax assessed and tax paid) is more than 25%. The assessee’s differential tax liability is less than 25%.
• ✓ Section 45(5) of the Gujarat Sales Tax Act, 1969, creates a rebuttable presumption.
• ✓ For imposing a penalty under Section 45(6), mens rea, blameworthy conduct, deliberate violation, evil doing, fraud, or suppression must be proved.
• ✓ Section 45(6) provides for a penalty “not exceeding” one and a half times the differential tax, indicating that the authority has the discretion to impose no penalty in cases where there is no mens rea.
• ✓ If the claim for a composition amount of 2% is rejected, the dealer can pay tax on the actual value of goods, and the additional tax payable would still be less than 25%, thus not attracting the penalty.
• ✓ No interest is payable under Section 47(4-A) of the Gujarat Sales Tax Act, 1969.
• ✓ The respondent can argue that the quantum of tax demand is incorrect, even if it was not pressed before the High Court.
• ✓ Any concession made by the counsel would not bind the parties, as advocates cannot throw away legal rights.
• ✓ Section 45(5) creates a presumption against the dealer, but this presumption is rebuttable.
• ✓ The burden of proof to prove mens rea lies with the revenue, although a statute can shift this burden.
• ✓ The term “not exceeding” in Section 45(6) implies that the assessing officer has discretionary power to impose a penalty.
• ✓ The principle of “actus non facit reum mens sit rea” applies, meaning an act does not make a man guilty unless he was aware he was doing wrong.
• ✓ The decisions in Hindustan Steel Ltd. (supra), Cement Marketing Co. of India Ltd. Vs. Assistant Commissioner of Sales Tax, Indore and Ors.; 1980 (6) ELT 295 (S.C.) and Commissioner of Central Excise, Chandigarh (supra) support the argument that mens rea must be proved before levying penalty and interest.
• ✓ The decision in Jyoti Overseas P. Ltd. (supra) supports the argument that discretionary power is vested with the authority to levy penalty.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

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

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court allowed the appeal by the State of Gujarat, setting aside the High Court’s judgment. The Court held that the penalty and interest under Section 45(6) and Section 47(4A) of the Gujarat Sales Tax Act, 1969, are statutory and mandatory. The Court emphasized that once the conditions of Section 45(5) are met, the penalty is automatically levied, and there is no discretion vested with the assessing officer to waive it or consider mens rea. The Court restored the orders passed by the Assessing Officer and confirmed by the Tribunal.

How each authority was viewed by the Court?

• Union of India and Ors. Vs. Dharamendra Textile Processors and Ors.; (2008) 13 SCC 369: The Court followed this authority to hold that the term “shall be levied” means that the adjudicating authority has no discretion.
• Chairman, SEBI Vs. Shriram Mutual Fund and Anr.; (2006) 5 SCC 361: The Court followed this authority to hold that mens rea is not an essential ingredient for contravention of the provisions of a civil Act.
• Hindustan Steel Ltd. Vs. State of Orissa; 1969 (2) SCC 627: The Court distinguished this authority as it pertained to criminal/quasi-criminal proceedings and not civil liabilities.
• Guljag Industries Vs. Commercial Taxes Officer (2007) 7 SCC 269: The Court followed this authority to hold that mens rea is not an essential ingredient for contravention of the provisions of a civil Act.
• Competition Commission of India Vs. Thomas Cook (India) Limited and Anr. (2018) 6 SCC 549: The Court followed this authority to hold that for the imposition of penalty under civil law, mens rea is not required.
• State of Gujarat Vs. Arcelor Mittal Nippon Steel India Limited; (2022) 6 SCC 459: The Court followed this authority to hold that penalty under Section 45 is leviable when the difference of tax is more than 25% and it is a case of deliberate violation.
• Riddhi Siddhi Gluco Biols Ltd. Vs. State of Gujarat; (2017) 100 VST 305 (Guj): The Court followed this authority to hold that penalty under Section 45(6) is a statutory and mandatory penalty.
• State of Gujarat Vs. Oil and Natural Gas Corporation Limited; (2017) 97 VST 506 (Guj): The Court followed this authority to hold that penalty under Section 45(6) is a statutory and mandatory penalty.
• Brooke Bond India Limited Vs. State of Gujarat; 1998 JX (Guj) 128: The Court distinguished this authority as it was not applicable to the facts of the case.
• Cement Marketing Co. of India Ltd. Vs. Assistant Commissioner of Sales Tax, Indore and Ors.; 1980 (6) ELT 295 (S.C.): The Court distinguished this authority as it was not applicable to the facts of the case.
• Commissioner of Central Excise, Chandigarh Vs. Pepsi Foods Ltd; (2011) 1 SCC 601: The Court distinguished this authority as it interpreted Section 11AC of the Central Excise Act, which includes elements of fraud and intent to evade.
• Jyoti Overseas P. Ltd. Vs. State of Gujarat; 2017 SCC Online Guj 2511: The Court distinguished this authority as it dealt with Section 34(7) of the Gujarat VAT Act, which specifically requires an intention to evade tax.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the clear 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 intention was to make the penalty and interest mandatory once the conditions of Section 45(5) are met. The court also highlighted that the penalty for tax delinquency is a civil obligation and that mens rea is not required unless the statute specifically mentions it. The Court distinguished the cases relied upon by the assessee, noting that those cases involved provisions with different language and intent. The Court also observed that the assessee was represented by a senior advocate who had consciously conceded the tax liability before the High Court.

Flowchart of the Case

Conclusion

The Supreme Court’s decision in State of Gujarat vs. M/s Saw Pipes Ltd. clarifies that 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 mens rea or a bonafide belief is not a defense against the imposition of these penalties. This judgment reinforces the strict interpretation of tax laws and highlights the importance of adhering to the prescribed tax rates and procedures. The Court’s stance underscores that the absence of a guilty mind does not exempt taxpayers from the consequences of non-compliance with tax laws, particularly when the statute mandates a penalty for non-payment or underpayment of taxes. This decision has significant implications for businesses operating in Gujarat and underscores the need for careful tax planning and compliance.