By TIOL News Service

ERNAKULAM, MAR 18, 2019: THE ISSUE BEFORE THE HIGH COURT IS - Whether penalty is imposable where the assessee collects an amount as tax from its customers but does not deposit the same with the Government & also if such amount collected is not reflected in the assessee's return. YES IS THE ANSWER.

Facts of the case

THE assessee company sold rubber trees during the relevant AY. The issue of Sales Tax liability on rubber trees had come up several times before the court, before in M/s Tropical Plantations Limited v. State of Kerala & Padinjarekara Estates Limited v. State of Kerala, it was finally held that sale of rubber trees would not attract sales tax since felled trees could not be brought under the definition of Timber. The Revenue appealed to the Apex Court, which remanded the matter to the Sales Tax Appellate Tribunal (STAT). The STAT then went on to hold that the wood derived from felling such rubber trees was being used to make furniture & so the same classified as Timber.

While the issue was pending adjudication, the assessee collected deposit from a party with whom the assessee had entered into an agreement for sale of rubber trees. Such deposit was collected to satisfy the tax liability, if the same was found to be payable. On assessment, the AO opined that the deposit so accepted by the assessee was in purported collection of tax. Hence the AO directed that such amount collected be deposited with the State Exchequer. The AO also initiated penalty proceedings. The lower authorities upheld such findings. On writ petition being filed, the Single Judge of the High Court sustained the grounds for imposing penalty, while somewhat reducing its quantum.

In writ appeal, the High Court held that,

++ the Single Judge correctly held that penalty is liable to be imposed upon the assessee. From the agreement, it is seen that the collection has been made in lieu of tax. When such collection was made necessarily it has to be paid over to the State. It can be understood that the issue itself was in a flux and it was not finally decided as to whether there is liability to tax or not. If at all the assessees were absolved of the tax liability the assessee could have refunded the amounts to the ascertained purchasers and then sought for a refund from the State. Or otherwise, as specifically provided under Section 46A(2) the purchasers of rubber trees who paid up the tax to the assessee could have approached the State producing the evidence of payment and sought for a refund;

++ the assessee having collected the tax the same has to be paid over to the State as per Section 22 of the KGST Act and Rule 18(3) of the KGST Rules. The same having not been done, penalty proceedings initiated against the assessee was perfectly in order. The assessee had also filed an incorrect return insofar as the tax collected having not been shown in the records. The proceedings hence was under Section 45A, where the penalty could extent to twice the amount of tax sought to be evaded. The assessee had not paid over the tax to the State despite collecting. The deposit in lieu of tax was a device employed to deprive the State of the tax; when already collected by the seller. As was noticed earlier if at all the assessee was absolved from such liability there could have been a refund sought either by the assessee or by the person who suffered tax; producing evidence of refund having been made to the purchaser and in the latter case producing evidence of payment of tax having been effected. Hence the order passed by the Single Judge merits being sustained.

(See 2019-TIOL-600-HC-KERALA-CT)