Recording of reasons mandatory for initiation of proceedings u/s 35(7) of JVAT

Mishri Lal Jain Vs State of Jharkhand (Jharkhand High Court)

Jharkhand High Court held that it is mandatory to record reasons for initiation of proceedings under Section 35(7) of the Jharkhand Value Added Tax Act (JVAT Act). Non-recording of the same makes the proceedings untenable in law.

Facts- The instant writ petition has been preferred against the order passed by the learned Commercial Taxes Tribunal, whereby the revision petition and review petition of the petitioner have been rejected and the determination of sale price of Iron Ore sold by the petitioner on the basis of average rate of neighbouring mines in exercise of the powers under Section 35(7) read with Section 30(4) of the Jharkhand Value Added Tax Act, 2005 (JVAT Act) has been upheld.

The petitioner is engaged in the business of mining and trading of iron ore, and Iron ore extracted from mines is known as “Run of Mines (ROM)” which requires further processing and screening. Petitioner’s premise does not have processing and screening facility and thus, only ROM was being sold by the petitioner.

The Assessment proceeding of the petitioner was completed wherein, in alleged exercise of power u/s 35(7) r/w Section 30(4) of the JVAT Act, tax and interest has been imposed upon the petitioner on the alleged ground that petitioner has concealed its Gross Turn Over (for short GTO). The assessing officer despite taking actual figure of sale price, has taken the value of goods sold on the basis of average sale price of nearby mines i.e., M/s. Rungta Mines Ltd.

Conclusion- It is only after recording of reasons for initiation of proceedings under Section 35(7) the exercise for determination of value of goods at the time of sale and assessment of tax on such price is to be done by giving the dealer an opportunity of being heard.

At this stage it is further appropriate to observe that the condition of recording satisfaction under proviso to Section 35 (7) is a prerequisite before initiation of proceedings and cannot be dispensed with by the AO. In other words, the assessing officer is duty bound to record his reasons before initiating any proceeding. It appears that the petitioner had also specifically raised this plea before the AO before passing of the revised assessment order and also before the appellate authority thereafter at the second instance.

It is reiterated that recording of satisfaction is sine qua non before proceeding to impose tax and penalty upon the assessee under Section 35(7) of the JVAT Act. Any such satisfaction is to be based on tangible materials as are found by the AO as the provisions are penal in nature where an assessee is found to be indulging in tax evasion by suppression or concealment of actual sales or turnover by selling goods at a higher price than shown by him. Learned Tribunal has completely failed to consider that the requirement of law for initiating a proceeding under Section 35(7) by recording reasons has not been fulfilled by the Assessing Officer.

FULL TEXT OF THE JUDGMENT/ORDER OF JHARKHAND HIGH COURT

The instant writ petition has been preferred against the order dated 25^th February, 2020 & 5^th May, 2022 passed by the learned Commercial Taxes Tribunal, Jharkhand, Ranchi in Revision Case No. JR 40 of 2013, as well as Review Case No. JR 04 of 2021, respectively; whereby the revision petition and review petition of the petitioner have been rejected and the determination of sale price of Iron Ore sold by the petitioner on the basis of average rate of neighbouring mines in exercise of the powers under Section 35(7) read with Section 30(4) of the JVAT Act has been upheld.

2. The brief facts of the case as pleaded by the petitioner is that the petitioner is engaged in the business of mining & trading of iron ore, and Iron ore extracted from mines is known as “Run of Mines (ROM)” which requires further processing and screening. Petitioner’s premise does not have processing and screening facility and thus, only ROM was being sold by the petitioner. ROM includes Fines & Lumps and the grade of minerals found in petitioner’s premises was between 50-65% Fe content, which would be evident from survey report as contained in Annexure- 1.

The Assessment proceeding of the petitioner was completed wherein, in alleged exercise of power u/s 35(7) r/w Section 30(4) of the JVAT Act, tax and interest has been imposed upon the petitioner on the alleged ground that petitioner has concealed its Gross Turn Over (for short GTO). The assessing officer despite taking actual figure of sale price, has taken the value of goods sold on the basis of average sale price of nearby mines i.e., M/s. Rungta Mines Ltd.

3. Being aggrieved by the assessment order, petitioner filed appeal before the JCCT (Appeal) being Appeal Case No. CB-VAT-A-09/2011-12. However, the learned appellate court rejected the appeal of the petitioner. Thereafter, the petitioner filed a revision petition being JR 40 of 2013 before the Commercial Taxes Tribunal, Jharkhand at Ranchi which was dismissed on 25th February, 2020 and thereafter, petitioner also filed Review Case No. JR 04 of 2021 before the learned Tribunal. The learned Tribunal also rejected the review petition preferred by the petitioner; hence this application.

4. Learned counsel for the petitioner has taken us through the relevant provisions of JVAT Act, 2005 including Section 2 (xlvii) Sale and 2 (xlviii) sale price definition and in particular Section 35(7) and Section 40 relating to turn over escaping assessment. Learned counsel for the petitioner has, inter alia, questioned the impugned findings on two-fold legal issues:

• Whether sale price of the petitioner company can be determined on the basis of average sale price of neighbouring mines namely, Rungta Mines Ltd. without even recording any finding that petitioner has sold goods at a price higher than the price reflected in its invoices, and, under such circumstances, whether provisions of Section 35(7) of the JVAT Act, 2005 can be invoked by the Respondents?

In support of the legal issues, following submissions have been made:

(a) Finding of AO that petitioner has sold goods at uniform rate @ 660/- per metric ton is perverse which is evident from tax invoices issued by petitioner at Annexure- 3 series.

(b) AO, in the order has not recorded its finding that petitioner has sold goods at a price higher than the price shown in its invoice and thus, no tax could have been levied to the petitioner under section 35(7) of the JVAT Act, 2005.

From bare perusal of Section 35(7) of the JVAT Act it would reveal that assessing authority is entitled to determine the market value of the goods sold by the petitioner only and only if the assessing officer comes to a definite finding that the goods have been sold at the rate higher than the rate shown by the petitioner and admittedly, in the instant case, no such finding has been recorded by assessing officer.

Thus, section 35(7) of the JVAT Act which permits the assessing officer to determine the market value of goods is not applicable to the facts of the present case.

(c) The State Tax authorities as well as the learned Tribunal has failed to take into consideration the definition of “Sale” and “Sale Price” as enshrined in Section 2 (xlvii) & 2 (xlviii) respectively of the JVAT Act which in substance provides that the VAT would be levied on the sale of goods and on the consideration received for such sale of goods and not on the basis of market value of the goods in question. Thus, they have failed to consider the aforesaid provisions of the JVAT Act at the time of deciding the issue of determination of goods sold by the petitioner.

(d) Further finding with respect to “under valuation” of the goods sold by the petitioner recorded by the appellate court is totally misconceived and not tenable in the eye of law. It is really un-understandable that why purchaser of petitioner would purchase minerals at a lesser price just in order to evade payment of tax especially when the said purchaser is entitled to avail ITC under the JVAT Act, 2005.

(e) Further, the lower court records itself demonstrates that no such enquiry whatsoever was conducted by the assessing officer to conclude under-pricing done by the petitioner.

(f) The quantity of goods sold has not been disputed either by the assessing officer or the learned appellate court or by the Further, nowhere the returns of the petitioner have been disputed by the Tax authorities or by the learned Tribunal. The assessment order should have only confined to the facts that whether petitioner has sold its goods at a higher price than shown in invoice. But the assessing officer has exceeded its jurisdiction and has determined the sale price of petitioner on the basis of sale price of neighbouring mines.

Further, in respect of other mines owner similar assessment order were passed by determining the market rate on the basis of average rate & neighbouring mines and IBM rate which has been set aside by appellate court.

5. In order to buttress his contention, learned counsel for the petitioner relied upon the judgment of Hon’ble Supreme Court rendered in Morriroku U.T. Indians Pvt. Ltd. Vs. State of U.P. reported in (2008) 15 VST 559 (SC) wherein it has been held that “Sales Tax is a tax on the price received or receivable by the dealer in respect of sale and the dealer is entitled to frame the price structure which is best suited for the type of business with a view to stand the competition”.

Petitioner also relied upon the following judgments: –

• State of Rajasthan Vs. Rajasthan Chemists Assn. reported in (2006) 6 SCC 773 wherein the Hon’ble Supreme Court has reiterated the principle of levy of “tax on sale of goods” and held that State Legislature does not have legislative competence to give the expression “sale of goods” extended meaning and to enlarge its legislative fields to cover those transactions for taxing which do not properly confirm the element of sale of goods within the Sales Tax.
• M/s. Girdharilal Nanhelal Vs. The Sales Tax Commissioner, P. reported in (1976) 3 SCC 701 wherein it has been held that in order to impose liability, onus of proving the ingredients of sale squarely lies upon the department.
• M/s. Devkavai Velji Vs. State of Jharkhand & Ors. reported in 2013 (2) JLJR 456, this Court has observed that tax cannot be levied on differential rate, merely because the petitioner has sold goods at a rate lower than the market rate.

Apart from the above, petitioner also relied upon the judgment of Hon’ble Apex Court passed in the case of Commissioner of Income Tax Vs. Calcutta Discount Co. Ltd. reported in (1974) 3 SCC 260 (Para-11) wherein it has been held that a dealer cannot be assessed on the basis of market price of goods sold by the said dealer.

6. Mr. Deepak Kr. Dubey, A.C. to Sr. S.C.-II has argued on behalf of the State. A counter affidavit has been filed in the matter contending that ROM consists of less ferrous content of iron, while Iron Ore consists of higher quantity of Ferrous content. This is the reason that there is no mention of ROM in the rate of IBM. Based on the records showing the sale of iron ore filed by the petitioner, it is argued that the petitioner had been producing/raising iron ore as lumps which are more valuable than ROM and fines. It is also pointed out from these invoices that the rate of iron ore lump (ROM) and fines, ferrous wise mentioned in Tax invoices is lower rate than the ferrous wise, grade wise mentioned rate of IBM.

The basis for initiation of the proceedings by the assessing officer was this satisfaction that the petitioner has sold the iron ore at a higher price than shown by him in these invoices. Thus, the ingredients of Section 35 (7) of the JVAT Act were satisfied for proceeding against him in terms of the JVAT Act.

Pursuant thereto; notices were issued upon the petitioner for the relevant assessment year. Since the Assessing officer found a case of underpricing, the order dated 23^rd November, 2010 was passed imposing tax and interest upon the petitioner. The same were taken in appeal before the Joint Commissioner (Appeals). The appellate authority rejected the appeals vide order dated 22.02.20 13.

It is further argued by the State counsel that sale of lumps and fines have been made. It is submitted that for the relevant years though the petitioner did not have a screening or processing unit but the petitioner did have such units for the previous years.

The learned tribunal has also addressed the issue relating to price variation of iron ore of same grade giving different uses. According to the learned tribunal also there cannot be any evidence of underpricing to the effect that the goods are sold at a price higher than what is reflected in the sale invoices, as such, such sale transactions are generally colourable transaction between the buyer and the seller. The documents available showed that the goods were sold at a higher price and there was no requirement to take recourse to the provision of 35 (7), rather the assessment order could have been passed in terms of Section 35 (5) and 35 (6) of the JVAT Act. Only when such evidence is not there and on the basis of enquiry conducted by the assessing officer, he was satisfied that the goods have been underpriced, then a case under Section 35 (7) is made out.

7. Learned counsel for the State has placed reliance on the decisions of the Hon’ble Apex Court in the case of M’s VEENA THEATRE, PATNA versus THE STATE OF BIHAR reported in 1970 (3) SCC 79, Para 9 and THE COMMISSIONER OF SALES TAX, MADHYA PRADESH versus M’S H.M. ESUFALI, H.M. ABDULALI, SIYAGANJ, MAIN ROAD, INDORE reported in (1973) 2 SCC 137, Para 8 and 11 in support of his submission that in a case where the invoices and books of accounts of the petitioner were not believable the assessing officer had no other option than to make a best judgment/assessment by making an estimate of the sale price relying upon the rates of neighbouring mines.

He lastly submits that the assessment order does not suffer from any illegality or error. The impugned orders passed by the learned tribunal upholding the same, therefore, needs no interference.

Learned counsel for the petitioner in reply has sought to distinguish these decisions on facts as they relate to a case of best judgment assessment when the Books of Account were either rejected or were not produced.

8. Having gone through the rival contentions of learned counsel for the parties and after going through the impugned order and other relevant documents placed before us it appears that revised assessment proceeding of the petitioner was completed and an order has been passed whereby, in exercise of power u/s 35(7) r/w section 30(4) of the JVAT Act, tax and interest has been imposed upon the petitioner on the ground that petitioner has concealed its GTO.

The assessing officer despite taking actual figure of sale price, has taken the average sale price of M/s. Rungta Mines Ltd.

Aggrieved by the assessment order, the petitioner assailed the same in appeal before the JCCT (Appeal), Jamshedpur being Appeal Case No. CBVAT-A- 09/ 2011-12. The learned appellate court rejected the appeal without appreciating that GTO of petitioner cannot be enhanced by comparing sale price of neighboring mines and the AO has not found that petitioner has sold its goods lesser than the price shown in sale invoices of the petitioner.

9. After going through the aforesaid facts and the history of the case it appears that to decide the issue involved in this case, Section-35 of JVAT Act play an important role as it deals with assessment and self-assessment.

For brevity, Section 35 is quoted herein below:

“35. Assessment and Self-A11e11ment I

• Subject to provisions of sub-Section (2), the amount of tax due from a registered dealer or a dealer liable to be registered under this Act shall be assessed in the manner hereinafter provided, for the Tax Period during which the dealer is so liable as prescribed.
• Notwithstanding anything contained in this Section, if a registered dealer has failed to furnish return or returns under sub-Section (1) of Section 29 in respect of any tax period or periods, the prescribed authority shall proceed to make provisional assessment under Section 36.
• Where a registered dealer having turnover upto 1 (one) crore per annum other than the registered dealer referred to under sub-section 5 has furnished:-
• All the returns for any tax period.
• Revised returns and annual returns in respect of any tax period within the prescribed time and in the prescribed manner.
• Has paid the tax payable according to such returns or revised returns as also interest payable if any.
• Has furnished the Audit report within the prescribed time if required and in the prescribed manner.
• The returns so filed are found to be in order shall be accepted as self – assessment in the prescribed manner subject to adjustment of any arithmetical errors apparent on the face of the said return(s) and his assessment shall be deemed to be have been made for the purpose of subsection (1) of Section 35, provided this provision shall not applicable to dealers covered under section 19 of the Act.
• The amount of input tax credit, exemptions and other credits or concessions claimed by the dealer in the return(s) for which no supporting declarations, certificates or evidence required under this Act or Central Sales Tax Act is furnished, self assessment shall be made accordingly without such input tax credit, exemption and other claims, treating such sales as taxable by levying appropriate rate of tax, notwithstanding the fact that the dealer may have been prevented by sufficient cause to produce such declarations, certificates or evidence in support of his claim.
• If a dealer has furnished all the returns and the revised returns, if any, within the prescribed period and in the prescribed manner or within next fifteen days thereafter and-

The prescribed authority is satisfied that the returns or the revised returns as the case may be, and self assessment claim are prima-facie correct, consistent and complete, he shall accept the self assessment as filed by the dealer and shall assess the amount of tax and interest due from the dealer on the basis of such returns, after making prima-facie adjustment in the nature of arithmetical errors, if any, in the returns and the self assessment;

• • • In the circumstances, if the self-assessment under sub-section (1), (2), (3), (4) and (5) has not been filed within the prescribed time, the prescribed authority shall serve on such dealer a notice in the prescribed manner requiring him on a date and at a time and place to be specified therein either to attend in person or through an authorised representative or to produce or to cause to be produced any accounts and other evidences on which such dealer may rely in support of such returns and claims thereof and assess the dealer, the amount of tax and interest due from the dealer on the basis of such returns which have come on records and after making such adjustments as may be necessary including –
    • disallowance of claim of input tax credit, exemptions, discounts and deductions and any other concessions or rebates not supported by requisite evidence as required under the Act or the rules made thereunder; and
    • disallowance of claims of tax payments and refund adjustment not verified or otherwise not admissible; and
    • withdrawal of claim of tax credit including carry forward of tax credit not admissible under the Act; and levying of interest applicable under this Act.

Provided, notwithstanding anything contained in Section 36 if registered dealer fails to comply with the terms of the notice under this sub-section or accounts and other evidence produced by him are, in the opinion of the prescribed authority incorrect, incomplete or unreliable either wholly or partly the said authority shall assess, to the best of its judgment, the amount of tax and interest due from the dealer which have come on records and after making such adjustments as may be necessary”.

(7). If the prescribed authority is satisfied that goods have been sold a price higher than that shown by the dealer, he may determine value of goods at the time of the sale and proceed to assess the tax on such price.

Provided before initiating such proceedings, the prescribed authority shall record his reasons for doing so and no orders shall be passed under this sub-section without giving the dealer an  opportunity of being heard.”

10. After going through the proviso to Section 35 (7) of the Act it appears that the statute specifically postulates that prescribed authority shall record its reason before initiating the proceedings and no order shall be passed under this sub section without giving the dealer an opportunity to be heard. Section 35(7) contemplates of such a proceeding against an assessee regarding whom the Assessing Officer is satisfied that he has resorted to selling of goods at a higher price than shown in his invoices.

Therefore, the proviso to Section 35 (7) of the JVAT Act firstly stipulates that the reasons must be recorded by the prescribed authority for initiating the proceeding and secondly, the principles of natural justice should be followed.

Though in the instant case the second ingredient of the proviso has been fulfilled; however, there is no document to suggest that the assessing officer has recorded his reason before initiating the proceeding.

11. The principles regarding concept of ‘Sales Tax’ as compared to Income Tax or Excise Duty have been explained in the case of Morriroku U. T. Indians Pvt. Ltd. (supra) at paragraphs 19 and 23 quoted hereunder :-

“19. Before analysing Section 3 of the 1948 Act, it is important to keep in mind that in income tax cases, tax is exigible on “real income” which means the actual income received by or which accrues to the assesses. In case of sales tax, tax is exigible on real price received or receivable by the dealer in respect of a sale. A dealer is entitled to frame his price structure in a manner conducive to the type of his business or with a view to withstand the competition. In a given case, cost may be more than the price. The dealer may base his price structure to give an incentive to his clients, agents, distributors, etc., particularly if he is a manufacturer. In such cases, his price structure has to be scrutinized by the Department under the sales tax law to find out the real sale price receivable by him. There may be cases where he is required to give a discount on account of defect in quality or delay. The important thing to be noted is that “price” is the amount of consideration which a seller charges the buyer for parting with the title to the goods. It comprises of the amount which the dealer himself has to pay for the purchase of the goods, the expenditure, which he is to incur for transporting the goods from the place of purchase to the place of sale, the duties, if any, levied on the particular goods bought by him, the octroi duty, which he may have had to pay and his own margin of profit after meeting handling charges including interest on the capital invested. The cost price of the goods actually paid by him under various heads of accounts would no doubt constitute the consideration for which he would part with his title to the goods. The entire amount of consideration, including the sales tax component, which the purchaser pays, would constitute the price of goods. To this extent, there is no difficulty. The difficulty comes in when by law or by legal fiction the Department seeks to introduce a notional concept as an element of the “real price”. This is particularly important when there is no rule to that effect in the sales tax law. Even under the definition of turnover in Section 2(i) one has to take into account only the aggregate amount for which goods are bought or sold. It is this aggregate amount which is taxable under Section 3 read with Section 2(i) of the 1948 Act.”

xxx                                     xxx                                         xxx

“23. On the other hand, excise duty is a levy on a taxable event of “manufacture” and it is calculated on the “value” of manufactured goods. Excise duty is not concerned with ownership or sale. The liability under the excise law is event based and irrespective of whether the goods are sold or captively consumed. Under the excise law, the liability is there even when the manufacturer is not the owner of law material or finished goods (as in the case of job-workers). Excise duty, therefore, is independent of ownership [see Ujagar Prints (II) v. Union of India]. Therefore, for sales tax purposes, what has to be taken into account is the consideration for transfer of property in goods from the seller to the buyer. For this purpose, tax is to be levied on the agreed consideration for transfer of property in the goods and in such a case cost of manufacture is irrelevant. As compared to the sales tax law, the scheme of levy of excise duty is totally different. For excise duty purposes, transfer of property in goods or ownership is irrelevant. As stated, excise duty is a duty of manufacture. The provisions relating to measure (Section 4 of the 1944 Act read with the Excise Valuation Rules, 2000) aim at taking into consideration all items of costs of manufacture and all expenses which lead to value addition to be taken into account and for that purpose Rule 6 makes a deeming provision by providing for national additions. Such deeming fictions and notional additions in excise law are totally irrelevant for sales tax purposes. Therefore, in any event, these notional additions cannot be read into Clause 5.1 and Clause 5.2 of the General Agreement for Purchase of Parts dated 31.7.1997.”

In the case of M/s. Girdharilal Nanhelal (supra) cited by the petitioner, the Hon’ble Apex Court has at para-7 held that for the purpose of levy of Sales Tax it would be necessary not only to show that the source of money has not been explained but also to show existence of some material that such acquisition of money has resulted from transactions liable to Sales Tax and not from other sources.

12. The finding of assessing officer that petitioner has sold goods at uniform rate of Rs.660/- per metric ton upheld by Tribunal is contrary to the records of case particularly Annexure- 3 series of writ petition.

The finding with respect to “undervaluation/under pricing” of the goods sold by the petitioner recorded by the appellate court and Tribunal is not tenable in the eye of law. Further, Tribunal in its impugned order has stated that “underpricing” of the petitioner has been occasioned due to connivance of the seller and the purchaser; however, no details of such enquiry has been mentioned in the order. The records do not show that any such enquiry was conducted by the AO to conclude underpricing done by the petitioner before proceeding to impose tax and interest.

In the absence of any tangible materials to support such a finding, it is difficult to assume that a purchaser of petitioner would purchase minerals at a lesser price under an invoice in order to evade payment of tax especially when the said purchaser is entitled to avail ITC under the JVAT Act, 2005. It is only after recording of reasons for initiation of proceedings under Section 35(7) the exercise for determination of value of goods at the time of sale and assessment of tax on such price is to be done by giving the dealer an opportunity of being heard.

13. At this stage it is further appropriate to observe that the condition of recording satisfaction under proviso to Section 35 (7) is a prerequisite before initiation of proceedings and cannot be dispensed with by the AO. In other words, the assessing officer is duty bound to record his reasons before initiating any proceeding. It appears that the petitioner had also specifically raised this plea before the AO before passing of the revised assessment order and also before the appellate authority thereafter at the second instance.

It is reiterated that recording of satisfaction is sine qua non before proceeding to impose tax and penalty upon the assessee under Section 35(7) of the JVAT Act. Any such satisfaction is to be based on tangible materials as are found by the AO as the provisions are penal in nature where an assessee is found to be indulging in tax evasion by suppression or concealment of actual sales or turnover by selling goods at a higher price than shown by him. Learned Tribunal has completely failed to consider that the requirement of law for initiating a proceeding under Section 35(7) by recording reasons has not been fulfilled by the Assessing Officer.

The matter is therefore required to be remanded to the AO to comply the provisions of Section 35(7) of the Act for initiating the proceeding, if he finds any evidence that the goods have been sold at higher price than shown by the dealers.

On remand, the AO shall proceed strictly in accordance with law. The petitioner shall be at liberty to raise all the grounds available to him before the AO which shall be considered accordingly.

14. Before parting, it is made clear that though several contentions have been raised by the parties on the merits of the case regarding the levy of tax and interest but since the matter is being remanded to the AO on the point of recording of satisfaction under Section 35 (7) of the JVAT Act before initiation of the proceedings; we consciously refrain from making any observation on the merits of the case regarding the levy of tax and interest upon the petitioner under Section 35 (7) r/w Section 30 (4) of the JVAT Act. The judgment relied upon by the learned State counsel i.e. M/s VEENA THEATRE, PATNA and THE COMMISSIONER OF SALES TAX, MADHYA PRADESH (supra) relate to cases of best judgment assessment after the rejection of Books of Account of the Assessee. Since in the present case the requirement of law for initiation of the proceedings have not been fulfilled, these decisions are not of assistance to the present case.

15. Having regards to the discussions made hereinabove, the impugned order dated 25^th February, 2020, passed by the learned Commercial Taxes Tribunal, Jharkhand, Ranchi in Revision Case No. JR 40 of 2013 as well as order dated 5^th May, 2022 passed in Review Case No. JR 04 of 2021, are quashed.

16. As a result, W.P.(T) No. 3910 of 2022 is, hereby, allowed in the manner and to the extent indicated above on contest. Pending I.A., if any, is also disposed of.