MADATHIL REGENCY vs. THE STATE TAX OFFICER

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR. JUSTICE AMIT RAWAL FRIDAY, THE 23RD DAY OF OCTOBER 2020 / 1ST KARTHIKA, 1942 PETITIONER/S: MADATHIL REGENCY MAIN ROAD, KOTTIYAM, KOLLAM DISTRICT, PIN-691 571, REPRESENTED BY ITS MANAGING PARTNER R. RAGHU. BY ADVS. SRI.S.ANIL KUMAR (TRIVANDRUM) SHRI.RAHUL A. RESPONDENT/S: THE STATE TAX OFFICER SQUAD NO. I, STATE GOODS AND SERVICE TAXES DEPARTMENT, ASRAMOM, KOLLAM, PIN-691 002 OTHER PRESENT: SR GP SRI C K GOVIND THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 20- 10-2020, THE COURT ON 23-10-2020 DELIVERED THE FOLLOWING:

JUDGMENT Dated this the 23rd day of October 2020 The petitioner is a registered dealer under the Kerala General Sales Tax Act, 1963 and is running a bar hotel. The bar has two counters; the local bar counter named as 'the Tulip' and the other, the executive bar counter named as 'the Barrel', the selling price in the local bar counter being less than that in the executive bar counter. 2. On 18.2.2020, respondent had conducted an inspection at the business place of the petitioner and certain records recovered.On verification of the books of accounts of the petitioner as per Ext.P1 notice to impose a penalty of Rs.20,87,256/- under section 45A of the Act, was proposed ,by estimating the turnover suppression, (a) in relation to stock variation at Rs.1,23,411.28 and (b) Sales suppression at Rs.99,45,505.35 by Gross Profit separately for local bar counter and executive bar counter and applying the same on the total purchase value of liquor sold after making an assumption that 90 % of the liquor sold after making an assumption that 90 percent of the liquor might have been sold through the executive bar counter.

The petitioner filed reply to Ext.P1 notice, vide Ext.P2 pointing out the mistakes and variation in calculation of the stock and adoption of unscientific method in arriving at the sales suppression after estimating the average gross profit. Though the respondent considered some of the objections, confirmed the demand made based on the estimate of gross profit , also, the sales estimated in respect of bar counter as well as the executive bar counter and issued orders imposing a penalty of Rs.18,22,574/- under Section 45A of the KGST Act for the year 2019-20, Ext.P3. It is contended that Ext.P3 order is opposed to law and facts and also without jurisdiction hence unsustainable in law. Reliance has been laid to the dictum laid down by the Division Bench in U.K Monu Timbers (M/s.) Vs. State of Kerala, (2012 (3) KHC 111), wherein ,it was held that only the assessing authority has the power to make estimations and such exercise, as is mandated by the Statute, has to be regulated by the best judgment of the assessing officer with due notice and after affording a personal hearing. 3. On the other hand, learned Government Pleader

opposed the aforementioned prayers and submits that though the judgment of Single Bench, is based upon the judgment of the Division Bench in U.K Monu Timbers (supra), this Court in an identical case in W.P.(C) No.16321 of 2014 (M/s Parur Tourist Home v. State of Kerala) did not entertain the petition based upon the judgment in Hotel Surya v. State of Kerala (2017 105 VST 238) and relegated the petitioner to remedy of appeal, thus, urged this Court for dismissal of the writ petition. 4. I have heard the learned counsel for the parties and appraised the paper book. The ratio in Division Bench judgment of U.K Monu Timbers (supra) was in respect of the penalty proceedings initiated under the KVAT Act. It was held that an estimation of evaded tax was held to be impermissible under Section 67 of 2003 Act on the point that what required to be determined was tax evaded or sought to be evaded. It was further held that penalty cannot be imposed on what officer thinks in the best of his judgment/estimation as Section 67 do not permit any estimation. But another Division Bench

judgment in Hotel Surya v. State of Kerala (supra) in a case pertaining to Kerala General Sales Tax Act, 1963 , in respect of the proceedings under Section 45A, whereby the assessment was done, by not accepting the gross profit of an assessee, which is to be 41.32 per cent, held not to be usurpation of the power of estimation of turnover, and the argument that it would be within the purview of the assessing officer was rejected. By applying the aforementioned judgment, in Parur Tourist Home (supra) single judge relied upon the judgment in Hotel Surya (supra) relegated the affected party to avail the remedy of appeal. The instant case is of such kind where the Intelligence Officer found the gross profit to be different than what the petitioner had assessed. It would be in the fitness of things to extract relevant paragraphs of the judgment in Hotel Surya (supra). "The first contention raised by the learned Senior Counsel for the petitioner is that in a proceedings under Section 45A of the Act, the Officer did not have any power to fix taxable turnover. Though this contention, in principle, seems to be supported by the provisions of the Act and the decisions cited, on facts what we find is that the provisions or the judgments relied on have no relevance. As we have already stated, the reported gross

profit was 41.32%. But, the verification of the recovered bills disclosed that the average rate of gross profit was 80%. On that finding, all that the Intelligence Officer has done is that he estimated the turnover by adding 80% of the purchase price to the declared purchase price of the goods sold during the assessment year. Thereafter, the sales turnover reported in the monthly returns was deducted and on the differential turnover, tax due was quantified. Accordingly, double the amount of turnover tax was imposed as penalty under Section 45A of the Act. This exercise cannot be said to be an usurpation of the power of estimation of turnover, which is within the purview of the Assessing Officer. Having considered the submissions made on behalf of the respondent Revenue, we are of the view that though the basis of the estimation of the gross profit is the profit as disclosed in the sale bills, when this proposal was conveyed to the assessee in the show cause notice and thereafter, the assessee had the opportunity to produce his books of accounts, including the sale bills. Despite the availability of such opportunities at no stage of the proceedings, the assessee produced the documents or the sale bills. On the other hand, the learned senior Counsel made an attempt to introduce a new case by making reference to a certificate purported to have been issued by the Village Officer to the effect that there was a flood in the area, which resulted in loss of documents. The resultant situation is that the assessee is unable to produce any document showing what exactly was his gross profit. On the other hand, admittedly in the inspection, certain bills were recovered, which disclosed the average gross profit of 80% and its genuineness is not disputed. In such a situation, we are not prepared to find fault with the Revenue in estimating the turnover tax by taking the gross profit as

disclosed in the bills that were recovered. Further, the assessee cannot have any grievance, since the gross profit has now been reduced to 50% against the declared gross profit of 41.32%." 5. The contention of the learned counsel for the petitioner thus is liable to be rejected of not availing the remedy of appeal simply by raising an argument that, it would be wholly impermissible that Intelligence Officer had exceeded the jurisdiction in undertaking the task of the estimation on the basis of the inspection to be within the domain of Assessing Officer. The learned Single Judge by following the dictum in Hotel Surya (supra), in paragraph 4 of M/s Parur Tourist Home (supra) held as under: “4. Although a decision of this Court in U.K Monu Timbers (M/S.) v. State of Kerala [2012 (3) KHC 111] clearly holds that in penalty proceedings, the penalty imposed in terms of Section 45A cannot be based on an estimation of the turnover by the departmental authorities, I find that another Division Bench of this Court in Hotel Surya v. State of Kerala [2017 105 VST 238] has, in almost identical circumstances, found that when all that the Intelligence Officer has done is an estimation of the turnover by WP(C).No. 16321 of 2014 4 adding the average rate of gross profit revealed from a verification of a recovered bills to the declared purchase price of the goods sold during the assessment year, the exercise cannot be said to be in usurpation of the power of estimation of

turnover, which is within the purview of the Assessing Officer. Taking cue from the said judgment, and finding that the exercise done by the Intelligence Officer in the instant case is also similar to what was noticed by the Division Bench in Hotel Surya v. State of Kerala supra, I am of the view that the challenge to Ext.P4 penalty order and Ext.P5 demand notice in this Writ Petition under Article 226 of the Constitution of India cannot be legally sustained. Resultantly, I dismiss the writ petition in its challenge against Exts.P4 penalty order and Ext.P5 demand notice and relegate the petitioner to his alternate remedy of preferring an appeal against the said order before the appellate authority under the KGST Act.” I agree with the findings rendered by the Division Bench in Hotel Surya (supra) and followed by the decision of Single Bench of this Court in M/S. Parur Tourist Home (supra). With the aforementioned observations, I dismiss the writ petition and relegate the petitioner to avail alternative remedy by preferring an appeal against the penalty order Ext.P4 before the appellate authority under the KGST Act. Sd/- AMIT RAWAL sab JUDGE

APPENDIX PETITIONER'S/S EXHIBITS: EXHIBIT P1 COPY OF NOTICE DATED 16.06.2020 ISSUED BY THE RESPONDENT/S. 45A OF THE KGST ACT FOR THE YEAR 2019-20. EXHIBIT P2 COPY OF REPLY DATED 13.07.2020 FILED BY THE PETITIONER. EXHIBIT P3 COPY OF ORDER DATED 30.07.2020 ISSUED BY THE RESPONDENT U/S. 45A OF THE KGST ACT FOR THE YEAR 2019-20. EXHIBIT P4 COPY OF THE JUDGMENT OF THIS HON'BLE COURT IN HAMARA HOTELS (P) LTD. VS. THE INTELLIGENCE OFFICER AND OTHERS (JUDGMENT DATED 20.03.2018 IN W.A.no.679 of 2018