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PJ/CASE LAW/2016-17/3078

Whether penalty can be imposed in case of breach of law when assessee was working in guanine manner?

Case: HINDUSTAN STEEL LTD. Vs STATE OF ORISSA

Citation: 1978 (2) E.L.T. (J 159) (S.C.)

Brief Facts:M/s. Hindustan Steel Ltd., a Company incorporated under the Indian Companies Act, 1913 is a Government of India undertaking in the public sector. The Company is registered as a dealer under the Orissa Sales Tax Act, 1947 (14 of 1947), from the last quarter ending March, 1959.
Between 1954 and 1959 Company was erecting factory buildings for the steel plant, residential buildings for its employees and ancillary works such as roads, water supply, drainage. Some constructions were done departmentally and the rest through contractors. The Company supplied to the contractors for use in construction, bricks, coal, cement, steel, etc., for consideration and adjusted the value of the goods supplied at the rates specified in the tender.
In proceedings for assessment of tax under the Orissa Sales Tax Act, 1947, the Sales Tax Officer held that the Company was a dealer in building material, and had sold the material to contractors and was on that account liable to pay tax at the appropriate rates under the Orissa Sales Tax Act. The Sales Tax Officer directed the Company to pay tax due for ten quarters ending December 31, 1958, and penalty in addition to the tax for failure to register itself as a dealer. The Appellate Assistant Commissioner confirmed the order of the Sales Tax Officer. In second appeal the Tribunal agreed with the tax authorities and held that the Company was liable to pay tax on its turnover from bricks, cement and steel supplied to the contractors. The Tribunal however substantially reduced the penalty imposed upon the Company.
In these appeals filed with special leave substantially three matters fall to be determined:
(1) Whether the Company sold building material to the contractors during the quarters in question ?
(2) Whether the Company was a dealer in respect of building material within the meaning of the Orissa Sales Tax Act ?
(3) Whether imposition of penalties for failure to register as a dealer was justified ?
Solution of the first and the third matters does not present much difficulty. At the relevant time `sale’ was defined by Section 2(g) of the Orissa Sales Tax Act as follows :-
“Sale” means, with all its grammatical variations and cognate expressions, any transfer of property in goods for cash or deferred payment or other valuation consideration, including a transfer of property in goods involved in the execution of contract, but does not include a mortgage, hypothecation, charge or pledge :
The Company supplied building material to the contractors at agreed rates. There was concurrence of the four elements which constitute a sale - (1) the parties were competent to contract; (2) they had mutually assented to the terms of contract; (3) absolute property in building materials was agreed to be transferred to the contractors; and (4) price was agreed to be adjusted against the dues under the contract. No serious argument was advanced before the court that the supply of building material belonging to the Company for an agreed price did not constitute a sale.
Reasoning of Judgement:Under the Act penalty may be imposed for failure to register as a dealer : Section 9(1) read with Section 25(1)(a) of the Act. But the liability to pay penalty does not arise merely upon proof of default in registering as a dealer. An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute. Those in charge of the affairs of the Company in failing to register the Company as a dealer acted in the honest and genuine belief that the Company was not a dealer. Granting that they erred, no case for imposing penalty was made out.

Comment: The gist of the case is that no penalty should be imposed for technical or venial breach of legal provisions or where the breach flows from the bona-fide belief that the offender is not liable to act in the manner prescribed by the statute.
 

 

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