INTRODUCTION:
This article deals with the critical analysis of the recent decision of the Hon High court of kerala in Tomy Eapen v state of Kerala reported in (2013) 21 KTR 215 (Ker). In the said decision the Division bench of the Hon court held that the department can collect Rs 2 lakh each from an assessee in respect of the offence of failure to keep true and complete accounts at head office and branch separately under the Kerala Value Added Tax Act 2003. With great respect to the Hon court it is submitted that the said decision requires reconsideration on the basis of the reasons set out in this article.
FACTS OF THE CASE:
The Revision petitioner (hereinafter briefly referred to as RP) in this case is a proprietor running jewellery business having two places of business i.e. Head office and a branch at Pala, Kerala. Two separate Intelligence squads conducted inspection of the premises. The squad detected suppression of turnover of Rs 16306390/ in the HO and Rs 5176384/ in the branch having tax effects of Rs 652256 and Rs 207055 respectively. The RP submitted separate applications for compounding of offence of attempted evasion of tax for the head office and branch. The RP paid Rs 2 lakh each for the two compounding applications as if he committed two separate offences of evasion of tax in the HO and branch. It appears that the RP challenged the collection of Rs 2 lakh each totaling to Rs 4 lakhs on the ground that he committed only one offence and hence only Rs 2 lakh can be collected. The amount of Rs 4 lakh was paid under coercion and was also due to ignorance of the law. The Hon Tribunal dismissed the appeal and a Tax revision case has been filed before the Hon High Court raising 4 questions of law.
The two main questions of law were whether the Hon Tribunal is justified in taking the view that compounding fee can be collected from a person in respect of his HO and branch separately while the prevailing departmental practice is to collect only a single fee and whether the tribunal is correct in taking the view that two proceedings can be initiated against a dealer in respect of HO and branch separately though assessment was completed in a single order. The other two questions of law are not set out since the Hon court has not dealt with those questions.
It is very much apparent that RP is the sole owner of both the business premises as there is no separate ownership. It is also obvious that there is only one registration for the RP and he is issued with a copy of the registration certificate (RC) to be exhibited in his branch ( as additional place of business) as provided in section 16(4) of the Kerala Value Added Tax Act,2003 (the Act). It is also important to note that in law only one assessment can be done on the petitioner clubbing the turnover of both HO and the branch except in cases where it is specifically permitted. We shall now discuss the case in detail to see whether the authorities were justified in law for what they did.
THE STATUTORY PROVISIONS FOR COMPOUNDING OF OFFENCES:
The statutory provisions related to compounding of offences are contained under section 74 of the KVAT Act 2003.
“74. Composition of offences. –
(1) The assessing authority or other officer or authority authorized by the Government in this behalf may accept from any person who has committed or is reasonably suspected of having committed an offence against this Act, other than those specified under clause (e) of sub- section (1) or clauses (b), (c) or (d) of sub-section (2) of section 71, by way of compounding of such offence,-
(a) where the offence consists of the evasion of any tax payable under this Act, in addition to the tax so payable a sum of money equal to the amount of tax so payable subject to a minimum of rupees five hundred and maximum of rupees eight lakh: and
Provided that the maximum compounding fee collectable against a single offence spread over several return periods in a financial year shall be two lakh rupees
(b) in other cases, a sum of money not exceeding ten thousand rupees: Provided that the Commissioner may by order authorize any officer to compound the offence under this section on payment of a reduced amount.
(2) On payment of such amount under sub- section (1), no further penal or prosecution proceedings shall be taken against such person, in respect of that offence.”
WHAT OFFENCES ARE COMPOUNDABLE?
Section 71 of the Act contains a list of the various offences which are capable of being compounded under the Act. It may be noted that only those offences which are specified therein can be compounded and any other offence not listed there obviously cannot be compounded and the department is at full liberty to go ahead with the prosecution of the parties who committed such non-compoundable offences. Since section 71 is also pertinent for this article it is also set out below for the ease of reference.
“71. Punishment for submitting untrue return etc:-
(1) Any person who, -
(a) knowingly submits an untrue return or fails to submit return as required by the provisions of this Act or the rules made there under; or
(b) fails to keep true and complete accounts; or
(c) dishonestly objects to or fails to comply with the terms of a notice issued to him under sub-section (1) of section 35, or(d) being a person obliged to register himself as a dealer under this Act does not get himself registered; or (e) fails to stop any vehicle or vessel when required to do so by an officer empowered in this behalf; or (f) willfully acts in contravention of any of the provisions of this Act or the rules made there under, for the contravention of which no express provision for punishments made by this Act, shall, on conviction by a Magistrate, be liable to fine which may extend to twenty five thousand rupees.(2) Any person who –(a) makes any bogus claim of input tax credit, special rebate or refund, or(b) continues the business during the period of suspension of registration, or (c) prevents or obstructs survey, inspection, entry, search, checking of tax invoice or seizure by an officer empowered under this Act, or(d) prevents or obstructs inspection of any vehicle or vessel or goods transported otherwise or seizure of goods by an officer in charge of a check post or barrier or by any officer empowered under this Act, or(e) fraudulently evades the payment of tax, fee or other amount due from him under this Act, or(f) carries on business as a dealer without furnishing the security demanded under sub-section (1) of section 17, shall, on conviction by a Magistrate, be punished with simple imprisonment for a period which may extend to six months or to fine not less than the tax or other amounts due but not exceeding fifty thousand rupees or to both.”
Thus on going through the above provisions it is clear that in the case under study the petitioner has committed the offence of failure to keep true and complete accounts as specified in section 71(1)(b) and no other offence appears to have been charged or alleged against the petitioner.
PROVISIONS RELATED TO KEEPING OF ACCOUNTS:
The provisions of law related to keeping and maintaining accounts can be found in Section 40 of the Act and Rule 58(3) of the KVAT Rules and are reproduced below:
Section 40- “ Maintenance of true and correct accounts by dealers :- Every person registered under this Act, every dealer liable to get himself registered under this Act, every awarder other than Government Departments and Local Authorities, where the cost of the work exceeds one crore rupees and every other dealer who is required so to do by the authority by notice served in the prescribed manner shall keep and maintain true and correct accounts and such other records as may be prescribed, in Malayalam, Tamil, Kannada, or English relating to his business, showing such particulars as may be prescribed. Different particulars may be prescribed for different classes of dealers, Provided that dealers shall be permitted to use electronic billing and accounting subject to such restrictions and conditions as may be prescribed.”
Rule 58(3)- “ Every registered dealer, every dealer liable to get himself registered under the Act and every other dealer who is required so to do by the assessing authority shall keep the books of accounts, in the case of a registered dealer, at the place or places of business entered in the certificate of registration and in the case of others at the place where the dealer carries on his business. Every purchase and every sale shall be brought to account as soon as the purchase or sale, as the case may be, is affected. Every contractor, including a contractor who has opted for payments of tax at compounded rate, shall keep the books of accounts relating to each contract at the work site.
PLACE OF BUSINESS- WHAT IT MEANS?
We have noticed in the Paragraph just above that Rule 58(3) that accounts are to be kept at the place or places of business of the dealer. Hence we shall try to understand what is the meaning and scope of the expression “place of business” in its singular and plural sense in view of its definite meaning assigned under section 2(XXXV) of the Act reproduced below.
Section 2(xxxv): “Place of business” means any place where a dealer carries on the business and includes: -(a) any warehouse, go down or other place where a dealer stores or processes his goods,(b) any place where a dealer produces or manufactures goods,(c) any place where a dealer keeps his books of accounts,(d) in any case where a dealer carries on business through an agent (by whatever name called), the place of business of such agent, (e) any warehouse, railway station, railway goods yard, parcel office, steamer station, or any other place where goods for transportation in the course of business or otherwise are kept by dealers, and (f) any vehicle or vessel or any other carrier wherein the goods are stored or used for transporting the goods;”
WHAT IS “AN OFFENCE”?
It may be noted that the word “offence” is not defined under the Act or in the constitution. Therefore we shall rely on the binding definition of the word as given under the Kerala Interpretation and General Clauses Act 1125 (Act VII of 1125) which is the law applicable in Kerala for the purpose of interpretation of all the enactments passed by the Kerala legislature which are in force .Section 2(25) thereof defines the term “offence” as follows:
Section 2(25)-: “offence” shall mean any act or omission made punishable by any law for the time being in force:
On a bare reading of the definition it is clear that not only a positive act but also an omission to act would also constitute an offence. Here in our case the offence appears to be related to the omission to keep true and complete accounts. Alternatively it is also possible to say that the offence lies in the act of keeping untrue and incomplete accounts.
Attention of the readers is invited to the definition of the word “act” as per section 2(2) of the Kerala Interpretation and General clauses act 1125 which is very relevant for our study and is reproduced below:
Section 2(2)-: “act” used with reference to an offence or civil wrong, shall include a series of acts, and words which refer to acts done extend also to illegal omissions.
Therefore when we read the words “act or omission” in section 2(25) above we must bear in mind the fact that as per 2(2) it would include a “series of acts or omissions” also.
WHAT IS AN ENACTMENT?
At this juncture we may also make a reference to the definition of the word “enactment” as per section 2(10) which is as follows.
2(10) “enactment” shall include an “Act”.
Please note that the word “Act” here means and refers to “Acts” like KVAT Act 2003 and not to an “act” referred to in section 2(2). Please note that the 1125 Act while describing the word “Act” in the sense of a law passed by legislature use the first letter “A” in capital and describe it as “Act”. At the same time 1125 Act while describing the word “act” in the sense of actions of a person use the first letter “a” in small letter and describe it as “act”.
As the word “enactment” is defined in an inclusive fashion we will have to look elsewhere to find out the true meaning of the expression. Therefore we shall try to understand the meaning of the term “Act” as it is clearly included in the definition under 1125 Act.
The word “enactment” is not the same as the word “Act”: “Act” means the whole Act, but an “enactment” is the Act or a part of it, and a particular section or part of an Act of parliament may be an “enactment” Per Ridley. J in Wakefield Light Railway v Wakefield (1906) 2 K.B.143. See Stroud’s Judicial Dictionary (Fifth Edition –sweet & Maxwell -Volume 2 -Page 840).
WHETHER A “RULE” IS AN ENACTMENT?
Whether a Rule can also be regarded as an “enactment”? Yes, according to author. The opinion is based on the decision of the Hon’ Andhra Pradesh High court in Challa Ram Konda Reddy v State of AP –AIR 1989 AP 235 at 241. The Hon court observed “ Rules are nothing but a species of legislation. The legislature instead of enacting the same itself delegates that power and authority to another person or authority. That person or authority makes the rules merely as the delegate of the legislature. It is therefore, not correct to say that rules are not enacted by the legislature. Whatever is enacted by the delegate of the legislature is also an enactment of the legislature. This conclusion finds support from the decision in Rathbone v Bundock (1962) 2 QB 260 and a large catena of authorities below which are quoted with approval by the Hon Supreme court in India also.
Lord Alverstone C.J., in Wellingdale v. Norris [1909] 1 K.B. 57 at 64 held as follows:
"If it be said that a regulation is not a provision of an Act, I am of opinion that Rex v. Walker (2) is an authority against that proposition.. I should certainly have been prepared to hold apart from authority that, where a statute enables an authority to make regulations a regulation made' under the Act becomes for the purpose of obedience or disobedience a provision of the Act. The regulation is only the machinery by which Parliament has determined whether certain things shall be or shall not be done."
These observations were approved by the House of Lords in Wicks v. Director of Public Prosecution (1947] 1 All E.R. 205 at 206 thus: "There is, of 'course, no doubt that, when a statute like the Emergency Powers (Defence) Act, 1939, enables an authority to make regulations, a regulation which is validly made under the Act, i.e., which is intra vires the regulation-making authority, should be regarded as though it were itself an enactment. As the Court of Criminal Appeal has pointed out in its judgment, that was decided by the Divisional Court in Willingdale v. Norris and it appears to me that decision is perfectly correct. Consequently, the charge against the appellant here was in effect, that he had committed crimes defined or contained in the Act of Parliament."
The Court of Criminal Appeals had stated in R.v. Wicks [1946] 2 All E.R. 529, 531. as follows:"The first observation which the court would make is that they are in complete agreement with the decision of the Divisional Court in Willingdale v. Norris that where a statute enables an authority to make regulations, a regulation made under the Act becomes for the purpose of obedience or disobedience a provision of the Act. The regulation is only the machinery by which Parliament has determined whether certain things shall or shall not be done. It is, therefore, clear that the regulations must be read as though they were contained in the Act itself. They derive their efficacy solely from the Act and accordingly expire with the Act, but it may be that the legislature has provided that some restrictions or consequences shall remain effective notwithstanding the expiration of the Act."
Thus it can be concluded that a Rule forming part of an “Act” can also be regarded as an “Act” and therefore an “enactment”.
HAS THE PETITIONER COMMITTED AN OFFENCE?
Now applying the statutory provisions read along with the decisions of the courts it can be noticed that the RP in the case committed “an offence” which can be regarded as an ‘omission’ to keep true and complete accounts or as an ‘act’ of not keeping true and complete accounts as required under section 40 of the KVAT Act read with Rule 58(3) of the KVAT Rules. Hence the RP has committed an offence which falls in the list of compoundable offences ie in clause (b) of section 71(1) of the Act which is set out above in this article. Thus on going through the above provisions it is clear that in the case under study the RP has committed the offence of failure to keep true and complete accounts as specified in section 71(1)(d) above though section 74(1)(a) deals with offence consisting of evasion of tax. Since failure to keep true accounts would necessarily lead to evasion of tax except in cases where the dealer deals in tax free goods the author is of the view that the RP committed an offence punishable under the KVAT Act. Hence it is a “criminal offence”. On the basis of facts stated in the judgement it is clear that the offence of non-maintenance of true and complete accounts as provided in section 71(1)(d) alone is the subject matter of composition and no other offence has been mentioned.
HAS THE PETITIONER COMMITTED A SINGLE OFFENCE?
The most important and pertinent question in our case is whether the RP committed a single offence, or two offences as held by the Hon court. The author is of the view that he committed only a single offence of failure to keep true and complete accounts which offends section 40 of the KVAT Act and Rule 58(3) of the KVAT Rules. We have already seen that Rule 58 is part and parcel of the KVAT Act and hence KVAT Rules and KVAT Act taken together can be regarded as a single “enactment”. We have also taken notice based on authoritative pronouncements of the courts that a Rule is part and parcel of the Act and cannot be viewed as separate. As the word “enactment” as per General clauses Act includes an ”Act” also it can be concluded that when we use the term “ enactment” it includes both Act and Rules which in our case is the KVAT Act and KVAT Rules. Viewed thus the RP committed only a single offence against the “enactment” and not separate offences.
It can also be noted that the RP is charged with the offence of violating Rule 58(3) which is contained in one single enactment.
We shall now examine whether two prosecutions are possible against the RP for the same offence of failure to maintain true and complete accounts one for offending section Rule 58(3) in the HO and offending the same rule in the branch during the same return period? Definitely not possible because there is only a single offence and the ingredients of both the offences ie omissions in HO and branch are that of the same offence.
Attention is now invited to section 25 of the Kerala General Clauses Act 1125 which is reproduced below.
Section 25:- “ Where an Act or omission constitutes an offence under two or more enactments then the offender shall be liable to be prosecuted and punished under either or any of those enactments but shall not be liable to be punished twice for the same offence.”
It is very clear that if the offence is the same or its ingredients are same then the person is liable only once and cannot be punished twice. Therefore if the KVAT authorities proceeded with the prosecution then the court can consider only one offence and not two offences as there is no separate crime apart from the single crime under the single enactment ie KVAT Act. Section 25 of 1125 Act would apply even if it is held that KVAT Act and KVAT Rules are different enactments since in such case the RP is liable only once and cannot be punished twice under both enactments for the same offence. If he is punishable only once it goes without saying that he needs to compound only once. The fact is that it is the same person who committed the same offence both at HO and branch and the offence is in the same return period.
Attention is now invited to the provisions of section 2(2) of the Kerala general clauses Act which has been reproduced above. The said section clearly provides that an “act” would include a “series of acts” also. Hence the act or omission of non-keeping of accounts at HO and branch can be regarded as a “series of acts” leading to the very same offence specified in section 71(1)(b) of the Act.
Thus the demand for two separate compounding fees is clearly illegal. This aspect of the case was never brought to the notice of the Hon’ court and hence the decision requires reconsideration.
SHOULD ACCOUNTS BE KEPT IN HO AND BRANCH?
The department in the case relied on the Rule 58(3) to high light the requirement to maintain the accounts at the HO and branch. The author is of the view that there can legitimately be two interpretations possible while reading the said rule which is reproduced above. The rule permits keeping accounts in the place of business or places of business and appears to be an option because of the usage of the word “or” between “place” and “places of business”. Please note that as per the definition of “place of business” a place where the dealer keeps accounts is also a “place of business”. A place of manufacture, a vessel or vehicle, a warehouse and the places mentioned in clauses (a) to (f) of rule 58(3) are all regarded as “place of business”. The rule did not say that accounts should be kept in both the places since if it was the intention it could have used the words at the place AND places of business entered in the certificate of registration. The law never envisages that the dealer should maintain true and complete accounts in all the places of business listed out therein. Is it possible to maintain complete accounts of the dealer in all the places of business simultaneously? The answer is obvious. Therefore it appears that it shall be sufficient compliance with the Rule if accounts are maintained in HO or in branch and not at both the places.
The other possible interpretation may be that the dealer will have to keep complete accounts of the transactions taking place at that particular place and not of all the places of business as for eg accounts of the branch shall contain complete transactions taking place in that branch and not the transactions taking place in the HO.
Anyway, penalty cannot be imposed unless there is clear violation of law. If the law itself is capable of two interpretations out of which one is in favor of the assessee then no penalty should be imposed much less the launching of any prosecution. Thus if prosecution is not warranted there is no circumstances giving rise to the need for composition.
IS RULE 58(3) ULTRA VIRES THE KVAT ACT?
The author is of the opinion that it is ultra vires the Act.
It is to be immediately noted that the section did not provide anything regarding the place where the accounts are required to be kept. The section authorizes the government to prescribe the particulars of other records of the business and nothing more. If that be so how can the government prescribe that accounts should be kept in all the places of business in the absence of an authority flowing from the section or original enactment. Since the section is silent about the place where the accounts are to be kept can the government in the rules make provision for that unless it is specifically authorized? If the government does so it is a case of clear encroachment into the area of legislative power of law making which the constitution has not given to the government. It is the legislature which alone has the power.
Please note that the general rule making power given to the government under section 92 of the Act is also not applicable since that power is to be exercised only to carry out the purposes of the Act. In this case the purpose of the Act is to see that accounts are kept and maintained in the way and manner convenient for the dealers subject of course to the specific requirements and conditions as per the section. If that is the objective then the law should be treated as complied with if accounts are kept in the HO alone or in the branch alone and not at both the places. Hence if that serves the purpose then the rules cannot be said to have been framed to carry out the said purpose which imposes additional conditions.
It is also to be taken note that a rule cannot create a greater burden than the section actually envisages. The section nowhere requires the dealer to keep accounts in all the places of business. If so how can the government in the guise of its rule making power do so?
Hence the author is of the view that the rule 58(3) should be struck down as ultra vires the Act or should be read down omitting those provisions which makes it ultra vires.
CONCLUSION:
The Kerala general clauses Act do not permit double prosecution in respect of the very same offence committed under the very same enactment. All the aspects of the case have not been properly brought to the notice of the Hon’ court. In view of the above detailed legal analysis of the case it is respectfully submitted with great respect to Hon Court that the decision in Tomy Eapan’s case requires reconsideration.
CA SIVADAS CHETTOOR
B.COM FCA LLM
Email: Siva208@yahoo.com
CAclubindia
