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CASE NO.: Appeal (civil)  1768 of 2008

PETITIONER: M/s Bharjatiya Steel Industries

RESPONDENT: Commissioner, Sales Tax, U.P.

DATE OF JUDGMENT: 05/03/2008

BENCH: S.B. Sinha & V.S. Sirpurkar

JUDGMENT: J U D G M E N T  

CIVIL APPEAL NO.     1768         OF 2008 [Arising out of  SLP (Civil) No. 17921 of 2004]

S.B. SINHA, J :          1.      Leave granted.

2.      Appellant manufactures Steel Ingots.  It purchased iron scrap from the  Railways in public auction.  Iron scrap is melted and converted into the  finished products.  Appellant had been accorded recognition under Section  4-B (2) of the U.P. Trade Tax Act (for short "the Act") in terms whereof it  became entitled to purchase raw-materials for manufacturing purpose at a  concessional rate of tax.  In the year 1985-86, it purchased 2532.989 M.T. of  iron scrap.  Allegedly, the lots contained various categories of iron scraps as  it was purchased on "as is where is basis".  Appellant allegedly was not  allowed to sort out the scrap at the time of purchase as the conditions  specified therein were : "1.     The material will be sold of "AS IS WHERE  IS" basis. 2.      No sorting, picking whatsoever under any  circumstances will be allowed. 3.      The purchaser will be required to take  delivery of the material from the lots. 4.      The purchaser should inspect the lots prior  to the auction\005"

3.      Appellants stated that about 9.47% of the total amount of scrap  purchased, i.e., 239.966 M.T., could not be utilized by it.  It sold the said  goods to other dealers at a concessional rate of tax.   Inter alia, on the plea that the appellant for the purpose of obtaining  the tax concession in terms of Section 4-B(2) of the Act had furnished an  undertaking whereby and whereunder it undertook to utilize the entire  material for manufacturing purposes, which was breached by reason of the  said transfer, a proceeding for levy of penalty was initiated against it  whereupon a show-cause notice was issued.  Cause was shown by the  appellant on 5.03.1990 contending that the said quantity of scrap being not  usable, it had no other option but to dispose of the same. 4.      By reason of an order dated 26.03.1990, the assessing officer rejected  the said contention.  It levied penalty of Rs.85,619/- on the appellant.  5.      An appeal preferred thereagainst before the Deputy Commissioner  (Appeals) was dismissed by an order dated 8.02.1991.  An appeal to the  Tribunal preferred by the appellant was, however, allowed by an order dated  29.04.1993, stating: "6. Having given our deep consideration and  anxious thoughts to the rival submissions and

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perused the relevant record, we feel that the ld.  Authorities below have not appreciated the facts of  the case in right perspective.  It is not disputed that  the scrap has been purchased by the Appellant in  lots from the railway, in which there remains  existence of several types of scrap.  During the  course of arguments, the ld. Counsel produced  copy of tender invited by Railway Department.   We have gone though this document and we find  that in general conditions of the said document,  there is specific mention in condition No. 1 that the  material will be sold on "AS IS WHERE IS" basis  and in condition No. 2, no sorting, picking  whatsoever under any circumstance will be  allowed.  It is worth consideration that no  purchaser can violate the conditions of purchaser.    The purchases have been made in lots, in which  different types of scrap exists, out of which  maximum usable strap has been consumed by the  Appellant in the manufacture and only that type of  scrap was sold against the Form 3-B which was  not usable in the unit of Appellant in any  condition.  In these circumstances, to our mind,  there appears no malafide on the part of the  Appellant, hence no penalty could be initiated  against the assessee U/s 4-B(6) of the Act\005"

6.      Respondent preferred a revision petition thereagainst before the High  Court which has been allowed by the impugned judgment dated 1.04.2004. 7.      Mr. Puneet Jain, learned counsel appearing on behalf of the appellant,  in support of the appeal, inter alia would submit : (1)     On a plain reading of the provisions of Section 4-B of the Act, it is  evident that in terms of Sub-section (a-1) thereof, a dealer is entitled  to sell the goods to another;   (2)     From a perusal of Sub-section (5) of Section 4-B of the Act, it would  appear that a discretion has been conferred upon the authority to levy  or not to levy penalty and in that view of the matter the High Court  committed a serious error in opining that the principle of mens rea has  no application in the instant case as for technical or venial breaches no  penalty should be levied particularly when the action of the assessee  does not defeat the very object for which the provision has been  inserted.   (4)     In view of the fact that 90% of the scrap purchased by the appellant  has been utilized for the purpose of manufacture of steel ingots, only  because due to certain unavoidable reasons the rest 10% of it could  not be utilized, the appellant could not be said to have any mens rea in  relation thereto. 8.      Mr. Gaurav Banerjee, learned senior counsel appearing on behalf of  the respondent, on the other hand, would contend:  (1)     In a case of this nature as no duty can be imposed, the minimum  penalty which has been prescribed would amount to the duty payable  to the State.   (2)     The High Court, in a case of this nature, had ordinarily been ordering  levy of penalty only twice the amount of the duty keeping in view the  fact that the dealer admittedly has not utilized the goods for  manufacturing purposes wherefor it had furnished an undertaking.  (3)     In any event, as the assessing authority and the appellate authority had  assigned sufficient and cogent reasons for imposition of the penalty  having found that:

(i)     it has not been proved that the goods were not suitable for  manufacturing purposes; (ii)    the goods which were sold to another dealer had been used by  the vendee for manufacturing purposes; (iii)   the appellant could have given an advance intimation to the

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authorities pointing out its genuine difficulty; (iv)    10% of the total stock cannot be said to be a miniscule portion  which can be ignored by the authorities and, thus, there must be  something more than which meets the eye; and (v)     In any event such a process of getting away in regard to  payment of duty should not be encouraged. the impugned judgment should not be interfered with. 9.      Before embarking upon the rival contentions, as noticed hereinbefore,  we may notice the relevant part of Section 4-B of the Act, which reads as  under: "4-B - Specific relief to certain manufacturers - (1)  Notwithstanding anything contained in Sections 3,  3-A, 3-AAAA and 3-D-- (a) Where any goods liable to tax under sub- section (1) of Section 3-D are purchased by a  dealer who is liable to tax on the turnover of first  purchases under that sub-section or where any  goods are purchased by any dealer in  circumstances in which such dealer is liable to  trade tax on purchase of such goods under Section  3-AAAA, and the dealer holds a recognition  certificate issued under sub-section (2) in respect  thereof, he shall be liable in respect of those goods  to tax at such concessional rate, or be wholly or  partly exempt from tax, whether unconditionally or  subject to the conditions and restrictions specified  in that behalf, as may be notified in the Gazette by  the State Government in that behalf ; (a-1) Where any declared goods liable to tax under  sub-section (1) of Section 3-D are sold or supplied  by a dealer, who is the first purchaser thereof, to  another dealer, holding a valid recognition  certificate under sub-section (2), in respect thereof,  the State Government may, subject to such  conditions and restrictions as may be specified by  a notification in that behalf, grant the same relief  as mentioned in clause (a) to such first purchaser: XXX                     XXX                     XXX

(2) Where a dealer requires any goods, referred to  in sub-section (1) for use in the manufacture by  him in the State, of any notified goods, or in the  packing of such notified goods manufactured or  processed by him, and such notified goods are  intended to be sold by him in the State or in the  course of inter-State trade or commerce or in the  course of export out of India, he may apply to the  assessing authority in such form and manner and  within such period as may be prescribed, for the  grant of a recognition certificate in respect thereof,  and if the applicant satisfies such requirements  including requirement of depositing late fee, and  conditions as may be prescribed, the assessing  authority shall grant to him in respect of such  goods a recognition certificate in such form and  subject to such conditions, as may be prescribed.

XXX                     XXX                     XXX  (5) Where a dealer in whose favour a recognition  certificate has been granted under sub-section (2)  has purchased the goods after payment of tax at  concessional rate under this section or, as the case  may be, without payment of tax and has used such  goods for a purpose other than that for which the  recognition certificate was granted or has

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otherwise disposed of the said goods, such dealer  shall be liable to pay as penalty such amount as the  assessing authority may fix, which shall not be less  than the difference between the amount of tax on  the sale or purchase of such goods payable under  this section and the amount of tax payable under  any other provisions of this Act but not exceeding  three times the amount of such difference\005"

10.     It is not in dispute that the appellant was exempted from payment of  the entire amount of tax, subject to the conditions and restrictions specified  in the notification.  For the said purpose, it holds a recognition certificate.   The assessing authority while opining that the appellant should have taken  all precautions to see that the goods it had purchased were capable of being  utilized or consumed for manufacture of ingots, arrived inter alia at the  following finding of fact: (i)     "The trader could have very well properly looked  into the fact at the time of purchase of the goods   as to which of the purchased goods by them would  be fit/ proper for their manufacture, and purchase  of the same should have been carried out through  the assistance of the Form 3-B..." (ii)    "\005Now the conclusion arrives is that the trader  has knowingly carried out purchases of such  goods, without utilizing the same in their  manufacture, they have sold away the same with  the assistance of the Form 3-B, because there is no  such evidence available on the records, by which it  may be proved that the goods sold away was not  worth to be utilized in the manufacture.  Because  the purchases of old iron scrap have been made  against the Form 3-B, and the goods sold away  was also old iron scrap and the iron scrap traders  are utilizing the same in their manufacture,  therefore, their such averment is not proved that  the sold away iron was not fit for being utilized in  their manufacture\005" (iii)   "\005Therefore, the conclusion is arrived at that  these goods were worth being utilized in the  manufacture, but the same had been sold away  knowingly with the intention of escaping the tax  against the Form 3-B.  Therefore, the trader was  under the impression that even if each goods is not  in consonance with the conditions of the  provisions of Section 4-B, even then at the time of  purchases, they could have paid the tax against the  same, but the trader had desired to escape from the  payment of the tax to such kind of sale-purchase  till the decision about the final assessment of the  tax, and from the same, the conclusion is arrived at  that the trader has committed violation of the  provisions of Section 4-B of the Act, knowingly  and in planned manner\005"

       On the said findings, the minimum penalty of Rs. 85,619.00 was  imposed. 11.     The appellate authority agreed with the said finding of the assessing  authority stating:

"\005Clearly, the appellants while violating the  provisions of Section 4(B)(2) of the Act had  carried out the sale of the raw material purchased  against Form 3-B.  Therefore, this offence of the  appellant was naturally punishable under the  provisions of Section 4(B)(5) of the Act.  The

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appellants have committed this sale knowingly  with a view to escape from the liability of the tax.   Had this sale would not have been carried out  knowingly to escape from the liability of the tax,  then the appellants, while extending his  cooperation/ bone fides and informed the learned  Tax Assessing Authority and got inspected the  goods which they intended to sale and that that  material could not be utilized in the manufacturing  of the notified articles produced by them.  But the  appellants have not done so.  The appellants have  also not paid any tax against such sales and have  knowingly sold away the aforesaid goods to other  manufacturers and have also obtained the Form 3- B from them.  In this way, the appellants have also  not paid any tax against such sales\005" (Emphasis supplied)           The Tribunal, however, as noticed hereinbefore, allowed the appeal on  the ground that the appellant did not have any mens rea. 12.     The High Court by reason of its impugned judgment, following some  of its earlier decisions, opined: "This Court in the case of Sai Electrical (P) Ltd.  (supra) has placed reliance upon three judgments  of the Supreme Court given in the case of  Hindustan Steels Limited Vs. State of Orissa AIR  1970 S.C. 253, R.S. Gujarat S.T.O. Vs. Ajeet Mills  Ltd. 1979 U.P.T.C. 171 and Director of  Enforcement Vs. M.C.T. Municipal Corporation  J.T. 1996 (1) S.C. 79 to hold that classic view that  "no mens rea no crime" is not applicable to the  economic crimes and departmental penalties.   Plain language of sub-section (5) of Section 4-B  also does not show that mens rea is an essential  ingredient for imposition of penalty.  The  reasoning given by the tribunal in para 6 of its  order that since the goods were purchased in lots  and there appears no mala fide on the part of the  appellant, for deleting penalty under Section 4- B(5) of the Act cannot be sustained.  It appears  that sub-section (5) to Section 4-B was not brought  to the notice of the tribunal.  The tribunal has  failed to decide the case within the four corners of  Section 4-B(5) of the Act.

       The other reasoning given by the tribunal for  deleting the penalty is that the tax has been paid by  the purchasers to whom the sale of unusable iron  scrap has been made by the appellant.  Substantial  proofs have been produced before it about the  payment of tax.  These factors are hardly germane  for deleting penalty under Section 4-B (5) of the  Act."

13.     It is difficult to accede to the contention of the learned counsel that  Sub-section (a-1) of Section 4-B of the Act would be attracted.  Apart from  the fact that no such contention has been raised before the authorities  concerned, the notification purported to have been issued by the Stage  Government has also not been placed on record.           It is furthermore difficult to accept that in a case of this nature where a  tax benefit had already been granted to a dealer, a further tax benefit would  be granted even if he violates the condition of certificate.   14.     Sub-section (5) of Section 4-B of the Act is in two parts.  Penalty is  levied if the goods have been utilized for the purpose other than that for  which the recognition certificate was granted or the dealer otherwise had

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disposed of the said goods.  The statutory provision speaks of penalty and  not duty.  It is, therefore, difficult to accept the contention of Mr. Banerjee  that the said provision merely purports to recover the duty which was  otherwise payable by the dealer.  Mr. Banerjee himself submitted that the  stage of realization of the duty was over.  If that be so, only penalty could be  levied.  Levy of penalty, ordinarily, unless there exists any statutory  interdict, requires proof of mens rea.           It was so held in Hindustan Steel Ltd. v. State of Orissa [(1969) 2  SCC 627] stating: "8\005An 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\005"  

       Mr. Banerjee, however, urged that Hindustan Steel Ltd. (supra) is not  applicable to the facts of the present case.  We do not agree.   15.     Reliance placed by Mr. Banerjee on R.S. Joshi, S.T.O., Gujarat v. Ajit  Mills Ltd. and another [(1977) 4 SCC 98] has no application in the instant  case.  The question which arose for consideration therein was as to whether  the word ’penalty’ would include forfeiture.  The core question therein was  as to whether the enactment by the State legislature providing that sums  collected by dealers by way of sales tax but are not exigible under the State  law \026 and, indeed, prohibited by it \026 shall be forfeited to the public  exchequer punitively.  It was held that it is permissible, stating : "There is a tendency for valiant tax executives  clothed with judicial powers to remember their  former capacity at the expense of the latter.  In a  welfare state and in appreciation of the nature of  the judicial process, such an attitude, motivated by  various reasons cannot be commended.  The  penalty for deviance from these norms is the peril  to the order passed.  The effect of mala fides on  exercise of administrative power is well- established."

       P.S. Kailasam, J, in his concurrent but separate judgment, stated :

"63. Mr Kaji as well as Mr B. Sen, learned  Counsel for some of the assessees, further brought  to our notice cases in which by the application of  the provisions of the sales tax enactment  considerable hardship and injustice has been  caused to the dealers. It was submitted that where  the assessee innocently collected amounts on the  impression that tax was leviable, the amounts so  collected were forfeited while his obligation to the  purchasers to refund the amounts continued. If the  assessee by a mistake failed to collect tax, from the  purchasers, tax was levied and collected from the

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assessee making him suffer in any event. When  after a costly litigation, the assessee succeeded in  establishing that sales tax cannot be collected on  the railway freight on cement bags or inter-State  sales, the Government promptly forfeited such  amounts. We agree these are instances of hardship  to the assessees and deserve Government attention.  But for that reason the Courts cannot say that the  act is beyond the legislative competence. The fact  that in some cases the dealers are prejudiced would  not affect the validity of the legislation which is  the question we are called upon to decide. On a  careful consideration of the points raised, I am  satisfied that the provisions of Section 37(1) are  within the competence of the State Legislature."

       We are not concerned with such a question here. 16.     Reliance has also been placed on Director of Enforcement v. M.C.T.  M. Corporation Pvt. Ltd. & Others [(1996) 2 SCC 471].  This Court was  dealing therein with Foreign Exchange Regulation Act, 1947.  It was opined  that Section 23(1(a) of the Act confers adjudicatory function on the conduct  of the delinquent, stating : "8. It is thus the breach of a "civil obligation"  which attracts ’penalty’ under Section 23(1)( a ),  FERA, 1947 and a finding that the delinquent has  contravened the provisions of Section 10, FERA,  1947 that would immediately attract the levy of  ’penalty’ under Section 23, irrespective of the fact  whether the contravention was made by the  defaulter with any "guilty intention" or not.  Therefore, unlike in a criminal case, where it is  essential for the ’prosecution’ to establish that the  ’accused’ had the necessary guilty intention or in  other words the requisite "mens rea" to commit the  alleged offence with which he is charged before  recording his conviction, the obligation on the part  of the Directorate of Enforcement, in cases of  contravention of the provisions of Section 10 of  FERA, would be discharged where it is shown that  the "blameworthy conduct" of the delinquent had  been established by wilful contravention by him of  the provisions of Section 10, FERA, 1947. It is the  delinquency of the defaulter itself which  establishes his ’blameworthy’ conduct, attracting  the provisions of Section 23(1)( a ) of FERA, 1947  without any further proof of the existence of "mens  rea". Even after an adjudication by the authorities  and levy of penalty under Section 23(1)( a ) of  FERA, 1947, the defaulter can still be tried and  punished for the commission of an offence under  the penal law, where the act of the defaulter also  amounts to an offence under the penal law and the  bar under Article 20(2) of the Constitution of India  in such a case would not be attracted. The failure  to pay the penalty by itself attracts ’prosecution’  under Section 23-F and on conviction by the  ’court’ for the said offence imprisonment may  follow."

17.     The attention of the Court, therein, however, was not drawn to the  earlier binding precedent in Hindustan Steel (supra).  Furthermore, the  question as to whether mens rea is an essential ingredient or not will depend  upon the nature of the right of the parties and the purpose for which penalty  is sought to be imposed.

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18.     A distinction must also be borne in mind between a statute where no  discretion is conferred upon the adjudicatory authority and where such a  discretion is conferred.  Whereas in the former case the principle of mens  rea will be held to be imperative, in the latter, having regard to the purport  and object thereof, it may not be held to be so.   

       In Dilip N Shroff v. Joint Commissioner of Income Tax, Mumbai &  Anr. [(2007) 6 SCC 329], it was opined : "86. It is of some significance that in the standard  pro forma used by the assessing officer in issuing a  notice despite the fact that the same postulates that  inappropriate words and paragraphs were to be  deleted, but the same had not been done. Thus, the  assessing officer himself was not sure as to  whether he had proceeded on the basis that the  assessee had concealed his income or he had  furnished inaccurate particulars. Even before us,  the learned Additional Solicitor General while  placing the order of assessment laid emphasis that  he had dealt with both the situations. The  impugned order, therefore, suffers from non- application of mind. It was also bound to comply  with the principles of natural justice. (See Malabar  Industrial Co. Ltd. v. CIT)    87. We have, however, noticed hereinbefore that  the Income Tax Officer had merely held that the  assessee is guilty of furnishing of inaccurate  particulars and not of concealment of income;  which finding was arrived at also by the  Commissioner of Income Tax and the Income Tax  Appellate Tribunal."           In Chairman, SEBI v. Shriram Mutual Fund [(2006) 5 SCC 361], this  Court held: "35. In our considered opinion, penalty is attracted  as soon as the contravention of the statutory  obligation as contemplated by the Act and the  Regulations is established and hence the intention  of the parties committing such violation becomes  wholly irrelevant. A breach of civil obligation  which attracts penalty in the nature of fine under  the provisions of the Act and the Regulations  would immediately attract the levy of penalty  irrespective of the fact whether contravention must  be made by the defaulter with guilty intention or  not. We also further held that unless the language  of the statute indicates the need to establish the  presence of mens rea , it is wholly unnecessary to  ascertain whether such a violation was intentional  or not. On a careful perusal of Section 15-D( b )  and Section 15-E of the Act, there is nothing which  requires that mens rea must be proved before  penalty can be imposed under these provisions.  Hence once the contravention is established then  the penalty is to follow."  

19.     It is, therefore, difficult to accede to the contention of Mr. Banerjee  that under no circumstances absence of mens rea would not be a plea for  levy of penalty.  An assessing authority has been conferred with a  discretionary jurisdiction to levy penalty.  By necessary implication, the  authority may not levy penalty.  If it has the discretion not to levy penalty,  existence of mens rea becomes a relevant factor.  We may notice that in the  show cause notice itself, the authorities stated: "You have sold away 239.966 tons of iron and

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steel without payment of any sales tax with the  assistance of the Form No. 3(B), amounting to Rs.  10,73,850.89, whereas the receipt thereof was also  issued under the provisions of Section 4-B on the  basis of full exemption from the tax, with the  assistance of the Form No. 3(B).  In this way, the  material purchased for the purposes of production  under the provisions of Section 4-B, while utilizing  the same for the same purposes, was sold away in  the same condition, which is a violation of the  provisions of Section 4-B, and is punishable under  the aforesaid sub-section of the Act."

20.     The assessing authority, therefore, understood the said provision to  mean that the appellant was liable to be imposed with a punishment.  The  authority did not say that the duty which was otherwise due from the  appellant would be realized.   21.     We, however, are of the opinion that in the facts and circumstances of  this case, existence of mens rea on the part of the appellant is evident. 22.     Ordinarily a dealer must abide by the undertaking given by it.  If it is  not in a position to comply with the requirements contained in the statute, it  is expected that it would inform thereabout to the assessing authority.  It  purchased the goods in the assessment year 1985-86.  It did not disclose as  to when it sold out the goods.  What was its consumption during said  assessment year or the next assessment year had not been disclosed.   As a finding of fact has been arrived at that the dealer had not  furnished any proof in regard to its inability to use it for manufacturing  purposes.  It was obligatory on the part of the appellant as it has special  knowledge in regard thereto to show as to why the entire quantity of goods  could not be utilized.   A finding of fact has also been arrived at by the assessing authority  that the vendee had utilized the self-same goods for manufacturing.  10% of  the purchased goods, namely, 2532.989 M.T. is not such which could be  ignored by the assessing authority.  Although duty was payable thereon, it  may be that the auction of lots was on "as is where is basis", the same would  not mean that a part of it could not be melted for manufacturing the ingots.   If that was the position, it could have informed the authorities in that behalf  even prior to affecting the sale to a third party.   23.     Moreover, the assessing authority as also the appellate authority had  held that the appellant sold the goods knowingly and, it must, therefore, be  inferred that the finding in regard to mens rea had also been arrived at. 24.     In the facts and circumstances of this case, we are of the opinion that  no case has been made out for interfering with the impugned judgment.  The  appeal is dismissed accordingly.  No costs.