Kerala High Court
Deputy Commissioner Of Sales Tax vs F.A.C.T. Ltd. on 18 November, 1985
Equivalent citations: [1986]62STC354(KER)
Author: T.K. Kochu Thommen
Bench: T.K. Kochu Thommen
JUDGMENT K.P. Radhakrishna Menon, J.
1. The revenue is before us. The respondent is an assessee on the file of the Assistant Commissioner of Sales Tax (Assessment), Ernakulam. The assessment years are 1970-71 to 1973-74.
2. The assessee is the manufacturer of various chemical fertilisers. For the purpose of manufacturing chemical fertiliser, the assessee used to purchase naphtha from M/s. Burmah Shell Oil Storage & Distributing Co. of India Ltd. These purchases are covered by declarations given by the assessee in form 18, made mention of in the proviso to Sub-section (3) of Section 5 of the Kerala General Sales Tax Act, for short the Act.
3. The assessing authority accepted the above declarations in form 18, the respondent had given to the Burmah Shell and this resulted in the Burmah Shell being given the concessional rate of tax at 1 per cent as envisaged under Section 5(3) of the Act.
4. It is the case of the revenue that subsequently it was found that the respondent had given form 18 declarations wrongly. The revenue therefore contended that the respondent-assessee must be held to have failed, without reasonable excuse, to make use of goods for the declared purpose, warranting imposition of penalty under Section 46(2) (d) of the Act. In this connection, the revenue brought to the notice of the authorities concerned that the assessee-respondent has no case that naphtha is a component part of the chemical fertiliser manufactured by them though naphtha is used in the manufacture of the fertiliser.
5. The assessing authority accordingly levied penalty on the respondent-assessee for the years in question.
6. The grievance of the respondent that the levy of penalty was unauthorised was not entertained by the Deputy Commissioner (Appeals), Agricultural Income-tax and Sales Tax, Ernakulam, and this resulted in the dismissal of the appeals, the respondent had filed before him against the orders levying penalty. The second appeals filed before the Appellate Tribunal, however, were allowed and these tax revision cases arise out of the order of the Appellate Tribunal dated 4th October, 1976.
7. Disposing of the appeals, the Appellate Tribunal has entered the following findings :
So, actually though naphtha is not used as such but is split up and used in the manufacture of fertilisers and in the cross-examination also, the witness has given the same picture. We do not find any ground to disbelieve him and there is no evidence on record also to the contra.... We are of the view that in the light of the evidence of the Chemical Engineer, quoted above, we have, to hold that naphtha has been used as component part for the manufacture of chemical fertiliser and therefore, in the facts and circumstances of the case, the appellants are justified in using form 18 declaration for effecting their purchase of naphtha. Consequently there has been no misuse of these forms and the appellants cannot be penalised on such ground also. It follows that we have to find this point in favour of the appellants....
It is a fact admitted and proved that 'naphtha' has been used for the manufacture of chemical fertiliser. The appellants have been under the bonafide belief and still hold that 'naphtha' is only a component part of chemical fertiliser.
8. According to the revenue, the following questions of law arise out of the above orders :
(a) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in holding that the assessee-company had used "naphtha" as such as a component part for the manufacture of chemical fertiliser without adverting to the actual process of manufacture involved in this case ?
(b) Has not the Appellate Tribunal gone wrong in the finding and conclusion that naphtha has been used for the manufacture of chemical fertiliser and the appellant-company has a bonafide belief and still hold that naphtha is only a component part of chemical fertiliser and hence there is no contravention of Section 46(2)(d) of the Kerala General Sales Tax Act, 1963 ?
(c) Is it not an error of law on the part of the Appellate Tribunal to accept the evidence of the Chemical Engineer examined before the Tribunal without upsetting the findings and conclusions of the assessing authority as confirmed by the appellate authority that in the actual process of manufacture involved in this case, "naphtha" as such was not used and it could not be found in the final product as a component part, and that there is no misuse of form 18 declaration by the assessee-company ?
9. The question whether the respondent-assessee has committed any offence warranting the levy of penalty, depends upon the interpretation of Section 46(2)(d) of the Act. The section reads :
Section 46 (2). Any person who-
(a) ...
(b) ...
(c) ...
(d) after purchasing any goods in respect of which he has made a declaration under the proviso to Sub-section (3) of Section 5 fails without reasonable excuse to make use of the goods for the declared purpose, or
(e) ...shall, on conviction by a Magistrate not below the rank of a Magistrate of the First Class, be liable to simple imprisonment which may extend to six months or to fine not less than the tax or other amounts due but not exceeding two thousand rupees, or to both.
The section thus creates an offence and imposes a penalty of fine and/or imprisonment on the person who after purchasing any goods in respect of which he has made a declaration under the proviso to Sub-section (3) of Section 5, fails without reasonable excuse to make use of the goods for the declared purpose. It is for the revenue to establish that the respondent-assessee having given the declaration in form 18, has failed without reasonable excuse to make use of the goods for the declared purpose. The declared purpose, as is seen from the relevant provisions of the Act as also the clauses in form 18, is that the respondent-assessee purchased naphtha for use by it as component part of chemical fertiliser specified in the First Schedule in the manufacture "inside the State for sale" of chemical fertilisers. That the respondent-assessee did use naphtha for the manufacture of chemical fertiliser is beyond dispute. The only case of the revenue is that though the respondent-company has used naphtha for the manufacture of chemical fertiliser, naphtha, on an analysis of the chemical fertiliser, is not found as a component of the said product. The revenue therefore submits that the respondent-assessee has committed the offence falling under Section 46(2)(d) of the Act. We are of the view, that Section 46(2)(d) does not warrant the reference stated above. What the section insists is that the revenue must establish that the person, after giving the declaration, failed without reasonable excuse to make use of the goods for the declared purpose. The respondent-assessee in the circumstances of the case cannot be said to have failed without reasonable excuse, to use naphtha as a component part of the chemical fertilisers produced by it. In this connection it is relevant to take note of the following explanation given by the assessee to the notice proposing levy of penalty :
As a matter of fact, naphtha is used as a component part-rather the basic component-for the manufacture of chemical fertilisers by F.A.C.T. The naphtha is first chemically decomposed into its constituent elements, hydrogen being the main. This hydrogen is subsequently made to chemically react with nitrogen to form ammonia and by reaction and chemical combination of this ammonia with other appropriate chemical constituents, the chemical fertilisers like ammonium sulphate, ammonium phosphate, etc., are manufactured in our factory. Further, carbon in naphtha reacts with steam to produce hydrogen and carbon-dioxide. The carbon-dioxide thus obtained is utilised for the production of ammonium sulphate through gypsum process. Hence naphtha is fully utilised as a food stock for the manufacture of chemical fertilisers.
6. That naphtha is not a component part of chemical fertilisers is a rather far-fetched interpretation and patently against all notions hitherto accepted and followed, to our knowledge even by the Revenue Board and the Government. We may in this connection give below the relevant extract from a letter dated 8th December, 1966, from Shri N. Kaleeswaran, Secretary, Board of Revenue, Trivandrum, to Shri M. Dandapani, our then Deputy General Manager:
'In this connection I would, however, point out that in reply to the Government reference in their memo No. 56362/H1/65/RD dated 23-11-1965 the Board of Revenue has already informed the Government that under the existing provisions of law, naphtha can be treated as a component part, used in the manufacture of chemical fertilisers as the term component part as now used in the Kerala General Sales Tax Act will take in naphtha also. It was also pointed out that the F. A. C. T. will be eligible for the concessional rate of 1 per cent as provided in Section 5(3) of the Kerala General Sales Tax Act. This report was sent as early as on 29th December, 1965, but no orders of Government have been received so far in the matter'.
The above explanation would show positively that even assuming that naphtha was found not to be a component part of chemical fertiliser, the assessee could not be said to have failed, without reasonable excuse, to make use of the goods for the declared purpose. The letter of the Board of Revenue extracted in the explanation would show that the assessee-company was, in any event, led to believe that the Board of Revenue which under Section 3 of the Act is empowered to administer the provisions of the Act, has made it clear that under "the existing provisions of law" naphtha can be treated as a component part used in the manufacture of the chemical fertiliser and hence the respondent-assessee is eligible for the concessional rate of tax of 1 per cent as provided for under Section 5(3) of the Act. If that be so, it cannot be said that the respondent-assessee has committed the offence falling under the above section. ?Here italicised.
10. The above section, as already stated, creates an offence and imposes a penalty of fine and imprisonment. The words of the section therefore require to be interpreted strictly and in favour of the subject. It is a cardinal principle of interpretation that penal statutes must be construed strictly. It is also a well-established principle of interpretation that in construing a penal statute, if any doubt arises, the construction more favourable to the subject should be preferred.
11. For the reasons stated above, we are of the view, that the Tribunal was right in holding that the assessee-respondent has not committed the offence falling under Section 46(2)(d) of the Act.
The tax revision cases are therefore liable to be rejected. Accordingly we dismiss the same. No costs.