Telangana High Court
M/S. Hindustan Lever Limited vs State Of Andhra Pradesh on 8 June, 2018
Author: Sanjay Kumar
Bench: Sanjay Kumar
IN THE HIGH COURT OF JUDICATURE AT HYDERABAD
FOR THE STATE OF TELANGANA AND THE STATE OF
ANDHRA PRADESH
****
TAX REVISION CASE NOS.1 AND 2 OF 2009
M/s. Hindustan Unilever Limited
Bachupally, Ranga Reddy District ... Petitioner
Vs.
State of Andhra Pradesh, rep. by its
State Representative before Sales Tax
Appellate Tribunal, Hyderabad ... Respondent
DATE OF JUDGMENT PRONOUNCEMENT: 8th JUNE, 2018
SUBMITTED FOR APPROVAL:
THE HON'BLE SRI JUSTICE SANJAY KUMAR
AND
THE HON'BLE SRI JUSTICE D.V.S.S.SOMAYAJULU
1. Whether Reporters of Local newspapers Yes/No
may be allowed to see the judgment?
2. Whether copies of the judgment may be Yes/No
marked to Law Reporters/Journals
3. Whether His Lordship wishes to Yes/No
see the fair copy of the judgment?
__________________
SANJAY KUMAR, J
_______________________
D.V.S.S.SOMAYAJULU, J
2
*THE HON'BLE SRI JUSTICE SANJAY KUMAR
AND
THE HON'BLE SRI JUSTICE D.V.S.S.SOMAYAJULU
+ TAX REVISION CASE NOS.1 AND 2 OF 2009
% DATED 8TH JUNE, 2018
# M/s. Hindustan Unilever Limited
Bachupally, Ranga Reddy District ... Petitioner
Vs.
$ State of Andhra Pradesh, rep. by its
State Representative before Sales Tax
Appellate Tribunal, Hyderabad ... Respondent
<Gist:
>Head Note:
! Counsel for petitioner in both cases : Sri S.Dwarakanath
^Counsel for respondent in both cases : Sri J.Anil Kumar
? CASES REFERRED:
1. AIR 1959 SC 24
2. (1976) 4 SCC 147
3. AIR 1985 SC 1293 = 1985 Supp SCC 280
4. 1989 SUPP (1) SCC 487
5. 1900 AC 260, 267
6. (1999) 1 WLR 756
7. (2013) 8 SCC 131
8. (2006) 12 SCC 203
9. 126 Ind Cas 273
10. (1993) 17 APSTJ 98
11. AIR 1970 SC 253
12. 2000 (5) ALD 726
13. AIR 1980 SC 346
14. (2000) 2 SCC 321
15. (2007) 9 SCC 617
16. (2011) 52 APSTJ 147
17. W.P.No.214 of 2016 decided on 23.02.2016
3
THE HON'BLE SRI JUSTICE SANJAY KUMAR
AND
THE HON'BLE SRI JUSTICE D.V.S.S.SOMAYAJULU
TAX REVISION CASE NOS. 1 AND 2 OF 2009
COMMON ORDER
(Per Sri Justice Sanjay Kumar) Hindustan Unilever Limited, formerly known as Hindustan Lever Limited (hereinafter, referred to as HLL), filed these revisions under Section 22(1) of the Andhra Pradesh General Sales Tax Act, 1957 (for brevity, 'the Act of 1957'), aggrieved by the common order dated 24.11.2008 passed by the Sales Tax Appellate Tribunal (STAT), Andhra Pradesh, Hyderabad, in T.A.Nos.103 and 104 of 2001, in relation to the year 1984-85. TREVC No.1 of 2009 pertains to T.A.No.104 of 2001 while TREVC No.2 of 2009 arises out of T.A.No.103 of 2001. T.A.No.104 of 2001, in turn, pertains to assessment of HLL to tax while T.A.No.103 of 2001 deals with levy of penalty on it in relation to the said assessment.
The factual matrix from which these cases arise is as follows: HLL was a registered dealer under the Act of 1957. It however did not disclose the turnover of Rs.89,34,625/- during the year 1984-85 which, according to the Revenue, pertained to purchase of shrimps from Union Carbide India Limited (UCIL), Visakhapatnam. Final assessment was completed on this escaped turnover vide order dated 31.03.1989 of the Commercial Tax Officer (CTO), Secunderabad Division, quantifying the sales tax payable at Rs.5,40,545/- and imposing penalty of Rs.27,02,725/-, at five times the tax component. HLL preferred appeals before the Appellate Deputy Commissioner (ADC), Commercial Taxes, Secunderabad, in Appeal Nos.21 and 28/89-90. By common order dated 24.10.1992, the ADC opined that a fresh probe had to be conducted into the issue of whether the purchase of shrimps by HLL was in the course of export and set aside the assessment. 4 He remitted the matter to the assessing authority for fresh enquiry. As the assessment was set aside and the levy of penalty would depend upon the tax liability, the ADC set aside the penalty proceedings and remanded the penalty issue also, without going into the merits of such levy. Aggrieved by these orders of remand, HLL preferred appeals in T.A.Nos.766 and 767 of 1993 before the STAT. Therein, HLL contended that the ADC had failed to give a finding on the main issue as to whether there was any purchase of shrimps by it at all and even so, such purchase, if any, ought to have been accepted as having been made in the course of export. By order dated 18.03.1996 in T.A.No.766 of 1993, the STAT confirmed the remand of the case to the assessing authority, with the following directions:
'The C.T.O. should thoroughly scrutinize the contents of the various debit notes or invoices covering the disputed turnover for deciding whether thee appellant purchased the shrimps from the UCIL, or merely engaged the latter as its agent for carrying out the trawling operators. The appellant shall promptly produce all relevant books, vouchers and other material as shall be called for by the C.T.O." By a separate order passed in T.A.No.767 of 1993 arising out of the penalty proceedings, the STAT also upheld remand of the penalty issue.
Pursuant to the remand, the matter was taken up by the CTO, Hydernagar Circle, who issued notice dated 15.12.1998 calling upon HLL to submit relevant books of accounts. Therein, the CTO observed that HLL had produced the correspondence made by it with the assessing authority; copies of debit notes raised by UCIL (Marine Products Division); and copies of the purchase orders from foreign buyers. However, with a view to give another opportunity to HLL, as directed by the STAT, the CTO asked HLL to submit its cash book for the period in question; the party ledger with special reference to UCIL; payment vouchers/details by HLL to UCIL; related agreements to substantiate HLL's version that it had entered 5 into an agency transaction for carrying on trawling operations; any specific agreement with UCIL, in the event of catching products/material other than shrimps in the process of the operations and, if so, the means of disposal of such material by HLL; reasons for not showing the turnovers relating to purchase of shrimps in the books of accounts and monthly returns; and the purchase register for the period in question. The CTO further stated that these documents relating to the period were essential to redo the assessment pursuant to the directions of the STAT and to establish the real transaction between HLL and UCIL. HLL was requested to submit the documents within 7 days.
It is an admitted fact that HLL, despite receipt of the aforestated notice, submitted copies of the very same documents which had been furnished to the assessing authority earlier and no new documents were produced by it to substantiate that there was no purchase of shrimps by it. The CTO, Hydernagar Circle, therefore opined that HLL had no documentary evidence to prove that there was no purchase of shrimps. The CTO referred to the earlier findings of the assessing authority, which were to this effect: HLL entered into an agreement with UCIL titled 'Agreement for sale of catch' and the catch was nothing but shrimps. In the Memorandum of Understanding (MOU), there was no mention that HLL was holding orders from foreign buyers for purchase of shrimps and that it was intending to take trawlers on charter from UCIL for catching shrimps. Clause 3 of the agreement also stated that HLL would co-operate with UCIL in the operation of the trawlers and would purchase all the catch from the four trawlers as per Clause 8 thereof. Sale of shrimps was mentioned in the agreement in Clause 10 also.6
Referring to the aforestated earlier findings of the assessing authority, the CTO, Hydernagar Circle, held that as HLL deliberately suppressed the turnover of Rs.89,34,625/- pertaining to purchase of shrimps in its returns though it was taxable in its hands and as UCIL had raised debit notes issued each month against HLL with the endorsement 'Amount payable by you for sale of catch as per Agreement dated 12.10.1984', it was proved beyond doubt that HLL had paid sums for purchase of shrimps only as it could not substantiate its argument to the contrary with documentary evidence. As this turnover was liable to suffer sales tax in the hands of HLL, the C.T.O., Hydernagar Circle, determined the total tax liability in respect thereof at Rs.5,40,545/-. This assessment was made under Order dated 28.12.1998 and demand notice of the same date was issued to HLL requiring it to pay the said sum towards the tax liability. Another order was passed by him imposing Rs.24,07,725/-
towards the balance penalty payable by HLL for the year 1984-85, after taking into account the sum of Rs.3,00,000/- already paid.
Aggrieved by these orders, HLL preferred Appeal Nos.R/395/98-99 and R/396/98-99 before the ADC (Commercial Tax), Hyderabad Rural Division, Hyderabad. By common order dated 13.10.2000, the ADC dismissed both appeals. Therein, the ADC noted that HLL had merely submitted the documents originally submitted by it before the assessing authority at the time of the earlier final assessment and had not produced any fresh documentary evidence, as directed by the STAT. On merits, the ADC found that HLL had entered into an agreement with UCIL and therein, there was no mention of any intention to take trawlers on charter from UCIL for catching shrimps. Clause 3 of the agreement showed that HLL was to co-operate with UCIL in the operation of trawlers and 7 purchase all the catch from the four trawlers in terms of Clause 8 thereof. UCIL also raised debit notes against HLL that the amount payable to it was for sale of catch as per the agreement dated 12.10.1984. These documents, per the ADC, indicated that there was sale of shrimps by UCIL to HLL. As no contrary evidence was adduced by HLL to disprove this transaction, the ADC rejected HLL's appeal vis-à-vis the tax component. Further, as HLL had failed to disclose the disputed turnover at the time of assessment, the ADC opined that it amounted to suppression, attracting levy of penalty under Section 14(8) of the Act of 1957, and confirmed the penalty. In consequence, both the appeals were dismissed. It is against this common order of the ADC that T.A.Nos.103 and 104 of 2001 were filed by HLL before the STAT.
Significantly, during the hearing of the subject T.As. by the STAT, HLL gave up its contention that purchase of shrimps, if any, was liable to be exempted under Section 5(3) of the Central Sales Tax Act, 1956, on the ground that it related to export turnover.
In the first instance, T.A.Nos.103 and 104 of 2001 were heard by the Bench comprising Hon'ble Sri Justice P.Lakshmana Reddy (Retired), Chairman, and Sri S.A.Kareem, Departmental Member. By separate orders dated 16.02.2005, the members of the Bench differed with each other. The Chairman opined that the notice dated 15.12.1998 issued by the CTO did not satisfy the mandatory requirement of issuing a pre-assessment show-cause notice before final assessment and therefore, the final assessment order dated 28.12.1998 was not sustainable. As regards the levy of penalty, the Chairman opined that the CTO completely misunderstood the observations of the STAT and as he did not issue any show-cause notice to HLL prior to passing such an order, the penalty of 8 Rs.27,02,725/- imposed upon HLL was also unsustainable in law. The Chairman further pointed out that neither of the assessing authorities, be it during the first assessment or the subsequent one, found that any particular quantity of shrimps was purchased by HLL from UCIL and as only purchase of shrimps was taxable and fish were exempted, there could be no guarantee that the entire catch delivered by UCIL to HLL would be only shrimps and not other marine life. As the burden was upon the Revenue to prove the taxable event, which was the purchase of shrimps alone, the Chairman concluded that the Revenue had failed at the threshold to establish the taxable event. On facts, the Chairman held that HLL had chartered the trawlers belonging to UCIL and there was no sale transaction envisaged by and between the parties in so far as the catch was concerned. As regards the penalty imposed, the Chairman opined that it could not be concluded that HLL suppressed the subject turnover with the deliberate intention of avoiding tax but as it had failed to file a return, which amounted to negligence, HLL was held liable to pay penalty of Rs.30,250/-. The rest of the penalty imposed was set aside.
The Departmental Member, on the other hand, observed that HLL had failed to reflect the purchase value of shrimps in its statutory returns and the same came to light only when the business premises of UCIL were inspected and the transaction between the parties was detected. Further, taking note of the changing stands of HLL as regards the issue of export of shrimps, the Departmental Member opined that it was necessary to elicit the truth underlying the transaction. On facts, the Departmental Member held against HLL for its failure to produce its books of account and other material as directed by the STAT earlier. He concluded that the agreement between the parties clearly brought out that UCIL sold the 9 catch, including the shrimps, to HLL. He accordingly confirmed the order of the ADC, disagreeing with the Chairman.
Thereupon, the matter was heard by a three member Bench of the STAT comprising a new Chairman, an Accountant Member and a Departmental Member. HLL reiterated that it did not wish to press the point regarding the purchase of shrimps, if any, being made in the course of export. The only point urged by HLL was that there was no purchase of catch from UCIL at all. HLL once again contended that the transaction was for charter of the trawlers of UCIL and therefore, there was no question of any purchase of the catch separately. The Bench opined that the documents, viz., the MOU and the agreement dated 12.10.1984, clearly demonstrated that what was intended thereunder was sale of the catch by UCIL to HLL. The debit notes raised thereafter by UCIL against HLL also bore the element of sale. In the light of these documents, the Bench opined that it was for HLL to disprove the inference drawn by the Revenue therefrom to the effect that there was sale of shrimps by UCIL to HLL. Holding that the contract between the parties in its totality clearly indicated sale of the catch and as HLL failed to produce its books of account or any other documentary evidence, the Bench opined that there was no necessity for the CTO to issue a fresh show-cause notice, as the matter had been remitted for fresh consideration. The Bench also found no grounds to interfere with the penalty, as HLL had willfully suppressed the transaction and was caught out only when documents were procured from UCIL by the Revenue. Both the appeals were accordingly dismissed vide the common order dated 24.11.2008, presently under revision.
At the time of admission of these revisions, the questions of law raised were not determined under Section 22(4) of the Act of 1957. Upon 10 consideration of the record and the arguments of the learned counsel for the parties, this Court frames the following questions of law:
(1) Whether the understanding of the STAT and the Revenue as to the true import of the transaction entered into by and between the parties as per their MOU and agreement dated 12.10.1984 is correct and proper?
(2) Whether upon true and proper construction and interpretation of the MOU and agreement dated 12.10.1984, the transaction thereunder can be held to be for purchase of shrimps by HLL from UCIL or whether it is a mere rental agreement for lease of trawlers?
(3) Whether the fixed amount of consideration payable by HLL under Clauses 8(a) and 8(b) of the agreement dated 12.10.1984 can be taken to be payment by it for purchase of shrimps or towards lease rental along with operating expenses?
(4) Whether the failure to mention the quantity and quality of the shrimps in the MOU and agreement dated 12.10.1984 negates a conclusion being drawn to the effect that the transaction was one for purchase of shrimps by HLL from UCIL?
(5) Whether the failure of the Revenue to issue a show-cause notice to HLL prior to assessment to tax pursuant to the remand by the STAT is fatal?
(6) Whether the failure of the Revenue to issue a show-cause notice prior to levy of penalty and passing the orders of assessment and penalty simultaneously is fatal?
(7) Whether the failure on the part of the HLL in producing documentary evidence afresh after remand by the STAT has any impact on its case and whether any adverse inference can be drawn from such failure?
It would be apposite at this stage to examine the transaction between HLL and UCIL, as borne out by the MOU and agreement entered into by and between them. Both these documents are dated 12.10.1984, but the MOU preceded the agreement. The MOU stated to the following effect: HLL was desirous of undertaking deep sea trawling operations for its marine products business and was interested in taking trawlers on charter and UCIL had a fleet of trawlers of different sizes and had experience and expertise in deep sea trawling operations. They therefore recorded their intention to enter into a commercial agreement which would, inter alia, incorporate the following terms and conditions. 11
1. HLL will take on charter six indigenously built trawlers from UCIL on or about April 1985.
2. The tenure of the charter will be initially for a period of five years. The parties may extend the charter for another period of five years on terms and conditions to be mutually agreed upon at the expiry of the first charter period.
3. HLL will appoint a marine surveyor to ensure maintenance of class of vessels in accordance with ABS classification prior to the commencement of the lease agreement.
4. In consideration for the charter, HLL will pay to UCIL rental and other charges as may be agreed upon.
5. Both HLL and UCIL will obtain all necessary approval from their shareholders, Government and other statutory authorities for the arrangement contemplated herein. It is understood between the parties that this Memorandum of Understanding will remain in force upto May 31, 1985, unless extended for a further period by mutual agreement. It was further stated that the MOU only summarized the intentions and verbal discussions between HLL and UCIL and that it was the intent of the parties to enter into a formal contract which would embody a charter hire and the usual terms and conditions. The 'Agreement for sale of catch' was executed by the parties on the very same day, 12.10.1984. Therein, referring to the MOU of even date in respect of the charter of six indigenously built trawlers and the discussions held, wherein HLL desired that UCIL operate a minimum of four trawlers out of six trawlers and sell the entire catch to HLL, UCIL confirmed the terms, as agreed upon between them during the discussions. Thirteen clauses find mention thereunder, being the terms of the agreement. The relevant clauses may be noted. Clause 1 detailed that the tenure of the agreement would be from 15.10.1984 to 30.04.1985. Clause 2 recorded that it was understood and agreed that UCIL would operate the said trawlers during the period of the agreement in a prudent and businesslike manner and would be responsible for complying with all statutory rules and regulations in connection with the operation of the said trawlers in their capacity as owners. UCIL also agreed to take all such steps, including maintenance 12 and repairs of the trawlers, manning of crew, provision of adequate personnel & shore support facilities, provision of spare parts and stores, to ensure that operation of the trawlers was carried out in a smooth and optimal manner. Clause 3 provided that HLL would co-operate with UCIL in the operation of the trawlers and purchase all the catch from the four trawlers under the terms covered in Clause 8 of the agreement. Further, during this period, UCIL would share with HLL the data collected during their trawling operations over the years to enable HLL to benefit from the same and optimize economies of trawler operations. Clause 4 stated that HLL was at liberty to post two managers to gain first hand understanding and training from UCIL personnel on trawling operations. UCIL was to arrange for its staff to provide all necessary help and assistance for this purpose. Clause 8 is relevant and is extracted hereunder:
'(8) In consideration of UCIL selling the catches to HLL as above, HLL agrees to make the following payments to UCIL every month:
a) A fixed sum of Rs.3,55,000 for 4 trawlers per month to be paid in advance provided that prorate adjustment will be made with reference to the sailing date of each trawler in the first month of operation.
b) In addition HLL will reimburse UCIL all actual operating expenses including the following, viz.
Cost of HSD oil, lubricating oil, spare parts used in the repair of trawlers, nets and gears, salary and other payments (including incentives) paid to the Master and the crew, supplies including provision for the crew, paints, ropes, refrigerant pilotage, berthing charges and port dues relating to the operation of the said trawlers. In respect of these actual expenses UCIL shall submit invoices to HLL within 7 days of the expiry of each month and HLL agrees to make the payments within 7 days of the submission of the invoices.
c) All taxes and duties in respect of the sale transactions hereunder will be to HLL's account.' Clause 9 provided that HLL would not be liable to pay UCIL any charge or compensation other than payment for the catch, as determined 13 in the manner set out in Clause 8, and for this purpose, UCIL would keep for HLL detailed records of all costs incurred on the trawlers and maintain necessary accounting staff to compile these records. Clause 10 stated that it was understood and agreed that HLL would purchase the entire catch from the trawlers in their capacity as a recognised Export Trading House and would process the catch and export the entire processed material in its own name. Clause 12 is also relevant and is extracted hereunder:
'(12) It is agreed between HLL and UCIL that HLL will communicate their final decision about their intention to take the 6 trawlers on 5- year lease as contemplated in the said Memorandum of Understanding dated 12-10-1984 on or before 15-3-1985. In the event HLL confirms their intention to enter into the lease agreement for a 5-year period the said lease arrangement would commence from 1-5-1985 or the day following the extended period of this arrangement as stated hereafter. If HLL does not communicate their final decision to take the trawlers on lease by 15-3-1985 the arrangement set out herein shall stand automatically extended beyond 30-4-1985 on the same terms and conditions and shall remain in force for a period of six weeks from the date HLL communicate their decision. However, under no circumstances HLL shall be entitled to delay their decision beyond 31-5-1985 and in any event the extended arrangement shall come to an end on 15-7-1985.' Sri S.Dwarakanath, learned counsel, would rely on the invoice dated 25.10.1984 raised by UCIL in the name of HLL which was worded differently from later debit notes. Therein, details were mentioned as to the catch during September, 1984. It stated to the effect that 9,535 Kgs. of various kinds of shrimps unloaded in September, 1984 was sold to HLL for Rs.5,00,000/-. This invoice is sought to be relied upon by juxtaposing it with the debit note dated 23.11.1984 and debit notes of later date. However, it may be noted that prior to the MOU and agreement dated 12.10.1984, HLL and UCIL had entered into MOU dated 24.03.1984 on the same subject. Therefore, the invoice relating to September, 1984, was relatable to the earlier MOU, which has not even been produced. The earlier MOU dated 24.03.1984 entered into by HLL with UCIL seems to 14 have been on different lines and that is the reason why the invoice read differently. The mere fact that no mention was made in the later debit notes as to the details of the catch does not assume the significance that the learned counsel would suggest it have.
The first debit note raised by UCIL against HLL, pertaining to the agreement dated 12.10.1984, was dated 23.11.1984. It reads as under:
23rd November, 1984 DEBIT NOTE Messers, Hindustan Lever Limited, Lever House, 165/166 Backbay Reclamation, BOMBAY - 400 020 Debit Note No: HLL/3/84 Date :23/11/84 Account Payable by you for Sale of Catch as per agreement Dated 12/10/84 for the month October, 1984.
A) As per Clause 8(a) of the Agreement ... Rs.3,06,331/- B) As per Clause 8(b) of the Agreement ... Rs.4,22,721/-
Total Rs.7,29,052/-
LESS:Advance received from you on 26/10/84 Rs.3,55,000/-
Balance due from you Rs.3,74,052/-
(Rupees Three Lakhs, Seventy Four Thousand & Fifty two only).
M. N. MURTY, ACCOUNTS MANAGER, UNION CARBIDE INDIA LTD.
MARINE PRODUCTS DIVISION The later debit notes dated 05.12.1984 (for the month of November, 1984), 31.12.1984 (for the month of December, 1984), 01.02.1985 (for the month of January, 1985), 02.03.1985 (for the month of February, 1985) and 03.04.1985 (for the month of March, 1985) raised by UCIL against HLL run on the same lines. Significantly, all of them 15 detailed that the amount payable by HLL was for sale of the catch as per the agreement dated 12.10.1984.
Sri S.Dwarakanath, learned counsel, would point out that these debit notes merely required payment to be made as per Clauses 8(a) and 8(b) of the agreement dated 12.10.1984 and disclose that a lumpsum amount of Rs.3,55,000/- was paid for the four trawlers along with the operating expenses. He would further point out that under Clause 8(a), a fixed sum of Rs.3,55,000/- was to be paid for the four trawlers per month, which was attributable to the lease thereof, and the operating expenses borne by the UCIL for such trawling operations were to be reimbursed by HLL under Clause 8(b). He would therefore argue that there was no component payable out of these amounts towards purchase of the catch and notwithstanding the misnomer in the debit notes that the amounts were payable for sale of catch, there was no actual payment for purchasing the catch. He would further state that Clause 12 of the agreement dated 12.10.1984 clearly demonstrated the actual nature of the transaction, i.e., the lease of the trawlers by HLL.
The case therefore turns upon the construction and interpretation of the MOU and agreement between the parties to get to the real nature of the transaction. It would be relevant before that to consider precedential wisdom on the law of interpretation.
In RADHA SUNDAR DUTTA V/s. MOHD. JAHADUR RAHIM1, the Supreme Court observed that it is a settled rule of interpretation that if there be two admissible constructions of a document, one of which will give effect to all the clauses therein while the other would render one or more of them nugatory, it is the former that should be adopted on the 1 AIR 1959 SC 24 16 principle expressed in the maxim 'ut res magis valeat quam pereat' as what has to be considered is whether it is possible to give effect to all the clauses in question.
In UNION OF INDIA V/s. D.N. REVRI AND CO.2, the Supreme Court observed that a contract is a commercial document between the parties and it must be interpreted in such a manner as to give efficacy to the contract rather than to invalidate it and it would not be right while interpreting a contract to apply strict rules of construction which are ordinarily applicable to formal documents. It was further observed that the meaning of such a contract must be gathered by adopting a commonsense approach.
In STATE OF ORISSA V/s. TITAGHUR PAPER MILLS CO.
LTD.3, the Supreme Court observed that a document cannot be interpreted by picking out only a few clauses ignoring other relevant ones.
In PROVASH CHANDRA DALUI V/s. BISWANATH BANERJEE4, the Supreme Court affirmed that the best interpretation is made from the context and every contract is to be construed with reference to its object and the whole of its terms. It was observed that the whole context must be considered to ascertain the intention of the parties. Reference was made to the observations of Lord Davey in N.E.RAILWAY CO. V/s. HASTINGS5 that the deed must be read as a whole to ascertain the true meaning of its clauses and the words of each clause should be so interpreted as to bring them into harmony with the other provisions of the deed if that interpretation does no violence to the meaning of which they are naturally susceptible. The Supreme Court 2 (1976) 4 SCC 147 3 AIR 1985 SC 1293 = 1985 Supp SCC 280 4 1989 SUPP (1) SCC 487 5 1900 AC 260, 267 17 further held that if the words in the contract are clear, there is very little that the Court can do about it and in the construction of a written instrument, it would be legitimate in order to ascertain the true meaning of the words used and if that be doubtful, it would be legitimate to have regard to the circumstances surrounding their creation and the subject matter for which they were designed and intended they should apply.
In SOCIETY OF LLOYD'S V/s. ROBINSON (APPELLANT AND CROSS RESPONDENT)6, the House of Lords observed that loyalty to the text of a commercial contract, instrument, or document, read in its contextual setting, is the paramount principle of interpretation but in the process of interpreting the meaning of the language of a commercial document, the Court ought generally to favour a commercially sensible construction and the reason for this approach is that a commercial construction is likely to give effect to the intention of the parties. It was further observed that words therefore ought to be interpreted in the way in which a reasonable commercial person would construe them.
In SATYA JAIN V/s. ANIS AHMED RUSHDIE7, the Supreme Court opined as under:
'33. The principle of business efficacy is normally invoked to read a term in an agreement or contract so as to achieve the result or the consequence intended by the parties acting as prudent businessmen. Business efficacy means the power to produce intended results. The classic test of business efficacy was proposed by Bowen, L.J. in Moorcock7. This test requires that a term can only be implied if it is necessary to give business efficacy to the contract to avoid such a failure of consideration that the parties cannot as reasonable businessmen have intended. But only the most limited term should then be implied--the bare minimum to achieve this goal. If the contract makes business sense without the term, the courts will not imply the same. The following passage from the opinion of Bowen, L.J. in Moorcock7 sums up the position: (PD p.
68) 6 (1999) 1 WLR 756 7 (2013) 8 SCC 131 18 "... In business transactions such as this, what the law desires to effect by the implication is to give such business efficacy to the transaction as must have been intended at all events by both parties who are businessmen; not to impose on one side all the perils of the transaction, or to emancipate one side from all the chances of failure, but to make each party promise in law as much, at all events, as it must have been in the contemplation of both parties that he should be responsible for in respect of those perils or chances." ' In the light of the aforestated principles, the issue essentially boils down to the transaction entered into by HLL with UCIL and what they intended by it. HLL would claim that it merely chartered UCIL's trawlers on lease and paid a lumpsum amount per month, which was inclusive of the lease rental, and in consequence, UCIL delivered the month's catch to it.
The Revenue, on the other hand, would have it that HLL purchased the catch from UCIL and was liable to pay tax thereon.
Shrimps and Prawns are crustaceans. They belong to the same family. Section 5 of the Act of 1957 authorizes levy of tax on sales or purchases of goods and states to the effect that every dealer shall pay tax each year under the said Act on every rupee of his turnover of sales or purchases of goods in each year, irrespective of the quantum of his turnover, at the rates of tax and at the points of levy specified in the Schedules. The Second Schedule to the Act of 1957 deals with goods in respect of which single point purchase tax is leviable under Section 5. Entry 19 in the Second Schedule deals with prawns, other than prawn seed mentioned in the First Schedule, lobsters, frogs and frog legs. The point of levy is stipulated to be at the point of first purchase in the State and the rate of tax is 8 paise in the rupee.
It is significant to note that though HLL construes its transaction with UCIL as one for trawling operations only, UCIL did not understand it to be so. The debit notes raised by UCIL against HLL put this beyond 19 doubt. Further, even the agreement dated 12.10.1984 does not help HLL in this regard. Though the MOU dated 12.10.1984 spoke only of the charter of UCIL's trawlers by HLL, the agreement dated 12.10.1984, which was subsequent to the said MOU, detailed the terms and conditions of their transaction. Clause 3 therein categorically stated that HLL would co-operate with UCIL in the operation of the trawlers and shall purchase all the catch from the four trawlers in terms of Clause 8 of the agreement. Clause 8, which has been extracted hereinabove, detailed the payments to be made by HLL and begins with the sentence 'In consideration of UCIL selling the catches to HLL as above, HLL agrees to make the following payments to UCIL every month:'. Thereunder, in sub-clause (a), HLL agreed to pay a fixed sum of Rs.3,55,000/- for the four trawlers per month and under sub-clause (b), it agreed to reimburse UCIL for all actual operating expenses. Sub-clause (c) made it clear that all taxes and duties in respect of the 'sale' transactions would be to HLL's account. Clause 9 of the agreement is equally damaging to HLL's claim of the transaction being one for mere rental of trawlers. Therein, the parties recorded that HLL was not liable to pay UCIL any charge or compensation other than payments for the catch as set out in Clause 8. Clause 10 recorded that it was agreed that HLL would purchase the entire catch from the trawlers and would process the same and export it in its own name.
Construction of the agreement, as projected by Sri S.Dwarakanath, learned counsel, would mean that HLL chartered UCIL's trawlers on lease, paid the entire operational expenses, inclusive of the crew who would be provided by UCIL, and paid a lumpsum amount of Rs.3,55,000/- towards the lease rental for the four trawlers per month, and by way of such 20 trawling operations during the month, whatever fish, shrimps or other marine life were caught would belong to HLL itself.
However, in the light of the aforestated clauses, it is clear that HLL did purchase the catch each month from UCIL and the consideration therefor was included in the lumpsum payment of Rs.3,55,000/-. Though its claim was that the entire fixed sum of Rs.3,55,000/- was only towards rental for the four trawlers, no evidence was let in at any stage, despite the matter being kept pending for over three decades, as to what was the prevailing rental payable for a trawler during the relevant period in 1984-
85. Therefore, there is no material before this Court to test this claim. In any event, if the claim of the HLL is to be accepted that the entire monthly payment was only towards the lease rental, the implication thereof would be that HLL merely leased the trawlers and the catch of fish, shrimps and other marine life vested in it at the outset itself. However, the agreement does not support this interpretation. Had it been so, the aforestated clauses in the agreement would not have found place therein. That apart, it is also to be noted that had HLL leased the trawlers and the catch during such trawling operations was owned by it, it would not have left the custody and safe-keeping of the catch to UCIL and its own crew. As a prudent business entity, HLL would have put in place its own people on the trawlers to oversee, supervise and index the fishing operations so as to prevent any pilferage by UCIL's crew. Significantly, though Clauses 4 and 5 of the agreement spoke of HLL posting two of its managers on the trawlers, the purpose thereof was only to enable them to get a first hand understanding and training from UCIL personnel as to trawling operations. They were not there for the purpose of keeping stock of the catch during such trawling operations.
21
It may also be noted that though the MOU dated 12.10.1984 specifically spoke of charter UCIL's six trawlers by HLL, there is no such indication in the relevant clauses in the agreement for sale of catch dated 12.10.1984. In this regard, Clause 12 of the agreement dated 12.10.1984 assumes significance as it stipulates that the final decision about taking UCIL's six trawlers on five year lease as contemplated in the MOU dated 12.10.1984 is to be taken by HLL on or before 15.03.1985, i.e., just before the expiry of the tenure of the agreement dated 12.10.1984. This clause therefore manifests that the intention recorded in the MOU as to the lease of trawlers is to come into effect only after expiry of the tenure of the agreement dated 12.10.1984 and therefore, the said agreement records a transaction different in nature from that contemplated in the MOU. In effect, the agreement dated 12.10.1984 seems to stand independently and the transaction thereunder does not take its colour completely from the MOU. The terms in the agreement, already discussed supra, clearly bear out that what was agreed upon was the purchase of catch by HLL from UCIL from only four out of its six trawlers.
Further, the fact cannot be lost sight of that though UCIL's debit notes always recorded that the amount was payable by HLL for sale of the catch as per the agreement dated 12.10.1984, HLL never objected to this nomenclature. This, in itself, is sufficient to indicate that HLL did not contest the nature of this sale transaction and the consideration paid.
It is clear from Clause 8(a) of the agreement dated 12.10.1984 that the parties adopted the method of a lumpsum consideration being paid by HLL to UCIL. This sum of Rs.3,55,000/- was inclusive of the lease rental payable by HLL to UCIL for the trawlers and also the purchase price for the shrimps delivered by UCIL to HLL during that month. As no material is 22 forthcoming as to the lease rental component out of the monthly lumpsum payment and there is no evidence adduced by HLL as to what was the prevailing lease rental for trawlers at that point of time, an adverse inference would necessarily have to be drawn against it. The entire monthly payment would therefore have to be appropriated towards the purchase of the shrimps. Sri S.Dwarakanath, learned counsel, would argue that as the catch would not comprise only shrimps and would also include fish of various varieties, the entire amount paid cannot be apportioned to purchase of shrimps, whereby Entry 19 of the II Schedule to the Act of 1957 would come into operation. No doubt, the catch would not only have included shrimps but also fish and other sea creatures, but the interest of HLL was only in the shrimps, as is evident from the agreement dated 12.10.1984, and therefore, it must be construed that the payment made by it was only for the shrimps and the rest of the catch was a bounty. It was for HLL to produce its books of account before the assessing authority in this regard. Despite the many opportunities given to it to do so, HLL failed to produce any material. Therefore, an adverse inference necessarily had to be drawn against HLL for its failure and in consequence, the assessing authority was at liberty to presume that the entire amount was paid for purchase of shrimps/prawns.
As regards the issue of an adverse inference, useful reference may be made to COMMISSIONER, SALES TAX V/s. M/S.MOHAN BRICKFIELD8, wherein the Supreme Court observed that production of the books of accounts at the time of the assessment would not take away the effect of non-production of such books at the time of the survey and such non-production is a relevant factor which can be considered by the 8 (2006) 12 SCC 203 23 assessing officer while looking into the issue as to whether the books of accounts should be accepted as having been maintained in the regular course of business. It was further observed that it is incumbent upon the assessee to offer a plausible explanation as to why it did not produce the books at the time of the survey and the burden is on him to show as to why no adverse inference should be drawn. On parallel lines, in T.M.M. SANKARALINGA NADAR V/s. COMMISSIONER OF INCOME-TAX9, a Full Bench of the Madras High Court observed that when accounts were called for during the course of the enquiry and the same were not produced, the assessing authority was entitled to draw an adverse inference owing to such non-production. Hence, an adverse inference was justified when HLL failed to comply with the direction of the STAT to produce documentary evidence as called upon by the assessing authority.
Another issue that is raised by HLL is that it was for the Revenue to prove the taxable event but the assessment proceeded only on the failure of HLL to produce its books of account, thereby placing the burden upon it. The failure to issue a show-cause notice prior to the fresh assessment assumes significance in the context of this argument. It may however be noticed that the whole issue came to light only because of the material found by the Revenue during inspection of UCIL's premises and the documents found were sufficient to prove the taxable event viz., the agreement dated 12.10.1984 and the debit notes raised by UCIL against HLL. This material was sufficient to prove that HLL had paid money to UCIL for purchase of shrimps/prawns. Thereupon, the onus shifted at that stage to HLL to disprove the sale transaction. It was in this context that the matter was remanded by the STAT, vide order dated 18.03.1996 in 9 126 Ind Cas 273 24 T.A.Nos.766 and 767 of 1993. Therein, the STAT directed HLL to produce the relevant books containing entries relating to the transaction with UCIL, covered by the agreement dated 12.10.1984, and the CTO was directed to give sufficient opportunity to HLL, analyse the entries in the relevant books of accounts in connection with the agreement and come to a proper conclusion. The CTO was further directed to thoroughly scrutinize the contents of various debit notes or invoices covering the disputed turnover for deciding whether HLL purchased shrimps from UCIL or merely engaged it as its agent for carrying out trawling operations. The STAT observed that HLL shall promptly produce all relevant books, vouchers and other material as shall be called for by the CTO. It is therefore clear that the taxable event already stood established and it was for the purpose of enabling HLL to disprove it that an opportunity was given to it to produce books of account, vouchers and such other material as it deemed fit. However, HLL did not take advantage of such opportunity. It is therefore erroneous on its part to now contend that the Revenue did not discharge its initial burden of proving the taxable event. Given the fact that the fresh assessment was pursuant to an order of remand and both sides were well aware of the parameters of such remand, the Revenue was not required to put HLL on notice once again. Ergo, failure on the part of the Revenue to issue a fresh show-cause notice is inconsequential.
Sri S.Dwarakanath, learned counsel, also attacked the levy of penalty on the ground that no separate show-cause notice was issued prior thereto and as the penalty order was issued along with the assessment order. However, these contentions are also without merit. It may be noted that Section 14(2) of the Act of 1957 states that when making an assessment to the best of judgment under sub-section (1) 25 thereof, the assessing authority may also direct the dealer to pay in addition to the tax assessed a penalty as specified in sub-section (8) thereof on the turnover that was not disclosed by the dealer in his return. Section 14(4-B) provides that before issuing any direction for the payment of any penalty under sub-section (2), the assessing authority shall give the dealer a reasonable opportunity to explain the omission to disclose the turnover and shall make such enquiry as he considers necessary. Section 14(8) states that the penalty levied under sub-section (2) thereof shall not be less than three times but may extend to five times the tax due in a case where the assessing authority is satisfied that the failure of the dealer to disclose the whole or part of the turnover or any other particulars correctly was willful and shall not exceed one half of the tax due in a case where such failure was not willful. The proviso thereto states that where such failure occurred due to a bonafide mistake on the part of the dealer, no penalty shall be levied.
In MAHAVEER BANGLES V/s. COMMERCIAL TAX OFFICER, TARAPET, VIJAYAWADA10, a Full Bench of this Court observed that there is no legal sanctity to the plea that levy of penalty must be simultaneous with the making of a best judgment assessment. In the context of Section 14(2) of the Act of 1957, it was observed that in tax laws, penalty provisions are meant to be deterrents against tax evasion and the trite saying that provisions relating to penalty must be construed strictly does not mean anything more than saying that the language of the provision must not be strained to sustain the power to levy penalty and in a case of reasonable doubt, the benefit should be given to the assessee. This principle, it was held, did not rule out a reasonable interpretation 10 (1993) 17 APSTJ 98 26 consistent with the object of the provision and the requirement that penalty should be levied simultaneous with the assessment or not at all, was based upon no discernable principle of tax jurisprudence. Referring to Section 14(4-B) of the Act of 1957, the Bench observed that it speaks of a pre-condition for directing levy of penalty as the assessing authority should give the dealer a reasonable opportunity to explain the omission to disclose the turnover or furnish particulars correctly. The assessing authority was bound to consider the fact situation, the explanation of the assessee and decide whether the failure of the assessee to disclose the turnover or the particulars correctly was wilful or not wilful or whether it was due to a bonafide mistake on the part of the assessee. Depending on a finding on these aspects, the levy or non-levy of penalty and the quantum of penalty would depend. Thus, the assessment must necessarily precede the levy of penalty and the completion of the enquiry in connection with the best judgment assessment and the enquiry in connection with levy of penalty may not be possible at one and the same time. Observing that the substantive power to levy penalty is to be found in Section 14(2) and 14(8) of the Act of 1957, the Bench observed that though penalty proceedings are not wholly independent of the assessment proceedings and the enquiry may, to some extent, overlap, it is not to say that the penalty partakes the same character as tax and the burden of proof also varies. The Bench accordingly rejected the argument that the assessment order and the penalty order must be simultaneous. It was however made clear that there should be proximity between the date of passing of the assessment order and the date of initiation of the penalty proceedings. However, while holding that there could be no objection for simultaneous levy of penalty, the Bench sounded a note of caution against 27 such simultaneous levy. Pointing out that the cause of action for the best judgment assessment and the levy of penalty would be broadly the same, i.e., furnishing of an incomplete or incorrect return, sometimes the assessee may find it useful to press into service the findings/observations in the assessment order so as to support his plea that it is not a fit case for levy of penalty, even going by such findings. The assessee may therefore take the plea that by reason of simultaneous levy of penalty, the assessee denied the opportunity of taking aid from the contents of the assessment order to the extent they help him and to avoid such objections, it would be desirable, as far as practicable, that penalty proceedings are concluded after assessment is made. However, no proposition was laid down that a penalty order passed simultaneously with the assessment order would be vitiated and the Bench observed that it would depend upon the facts and circumstances of each case.
In the light of the aforestated principles and as there is no embargo in the statutory scheme as to passing of orders of assessment and penalty simultaneously, it would essentially depend upon the individual facts of the case to decide the correctness of such procedure. Presently, when the issue of penalty was specifically remanded to be decided along with main assessment, no demonstrable prejudice was caused to HLL by passing of orders simultaneously.
As regards the issue of levy of penalty, it may be noted that in HINDUSTAN STEEL LTD. V/s. STATE OF ORISSA11, the Supreme Court observed that an order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding and penalty would not ordinarily be imposed unless the party obliged either 11 AIR 1970 SC 253 28 acted deliberately in defiance of law or was guilty of conduct, contumacious or dishonest, or acted in conscious disregard of its obligation. It was further observed that penalty should not be imposed merely because it is lawful to do so and it would be a matter of discretion to be exercised judicially, upon consideration of all relevant circumstances.
In A.N. CIGARETTE TRADING COMPANY V/s. STATE OF A.P.12, a Division Bench of this Court was dealing with levy of penalty under Section 14(8) of the Act of 1957. It was observed that authorities are given discretion even in a case where there is a failure to disclose total or part of the turnover to levy penalty from an amount equal to the tax due as a result of the suppressed turnover and may extend to five times. The Division Bench further observed that while levying penalty, the discretion conferred on the authorities has to be exercised properly and judiciously in order to determine the quantum of penalty to be levied as it is the gravity of the omission that would determine the same.
However, in CEMENT MARKETING CO. OF INDIA LTD. V/s.
ASSISTANT COMMISSIONER OF SALES TAX13, the Supreme Court found that the assessee did not include a particular component in the taxable turnover under the bonafide belief that it did not form part of the sale price and was not includible in the taxable turnover. As this was a highly arguable contention which required serious consideration and the belief entertained by the assessee could not be said to be unreasonable, the Supreme Court found that it was not a fit case for levy of penalty. Again, in E.I.D. PARRY (I) LTD. V/s. ASSTT. COMMR. OF COMMERCIAL TAXES14, the Supreme Court observed that when the 12 2000 (5) ALD 726 13 AIR 1980 SC 346 14 (2000) 2 SCC 321 29 correct position of law was not free from doubt as to the status of transport subsidy in relation to taxable turnover and when the assessee had a bonafide belief that such a subsidy was not includible in the turnover, the same could not be the basis for levy of penalty as they had not acted deliberately in defiance of law and that their conduct was neither dishonest nor in conscious disregard of their statutory obligation.
Later, in LARSEN & TOUBRO LTD. V/s. CCE15, the Supreme Court, while dealing with levy of penalty on the ground of suppression, held that acts of fraud or suppression must be specifically pleaded and allegations in regard to suppression of facts must be clear and explicit so as to enable the noticee to reply thereto effectively. On facts, the Supreme Court found that the issue in relation to which penalty was levied was a debatable one and it was not a case of suppression by the appellant. On similar lines, in VICEROY HOTELS LIMITED V/s. THE COMMERCIAL TAX OFFICER16, a Division Bench of this Court accepted that when there was no fraud or wilful neglect established in the under- declaration of tax, no penalty could be levied. In M/S. VPL PROJECTS PRIVATE LIMITED V/s. COMMERCIAL TAX OFFICER, DWARAKANAGAR, VISAKHAPATNAM17, a Division Bench of this Court reiterated that while under-declaration of tax was liable for penalty if fraud or wilful neglect is established, the jurisdictional facts necessary for such levy must be discernible from the show-cause notice and in the absence of any such basis being disclosed, the penalty must be set aside.
However, the mere fact that there was disagreement between the members of the earlier Bench of the STAT is not enough to make the 15 (2007) 9 SCC 617 16 (2011) 52 APSTJ 147 17 W.P.No.214 of 2016 decided on 23.02.2016 30 subject issue so contentious as to extend the benefit of the above decisions to HLL. Significantly, the levy of penalty on HLL under the proceedings dated 28.12.1998 was not for the first time. The earlier levy of penalty was set aside by the ADC and the matter was remanded back to the CTO to be decided along with the quantum addition. In T.A.No.767 of 1993 before the STAT, HLL's contention was that the ADC ought to have set aside the penalty without remanding it back to the CTO. This contention was however not accepted, as the STAT observed that it was for the CTO to apply his mind and decide not only whether the quantum addition was called for but also whether the circumstances warranted levy of penalty under Section 14 of the Act of 1957 for non-disclosure of the disputed turnover. HLL was therefore fully aware of the fact that the assessing authority would look into the issue of levy of penalty upon such remand. Therefore, it cannot claim ignorance or seek issuance of a show- cause notice treating it as a fresh case. Being fully cognizant of the parameters of the remand, it was for HLL to put forth its case along with supporting material before the assessing authority as to why it was not liable to be mulcted with penalty. However, HLL did not take any steps in that regard. The contention that the levy of penalty is unsustainable as it was not preceded by a show-cause notice therefore does not merit consideration. There was no necessity for the CTO to again call upon HLL to explain as to why it should not be visited with penalty, as the order of remand covered both the quantum addition as well as the penalty. In consequence, passing of the assessment order and the penalty order on the same day, viz., 28.12.1998, does not amount to a vital irregularity.
Even otherwise, the facts bear out that but for the inspection of UCIL's premises and detection of the agreement dated 12.10.1984 and 31 the supporting material, the non-disclosure of purchase of shrimps by HLL from UCIL would not have come to light and HLL would have gotten away with suppression of this transaction. Such a deliberate and wilful act of non-disclosure therefore attracted penalty and as there were no mitigating circumstances, the levy of highest penalty also cannot be found fault with.
On the above analysis, this Court finds no merit in the claims of HLL. The questions of law are answered against it as under: Question No.1 is answered in the affirmative. As regards Question No.2, this Court holds that the transactions under the MOU and the agreement dated 12.10.1984 were on different lines and the transaction under the agreement dated 12.10.1984, which was actually acted upon, was also for purchase of shrimps by HLL from UCIL and not for lease of trawlers only. In consequence, Question No.3 is answered holding that the payments made by HLL under Clauses 8(a) and 8(b) of the agreement dated 12.10.1984 were for purchase of shrimps and lease rental along with operating expenses. Question Nos.4, 5 and 6 are answered in the negative for the reasons set out hereinbefore. Question No.7 is answered in the affirmative as an adverse inference necessarily had to be drawn against HLL for its failure to produce documents as directed.
___________________ SANJAY KUMAR,J ___________________ D.V.S.S.SOMAYAJULU,J 8TH JUNE, 2018 Note : L.R.Copy to be marked.
(B/O) SVV/PGS