Penalty cannot be imposed merely because it is lawful to do so

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In M/s Mangalore Refinery and Petrochemicals Limited v. the State of Karnataka [S.T.R.P. No. 433 of 2017 decided on July 1, 2021] M/s Mangalore Refinery and Petrochemicals Limited (“the Petitioner”) is engaged in the activity of manufacture and sale of petroleum products. The Petitioner filed petition against the order dated May 24, 2017 (“the Order”) by the passed by the Karnataka Appellate Tribunal denying the input tax credit (“ITC”) in respect of capital goods and imposing penalty stating that penal provisions are mandatory.

The Hon’ble Karnataka High Court analysed Section 12 of the Karnataka Value Added Tax Act, 2003 (“KVAT Act”) and stated the deduction of input tax has to be allowed on fulfilment of one of the conditions namely:

  1. after commencement of commercial production,
  2. sale of taxable goods and
  3. sale of any goods in the course of export out of the territory of India by the registered dealer

Further, noted that none of the conditions prescribed in Rule 133 of the Karnataka Value Added Tax Rules, 2005 (“KVAT Rules”) provide that each unit of the petitioner has to be an independent unit to avail of the benefit of input tax.

Held that, the Petitioner was effecting sale of taxable goods on payment of VAT / CST as applicable and was effecting sale of goods in the course of export out of the territory of India. Therefore, the Petitioner had satisfied the conditions laid down in Section 12(2) of the KVAT Act and is eligible to avail of the benefit of ITC.

The finding recorded by the Joint Commissioner of Commercial Taxes as well as by the Tribunal that the petitioner cannot be sustained in the eye of law as the expression ‘or’ used in Section 12(2) of the KVAT Act is not conjunctive but is disjunctive.

Further, held that there is no element of any mens rea that the Petitioner had the intention to evade tax. The Petitioner had paid taxes according to the information furnished in the return and therefore, it should not have been penalized subsequently after the assessment proceedings are finalized and the amount of tax is determined. It is well settled in law that penalty cannot be imposed merely because it is lawful to do so. Since the Petitioner was entitled to ITC, therefore, the question of levy of penalty and interest does not apply.

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