Only technical errors under tax laws without any financial implications must not be the foundations for the imposition of penalties, the Allahabad HC stated.
When dealing with the case of goods not accompanying the e-way bill, Justice Shekhar B. Saraf stated.
“Mere technical errors, without having any potential financial implications, should not be the grounds for imposition of penalties. The underlying philosophy is to maintain a fair and just tax system, where penalties are proportionate to the gravity of the offense. In taxation, imposition of penalty serves as a critical measure to ensure compliance with tax laws and regulations.”
The Court relying on various judgments of the Allahabad High Court, noted that a penalty could not be levied if all valid documents are present and an e-way bill is not generated until the intention to evade tax is there. The Court ruled that no penalty can be levied in the absence of a finding concerning the intention to evade tax.
“The essence of any penal imposition is intrinsically linked to the presence of mens rea, a facet conspicuously absent from the record. The order, therefore, stands vulnerable to challenge on the grounds of disproportionate punitive measures meted out in the absence of concrete evidence substantiating an intent to evade tax liabilities.”
Factual Background about CGST Rules
The applicant is an authorized Steel Authority of India Ltd. (‘SAIL’) dealer. SAIL issued invoices for the purchase of TMT bars under Section 31 of the CGST Act read with Rule 46 of CGST Rules.
From SAIL Yard to the applicant’s place of business the goods were being transported, both in Allahabad District. The tax invoices including the goods had the vehicle information, but, the e-way bill could not be generated by the transporter, consignor, and consignee due to technical issues on the portal.
The applicant’s goods were intercepted. Before the issuance of the show cause notice the e-way bills were generated and before passing the penalty order under Section 129(3) of the CGST Act.
The e-way bills were not regarded via the Assistant Commissioner, Commercial Tax, (Mobile Squad), Unit – II, Prayagraj before passing the penalty order. The penalty order was confirmed by the First Appellate Authority.
The petitioner’s counsel contended that the vehicle owner’s statement cannot opt during the same time as the interception. Because of the technical issues one e-way bill was generated before the detention and the other was generated post-detention. It contended that the order of penalty is a non-speaking order and no cause has been furnished for imposing the petitioner’s penalty.
On the date of the hearing, the counsel for the petitioner could not appear for the hearing due to unavoidable circumstances, and an ex-parte order was passed by the First Appellate Authority, the petitioner’s counsel contended.
It was asserted that it is in gross breach of the principles of natural justice and against the provisions of Sections 107 (8), 107 (9), and 107(10) of the CGST Act, 2017 and the UPGST Act, 2017. It was contended that the order was served on the petitioner post 5 months of passing the order.
It was contended that there was no intention to evade tax on the petitioner’s end, hence, no penalty can be levied under Section 129 of the Central Goods and Services Tax Act.
Respondent’s counsel submitted that as the e-way bill was not generated during the inspection, the petitioner violated Rule 138(a) of the UPGST Rules, 2017 which mandates that an e-way bill be generated before the movement of goods. As the reply filed by the applicant was deficient, under Section 129 a penalty order was passed.
Argued that an adequate chance of hearing was given to the applicant via the First Appellate Authority. But, no one appeared on the petitioner’s behalf. An order was passed by the First Appellate Authority based on the proof on record.
Allahabad High Court Verdict
The Court laid on VSL Alloys (India) Pvt. Ltd. v. State of U.P. and others wherein the Allahabad High Court has ruled that even though the applicant did not file Part-B of the Goods and Services Tax e-way bill, there was no intent to evade tax since the additional documents carrying goods held all required vehicle information.
The Court sees that there was no tax evasion intent on the part of the applicant since all details with a vehicle transporting information of the goods were mentioned in the tax invoices carrying the goods.
Reliance was placed on Modern Traders v. State of U.P. and Others wherein the Allahabad High Court granted relief to the taxpayer based on the e-way bill, however not accompanying the goods, which was produced as soon as the interception was created.
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The Court ruled that once the e-way bill had been produced and all additional documents were carrying the goods, no intent to evade tax could be made to draw the penalty under Section 129.
Both the assessing authority and the first appellate authority overlooked them, though the e-way bills were produced within time, the court observed. Before the interception one e-way bill was generated and the other was generated post-interception. However, before the penalty order was passed, the court ruled that there was no tax evasion intent.
The Court ruled that “the petitioner cannot be made to suffer due to mere technical mistakes that may have arisen, without there being any intention to evade tax.”
The first appellate authority had erred in holding that intent to evade the tax was a critical element under the Uttar Pradesh Value Added Tax Act, 2008 but was done away with under GST laws, the court ruled.
A penal action devoid of mens rea not only lacks a solid legal foundation but also raises concerns about the proportionality and reasonableness of the penalties imposed. The imposition of penalties without a clear indication of intent may result in an arbitrary exercise of authority, undermining the principles of justice. Tax evasion is a serious allegation that necessitates a robust evidentiary basis to withstand legal scrutiny.
As per the court, establishing the tax evasion intention of the paramount acknowledgement in the tax regime to keep its virtue, the court ruled.
Therefore quashing the penalty order and the subsequent order of the first appellate authority.
| Case Title | M/S Falguni Steels v. State Of U.P. And Others |
| Citation | WRIT TAX No. – 146 of 2023 |
| Date | 25.01.2024 |
| Counsel For Appellant | Ajay Kumar Yadav, Advocate |
| Counsel For Respondent | Rishi Kumar, Additional Chief Standing Counsel |
| Allahabad High Court | Read Order |
