Penalty powers are inseparable part of any fiscal statutes. As known, the said powers are required to have control over the erring dealers/ persons. In other words, they are considered to be necessary evil, so as to create law abidance in the dealers/persons. The basic principles of penalty are almost similar in all the fiscal statutes. For guiding principle about penalty, reference can be made to the landmark judgment of Supreme Court in case of Hindustan Steel Ltd. (25 STC 211) wherein, about nature of penalty in fiscal laws, Hon’ble Supreme Court has observed as under:

“Under the Act penalty may be imposed for failure to register as a dealer: section 9(1) r/w section 25(1)(a) of the Act. But the liability to pay penalty does not arise merely upon proof of default in registering as a dealer. An 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 the act in the manner prescribed by the statute.”

Therefore, the penalty cannot be levied for mere technical breach of any provision. If such breach is conscious and with guilty mind, then only penalty can be attracted.

The penal provisions can be seen in light of above guiding principle. As per sections 9(2A) and 9(2B) of Central Sales Tax Act, 1956 (CST Act, 1956), all the provisions of penalty under Local Act equally applies to CST Act, 1956 also. Here the specific penal provisions under CST Act are discussed briefly. Such separate penalty provisions are contained in section 10 of the CST Act, 1956.

Though section 10 refers to penalty, offences mentioned in the said section attract imprisonment i.e. prosecution.

In certain cases section 10A provides penalty in lieu of prosecution under section 10. Therefore the penalties under section 10 are to be read with section 10A. Thus combined effect is required to be seen.

a) Section 10(a) – False declaration

Section 10(a) of the CST Act, 1956 contemplates levy of penalty, if the dealer has furnished any declaration in Form ‘C’, ‘E-I’, ‘E-II’, ‘F’ & ‘I’ which he knows to be false. The above declarations/certificates are to be issued in specified circumstances. For example, ‘C’ form should be issued for purchases which are for eligible purposes like, for resale or use in manufacturing of goods for sale etc.. If, while purchasing it was known to dealer that he is not purchasing goods for permissible uses, he can be said to have issued false declaration.

The other instance is that the dealer is required to issue ‘C’ form from the State in which delivery of goods purchased is given, unless he is not registered in such state. In such circumstances, in spite of being registered in such delivery State, ‘C’ form from other State is issued, it will be a case of false issue of ‘C form and penalty can be attracted. However, as the wording of the section itself shows, if such breach of condition is conscious then only such penalty can be attracted. In other words, if the dealer can show that there was no intentional act of issue of such false declaration then penalty cannot be levied. All the principles applicable for attraction of penalty equally apply to this penalty also. There are number of judgments throwing light as to when such penalty is attracted and when it is not attracted. Since the penalty is based on facts of each case, no standard criteria can be applicable. For guidance in the matter, reference can be made to following judgments.

Bhuwaneshwari Traders (143 STC 608) (Mad)

In this case Madras High Court has confirmed penalty observing that “mens rea” not applicable to penalty under CST Act and confirmed the penalty.

Agricultural IT and STO vs. Tata Tea Ltd. (127 STC 210) (Ker)

Amongst others, observing that transferee cannot be liable for acts of transferor and looking to inordinate delay in levy of penalty, Kerala High Court struck down the penalty.

b) Section 10(aa)

This penalty is to be attracted if a person liable to pay CST fails to obtain registration. As per section 7(1) the person liable to pay CST should apply for registration within 30 days from the date of becoming liable. Therefore this penalty will apply if registration is not applied within such 30 days. As per section 7(2) the person registered under Local Act is entitled to obtain registration under CST Act voluntarily. Therefore a person can always obtain registration without being actually liable under CST Act. If a person has not taken such voluntary registration or is not covered under Local Act then a contingency can arise for obtaining registration under section 7(1) of the CST Act, if becoming liable to pay CST. As ultimately this a penalty section the safeguards available against penalty section like no conscious failure, etc., can be taken as defence against such penalty.

As per section 7(3A), etc. the authorities entitled to grant registration can also ask for security. This penalty can be attracted, if one fails to comply with the direction for giving such security.

c) Section 10(b)

This penalty can apply if a person purchases goods against C form where such goods are not mentioned in the registration certificate. As per one of the conditions for purchases against ‘C’ form (section 8(3)) the goods to be purchased should find mention on the registration certificate. Normally, at the time of registration the dealer can list his items of purchases in the registration application. The registering authority is suppose to incorporate the same in the registration certificate issued by him. However, if the authority is of the opinion that the goods to be purchased are not within the permissible uses qua the activity of dealer then he may refuse to incorporate the same. The dealer can litigate the matter to get it incorporated.

Sometime it also happens that inadvertently the registration authority forgets to incorporate the list or enter incomplete list. The dealer should be vigilant to see that the list is duly incorporated. This penalty also depends upon facts of the case. There are judgments which says that non mentioning may be a technical fault if otherwise the goods are used for permissible uses. In such cases the penalty is waived. However there are also judgments which take strict view of the matter and justify the penalty though the offence may be technical. Reference can be made to following judgments for guidance.

U. P. State Agro Industries Corporation (20 VST 324) (All.)

Purchases of coal without registering for the same and hence penalty levied. However information was given to department about such purchases from time to time. Penalty reduced to token amount.

Chokrayat Cold Storage (15 VST 338)(All.)

Machinery permitted to be used for processing of fruits, used for construction of cold storage. Held, use was under bonafide belief and penalty set aside.

International Steel Trader (20 VST 660)(All.)

Motor parts not permitted to be purchased against ‘C’ form. The said item inserted in R.C. from later date. Penalty levied for misuse of C form for earlier period. High Court justified the penalty.

It may be noted that if at all any purchases are made without being mentioned on registration certificate (R.C.) then the dealer should immediately take steps to get the R.C. amended. Similarly, before purchasing the dealer should verify the fact of mention on R.C. and if possible should apply for amendment of R.C., if the goods to be purchased are not mentioned on the R.C., before purchasing the goods.

d) Section 10(c)

This penalty is attracted, amongst others, when a dealer purchases the goods against C form, when he is not a registered dealer on the date of such purchase.

Since the section says about false representation, if dealer can prove that the default was unintentional then such penalty may not be attracted. In relation to purchase it can be noted that the completion of transaction of purchase is required to be considered.

For example, the goods are dispatched on 26th April by vendor from other state. The purchasing dealer may not be registered on such date. The goods may be received by purchaser on 5th of May. If on the date of receipt the purchaser is registered then also it can be said that the purchase is as a registered dealer and this penalty cannot apply.

e) Section 10(d)

This is the mostly used section. Goods purchased against ‘C’ or ‘I’ form are required to be used as per the permissible uses. If after purchase the goods are not used for such permissible uses then the penalty under this section is attracted. There can be various circumstances due to which there may be breach of this condition. For example, goods are purchased for resale. If the goods purchased are destroyed in fire then certainly there will be breach of the given condition. Under such circumstances the penalty under this clause can be attracted. However the section itself suggests that if such non compliance is

due to reasonable excuse then the penalty cannot be attracted. Therefore, in above example, the authorities will be justified in not levying penalty. This penalty section is keeping into account business like approach.

The section itself has anticipated non use due to reasonable excuse and in such circumstances penalty is not to be attracted. Following is example, where this penalty is dealt with.

Triveni Bore Well (114 STC 243) (Raj.)

Registration Certificate showed drilling machines for mining. Drilling machine purchased against ‘C’ form where used for job work of bore well. The entry about drilling machines removed from R.C. subsequently. Hon’ble High Court held that there is no misrepresentation and penalty not attracted.

f) Section 10(e)

This penalty is contemplated in the case where a person holds declaration forms ‘C’ or ‘I’ which he has not obtained lawfully. In other words this penalty is meant to tackle the cases where such forms are

obtained fraudulently or by illegal means.

g) Section 10(f)

This section is to tackle the cases of excess collection. As per the section 9A of the CST Act the selling dealer can recover from the purchaser only such amount of tax which he is liable to pay to Government. Also an unregistered dealer cannot collect tax. If any collection, in contravention of section 9A, is made, it cannot be allowed to be retained by the collecting dealer. Though this section provides for imprisonment, etc., i.e. prosecution, in practice normally the authorities compound the offence read with provisions of Local Act. Normally the excess collection is get deposited in the Government Treasury as a compounding fee. Thus, this is basically a section in the nature of forfeiture.