(Per : HONOURABLE MR.JUSTICE V. M. SAHAI) 1. This Tax Appeal has been admitted on the following two questions.
1. Whether on the facts and circumstances of the case, the Appellate Tribunal was right in law in holding that towels and bed sheets would not be classified as "cotton fabric" below Entry 3 of Schedule IIA of the Gujarat Sales Tax Act, 1969 but would be classified as "ready-made garment" under Entry 51 of Schedule-IIA ?
2. Whether on the facts and circumstances of the case, the Appellate Tribunal was right in law in imposing penalty even though admittedly there is no mens-rea ?
2. Brief facts of the case are that the appellant-assessee was a distributor since 1980 of Bombay Dyeing Mills Ltd. dealing in cotton fabrics like towels and bed sheets. After visit by Flying Squad officers, on the business premises of the assessee, the Sales Tax Officer issued a show cause notice on 1.4.1999 under Form 36 calling for various details pertaining to collection and payment of sales tax. During the proceedings before Sales Tax Officer, the appellant contended that the fabrics like towels and bed sheets were covered by entry 3 of schedule IIA which were exempted from payment of sales tax. The Sales Tax Officer in the assessment order dated 6.11.2001 held that towels and bed sheets were covered under entry 51 under the head "ready made garments" and accordingly imposed sales tax and penalty. The assessee filed an appeal which was dismissed on 10.9.2002 by the Assistant Commissioner of Sales Tax, Unit-8, Rajkot. Thereafter, Second Appeal No. 894 of 2002 was filed by the assessee before Gujarat Valued Added Tax Tribunal, Ahmedabad which had been dismissed on 28.8.2008.
3. We have heard Ms.Gargi Vyas holding brief of M/s. Wadia Ghandy and Co. appearing for the appellant and Mr.Kabir A.Hathi, learned Assistant Government Pleader for the respondents. All the authorities below have decided against the assessee and have held that towel and bed sheets are not fabric covered by entry No.51 of Schedule IIA and sales tax had to be levied treating it to be ready-made garment. The assessee was assessed for revenue assessment years 1991-92. The learned counsel for the assessee urged that towel and bed sheets are merely cotton fabrics and, therefore, they cannot be treated as ready made garments or articles made from textile fabrics as the appellant was a distributor of a company, namely, Bombay Dyeing Company Ltd. which was manufacturing cotton fabrics including towels and bed sheets in a woven form on looms and merely by stitching two sides, it cannot be said that any new article is prepared from such textile fabric. Stitching is necessary for better use and long life of the aforesaid cotton fabric. The argument is that no different commercial commodity comes into existence and character of textile fabric is not altered. It was urged that the appellant has not collected sales tax under an impression that they are exempted from payment of sales tax being covered under entry 3 of schedule IIA of Gujarat Sales Tax Act, 1969. We extract Entry 3 of Schedule II-A as under:
"3. Cotton fabrics to which entry Four paise Four paise 24 in Schedule-I does not in rupee in rupee apply.
Note:
(1) Under entry 130 of Notification under section 49(2) Cotton Fabrics except the following are exempt from whole of tax and hence following are taxable under the entry IIA-3 w.e.f. 10.4.81.
(1) Fabrics imported from any place out of India;
(2) Surgical absorbent lint packed in packets of one half kilogram or less.
(3) Unprocessed cotton hose pipes and belting woven as such.
(4) Cotton fabrics coated or laminated with low density polythelene.
(2) Sales of cotton hose pipes exempt from whole of tax 1-8-
95 to 31-8-01 by entry 42 of section 49(2) notification No. dated 1-8-95 and from 1-9-01 exempt in excess at 8% ST by amended entry 42 w.e.f. 1-9-01.
(3) Sales of cotton fabrics dyes, bleached or printed other than taxable as per entry 130 of Section 49(2) stated note 1 above exempt from whole of tax by entry 67 of section 49(2) as amended from 14-5-81 and executived effective from 10-4- 81.
Note: Rate pf C.S.T. on inter-state sales without "c" form reduced to 4% by 8(5)(99) w.e.f. 12-9-95 to 15-6-2000 from 16-6-2000 8(5)(110) refer: Appendix-16."
4. All the authorities below have rejected the argument of the assessee that towel and bed sheets remain cotton fabric eventhough for longer durability, two sides are merely stitched and thereafter they are marketed. It shall be profitable to extract Entry 51 of schedule IIA which reads as under:
"51. Ready made garments Four paise Four paise and articles prepared from in the rupee in the rupee any textile of handloom fabrics.
Notes:(i) Rate of tax on Sales of ready made garments or articles prepared from any textile or handloom fabrics including those which have been embroidered or otherwise decorated when sold at a price not exceeding 100 rupees per suit or per article, exempt whole or tax be entry 111 of Noti. under section 49(2) w.e.f. 1.1.2000.
(ii) Rate of C.S.T. on inter-state without "c" form reduced to 4.4% by 8(5)(109) w.e.f. 16.6.00."
Entry 51 of Schedule IIA lays down that any article prepared from any textile or handloom fabrics which had been embroidered or otherwise decorated would be liable to sales tax if its price exceeds Rs. 100/-. In common parlance once the cotton fabric is stitched on both the ends only then it can be called towel or bed sheet. Once stitched it ceases to be cotton fabric and a new commercial goods comes into existence, therefore, towels and bedsheets would not be covered under Entry 3 Schedule IIA. We are of the considered opinion that towel and bed sheets for which the appellant was a distributor are covered by entry no.51 of schedule IIA and the appellant is liable to pay sales tax. Therefore, we do not find any illegality in the order passed by the authorities below. Therefore, the first question is answered in the affirmative in favour of the department and against the assessee.
5. So far as the second question with regard to penalty is concerned, though the Tribunal had reduced the penalty, but the question is as to whether in absence of mens rea, penalty can be imposed on the assessee under section 45 of the Act. Sub-section (9) of section 45 of the Act provides that if Commissioner has reason to believe that any person is liable to pay penalty, then he has to serve a show cause notice to the assessee as to why penalty may not be imposed. Further under sub-section (10) he may hold an inquiry and make such order as he thinks fit.
6. In this case, the appellant had not charged any sales tax from the buyers of the towel and bed sheets under a bonafide belief that the goods like towel and bed sheets sold by him were not liable to sales tax and were exempted goods. There was no intention to evade or avoid payment of sales tax and there was no mens rea. The law has been settled by the Apex Court that mens rea is an essential ingredient for levying penalty. The Apex Court in Assistant Commercial Taxes Officer v. Bajaj Electricals Ltd. (2009)1 SCC 308, has approved its earlier decision in Guljag Industries v CTO (2007) 7 SCC 269 and has held in para-16 as under:
"16. For the sake of convenience we reproduce important paragraphs from the judgment of this Court in Guljag Industries as in our view the judgment in Guljag Industries squarely applies to the present case:
"9. Existence of mens rea is an essential ingredient of an offence. However, it is a rule of construction. If there is a conflict between the common law and the statute law, one has to construe a statute in conformity with the common law. However, if it is plain from the statute that it intends to alter the course of the common law, then that plain meaning should be accepted. Existence of mens rea is an essential ingredient in every offence; but that presumption is liable to be displaced either by the words of the statute creating the offence or by the subject-matter with which it deals. A penalty imposed for a tax delinquency is a civil obligation, remedial and coercive in its nature, and is different from the penalty for a crime. (SCC pp.275-76, para 9)."
Almost similar view has been taken by the Apex Court in Guljag Industries v Commercial Taxes Officer (2007)7 SCC 269; Union of India and others v Dharmendra Textile Processors and others (2008) 13 SCC 369; Bharjatiya Steel Industries v Commissioner, Sales Tax, Uttar Pradesh (2008) 11 SCC 617; General Instruments Company v Union of India and others (2008) 11 SCC 775; Assistant Commissioner (CT) LTU and another v Amara Raja Batteries Ltd. (2009) 8 SCC 209; G.P.Ceramics Pvt.Ltd. v Commissioner, Trade Tax, Uttar Pradesh (2009) 2 SCC 90; Pepsico India Holdings Pvt.Ltd. vs. State of Kerala and others (2009) 13 SCC 55; Assistant Commercial Taxes Officer vs. Bajaj Electricals Ltd. (2009) 1 SCC 308; Commissioner, Income Tax, Delhi vs. Atul Mohan Bindal (2009) 9 SCC 589; Commissioner of Sales Tax, Uttar Pradesh vs. Sanjiv Fabrics (2010) 9 SCC 630; Bajaj Hindustan Ltd. vs. Sir Shadilal Enterprises Ltd. and others (2011) 1 SCC 640; Bhai Jaspal Singh and another vs. Assistant Commissioner of Commercial Tax and others (2011) 1 SCC 39.
7. In absence of any mens rea to evade payment of sales tax, in our opinion, all the authorities below were not justified in levying penalty when admittedly there was no mens rea. We are of the considered opinion that so far as the penalty imposed by all the authorities below is liable to be set aside. Therefore, we answer question no.2 in the negative in favour of the assessee and against the department. The Appeal is partly allowed and the penalty levied by the authorities below is set aside. Parties shall bear their own costs.
(V.M.SAHAI,J) (N.V.ANJARIA,J) ***vcdarji