Penalty cannot be imposed in the absence of E-way bill until the department proves intention to evade tax

The Hon'ble Allahabad High Court in the case of M/s. Falguni Steels v. State of Uttar Pradesh and Ors. [Writ Tax No. 146 of 2023 dated January 25, 2024]held that mere technical errors, without having any potential financial implications, should not be the grounds for imposition of penalties. The Court emphasized that there must be an intention to evade tax. Therefore, if a penalty is imposed in the presence of all the valid documents, even if an E-Way Bill has not been generated, and there is the absence of any determination to evade tax, the penalty cannot be sustained. 

Facts

M/s. Falguni Steels ("the Petitioner") was an authorized dealer of the Steel Authority of India Ltd. ("SAIL"). On February 17, 2019, the Petitioner purchased a consignment of TMT Bar by SAIL. The Petitioner obtained the service for transporting its goods through a registered vehicle. The tax invoices dated February 17, 2019 issued by SAIL contained quantity, description of goods and the vehicle number. The E-way bill could not be generated by the transport due to a technical glitch on the portal. Later, these E-way bills were generated on February 20, 2019, and presented to the Assistant Commissioner ("the Respondent-1"),whichwere not taken into consideration.

The Petitioner submitted that the transportation of the goods on the same day was not possible due to the barrier imposed by the local administration for transportation due to the occasion of "Maghi Purnima, Kumbh Mela, 2019". Therefore, the goods were transported on February 20, 2019.

On February 21, 2019, the Show Cause Notice was served under FORM GST MOV - 07 ("the Impugned SCN") to the Petitioner under Section 129(3) of the Uttar Pradesh Goods and Services Tax Act, 2017 ("the UPGST Act") alleging that the movement of the goods was in contravention to the provisions of the UPGST Act. The Impugned SCN required the Petitioner to show cause as to why tax of an amount of INR 1,29,862/- along with an equivalent penalty of INR 1,29,862/- ought not to be recovered from it.

The Petitioner deposited the amount of INR 2,59,724/- on February 21, 2019, towards tax and penalty, after which the Respondent-1 released the goods by the Order dated February 21, 2019.The Petitioner preferred a statutory appeal before the Assistant Commissioner -Grade 2 ("Respondent-2").

Respondent-2 upheld the Order dated February 21, 2019, passed by Respondent-1, and confirmed the tax liability and penalty imposed by Respondent No-1 by passing an Order dated October 20, 2019 ("the Impugned Order").

Hence, aggrieved by the Impugned Order, the Petitioner filed the present writ petition.

Issue

Whether Penalty can be imposed on the Assessee in absence of E-way bill if the Tax Authorities prove that there was a mala-fide intention to evade tax?

Held:

The Allahabad High Court Writ Tax No. 276 of 2020 held as under:

• Observed that, the Petitioner had provided all the relevant details before the issuance of the Impugned SCN, and the Respondents failed to record concrete evidence substantiating an intent to evade tax liabilities. The essence of any penal imposition is intrinsically linked to the presence of mens rea and is absent from the record. The intention to evade tax is desideratum for the imposition of penalty. The Impugned Orders were vulnerable to challenge. 
• Relied on J.K. Cement Ltd. v. State of Uttar Pradesh. and Others [MANU/UP/2812/2023], Modern Traders v. State of U.P. and Others reported in 2018 SCC OnLine All 6054,M/s. Shyam Sel and Power Ltd. v. State of Uttar Pradesh. and Others [2023: AHC:191074], Axpress Logistics Pvt Ltd. v. Union of India and Others reported in 2018 SCC OnLine All 6089, VSL Alloys (India) Pvt. Ltd. v. State of Uttar Pradesh and Another [2018 SCC OnLine All 6080], the Courts observed that there was no ill intention at the hands of the petitioners therein to evade tax, since the documents accompanying the goods contained all the relevant details. The Courts emphasized the need for a meticulous examination of the facts and circumstances surrounding each case to establish the presence or absence of intentional tax evasion.
• Observed that, the reason afforded by Respondent No. 2 that the provisions under the Uttar Pradesh Value Added Tax Act, 2008 ("the UPVAT Act") mandated establishing a prior intent to evade tax, there was no such provision in the Central Goods and Services Tax Act, 2017 ("theCGST Act") / the UPGST Actwas palpably erroneous. A penal action devoid of mens realacks a solid legal foundation and raises concerns about the proportionality and reasonableness of the imposed penalties. The mere rejection of post-detention E-Way Bills, without a cogent nexus to the intention to evade tax, is fallacious. Hence, the Respondents have acted beyond their jurisdiction and imposed tax without there being any cogent reason for the same. 
• Opined that, mere technical errors, without having any potential financial implications, should not be the grounds for imposition of penalties. The burden of proof, therefore, rests on tax authorities to establish the actual intent to evade tax before imposing penalties on taxpayers. This safeguards individuals and entities from punitive measures arising from honest mistakes, administrative errors, or technical discrepancies lacking malicious intent. 
• Held that, the requirement of intent to evade tax for the imposition of penalties is a fundamental principle that underpins the fairness and integrity of taxation systems. Recognizing the distinction between technical errors and intentional evasion is essential for maintaining a balanced and equitable approach to tax enforcement. Hence, Respondent-1is to refund the amount of tax and penalty deposited by the Petitioner. 

Therefore, the Impugned Order was quashed and set aside, and the writ petition was allowed. 

Our Comments

In the Pari Materia case, the Hon'ble Calcutta High Court in the case of Ashok Kumar Sureka v. Assistant Commissioner State Tax, Durgapur Range, [Writ Petition Application No.11085 of 2021 dated March 03, 2022] quashed the order imposing a penalty for expiry of the e-way bill as there was no intention to evade tax. The Counsel for the Department could not make out a case against the Petitioner that the aforesaid violation was willful and deliberate or with specific material that the Petitioner intended to evade tax.