UPGST | Burden To Prove Intention To Evade Tax Lies Solely On Department: Allahabad High Court

On Wednesday, the Allahabad High Court held that the burden to prove intention to evade tax lies solely on the Department. The Court held penalties in tax laws should not be imposed solely on insignificant technical errors which do not have any financial consequences.

The Court held that penalties should only be imposed where there is concrete evidence to show that an assesee is deliberately trying to defraud the system and not in cases of unintentional mistakes.

While quashing a penalty order passed under Section 129 of the Uttar Pradesh Goods and Service Tax Act, 2017, Justice Shekhar B. Saraf held that

“While penalties serve a pivotal role in ensuring compliance with tax laws, legal frameworks stress the importance of establishing the actual intent to evade taxes as a prerequisite for their just imposition.”

The Court held that

“Penalties, according to this principle, should be reserved exclusively for cases where concrete evidence points to a deliberate and fraudulent act against the tax system, rather than being applied to situations involving unintentional mistakes. The legal rationale supporting this principle recognizes that the primary purpose of taxation statutes is not to penalize inadvertent errors but rather to address intentional acts of non-compliance.”

The vehicle transporting petitioner's good broke down. Incidentally, a nationwide strike was declared on the same day. Goods were loaded onto another vehicle, however, the driver before the driver could generate a fresh e-way bill with the changed vehicle number, the vehicle was intercepted. The goods were accompanied by invoices and the original e-way bill.

Before the detention order was passed, the driver had produced the revised e-way bill. However, penalty was imposed under Section 129 on grounds that the vehicle number in the e-way bill with the goods was incorrect. The appeal filed by the petitioner was rejected on grounds that even though the goods were accompanied by requisite documents, technical errors attract penalty under Section 129 UPGST Act read with Rule 138 of the UPGST Rules. The appellate authority had held that intention to evade tax was irrelevant for imposition of penalty under Section 129.

Relying on its earlier decisions, the Court held that intention to evade tax was necessary to attract penalty under Section 129 of the UPGST Act.

The Court held that penalties under tax laws are only for those who have wilfully and deliberately attempted to defraud the system, and not for those who have erred unintentionally. The Court held that requirement to prove intention to evade tax is essential for preserving the fairness and integrity of taxation systems.

“Consequently, the burden of proof falls squarely on tax authorities to demonstrate the genuine intent to evade tax before penalizing taxpayers. This safeguard is indispensable to shield individuals and entities from punitive measures arising from honest mistakes, administrative errors, or technical discrepancies that lack any malicious intent.”

The Court held that it is imperative to recognize and acknowledge the distinction between technical errors and intentional evasion for upholding balance and equity in tax enforcement.

Accordingly, the Court quashed the order passed under Section 129 as well as the order of the appellate authority.

Case Title: M/S Ashoka P.U. Foam (India) Pvt. Ltd. vs. State Of U.P. And 3 Others 2024 LiveLaw (AB) 50 [WRIT TAX No. - 228 of 2020]

Case Citation: 2024 LiveLaw (AB) 50

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