Where initial returns were merged in the revised returns, no case for penalty is made out

A registered dealer is in the process of revising its return and in the meanwhile, the Department has issued a notice for special audit. The Dealer manages to revise the return within the time period prescribed by law and pays the tax and interest on delayed deposit of tax. But despite so, the Department frames the assessment based on the original return.

The differential tax liability arising due to revision of return was immediately paid by the Dealer within a month but because the Department framed assessment based on original return, whether the dealer can be held liable to penalty on ground of payment of tax after the notice for special audit?

  • In a recent decision of Hon’ble Appellate Tribunal, VAT, Delhi, in the case of Afcons Infrastructure v. Commissioner, Appeal No. 577-587/ATVAT/12-13, the Hon’ble Tribunal has vide order dated 12.03.2020 held that penalty under Section 86(12) of the DVAT Act on the ground of tax deficiency is not justified when the initial returns were merged in the revised returns.
  • It was further held that there is no provision under the DVAT Act for imposition of penalty on the ground of revision of return subsequent to service of Notice for audit.


  • The Appellant, Afcons Infrastructure is engaged in the execution of works contract in the State of Delhi mainly of the civil nature.
  • The Appellant was in appeal before the Hon’ble Tribunal against the decision of Objection Hearing Authority upholding the penalty orders passed by Ld. VATO under Section 86(12) and 86(10) of the DVAT Act.

Penalty under Section 86(12)

  • The Hon’ble Tribunal was faced with an issue where the Ld. VATO had framed the assessment of a dealer based on its original return and consequently raised a demand for recovery of ITC disallowed, while the dealer had paid the tax and interest for late deposit of tax after undertaking the process of revision of return.
  • The penalty was imposed by Ld. VATO under Section 86(12) of the DVAT Act for deposit of tax after issue of notice of special audit. No speaking order was passed while passing the penalty order.
  • Section 86(12):

Where a tax deficiency arises in relation to a person, the person shall be liable to pay, by way of penalty, a sum equal to one per cent of the tax deficiency per week or a sum equal to rupees one hundred per week, whichever is higher, for the period of default.

  • Tax deficiency is defined in Section 86(1) to mean:The difference between the tax properly payable by the person in accordance with the provisions of the Act and the amount of tax paid by the person in respect of a calendar month.

Argument of the Appellant

  • It was contended on behalf of the Appellant that in view of the peculiarity of the nature of work, magnitude of business operation and the complexity of computation required to be made, it is impossible for estimating all adjustment each month before hand and therefore, returns are bound to be revised at the end of a year as an annual exercise. At the time when notice for special audit was issued to the Appellant, revision of return for the year 2007-08 was complete. However, at the time when notice for special audit was issued, the process for revision of return was underway for the year 2008-09. Revisions of the return for the said year were duly made and the accounts were thereafter audited by the special auditor appointed under the DVAT Act.

Argument of the Revenue

  • It was the contention of the Ld. Counsel for Revenue that because returns were revised after the issue of audit notice, hence penalty was imposed.


  • The Hon’ble Tribunal framed the question as follows:

Whether penalty u/s 86(12) of the DVAT Act can be imposed when appellant revised the returns within time prescribed by the law and as per revised returns paid the tax and interest for late deposit of taxes due to revision of returns?

  • The Hon’ble Tribunal held:

That on this ground penalty u/s 86(12) of the DVAT Act cannot be imposed because the initial returns merged in the revised returns and so it cannot be said that there was any tax deficiency.

  • It was observed that this type of revision is neither escapement nor avoidance nor willful default but a genuine exercise under a typical works contract accounting.
  • It was further observed that the Appellant deposited the tax and interest as per revised returns within a period of one month after revising the returns and the assessment was framed on the basis of original returns.
  • The Hon’ble Tribunal also relied on its earlier decision in the case of Galaxy Sports Shoes (P) Ltd. Appeal No. 555-566/ ATVAT/ 09-10 wherein it was held that there is no penalty provision under which penalty can be assessed because the dealer revised the returns after service of the notice for audit.

Penalty order also quashed on the ground that it was a non-speaking order

  • It was further observed that the penalty order passed by VATO was a non- speaking order and that the OHA had not given any reasons while upholding the penalty orders.
  • It was held that it is clear from these orders that these are mechanical and bald orders. Why submissions put forth by the objector have been rejected, no reason has been given, so on this ground also impugned penalty orders are liable to be quashed and accordingly are quashed.

Penalty under Section 86(10) of the DVAT Act

  • The Hon’ble Tribunal was pleased to set aside the penalty on the issue of ITC claimed on the basis of retail invoices and on the issue of ITC claimed on consumables.
  • While setting aside the penalty order, the Hon’ble Tribunal observed that Penalty proceedings are independent of the assessment proceedings and therefore, VATO has to do something more, to establish penalty and deficiency other than assessment order.

The decision was passed by Hon’ble Member Judge (Judicial), Sh. M.S. Wadhwa. Appellant was represented by Adv. Puneet Agrawal, ALA Legal while Revenue was represented by Adv. M.L. Garg.

Copy of order is attached herewith: .DVAT Tribunal Order

Gaurav is an advocate by profession and has done his B.Com(H) from Hansraj College and LL.B(H) from Faculty of Law, Banaras Hindu University. He has represented clients from Diverse sectors, providing services in Litigation involving Indirect Taxes, IBC, Commercial laws, Direct Taxes, RBI matters. He is active beforewrit Courts, Tribunals and Quasi-Judicial Authorities.