2009 (4) TMI 845 - HC - VAT and Sales Tax

Whether the provisions of section 15(5)(e) of the Act is only by way of clarification and even as indicated in the budget speech of the Finance Minister and that it does not create an additional liability but only points to an existing liability only reveals half truth? Held that - The principle of promissory estoppel having been indicated to be attracted to a situation of the present nature as what the statute provided for earlier is an option and that option after having been exercised the consequence are sought to be changed by subsequent variation of the law is unreasonable, same logic holds good in respect of any liability fastened for the period from April 1, 2005 to March 31, 2007. However, the position continues to be the same in respect of all dealers other than works contractors and in the case of works contractors from April 1, 2007 onwards the liability as indicated in section 15(5)(e) of the Act though is independently mentioned is to be read as part of composition as offered under section 15(1) of the Act and it has to be worked on such premise for persons who have opted for payment of tax by way of composition and who are dealers, on and after April 1, 2007 onwards. In this view of the matter, all reassessment orders for levy of additional burden on the premise of the liability under section 3(2) of the Act for the period prior to April 1, 2007 and also any penalties levied under section 72(2) of the Act and the consequential levy of interest and penalty including any prosecution launched covering the period only on the premise that the tax paid by the petitioners by way of composition falls short of the amount indicated in the reassessment order, stands quashed by issue of a writ of certiorari. In this view of the matter, the show-cause notices issued in the case of petitioners in W.P. No. 2416 of 2008 at annexure D stand quashed by issue of a writ of certiorari. The petitioners having confined their challenge to the assessment orders up to the period March 31, 2007 and with the declaration of law that the provision of section 15(5)(e) of the Act as it operates from April 1, 2007 is a valid provision, other consequences in law follows. Section 4(3)(d) of Act No. 6 of 2007 is declared unconstitutional in so far as it pertains to the deeming provision of making clause (e) of sub-section (5) of section 15 of the Act operative from April 1, 2006 being an unreasonable provision having deleterious consequences on the petitioners.

Summary

Issues Involved:
1. Retrospective application of Section 15(5)(e) of the Karnataka Value Added Tax Act, 2003.
2. Constitutionality of Section 15(5)(e) regarding double taxation.
3. Validity of reassessment orders and penalties imposed under Section 72(2) of the Act.
4. Impact of legislative amendments on dealers who opted for the composition scheme.

Detailed Analysis:

1. Retrospective Application of Section 15(5)(e) of the Karnataka Value Added Tax Act, 2003:
The petitioners, who are registered dealers under the Karnataka Value Added Tax Act, 2003, challenged the retrospective application of Section 15(5)(e), introduced by Karnataka Act No. 6 of 2007, effective from April 1, 2006. The petitioners argued that this retrospective application imposed an additional tax burden and penalties, making it unreasonable and unconstitutional. The court noted that retrospective legislation could be sustained if it serves a purpose, such as validating an earlier levy invalidated by courts. However, in this case, the retrospective application was deemed unreasonable as it imposed additional burdens without justifiable reasons, thus violating Article 14 of the Constitution of India.

2. Constitutionality of Section 15(5)(e) Regarding Double Taxation:
The petitioners contended that Section 15(5)(e) resulted in double taxation, as it imposed tax both at the purchase and sale points on the same goods in the hands of the same dealer, which is beyond the scope of Entry 54 of List II of the Seventh Schedule to the Constitution of India. The court examined the nature of the transactions and concluded that the tax on purchases from unregistered dealers and the tax on the sale of goods as part of works contracts are two distinct transactions. Therefore, the provision did not amount to double taxation on the same transaction. However, the court acknowledged that the retrospective application of this provision could transform it into a levy on profit rather than on the transaction of sale or purchase, making it unreasonable.

3. Validity of Reassessment Orders and Penalties Imposed Under Section 72(2) of the Act:
The petitioners challenged the reassessment orders and penalties imposed for the periods from April 1, 2005, to March 31, 2007, arguing that they had already paid their tax liabilities under the composition scheme. The court held that the reassessment orders and penalties were invalid for the period before April 1, 2007, as the retrospective application of Section 15(5)(e) was unconstitutional. Consequently, all reassessment orders, penalties, and interest levied based on the retrospective application were quashed.

4. Impact of Legislative Amendments on Dealers Who Opted for the Composition Scheme:
The court examined the legislative changes to Section 15 of the Act and concluded that the composition scheme was an alternative and optional mode of tax payment. The amendments aimed to ensure parity between dealers who opted for the composition scheme and those who did not. However, the court found that the retrospective application of Section 15(5)(e) altered the tax liability of dealers who had already opted for the composition scheme, making it unreasonable and oppressive. The court declared Section 4(3)(d) of Act No. 6 of 2007, which made Section 15(5)(e) operative from April 1, 2006, unconstitutional.

Conclusion:
The court allowed the writ petitions in part, quashing the reassessment orders, penalties, and interest for the period before April 1, 2007. It declared the retrospective application of Section 15(5)(e) unconstitutional but upheld its prospective application from April 1, 2007. The court emphasized that legislative amendments should not impose unreasonable burdens or penalties on dealers who had acted in good faith based on the law as it existed at the time of their transactions.