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TMI Blog2009 (3) TMI 939X X X X Extracts X X X X X X X X Extracts X X X X ..... m their customers, file monthly returns in the prescribed form and pay the tax so collected to the State. The Act has a scheme whereunder the goods or commodity which are transacted repeatedly, i.e., sold or purchased which would otherwise suffer tax at each transaction, does not suffer such repeated levies, but it suffers tax only on the additional value as enhanced by selling dealer with reference to purchase price, so long as the nature of the goods when purchased and sold remains the same. It is a scheme whereunder ultimately the goods suffer tax irrespective of the number of transactions only once and at the value at which it reaches the consumer. The rate of tax on different goods or commodity varies and is as provided under different Schedules to the Act. If a commodity is not covered by any of the specified rates mentioned in the Schedules, the general residual rate of 12.5 per cent should be levied on the goods or commodity. The Act also envisages a scheme of net tax liability on the dealers, which is arrived at by deducting the tax paid on the inputs from out of the tax collected on the outputs. A dealer, for arriving at this net tax liability, has to necessarily mainta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nataka and dealers like the petitioner who had some purchases effected or made from outside the State of Karnataka and because of which reason has not merely lost the facility of opting for payment of tax by way of composition under section 15 of the Act but also being denied this facility which had already been extended it has been assessed to tax in terms of the provisions of section 4 of the Act, consequent upon which the liability for payment of tax has gone up and as a result has also suffered penalty leviable under section 72(2) of the Act. Because of such consequence, the petitioner in this writ petition has also questioned the legality of the provisions of section 72(2) of the Act. Writ petitioner in W.P. No. 4328 of 2008 is also a dealer and a caterer, in the sense, supplier/seller of food items who has also suffered an adverse order by way of a reassessment order under the provisions of section 39(1) of the Act and because of which his tax liability has gone up. Such consequences have befallen the petitioner only for the reason that the petitioner had made certain purchases from outside the State of Karnataka which formed part of the turnover for the month in question w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chases made by him. (B) Section 15 of the Act as amended by Karnataka Act No. 11 of 2005 with effect from April 1, 2005; 15.. Composition of tax.-(1) Subject to such conditions and in such circumstances as may be prescribed, any dealer other than a dealer who purchases or obtains goods from outside the State or from outside the territory of India, liable to pay tax as specified in section 4 and, (a) whose total turnover in a period of four consecutive quarters does not exceed fifteen lakh rupees; or (b) who is a dealer executing works contracts; or (c) who is a hotelier, restaurateur, caterer, or (d) who is a mechanised crushing unit producing granite metals; may elect to pay in lieu of the net amount of tax payable by him, under this Act, by way of composition, an amount at such rate not exceeding five per cent on his total turnover or on the total consideration for the works contracts executed or not exceeding two lakh rupees for each crushing machine 'per annum as may be notified by the Government'. (2) For the purposes of sub-section (1) a quarter shall mean, any period ending on final day of the months of March, June, September and December. (3) Any dealer elig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount as may be notified by the State Government which shall not exceed fifty lakh rupees, and who is not a dealer falling under clause (b) or (c) or (d) below; or (b) who is a dealer executing works contracts; or (c) who is a hotelier, restaurateur, caterer; or dealer running a sweetmeat stall or an ice-cream parlour or bakery or any other class of dealers as may be notified by the Government; or (d) who is a mechanised crushing unit producing granite or any other metals may elect to pay in lieu of the net amount of tax payable by him under this Act by way of composition, an amount at such rate not exceeding five per cent on his total turnover or on the total consideration for the works contracts executed, or not exceeding two lakh rupees for each crushing machine per annum as may be notified by the Government. (2) For the purposes of sub-section (1) a quarter shall mean any period ending on final day of the months of March, June, September and December. (3) Any dealer eligible for composition of tax under sub-section (1) may report, to the prescribed authority, the exercise of his option and he shall pay such amount due and furnish a return, in such manner as may be prescrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act as amended by Karnataka Act No. 6 of 2007 with effect from April 1, 2007: 15.. Composition of tax.-(1) Subject to such conditions and in such circumstances as may be prescribed, any dealer other than a dealer who purchases or obtains goods from outside the State or from, outside the territory of India, liable to pay tax as specified in section 4 and, (a) whose total turnover in a year does not exceed an amount as may be notified by the State Government which shall not exceed fifty lakh rupees, and who is not a dealer falling under clause (b) or (c) or (d) below; or (b) who is a dealer executing works contracts; or (c) who is a hotelier restaurateur caterer; or dealer running a sweetmeat stall or an ice cream parlour or bakery or any other class of dealers as may be notified by the Government; or (d) who is a mechanised crushing unit producing granite or any other metals may elect to pay in lieu of the net amount of tax payable by him under this Act by way of composition, an amount at such rate not exceeding five per cent on his total turnover or on the total consideration for the works contracts executed or not exceeding two lakh rupees for each crushing machine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d from the total consideration of the works contracts executed on which an amount as notified is payable under sub-section (1) by way of composition in lieu of the tax payable under the Act; (b) in the case of a dealer executing works contracts and opting for composition of tax under sub-section (1), no tax by way of composition shall be payable on the amounts payable or paid to a subcontractor as consideration for execution of works contract whether wholly or partly and such amounts shall be deducted from the total consideration of the works contracts executed on which an amount as notified is payable under sub-section (1) by way of composition in lieu of the tax payable under the Act subject to production of proof that such sub-contractor is a registered dealer liable to tax under the Act and that such amounts are included in the return filed by such sub-contractor; (c) in the case of a dealer executing works contracts, after opting for composition of tax under sub-section (1), who effects sale of any goods liable to tax under the Act other than by transfer of the property in such goods (whether as goods or in some other form) in any works contract executed by him, the dealer s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such dealer maintains separate account of each type of his business; (b) the total turnover in a year in respect of all types of business of such dealer falling under clause (a) of sub-section (1) does not exceed the amount as may be notified under the said clause; (c) the amount payable by way of composition by such dealer on his total turnover or the total consideration in respect of each type of such business shall be as may be notified for such type under subsection (1); (d) the total turnover of such dealer from all his types of business shall be reduced to the extent of the total turnover or total consideration in respect of each such type, for calculating the amount payable by way of composition for such type of business under subsection (1); and (e) in respect of such type of business for which, he has not exercised his option or is not eligible, for composition under sub-section (1) then on the taxable turnover as determined from the balance total turnover after reduction as specified in clause (d), he shall be liable to tax as specified under section 4. (3) Any dealer eligible for composition of tax under sub-section (1) may report, to the prescribed authority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yable under subsection (1) by way of composition in lieu of the tax payable under the Act; (e) a dealer executing works contracts and opting for composition of tax under sub-section (1), shall be liable to pay tax, if any, under sub-section (2) of section 3, in addition to tax by way of composition on the total consideration for the works contracts executed." had extended a facility of option to category of dealers mentioned in the section to opt for payment of tax under the provisions of section 15 of the Act who are otherwise liable to pay tax as specified in section 4 of the Act. Section 4 of the Act is the main charging section in the Act providing for collection of tax from dealers at different rates on the goods specified in Schedules II, III and IV to the Act and if it did not figure in any of the Schedules at the rate of 12½ per cent. of the value of the goods forming part of the total turnover of the dealer. The dealers executing works contract were to pay tax at the rate as indicated in Schedule VI to the Act. The composition scheme as an option enables the class of dealers identified in section 15 of the Act, to pay tax at a notified rate not exceeding five per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt who had taken up some cases for scrutiny and having noticed that the petitioners were dealers who had effected purchases from outside the State also the petitioners were not eligible for claiming the benefit of section 15 of the Act and therefore thought it fit not only to cancel the facility of composition but also proceeded to recompute the tax liability of the petitioners independent of section 15 of the Act, i.e., as under section 4 of the Act. The assessing authority having raised the demand on such premise and calling upon the petitioners to pay difference of tax and also mulcting them with penalties in terms of section 72(2) of the Act, the petitioners have approached this court foregoing the appellate remedies questioning the constitutional validity of the provisions of section 15(1) of the Act and for a good measure have also roped in the validity of section 72(2) of the Act whereunder consequential penalties have been levied on the petitioners. The attack on the validity of section 15(1) of the Act is mainly on the ground that the provision is a discriminatory provision making an invidious classification of the dealers who were extended the facility of composition; th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Government had identified such class of dealers as mentioned in clauses (a), (b), (c) and (d) of of section 15(1) of the Act and even while extending such facility the Legislature had bestowed its attention for maintaining parity of burden of levy on the dealers who pay tax in the normal scheme of the Act, i.e., the liability as created under sections 3 and 4 of the Act and those who paid tax by way of composition; that the facility of composition being provided as an exception and not as a general measure and the need to maintain parity of the burden of levy and having regard to the fact that the dealers who effect purchases from outside the State which forms part of their input into the output that is subjected to levy tax in the State being not liable to pay any tax on the input and other dealers who effect their purchases within the State are being made liable to pay tax when they make purchases and therefore the burden on them being a little higher and the State with the object of maintaining its revenue and not keen on foregoing any part of the revenue but at the same time with the object of extending the benefit of composition in favour of some of the dealers who faced grea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffected purchases from outside the State without taking note of their business requirements as in the case of the petitioners some of the inputs are either not available readily within the State or business expediency compels the petitioners to procure it from outside the State and without any regard or consideration for such business compulsions, to deny the facility of composition by making such highly artificial classification directly infringes the equality clause under article 14 of the Constitution of India and therefore the provision should be necessarily declared as unconstitutional. In this regard, further submission of learned Senior Counsel appearing for the petitioners is that the denial of benefit to only the class of dealers within the identified groups who had made their purchases from outside the State alone is an offending part violating article 14 of the Constitution of India; that it is not the object of the petitioners to seek for invalidation of the very provision of composition itself; that the petitioners are only desirous of availing the facility of composition but are irked or affected because it is not only denied to the petitioners because of the purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng out-of-State purchases, etc., and the Andhra Pradesh High Court having found the classification of this nature and denial of the benefit of facility of composition only to dealers who had ffected their purchases from outside the State, is an artificial classification discriminatory in nature and having declared the provision so, the ratio of the decision equally applies to the present situation and for the same reason the offending portion of section 15(1) of the Act could be declared as unconstitutional and the section retained without the offending portion. Special attention is drawn to paragraphs 40 to 44 (pages 374 and 375) of the judgment of the Andhra Pradesh High Court. It is the submission of the learned Senior Counsel appearing for the petitioners that the principle of interpretation to read down the section to remove the offending portion and to retain the benign portion is a principle of interpretation well recognized in law and should be necessarily applied to the present case to save the entire provision from the vice of unconstitutionality and therefore only the offending part may be declared to be bad in law and section read down accordingly. It is also pointed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nse, the Revenue was likely to lose if section 15 of the Act was implemented without any limitations, a balance has been struck in such a manner that the total revenue generated in the State, even after extending the facility of section 15 of the Act, is not substantially affected. Submission is that of classification of dealers identified for extending the facility of section 15 of the Act as dealers who have purchased from outside the State and from outside the country as one class who are kept out of the scheme of composition and others as a class who can claim benefit of section 15 of the Act; that it is a reasonable classification, it has a nexus to not only the object of providing the facility but also taking into account the overall object of the Act to raise the revenue and to ensure the revenue to the State is not appreciably affected, in the sense, it does not go down considerably. It is submitted that the present mechanism achieves these twin objects and therefore is well within the permitted limits of reasonable classification passing the test of article 14 of the Constitution of India and therefore the provision is not one liable to be declared as unconstitutional. Sr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the need for balancing the revenue to the State even after providing the facility of composition, the classification has been made and it is a reasonable classification passing the test of article 14 of the Constitution of India. The following two tables as found in the additional statement of objections dated March 17, 2009 to W.P. No. 4328 of 2008 for the purpose of showing the manner of utilization of some of the purchases effected by the petitioners from outside the State and the manner of user of the purchased items as per statement dated March 23, 2009 are placed before the court. Sl. No. Name of the goods Rate of tax u/s. 4 of the VAT Act Tax paid by the petitioner-company 1 Coffee stirrers 12.5% Supplied along with coffee, tea, etc., without charging - loss by 12.5% 2 Malt powder 12.5% 4% - loss by 8.5% 3 Coffee vending machines 12.5% 4% - loss by 8.5% 4 Hiring charges received for hiring out coffee vending machines 12.5% 4% - loss by 8.5% 5 Capital goods like air-cooler, refrigerators, furniture, pressure cookers, etc. 12.5% These purchase turno-vers are not declared at all by a hotelier or caterer for the reason that these goods are used as capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... option is given the person who has opted for the scheme cannot challenge the validity of the provision cannot be accepted. Providing an option does not mean that the provision gets immunity from the test of article 14 of the Constitution of India. All actions of the State are required to pass the test of equality and fairplay. It is only for this reason argument of the learned Government Pleader that petitioners are persons who have availed the benefit of section 15 of the Act and only because they have suffered an adverse order now they cannot turn around and question the validity of the provision, is not accepted. When the courts examine the constitutional validity of statutory provision or legislation, it is not so much as to the benefit or loss that an individual gains or loses that is the criteria, but the manner of the working of the legislative provision in general and as to whether the provision answers the constitutional requirement. It is not even the individual's rights that are so much examined, but a person complaining of violation of article 14 of the Constitution of India, definitely has locus to question the validity of the provision. It is not so much that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e criteria having a nexus to the object has to be demonstrated. The classification should be based on an identifiable criteria, i.e., one should be able to clearly understand the difference between the two groups, one who is in and one who is kept out. There is no difficulty in the present provision for identifying the class of dealers who are given the facility and who are not which is clearly identifiable as those who have effected purchases within the State and those who have effected purchases from outside the State. The other requirement is that it should have a nexus to the object of the provision. The object of the particular provision section 15 of the Act is to provide some facility, i.e., simplifying the procedural compliances required on the part of an assessee and the identification of such assessees or dealers having been indicated to be on the basis of the difficulty in adhering to the procedural requirements, particularly, in respect of persons like dealers who have turnover less than Rs. 15 lakhs, i.e., small-time dealers, not big businessmen, dealers who are executing works contract or dealers who are hoteliers, restaurateurs, caterers or dealers running a sweetm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g as that has the nexus to the object, the statutory provision cannot be found fault with on the ground of being a discriminatory provision violating article 14 of the Constitution of India. By and large, the provisions of section 15 of the Act as they exist now, i.e., one of making a distinction between identified class of dealers who have purchased from outside the State and those who have not, can be said to be a reasonable classification and having some purpose and nexus to the object of providing the facility and retaining the purpose of the Act. Even here, the depth of scrutiny is proportionate to the affectation in the sense, greater the affectation stricter the examination. The complaint is not that there is affectation, complaint is that the facility is denied. The affectation being present in the case of the petitioners is a different matter because that is an affectation which they had invited on themselves and that cannot be the test to examine the discriminatory nature of the provision as complained by the petitioners. It is also of relevance to notice that the petitioners by themselves form a class of dealers who are in fact identified for extending the facility and w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from outside the State; that the very basis of distinction is bad in law, etc. This argument has already been noticed and found not good enough to declare the provision as a discriminatory provision. A provision would fall foul of article 301 only if it in reality constitutes an impediment for free movement of trade and commerce. The provisions of section 15 of the Act having been so arranged that the State has endeavoured to not only maintain the overall revenue to the State from the imposition of levy under the Act but also to the extent possible it is maintained at the same level whether a dealer has opted for payment of tax by way of normal method or by way of composition, the provision cannot be said to be one imposing an additional burden on dealers who opt for composition. In fact, the obstruction, for attracting article 301 of the Constitution of India is said to be the denial of facility to dealers having out-of-State purchase of goods and not anything else. If the very premise is not available, namely, that there is no discrimination by making such distinction and also that there is no additional burden on dealers who are denied the facility of payment of tax by way of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ten days (2) A dealer who for any prescribed tax period furnishes a return which understates his liability to tax or overstates his entitlement to a tax credit by more than five per cent or his actual tax credit, as the case may be, shall after being given the opportunity of showing cause in writing against the imposition of a penalty, be liable to a penalty equal to ten per cent of the amount of such tax under or over-stated. (3) A dealer who furnishes a return which is incomplete or incorrect in any material particular as informed in a notice issued to him shall be liable to a penalty of fifty rupees for each day the return remains incomplete or incorrect. (4) In any case where a dealer who has failed to furnish a return has been issued with an assessment showing less than his actual liability to tax and he pays such tax as assessed, such dealer, after being given the opportunity of showing cause in writing against the imposition of a penalty, shall be liable to a penalty of ten per cent of the amount of the tax under-assessed. (5) A dealer who fails, within the time specified, to get registered though liable to do so, after being given an opportunity of showing cause in writ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions including the provision for prosecution itself under section 79 of the Act and would submit that when there are so many other provisions, providing for an automatic statutory levy of penalty is not reasonable and therefore the provision is bad in law, etc. In support of such submissions, reliance is placed on the judgment of the Supreme Court in the case of Cement Marketing Co. of India Ltd. v. Assistant Commissioner of Sales Tax, Indore reported in [1980] 45 STC 197. Countering such submissions on behalf of the State, Sri. Shivayogiswamy, learned Government Pleader would submit that the levy of penalty under the statutory provisions, particularly in fiscal statutes has now been a well recognized means of ensuring statutory adherences and tax payments; that a penalty can be levied even for statutory violations and the requirement of the element of mens rea has long been given a go by in the provisions of providing for levy of penalty under the fiscal enactments; that it is also a well accepted legislative principle of law that levy of penalty is incidental to the collection of taxes and so long as the Legislature has legislative competence to levy tax it can also provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of deterrence that an element of mens rea is read into statutory penal provisions, that purpose being still achieved by levy of penalty, it cannot be said that the very levy makes it unreasonable or unconstitutional. The provision also provides for an opportunity though not with regard to the aspect of either the rate of percentage of penalty or whether to levy or not but on the aspect as to whether there is justification, in the sense, a difference of more than five per cent if it exists or otherwise. To that extent, the levy being not automatic but only in cases where there exists difference of more than five per cent in the actual tax liability, levy of penalty cannot be characterized as quite very unreasonable levy. However, an alternative argument is sought to be advanced on behalf of the petitioners submitting that in the case of petitioners who had opted for payment of taxes under the composition scheme and who had disclosed their turnover as is turnover and the precise turnover transacted by the dealers, the liability for payment of additional tax has arisen only because the facility of composition has been withdrawn or cancelled and consequentially the assessing ..... 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