TMI Blog2009 (1) TMI 182X X X X Extracts X X X X X X X X Extracts X X X X ..... G. Saragan, Smt. Vani H., G. Saragan, T.N. Keshavamurthy, A. Satyanarayan, A. Nagaraja Naidu, E.R. Indra Kumar, E.I. Sanmathi and K.S. Ramabadran for the Petitioner. K.M. Shivayogiswamy for the Respondent. ORDER 1. Writ petitioners are all persons who are dealers as the expression occurs in section 2(12) of the Karnataka Value Added Tax Act, 2003 [for short, 'the Act'] and also dealers who are registered under section 22 of the Act. 2. Petitioners have a common grievance and complaint against the validity of the penalty orders, which penalty has been imposed on the petitioners under the provisions of sub-section (1) of section 72 of the Act. Such penalty is levied on the petitioners either for their failure to file returns of the turnover, which is a periodic return to be filed every month, in terms of section 35 of the Act or for their failure to have paid the tax, which they have collected and which had become payable within the permitted time, as stipulated in sub-section (1) of section 35 of the Act. 3. Writ petitioners are complaining that the quantum of penalty levied on them under the provisions of sub-section (1) of section 72 of the Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Constitution of India and also going beyond the legislative competence of the State Legislature to make laws with reference to Entry 54 of List-II of the Seventh Schedule to the Constitution and for consequential writ of certiorari to quash the penalty orders and the consequential demand notices. 5. In all the above writ petitions, while the differing facts in each of the petitioners' case are narrated, several permutations and combinations of the basic grounds, as indicated above, are urged in support of the writ petitions praying for the relief of declaration that the provisions of sub-section (1) of section 72 of the Act are unconstitutional and the consequential relief of quashing the penalty orders. 6. Relevant statutory provisions of the Act read as under: 2. Definitions.- (12) 'Dealer' means any person who carries on the business of buying, selling, supplying or distributing goods, directly or otherwise, whether for cash or for deferred payment, or for commission, remuneration or other valuable consideration, and includes - (a) an industrial, commercial or trading undertaking of the Government, the Central Government, a State Governmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the purposes of this Act. (3) In respect of the transfer of the right to use, feature films, the person who transfers such right to the exhibitor and from whom the exhibitor derives the right to make such use shall be deemed to be the dealer under this clause. (4)(a) An agriculturist who sells exclusively agricultural produce grown on land cultivated by him personally or a person who is exclusively engaged in poultry farming and sells the products of such poultry farm shall not be deemed to be a dealer within the meaning of this clause; (b) Where the agriculturist is a company and is selling pepper, cardamom, rubber, timber, wood, raw cashew or coffee grown on land cultivated by it personally, directly or otherwise, such company, shall be deemed to be a dealer in respect of turnovers relating to sales of such produce. (27) 'Registered dealer' means a dealer registered under this Act. (28) 'Return 'means any return including a revised return prescribed or other wise required to be furnished by or under this Act. 3. Levy of tax. - (l) The tax shall be levied on every sale of goods in the State by a registered dealer or a dealer liable to be regis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a local authority liable to pay tax collected under sub-section (2) of section 9, shall furnish a return in such form and manner, including electronic methods, and shall pay the tax due on such return within twenty days after the end of the preceding month or any other tax period as may be prescribed. (2) The tax on any sale or purchase of goods declared in a return furnished shall become payable at the expiry of the period specified in sub-section (1) without requiring issue of a notice for payment of such tax. (3) Subject to such terms and conditions as may be specified, the prescribed authority may require any registered dealer- (a) to furnish a return for such periods, or (b) to furnish separate branch returns where the registered dealer has more than one place of business. (4) If any dealer having furnished a return under this Act, other than a return furnished under sub-section (3) of section 38, discovers any omission or incorrect statement therein, other than as a result of an inspection or receipt of any other information or evidence by the prescribed authority, he shall furnish a revised return within six months from the end of the relevant tax period excep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 or reassessment under section 39 of an amount of tax due for any prescribed tax period shall not be made after the following time limits- (a) five years after the end of the prescribed tax period; or (b) three years after evidence of facts, sufficient in the opinion of the prescribed authority to justify making of the reassessment, comes to its knowledge, whichever is later. (2) If any tax is fraudulently evaded attracting punishment under section 79, an assessment may be made as if in sub-section (1), reference to five years was a reference to ten years. (3) In computing the period of limitation specified for assessment or reassessment, as the case may be under this Act, the period taken for disposal of any appeal against an assessment or other proceeding by the appellate authority, a Tribunal or competent court shall not be taken into account in computing such period for assessment or reassessment as the case may be. 55. Penalty in case of under-valuation of goods. - (1) Where, in respect of goods liable to tax under this Act carried in a goods vehicle or boat, ship or similar vessel, or held in stock by any dealer or on his behalf by any other person, or he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 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) The power to levy the above penalties shall be vested in the prescribed authority to which returns are required to be furnished or the prescribed authority making an assessment or reassessment. 73. Penalties in relation to unauthorised collection of tax. - (1) If any dealer, not being registered under this Act, collects any amount by way of tax or purporting to be by way of tax under this Act, he shall be liable to remit to the prescribed authority such amount, whether or not that amount would be payable under the provisions of this Act, and also liable to a penalty of an amount not exceeding the amount so collected, after being given the opportunity of showing cause in writing against repayment of the tax and the imposition of such penalty. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees for such offence which is the first during a financial year and if the offence committed is not the first offence during a financial year, a penalty of two thousand rupees. (3) The power to levy the penalty under this section shall be vested in the officer authorised under section 52. 77. Penalties relating to seals and to unaccounted stocks. - (1) Any person who removes, or in any way tampers with, a seal attached under the provisions of clause (f) of sub-section (1) of section 52, and sub-section (4) of section 53, shall be liable on conviction by a Court, not inferior to that of a Magistrate of the First Class, to a fine of not less than five thousand rupees but not exceeding twenty five thousand rupees and imprisonment for a period not exceeding one year. (2) Any person or dealer who is found to be in possession of unaccounted stocks of any taxable goods under the provisions of clause (j) of sub-section (1) of section 52, after being given the opportunity of showing cause in writing against the imposition of a penalty, shall be liable to a penalty which shall not be less than the amount of tax leviable or one thousand rupees whichever is higher but which shall no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n annual fiscal exercise; that the second amendment to section 72 was carried out by Act No. 4 of 2006 with effect from 1-4-2006; that the third amendment followed in the year 2007 by Act No. 6 of 2007 and the latest amendment being by Act No. 5 of 2008, a part of which has been made operative retrospectively from 1-4-2007 itself, whereas the rest of the amendment to section 72 is made effective from 1-8-2008. As such, the frequent legislative changes in a provision providing for levy of penalty, a power ancillary and incidental to the main power levying tax on the transactions of sale of goods, and collection of tax by the State Government on the transaction of sale or purchase of goods, has lead to a chaotic situation and the amendments having been effected without any rationale or justification, has only resulted in arbitrariness rendering sub-section (1) of section 72 of the Act unconstitutional on the touchstone of Article 14 of the Constitution of India also. 9. Writ petitions have been admitted by issue of Rule and the respondents were called upon to defend the validity of the legislation. The State and its officers functioning under the provisions of the Act, have ente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to discourage such tendencies on the part of the registered dealers who promptly collect tax from the purchasers but do not remit the amount to the State with the same prompt ness; that it was also the legislative policy to deliberately discontinue the practice of the assessing authorities, in choosing some dealers for levy of penalty when violations in terms of section 35 are present, but not resorting to levy of penalty proceedings in respect of several other dealers, though had failed to either file return in time or to pay tax on the return filed within the permitted time; that the Legislature has designedly done away with the possibilities of the assessing authorities becoming choosy in the name of exercising discretion; that the discretion even in the area of quantifying penalty from zero to the amount, as stipulated, up to outer limit of the quantum of penalty, is also given a go-by to ensure levy of a uniform penalty; that the reason for filing a delayed return or reason for making a delayed remittance of the tax under the return filed is also made non-consequential, consciously to ensure a uniform levy of statutorily determined amount of penalty in all cases of delay; th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w and there is no requirement that there should be an element of mens rea and this argument is sought to be buttressed by relying upon the decision of the Supreme Court in the case reported in Guljag Industries v. CTO 9 VST 1, wherein section 78(5) of the Rajasthan Sales Tax Act, 1994, an analogous provision to sub-section (1) of section 72 of the Act and the validity of which was called in question, had been upheld by the Supreme Court, holding that even in the absence of mens rea, penalty can be levied. Reliance is also placed on the decision of the Supreme Court in the case of Chairman, SEBI v. Shriram Mutual Fund [2006] 68 SCL 216. The other two decisions of the Supreme Court in the case of Director of Enforcement v. MCT. M. Corpn. (P.) Ltd. AIR 1996 SC 1100 and Gujarat Travancore Agency v. CIT [1989] 177 ITR 455', are also cited for the same purpose. The factual averments in the writ petitions are denied in the counter and therefore it is urged that the writ petitions should be dismissed. 13. I have heard a good number of learned counsel appearing on behalf of the petitioners led by Sri G. Sarangan and Sri E.R. Indra Kumar, learned senior counsel and on be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der Entry 54 of List-II of Seventh Schedule to the Constitution; that the levy virtually partakes the character of a levy in the nature of levy of tax on income, as it seeks to make an inroad into the profits of the dealers; that while the levy of penalty becomes arbitrary and irrational, when once the nexus between the actual levy of penalty and the object for which it is levied, is snapped and therefore it is clearly violative of the Article 14 of the Constitution of India; that the levy of penalty when it became disproportionate and reached the level of confiscation, becomes an unrealistic restriction on the dealers to carry on the trade of their choice and therefore is violative of Article 19(1)(g) of the Constitution of India and not saved under Article 19(6) of the Constitution, and renders itself unconstitutional. 16. The argument is two-fold. The first argument is that the levy of penalty when once it exceeds the scope of ancillary and incidental power of Legislature, while legislating on the main subject, becomes unconstitutional for want of legislative competence, is also rendered unconstitutional for being in violation of Articles 14 and 19 of the Constitution of In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ective deterrent, sufficient to dissuade the violator, it assumes the character of a disproportionate penalty. Reliance is placed on the following decisions in support of the submissions :- * State of Haryana v. Sant Lal [1993] 4 SCC 380; * Kantilal Babulal v. H.C. Patel [1968] 21 STC 174 (SC); * Consolidated Coffee Ltd. v. Agrl ITO [2001] 248 ITR 417 (SC); * State of Madras v. V.G. Row AIR 1952 SC 196; * Abdul Quader Co. v. Sales Tax Officer [1964] 15 STC 403 (SC); * Om Kumar v. Union of India [2001] 2 SCC 386 - Paras 28 and 32; * A. Sanyasi Rao v. Government of Andhra Pradesh [1989] 178 ITR 31, a judgment of the Andhra Pradesh High Court, which was affirmed by the Supreme Court in the case of Union of India v. A. Sanyasi Rao [1996] 219 ITR 330. 19. Another facet of the argument, addressed on behalf of the petitioners is that the State through the statutory provision is treating alike dealers situated in different circumstances for levy of uniform maximum penalty, is per se an act of discrimination and in support of such submission, have placed reliance on the decision of the Supreme Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missions on behalf of the petitioners by the learned counsel mentioned above are that the word 'failure' is the key to the understanding of the provisions of sub-section (1) of section 72 of the Act; that unless there is a failure, which is a failure which must be intended or deliberate, there cannot be any levy; that unless the officer levying the penalty ascertains this aspect, there cannot by any levy of penalty; that therefore the provision should be interpreted so as to include the principle of natural justice in the very provision and in such a case, the levy of penalty cannot be automatic, as has been done under the impugned orders and therefore also all these orders are bad. 24. One another argument is that the penalty that can be levied under one situation i.e., either the penalty on the basis of the delay excludes the levy of penalty on the basis of the percentage of tax liability and vice versa that imposition of penalty which is earlier in the sequence of the provisions provided for levying penalty automatically avoids levy of penalty under the subsequent provision, as otherwise, it results in duplication of levy of penalty for the very act or violation and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions 3, 4, 9, 10, 35, 39 and the impugned provision of sub-section (1) of section 72 of the Act and also to other provisions of the Act providing for levy of penalty, such as sub-section (2) of section 72 of the Act and has submitted that it is by now well-settled principle that the power to levy penalty in an Act providing for raising revenue is a power ancillary and incidental to the power of levying tax on the main subject-matter; that levy of penalty being a provision which is deterrent and for the purpose of ensuring prompt compliance with the taxing statute, it necessarily travels beyond the main power; that courts have time and again upheld the validity of such legislative provisions; that the present provision such as sub-section (1) of section 72 of the Act is no different from those provisions; that the provision of sub-section (1) of section 72 of the Act and the rationale for enacting such provision is well-supported by a plethora of decided cases and has in this regard placed reliance on the following decisions : Tripura Goods Transport Association's case (supra); State of Rajasthan v. D.P. Metals [2001] 124 STC 611 (SC); Eita India L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (vii) Promotes voluntary compliance by providing for acceptance of returns filed by dealers on self-assessment basis and for scrutiny of books of account only in selected cases. (viii) Enhances compliance by providing for non-discretionary automatic penalty for offences of non-compliance and contravention of the various provisions of law; and (ix) Minimises disputes regarding the time of sale by defining the same and thereby ensuring payment of tax without delay and also requires dealers to issue tax invoices within reasonable time to the buying dealers. Certain other incidental and consequential provisions are also made. Hence the Bill. and is only a deterrent to ensure prompt compliance with the time stipulation and compulsory nature of penalty was also an intended provision by the Legislature to eliminate arbitrariness in orders passed by the authorities levying penalty, which was the experience when the authorities had been allowed an element of discretion as to the extent of penalty, which is to be levied starting from zero per cent to the maximum per cent; that it is to be noticed that a penalty is attracted only when a dealer crosses the outer limit of 15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision even assuming that it has not mentioned the outer time limit of delay, can be read down in this manner and should be held to be a valid provision and on such interpretation and therefore it is submitted that the writ petitions are all without merit and are to be dismissed. 30. I have bestowed my anxious considerations to the submissions made at the Bar and also examined the legal principles that emerge from a large number of decisions cited at the Bar. 31. The manner in which the provisions of sub-section (1) of section 72 of the Act have been tinkered every year as an annual exercise, as can be noticed below :- Section 72(1) of the Karnataka Value Added Tax Act, 2003 as it stood from time to time since 2005 I. Section as it stood after amendment by Act No.6 of 2005 with effect from 1-4-2005. 72. Penalties Relating to returns. - (1) A dealer who fails to furnish a return or who fails to pay the tax due on any return furnished as required under section 35 shall be liable to a penalty not exceeding two hundred rupees for each day of default in addition to a further penalty of a sum not less than ten per cent but not exceeding fifty per cent of the amount o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legislative policy is definitely a matter for judicial review, as what is examined by courts is not the policy but the effect or impact of the implementation of the policy. The policy is implemented by making legislative provision and in this case sub-section (1) of section 72 of the Act and during all the periods, when it was in different forms, it fails the test of both reasonableness and being proportionate to the mischief sought to be redressed by the legislative provision. 32. While a provision for the levy of penalty in a taxing statute is undoubtedly a power which is ancillary and incidental to the main power of levy of tax on sale of goods and the levy of penalty itself can be sustained on such premise, it has to remain within the scope of the ancillary and incidental powers and cannot go beyond. The power should also be exercised in a fair and reasonable manner and with all possible interpretations and understanding of the provision, if the provision is still one failing the test of either Article 14 or Article 19 of the Constitution of India, it automatically renders itself unconstitutional. 33. Unreasonableness has two dimensions. The word 'unreasonable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of smaller dealers and in the case of small tax liability, the extent of delay being large, i.e. to say, 3 to 5 years, the penalty based on the extent of delay again assuming gigantic proportions to make it an irrational levy of penalty. An arbitrary penalty, which is also an irrational levy, automatically loses the nexus of achieving the object of correcting the mischief sought to be prevented by the Legislature and therefore renders itself unconstitutional. Even a legislative provision becoming unconstitutional as violative of Article 14 of the Constitution of India for arbitrariness or for being irrational, is supported by the authority of the decision of Supreme Court in the case of Mardia Chemicals Ltd. - para 66 (supra). 37. The provision also becomes disproportionate, as the extent of penalty reaches 100 times or more of the actual tax liability, which is grossly disproportionate to the act of failure in not complying with the requirement of filing of return within the stipulated time and paying the tax within such stipulated time. This aspect is well-supported by numerous decisions of the Supreme Court starting from the judgment in the case of V.G. Rao (supra) relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. 69/07 2,21,808 57,679 210 days 6. 483/07 38,11,055 3,81,104 60 days 7. 1617/07 1,25,708 20,321 29 days 8. 1694/07 1,87,790 18,779 31 days 9. 1982/07 10,165 1,016 31 days 10. 2630/07 95,53,272 4,77,670 1 day 11. 3396/07 12,500 6,000 120 days 12. 3854/07 70,89,796 7,09,080 2 days 13. 4439/07 25,95,637 2,60,213 30 days 14. 6349/07 4,9 1,753 76,971 31 days ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ys 35. 8201/08 14,74,327 1,47,382 3 days 36. 12006/07 10,29,155 11,32,070 12 days 37. 11511/08 1,17,500 18,250 365 days 38. 12266/08 18,62,381 1,86,238 4 days 39. 19519/07 1,61,300 18,250 365 days 40. 9073/07 1,15,150 18,250 365 days 41. 18531/07 1,29,800 25,750 515 days 42. 15517/08 11,95,524 1,95,552 31 days 40. The provisions of sub-section (1) of section 72 of the Act have been enacted by the Legislature with the specific intention to discourage the registered dealers not complying with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artificial or unrealistic levels of interpretation of statutory provisions, losing sight of the object of the provision, the nature of mischief and the manner and method by which the mischief is sought to be prevented. 43. While it is true that there is an initial presumption of constitutionality in favour of all legislative provisions, when once it is demonstrated that the provisions have failed the test of Articles 14 and 19 of the Constitution of India and the challenge is not satisfactorily met, it is the duty of the court to declare the provision as unconstitutional. 44. The further argument on behalf of the State that a registered dealer can very well avoid getting into a situation of such nature by ensuring early compliance and not by waiting till the last date for compliance, is an argument only to be rejected, as when once the law provides for an outer limit for compliance, the test is not as to whether the dealer could have acted well within the last date to avoid falling foul of the statutory provision and avoid attraction of the penalty under sub-section (1) of section 72 of the Act, but as to what will be the consequences on a registered dealer in terms of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ling over smaller private interest, cannot be put on a higher pedestal than the rights under Articles 14 and 19 of the Constitution of India and to save the provisions under Article 14, the classification should be a reasonable classification with nexus to the object sought to be achieved by the legislative provision and the restriction should be a reasonable restriction within the meaning of Article 19(6) of the Constitution of India and as the examination reveals that the provision even on such examination is violative of Articles 14 and 19 of the Constitution of India, the argument fails and is therefore rejected. 47. In the result, the petitioners succeed. All these petitions are allowed, provisions of sub-section (1) of section 72 of the Act as it stood during the different periods in respect of which the validity is challenged in these writ petitions, are declared unconstitutional. Consequently, the penalty orders or show-cause notices for imposing penalty, as the case may be, all stand quashed by issue of a writ of certiorari. The amount collected by way of penalty to be refunded to the respective petitioners. 48. Rule made absolute. - - TaxTMI - TMITax - CST, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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