1977 (8) TMI 140 - SC - VAT / Sales Tax

Supreme Court allows appeal on tax forfeiture provisions, remands factual questions to High Court for merit-based decision

RS. Joshi, Sales Tax Officer, Gujarat Versus Ajit Mills Limited and Another (and another case)

The SC allowed the appeal regarding forfeiture provisions in tax matters. The court addressed whether forfeiture constitutes a penalty or merely a ... Whether the provision as to the forfeiture in the impugned section is a penalty or whether it is merely a device to collect the amount unauthorisedly realised by the dealer? Held that:- Appeal allowed. It was submitted by the learned counsel for the assessees that apart from the question of legislative competence and the challenge based on articles 14 and 19(1)(f) certain questions of facts arise and they will have to be dealt with by the High Court. On ascertainment of such cases a direction will issue to the High Court to decide those cases on merits. Issues Presented and ConsideredThe core legal questions considered by the Court in this judgment revolve around the constitutionality and legislative competence of certain provisions of the Bombay Sales Tax Act, 1959, specifically sections 37(1) and 46. The principal issues are:Whether the State Legislature has the competence under Entry 54 read with Entry 64 of List II of the Seventh Schedule of the Constitution to enact provisions that impose forfeiture of sums collected by dealers as sales tax but which are not exigible under the law.Whether such forfeiture provisions amount to a penalty or are merely a device for the State to appropriate sums not due as tax, thereby exceeding legislative competence.Whether the provisions contravene fundamental rights guaranteed under Articles 14 (equality before law) and 19(1)(f) (protection of property) of the Constitution.The interpretation and scope of the terms 'penalty' and 'forfeiture' within the statutory scheme, including whether forfeiture requires mens rea or can be imposed without fault.The procedural safeguards and reasonableness of the statutory scheme, including the discretion vested in authorities and the rights of dealers and purchasers.Issue-Wise Detailed Analysis1. Legislative Competency to Forfeit Sums Collected as Sales Tax but Not DueThe Court examined the scope of Entry 54 of List II, which empowers States to legislate on taxes on the sale or purchase of goods. The State argued that the impugned provisions, including the forfeiture clause, are valid ancillary powers necessary to enforce the sales tax law and protect consumers from illegal tax collections by dealers.The Court emphasized the principle that legislative entries should be interpreted liberally to include all ancillary and incidental matters necessary for effective legislation. However, it distinguished between:Direct imposition or collection of tax (which the State is empowered to do under Entry 54).Recovery or forfeiture of amounts collected as tax but which are not exigible under the law (which may exceed State competence if not framed as a penalty).The Court reviewed precedent, notably Abdul Quader, where it was held that the State cannot compel payment to the Government of sums collected as tax but not due under the law, absent a penalty provision. The key is whether the forfeiture is punitive (penalty) or merely confiscatory (recovery of illegal collections). The Court found that if the forfeiture is a penalty for contravention of the sales tax law, it falls within ancillary legislative powers and is valid.The Court rejected the High Court's view that the forfeiture provision was a 'colourable device' to appropriate illegal collections, clarifying that 'colourability' relates to legislative incompetence, not motive, and that the pith and substance of the law must be considered.2. Nature of Forfeiture: Penalty or Mere RecoveryThe Court undertook a detailed linguistic and jurisprudential analysis of the term 'forfeiture.' It relied on authoritative sources including Black's Legal Dictionary and U.S. Supreme Court decisions, concluding that forfeiture is generally a form of penalty or punishment imposed for an illegal act or breach.Applying this to the statutory context, the Court held that the forfeiture of sums collected in contravention of the sales tax law is punitive, not merely a transfer of funds. It emphasized that the provision imposes absolute liability without requiring mens rea, which is consistent with modern economic and regulatory statutes imposing strict penalties to ensure compliance.The Court rejected arguments that forfeiture was not a penalty because it was distinct from the express penalty provisions or because it lacked mens rea. It held that forfeiture is a valid form of penalty and that the legislature can impose it to enforce the sales tax law effectively.3. Procedural Safeguards and DiscretionThe Court examined the statutory procedure under section 37, which requires the Commissioner to issue a show-cause notice and hold an inquiry before imposing penalty or forfeiture. The Commissioner has discretion to forfeit the whole, part, or none of the amount collected illegally.This discretion and procedural framework were held to satisfy constitutional requirements, including the right to a fair hearing and protection against arbitrary action. The Court read the phrase 'shall be forfeited' as 'liable to be forfeited,' allowing for equitable application considering circumstances such as repayment to purchasers.The Court also noted that forfeiture under section 37 and prosecution under section 63(1)(h) are mutually exclusive on the same facts, preventing double punishment.4. Fundamental Rights under Articles 14 and 19(1)(f)The Court rejected the argument that the provisions violate Article 14, holding that the classification and penalty scheme are reasonable and do not offend equality principles. It also rejected the Article 19(1)(f) challenge, noting that procedural safeguards prevent arbitrary deprivation of property.The Court referred to precedent where forfeiture provisions were struck down only for lack of procedural safeguards, which are absent here.5. Consumer Protection and Social Justice ConsiderationsThe Court acknowledged the social welfare objective of the legislation: to prevent dealers from illegally burdening consumers with sales tax on exempt goods or in excess of liability.It emphasized that the State has a duty to protect consumers and that the penalty provisions, including forfeiture, serve as a deterrent against such illegal practices.The Court suggested that States should also provide mechanisms to refund amounts to purchasers to avoid unfair double loss and to maintain equity between dealers and consumers.6. Review of PrecedentsThe Court analyzed several key precedents:Abdul Quader: Held that the State cannot demand payment of sums not due as tax unless framed as a penalty. Distinguished between recovery and penalty.Ashoka Marketing: Held that compelling dealers to deposit illegal collections without penalty is beyond State competence; however, refund provisions to consumers are valid.Orient Paper Mills: Upheld refund provisions but did not address forfeiture or State's right to retain illegal collections.Kantilal Babulal: Assumed forfeiture provisions to be penal and within legislative competence but struck down on procedural grounds under Article 19(1)(f).Annapurna Biscuit: Followed Abdul Quader and Ashoka Marketing on limits of State power regarding illegal collections.The Court reconciled these precedents by holding that penalty provisions, including forfeiture, are valid if they are properly framed and procedurally fair, but mere appropriation of illegal collections without penalty is invalid.Significant Holdings'The legislature has power to levy a penalty for the proper enforcement of the taxing statute. The controversy therefore centres mainly on the question whether the provision as to the forfeiture in the impugned section is a penalty or whether it is merely a device to collect the amount unauthorisedly realised by the dealer.''Forfeiture is one form of penalty. Forfeiture of property is one of the punishments provided for in the Indian Penal Code. For contravention of the sales tax law the section provides two forms of punishment, levy of penalty and forfeiture, and the use of the word 'forfeiture' as distinct from penalty will not make it any the less a penalty.''The word 'forfeiture' must bear the same meaning of a penalty for breach of a prohibitory direction. The fact that there is arithmetical identity between the figures of the illegal collections made by the dealers and the amounts forfeited to the State cannot create a conceptual confusion that what is provided is not punishment but a transference of funds.''The State Legislature may under entry 54, List II, be competent to enact a law in respect of matters necessarily incidental to 'tax on the sale and purchase of goods'. But a provision compelling a dealer who has deliberately or erroneously recovered an amount from the purchaser on a representation that he is entitled to recover it to recoup himself for payment of tax, to pay over that amount to the State cannot, in our judgment, be regarded as necessarily incidental to entry 54, List II.''The forfeiture should operate only to the extent, and not in excess of, the total collections less what has been returned to the purchasers. It is fair and reasonable for the Commissioner to consider any undertaking given by the dealer that he will return the amounts collected from purchasers to them.''The legislature, by inflicting the forfeiture, does not go outside the crease when it hits out against the dealer and deprives him, by the penalty of the law, of the amount illegally gathered from the customers.''The High Court's charge of 'colourable device' is misplaced; colourability relates to incompetence and not to legislative motive.''The procedural safeguards in the Act, including notice, inquiry, discretion to the Commissioner, and right of appeal, satisfy constitutional requirements under Articles 14 and 19(1)(f).'Final DeterminationsThe State Legislature has the competence under Entry 54 read with Entry 64 of List II to enact penalty provisions including forfeiture for contravention of sales tax laws.The forfeiture of sums collected illegally as sales tax is a valid penal measure and not merely a device for recovery of illegal collections.The impugned provisions of sections 37(1) and 46 of the Bombay Sales Tax Act, 1959, are constitutionally valid and intra vires.The forfeiture should be applied equitably, taking into account repayments made to purchasers and undertakings by dealers to refund.The provisions do not violate Articles 14 or 19(1)(f) due to adequate procedural safeguards and reasonableness of the scheme.The High Court's contrary rulings are overruled, and the appeals are allowed.