Penalty cannot stand where the underlying tax levy is unconstitutional and the statutory foundation has ceased to exist.

Penalty under the Rajasthan Tax on Luxuries (Tobacco and its Products) Act could not survive once the luxury tax enactment had been struck down as unconstitutional and beyond legislative competence under Entry 62 of List II. Because the penalty under the RST Act was founded on that invalid statutory levy, the legal basis for imposing the penalty ceased to exist. On that reasoning, the penalty order was held unsustainable and the assessee's challenge succeeded.

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Issues: Whether penalty under section 78(5) of the RST Act, 1994 read with sections 31 and 45 of the Rajasthan Tax on Luxuries (Tobacco and its Products) Act, 1994 could be sustained after the luxury tax enactment had been struck down as unconstitutional.

Analysis: The levy of penalty was founded on the Rajasthan Tax on Luxuries (Tobacco and its Products) Act, 1994. That enactment had already been declared unconstitutional and beyond legislative competence on the basis that it offended entry 62 of List II of the Seventh Schedule to the Constitution of India. Once the statutory foundation itself ceased to exist, no penalty could survive under section 78(5) of the RST Act, 1994 by reference to that invalid levy.

Conclusion: The penalty order could not be sustained and the assessee's challenge succeeded.

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