TaxTMI 
TaxTMI 
2009 (1) TMI 182
X X X X Extracts X X X X
X X X X Extracts X X X X
....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, has assumed an oppressive proportion; that it has virtually turned out to be confiscatory in nature of a part of their income; that in the guise of levying the penalty for either a delayed filing of return or a delayed payment of tax on the return so filed, i.e., for their failure to comply with the twin requirements of filing of return and paying tax within the stipulated periods, the penalty levied is unreasonably high; that it has assumed a disproportionate level; that levying penalty is harsh, as the penalty is levied irrespective of the cause for the delay; that the orders are also bad for not taking into consideration the genuine explanation which the petitioners....
X X X X Extracts X X X X
X X X X Extracts X X X X
....quential 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 Government of any State other than the State of Karnataka, a statutory body, a local authority, company, a Hindu undivided family, an Aliyasanthana Family, a partnership firm, a society, a club or an association which carries on such business: (b) a casual trader, a person who has, whether as principal, agent or in any other capacity, carries on occasional transactions of a business nature involving the buying, selling, supply or distribution of goods in the State, whether for cash or for deferred payment, or for commission, remuneration or other valuable consideration; (c) a commission agent, a broker or del credere agent or an auctioneer or any other mercantile agent by whateve....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ltivated 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 registered, in accordance with the provisions of this Act. (2) The tax shall also be levied, and paid by every registered dealer or a dealer liable to be registered, on the sale of taxable goods to him, for use in the course of his business, by a person who is not registered under this Act. 9. Collection of tax by registered dealers, Governments and statutory authorities. - (1) Every registered dealer liable to pay tax under the Act shall collect such tax at the rate or rates at which he is liable to pay tax, and the tax collected shall be accounted for under the provisions of this Act and rules made thereunder. (2) The Central Government, a State Government, a statutory body ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....) 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 except when such revised return is on issue of a debit note under section 30, subject to sub-section (2) of section 72. 36. Interest in case of failure to furnish returns or to pay tax declared on returns or other amounts payable.- Every dealer shall be liable to pay simple interest on any amount of tax which should have been declared on a return, but which has been omitted from it, unless that omission is corrected within three months of the omission subject to sub-section (2) of section 72, and such interest is payable from the date the tax should have been declared, and the dealer shall declare his liability to pay that interest in such form and manner as may be prescribed. (2) If a dea....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iod 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 held in the custody of any transporter, the prescribed authority, or any officer empowered under section 53, has reason to believe that the value shown in the document accompanying the goods in transit or in the purchase invoice is lower than the prevailing market price or Maximum Retail Price, by a difference of thirty per cent or more, and such difference is not on account of any discount or margin allowed in accordance with the regular trade practice of the seller or any special discount or margin allowed by the seller or the goods being sold by the seller after manufacture to the trademark or brandholder, such authority or officers, for reasons to be recorded in writing and, after allowing the pe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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. (2) The power to levy the above penalty shall be vested in the assessing authority as prescribed. 74. Penalties relating to the keeping of records. - (l) Any dealer who fails to keep and maintain proper records, in accordance with section 31 or by order of the prescribed authority shall be liable to a penalty not exceeding five thousand rupees and, in addition, a further penalty not exceeding two hundred rupees per day for so long as the failure continues after being given an opportunity to show cause against such imposition of penalty. (2) Any dealer who fails to retain records and accounts in accordance with sections 32 and 33, after being given the opportunity of showing cause in writing against....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 not exceed double the amount of tax leviable of five thousand rupees whichever is higher. (3) The power to levy the penalty under sub-section (2) shall be vested in the officer authorised under section 52. 78. Offences against officers. - Any person who obstructs, hinders, molests or assaults an authorised officer or any other public servant assisting him in the performance of his duties under this Act, or does anything which is likely to prevent or obstruct any search or production of evidence, 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 or to imprisonment for ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 entered appearance through Sri K.M. Shivayogiswamy, learned Government pleader and responded to the averments and the grounds urged in WP No. 19519 of 2007, by filing statement of objections in this case on behalf of the second respondent-Commissioner of Commercial Taxes in Karnataka, defending not only the action of levy of penalty under sub-section (1) of section 72 of the Act but also urging that the statutory provisions supporting the levy of penalty as not either unconstitutional on the touchstone of Articles 14 and 19 of the Constitution of India or can be said to be unconstitutional for want of legislative competence on the part of the State Legislature, in enacting such a provision. The distinguishing features between....
X X X X Extracts X X X X
X X X X Extracts X X X X
....etion; 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; that the provision in fact eliminates any discrimination from dealer to dealer and therefore it is not a provision suffering from unconstitutionality on the touchstone of Article 14 of the Constitution of India, as contended by the petitioners. 10. It is contended in the statements of objections that the argument that it is a provision which goes even beyond the legislative power of the State Legislature under Entry 54 of List-II of Seventh Schedule to the Constitution, is also an untenable and illogical contention; that it is now well-accepted legal principle that an ancillary and incidental power is considered as a power that goes with the main legislative subject, and therefore also within the competence of the respec....
X X X X Extracts X X X X
X X X X Extracts X X X X
....) 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 behalf of the State and its officers, Sri K.M. Shivayogiswamy, learned Government Pleader, has made submissions, defending the validity of the provisions of sub-section (1) of section 72 of the Act. Submissions have proceeded more or less on the lines of the petition pleadings and the grounds urged on behalf of the petitioners and the counter and statement of objections filed on behalf of the State in two writ petitions viz., WP No. 1982 of 2007 and 9689 of 2006. 14. On behalf of the petitioners, apart from Sri G. Sarangan and Sri Indra Kumar, learned senior counsel, Sri G. Rabhinathan, learned counsel for the petitioner in WP No. 9689 of 2006; Sri C.R. Pandit, learned counsel for the petitioner in WP 483 of 2007; Sri Atul K. Alur, learned counsel for ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 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 India. Such submission is sought to be demonstrated with reference to the actual levies of penalty in the case of the petitioners and it is further urged that the levy of penalty being made compulsory by the statute and not taking into consideration either the different, situations in which different dealers may be placed due to which there can be a failure to ensure compliance within the stipulated time, but also not leaving any element of discretion with the authority levying the penalty to examine any explanation or justification a dealer may have for the smaller delays which may be beyond the control and means of the dealer concerned. Here again, it is submitted that, not providing for an opportunity to a registered dealer before levying maximum penalty by ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....0. 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 Court in the case of Kunnathat Thathunni Moopil Nair v. State of Kerala AIR 1961 SC 552, as also the case of Badri Prasad v. CCE AIR 1971 SC 1170-Para 19. 20. Considerable reliance is placed on the judgment of the Supreme Court in the case of Union of India v. Dharmendra Textile Processors [2008] 18 VST 180 and the decision of the Supreme Court in the case of Salem Advocate Bar Association, Tamil Nadu v. Union of India AIR 2005 SCW 3827 as also the case decided by the Supreme Court in A. Sanyasi Rao's case (supra), to submit that while the scope for reading down a provision by severing the offending part of the provision so that the remaining part of the legislative provision is saved of the vice of unconstitutionality, on the strength of the very decision, it is submitted that when such an alternative is not possible, in the wake....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 therefore renders itself arbitrary and excessive and thereby unconstitutional. 25. Yet another argument advanced on behalf of the petitioners is that in the very nature of levy, a tax on the sale of goods is in the nature of an indirect levy which a dealer can pass on to the consumer or buyer and a penalty which has to be necessarily absorbed by the dealer and cannot be passed on to a consumer, when it reaches disproportionate levels, becomes a tax in the nature of the tax on income, a direct tax, and thereby travels beyond the legislative competence of the State under the Constitution. Such is the argument addressed by Sri N. Nagaraj, learned counsel for the petitioner in WP No. 10328 of 2007. 26. Sri T.N. Keshavamurthy, learned counsel for the petitioner in WP No. 11411 of 2007, by drawing attention to the actual quantum of penalty levied in the case of petiti....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 Ltd's case (supra); * ABC (India) Ltd.'s case (supra); * M.A. Rahman v. State of Andhra Pradesh AIR 1961 SC 1471. 28. With reference to the decision of the Supreme Court in the case of M.A. Rahman (supra), learned Government pleader submitted that a harsh provision like cancellation of the very registration of the dealer who has not remitted the collected tax to the State, which virtually led to stoppage of business of the dealer and violating his right to carry on business as guaranteed under Article 19(1)(g) of the Constitution of India, had been nevertheless sustained by the Supreme Court as a reasonable penalty and on such legal principle, the levy of penalty under sub-section (1) of section 72 of the Act is also well-sustained. 29. Learned Government pleader submitted that levy of penalty under sub-section (1) of section 72 of the Act is part of a well thought out ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ence 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 or 20 days allowed by the statutory provision for ensuring compliance; that the dealer has collected the tax on behalf of the State and had kept the amount with him not only throughout the month but also for a period of 15 or 20 days thereafter; that it is only when the dealer crosses this limit, the penalty is attracted; that a dealer can very well avoid getting into such a situation by ensuring early compliance and not to wait till the last day; that the delay was attributable to an act beyond the control of a dealer is a lame excuse by a dealer who waits till the last date; that levy of penalty on erring dealer or defaulting dealer sub-serves the larger public interest of ensuring prompt remittance of the revenue collected by the registered dealer on behalf of the State, which, is due to the State; that such provisions which are enacted keeping in view the larger public interest, have all been approved by cour....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he 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 of tax due, together with any tax or interest due. II. Section as it stood after amendment by Act No.4 of 2006 with effect from 1-4-2006. 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 of fifty rupees for each day of default in addition to a further penalty of ten per cent of the amount of tax due, together with any tax or interest due. III. Section as it stood after amendment by Act No.6 of 2007 with effect from 1-4-2007. 72. Penalties relating to returns and assessment. - (1) A dealer who fails to furnish a return or who fails to pay the tax due on any return furnished as required under the Act shall be liable to pay together with any tax or interest due,- (a) a penalty of fifty rupees for each day of default and where such default is for more than five days, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing 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' assumes its colour and meaning from the context, in which it figures. What is unreasonable from the angle of Article 14 perpective which basically frowns upon discrimination is different from what is unreasonable in the context of the understanding of Article 19(6) vis-a-vis Article 19(1)(a) to (g). 34. The word 'unreasonable' in the context of Article 14 imbibes within itself arbitrariness whereas the phrase 'unreasonable' in the context of Article 19(6) connotes the concept of disproportionality i.e., a restriction disproportionate to the purpose and object of curtailing the right under Article 19(1) so as to achieve the common good or in the larger public interest which overrides even the right guaranteed under Article 19(1)(a) to (g) only so long as the restriction is a reasonable restriction. The concept of disproportionateness of a restriction is very much prevalent in understanding the scope of Articl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 on by the learned counsel for the petitioners. 38. The extent of levy of penalty in fact goes much beyond the scope of the power of ancillary and incidental power i.e., for ensuring prompt tax remittance to the State, as the only possible loss to the State is loss of revenue for the period of delay and when the loss is compensated by other statutory provisions providing for levy of penalty should be within reasonable limits to act as a sufficient or mere deterrent and not reaching the levels of confiscation. When such levels are reached, it becomes a tax in the nature of tax on income being at 10 per cent of the tax liability. It is to be noticed that the 10 per cent tax liability may not even be the entire profit of the dealer and such levy of penalty while therefore becomes an oppressive levy being confiscatory of a percentage of the tax liability, partakes the character of a levy of tax on income, as the penalty has to be inevitab....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s 30. 18340/07 5,94,507 1,18,902 90 days 31. 20604/07 36,84,806 3,68,481 1 day 32. 2466/08 5,95,332 93,802 730 days 33. 3208/08 1,03,350 19,800 396 days 34. 3979/08 7 1,17,489 7,11,750 153 days 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 the statutory periods provided for under the Act in either filing of the return or paying the collected admitted tax along with the returns etc. The provision is to ensure prompt compliance. It is not a provision wh....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 the provisions of sub-section (1) of section 72 of the Act when a dealer has made bona fide effort to ensure compliance within the permitted limits of law and even when non-compliance occurs due to a reason beyond the control ....