| SooperKanoon Citation | sooperkanoon.com/381297 |
| Subject | Direct Taxation |
| Court | Karnataka High Court |
| Decided On | Mar-26-2009 |
| Case Number | Writ Petition Nos. 10135 of 2006, 4328, 10329, 11279 and 14595/2008 and 6493/2009 |
| Judge | D.V. Shylendra Kumar, J. |
| Reported in | (2009)25VST101(Karn); 2009(3)KCCRSN97; 2009(5)AIRKarR167; AIR2009NOC2987 |
| Acts | Karnataka Value Added Tax Act, 2003 - Sections 3, 3(2), 4, 9, 10, 11, 15, 15(1), 15(4), 38, 39, 39(1), 72, 72(2) and 79; Karnataka Value Added Tax (Amendment) Act, 2004; Karnataka Value Added Tax (Amendment) Act, 2005; Karnataka Value Added Tax (Amendment) Act, 2006; Karnataka Value Added Tax (Amendment) Act, 2007; Karnataka Value Added Tax (Amendment) Act, 2008; Karnataka Sales Tax Act, 1957; Andhra Pradesh General Sales Tax Act, 1957 - Sections 5G(4); Karnataka Entertainments Tax Act, 1958 - Sections 3C; Karnataka Value Added Tax Rules; Constitution of India - Articles 14, 301 and 366(29A) |
| Appellant | New Taj Mahal Cafe Pvt. Ltd. by Its Executive Director, K. Jagadish Shenoy and ors. Etc. |
| Respondent | The State of Karnataka by Its Principal Secretary to Government, Finance Department and ors. Etc. |
| Appellant Advocate | G. Sarangan, Sr. Counsel for T.N. Keshavamurthy, Adv. in W.P. No. 10135 of 2006, ;A. Rama Venkatesh, Vikram and Alur in W.P. No. 4328 of 2008, ;A. Satyanarayan, Adv. in W.P. Nos. 10329, 11279 and 1459 |
| Respondent Advocate | K.M. Shivayogiswamy, HCGP |
| Disposition | Petition partly allowed in favour of assessee |
D.V. Shylendra Kumar, J.
1. Writ petitioners are dealers assessable to tax under the provisions of the Karnataka Value Added Tax Act, 2003 [for short 'the Act']. The Act is a piece of legislation providing for levy of tax on 'sale or purchase of goods', an expression as it occurs in Sub-article 29A of Article 366 of the Constitution of India.
2. Under this Act, persons having transaction in the nature of 'sale or purchase of goods' who are dealers and are required to be registered themselves as 'dealers' which enables them to collect tax on sale of goods at the rate as provided for under the provisions of the Act and pass it on to the State. The registered dealers act as agents for the State in gathering and remitting the tax. Such dealers are required to maintain the details of the sales effected by them, amount of tax collected from their customers, file monthly returns in the prescribed form and pay the tax so collected to the state.
3. The Act has a scheme where under 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 where under ultimately the goods suffer tax irrespective of the number of transactions only once and at the value at which it reaches the consumer.
4. 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% should be levied on the goods or commodity.
5. 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 maintain details of the transactions, books of accounts reflecting such transactions and such other particulars and information as are stipulated under the Act and the Rules framed thereunder.
6. In lieu of payment of tax, as indicated above and as per the Sections 9, 10 and 11 of the Act, the Act provides for an alternative mode of payment of tax as per Section 15, which is known as 'composition of tax'. The composition scheme provides for a rough and ready method of computing the tax liability of a dealer with reference to his total (sic) lower percentage of about 4% or the total turnover irrespective of the composition of the net turnover being inclusive of many known non-taxable components under the Act, such as value of the services, labour charges, and even exempted goods or goods required to be taxed at a lower rate, forming part of the turnover. This is an option extended to a dealer for payment of tax in lieu of the normal scheme of tax under the Act, which facilitates the dealer by relieving the dealer of the requirement of the maintenance of regular accounts and filing returns with full and detailed particulars of the turnover.
7. Writ petitioners are complaining that the scheme of payment of tax by way of composition as envisaged under Section 15 of the Act is not worked in a uniform or fair manner; that certain anomalies are brought about by denying the facility of composition in certain circumstance, which is not fair, not reasonable and therefore complaining of the denial of the facility under the stipulated circumstances, as illegal, unconstitutional. Petitioners have approached this Court for relief praying for declaring the invalidity of the provisions of Section 15 of the Act in such a manner that while the facility is retained, the discriminating part of the provisions is severed from the main provision.
8. In writ petition No. 10135 of 2006, the petitioner - a Hotelier who is a dealer assessable to tax under the provisions of the Act has questioned the legality of the provisions of Section 15 of the Act as being unconstitutional on the ground that it is a provision violating Article 14 of the Constitution of India, being discriminatory in nature and making an irrational classification of dealers who were extended the benefit to opt for composition who were all dealers who made their purchases within the State of Karnataka 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 and by denying, 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 of the Act. Because of such consequence, the petitioner in this writ petition has also questioned the legality of the provisions of Section 72 of the Act.
9. Writ petitioner in WP No. 4328 of 2008 is also a dealer and who is a caterer, in the sense, supplier/seller of food items who has also suffered an adverse order by way of reassessment order under the provisions of Section 39 of the Act and because of which the tax liability has gone up.
10. 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 which has gone into the making of the taxable turnover in respect of which the petitioner had opted for the facility of payment of tax by way of composition under Section 15 of the Act and which had been extended to the petitioner on an application but which has now been cancelled and the petitioner assessed to tax on the regular basis of charging Section i.e., under Sections 3 and 4 of the Act.
11. Writ petitioners in WP Nos. 10329/2008, 11279/2008, 14595/2008 are petitioners who are dealers under the provisions of the Act and who have been levied with penalty under Section 72[2] of the Act in the course of reassessment proceedings passed on them under the provisions of Section 39[1] of the Act.
12. Petitioner in WP No. 10135 of 2006 a caterer had it appears opted for payment of tax under the provisions of the Act in terms of Section 15 of the Act. Section 15 of the Act which reads as under:
[A]. Section 15 of the Act by Karnataka Act No. 32 of 2004 w.e.f. 19.1.2005:
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 prescribed.
(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 prescribed.
(4) Any dealer opting for composition of tax under Sub-section (1) shall not be permitted to claim any input tax on any purchases made by him.
[B]. Section 15 of the Act by Karnataka Act No. 32 of 2004 amended w.e.f. 1.4.2005:
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
(e) 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 man 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 prescribed.
(4) Any dealer opting for composition of tax under Sub-section (1) shall not be permitted to claim any input tax on any purchases made by him.
[C] Section 15 of the Act by Karnataka Act No. 27 of 2005 w.e.f. 7.6.2005:
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 dealer running a sweetmeat stall or an ice cream parlour.
(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 wider 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 prescribed.
(4) Any dealer opting for composition of tax under Sub-section (1) shall not be permitted to claim any input tax on any purchases made by him.
[D] Section 15 of the Act by Karnataka Act No. 4 of 2006 w.e.f. 1.4.2006:
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 an amount as man 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 man 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 prescribed.
(4) Any dealer opting for composition of tax under Sub-section (1) shall not be permitted to claim any input tax on any purchases made by him.
(5) Notwithstanding anything contained in Sub-sections (1) and (4)-
(a) a dealer executing works contracts and who purchases or obtains goods from outside the State or from outside the territory of India shall be eligible to opt for composition under Sub-section (1) and if the property in such goods (whether as goods or in some other form) is transferred in any works contract executed by him, the dealer shall be liable to pay tax on the value of such goods at the rate specified in Section 4, and such value 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;
(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 paid to a sub-contractor 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), 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 shall be liable to pay tax on the value of such goods at the rate specified in Section 4, without any deduction for input tax on purchase of such goods made by him;
(d) in the case of a dealer opting for composition of tax under Clause (a) or (c) of Sub-section (1), the turnover on which tax is leviable under Sub-section (2) of Section 3 shall be deducted from the total turnover on which an amount as notified is payable under Sub-section (1) by way of composition in lieu of the tax payable wider the Act.
[E] Section 15 of the Act by Karnataka Act No. 6 of 2007 w.e.f. 1.4.2007:
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 per annum as may be notified by the Government.
(2) Notwithstanding anything contained in Sub-section [1], a dealer whose nature of business is of a type falling under more than one Clause of Sub-section [1], shall be eligible to opt for composition under the said Sub-section in respect of tax payable on his turnover relating to any or all of such types of business subject to the condition that-
[a] 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 Sub-section [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 Sub-section [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, the exercise of his option and he shall pay such amount due and furnish a return in such manner as may be prescribed.
(4) Any dealer opting for composition of tax under Sub-section (1) shall not be permitted to claim any input tax on any purchases made by him.
(5) Notwithstanding anything contained in Sub-sections (1) and (4),-
(a) a dealer executing works contracts and who purchases or obtains goods from outside the State or from outside the territory of India shall be eligible to opt for composition under Sub-section (1), and if the property in such goods (whether as goods or in some other form) is transferred in any works contract executed by him, the dealer shall be liable to pay tax on the value of such goods at the rate specified in Section 4, and such value 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;
(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 sub contractor 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 shall be liable to pay tax on the value of such goods at the rate specified in Section 4, without any deduction for input tax on purchase of such goods made by him;
(d) in the case of a dealer opting for composition of tax under Clause (a) or (c) of Sub-section (1), the turnover on which tax is leviable under Sub-section (2) of Section 3 shall be deducted from the total turnover 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;
(e) a dealer executing works contracts and opting for composition of tax under Sub-section [1], shall be liable to pan 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.
[F] Section 15 of the Act by Karnataka Act No. 5 of 2008 w.e.f. 1.8.2008:
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 (sic) 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 fatting 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) Notwithstanding anything contained in Sub-section [1], a dealer whose nature of business is of a type falling under more than one Clause of Sub-section [1], shall be eligible to opt for composition under the said Sub-section in respect of tax payable on his turnover relating to any or all of such types of business subject to the condition that-
[a] 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 Sub-section [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 Sub-section [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, the exercise of his option and he shall pay such amount due and furnish a return in such manner as may be prescribed.
(4) Any dealer opting for composition of tax under this Section shall not be permitted to claim any input tax on any purchases made by him.
(5) Notwithstanding anything contained in Sub-section (1),-
(a) a dealer executing works contracts and who purchases or obtains goods from outside the State or from outside the territory of India shall be eligible to opt for composition under Sub-section (1), and if the property in such goods (whether as goods or in some other form} is transferred in any works contract executed by him, the dealer shall be liable to pay tax on the value of such goods at the rate specified in Section 4, and such value 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;
(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 sub contractor 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 subcontractor 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 shall be liable to pay tax on the value of such goods at the rate specified in Section 4, without any deduction for input tax on purchase of such goods made by him;
(d) in the case of a dealer opting for composition of tax under Clause (a) or (c) of Sub-section (1), the turnover on which tax is leviable under Sub-section (2) of Section 3 shall be deducted from the total turnover 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;
(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 & IV to the Act and if it did not figure in any of the schedules at the rate of 12 1/2% 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 VI Schedule to the Act.
13. 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 5% in general in lieu of the net amount of tax payable by a dealer, the State Government by issue of Notification dated 23.3.2005 for such purpose had stipulated 4% to be the rate for dealers opting for composition. Significance of opting for composition was that such dealers were relieved of the need for maintaining detailed books of accounts and also filing a return in Form No. 100 which required a dealer to furnish elaborate details of the turnover etc. This facility was at a price, in the sense, the dealer was required to pay the tax at the rate of 4% in respect of the entire turnover irrespective of the fact as to whether some part of the turnover was liable to tax or otherwise. The facility of composition was confined to identified class of dealers such as petty dealers or small dealers whose total turnover in an year did not exceed the amount as notified but below Rs. 50 lakhs in general or to those class of dealers who are executing works contract and who are dealers in the nature of restaurantier, hotelier or a dealer running an ice cream parlour, bakery or even a mechanized crushing unit producing granite or any other metals or any other class of dealers who can be added to the class of dealers by issue of the notification by the State Government.
14. There was one overriding condition or restriction as contained in Section 15 of the Act that all such dealers should not be dealers who are making purchases from outside the State or from outside the country. Such purchases acted as a disqualification for claiming the benefit of composition.
15. The controversy in these writ petitions, in so far as writ petition No. 10135 of 2006 is concerned, is for the period relating to assessment year 2005-06. In so far as writ petition No. 4398 of 2008 is concerned, it is for the assessment year 2006-07, in so far as WP No. 10329 of 2008 is concerned, it is for the assessment years 2005-06 & 2006-07, in so far as WP No. 11279 of 2008 is concerned, it is for the assessment year 2005-06, in so far as WP No. 14595 of 2008 is concerned, it is for the assessment years 2005-06 & 2006-07.
16. It appears petitioners had cleared their tax liability on the basis of the liability as can be computed in terms of Section 15 of the Act and were rest content. However, the assessing authorities appear to have been activated by the audit department 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 of the Act and for a good measure have also roped in the validity of Section 72[2] of the act where under consequential penalties have been levied on the petitioners.
17. The attack on the validity of Section 15 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; that denying the facility to such of those dealers who are nevertheless provided the facility in terms of Clauses [a], [b], [c] & [d] of Section 15 of the Act only on the ground that they had made purchases from outside the State while such of those dealers even within Clauses [a], [b], [c] & [d] of Section 15 who had not made such purchases are being provided such facility; that this classification is highly artificial, unreasonable and therefore violates the mandate of Article 14 of the Constitution of India and should be declared as unconstitutional.
18. The writ petitions having been admitted for examination by issue of rule and the State having been put on notice, the State Government has entered appearance through Sri. K.M. Shivayogiswamy, learned Government Pleader and has also filed its statement of objections.
19. The State Government has sought to defend the validity of Section 15 of the Act by drawing attention to the change over of the scheme of levy of sales tax under the Karnataka Sales Tax Act, 1957, the scheme of levy of tax under the Karnataka Value Added Tax Act, 2003 which virtually seeks to harmonize the levy of sales tax as though it is a single point levy; that the scheme is so formulated that the goods which has suffered tax once does not suffer the levy of sales tax again and it is only on the additional value, tax is sought to be levied and collected i.e., on the value addition at each point of transaction and having regard to the net liability of the registered dealer and the concept of net tax payable by a registered dealer under the provisions of Section 15 of the Act, a provision for providing composition has been suitably altered vis-a-vis a like provision which was available under the provisions of the Karnataka Sales Tax Act; that die practical effects of maintaining accounts, filing detailed returns were all taken into consideration in identifying the class of dealers who were provided with the facility of composition and in respect of dealers who had innumerable inputs as forming part of their output and therefore numerous transaction of purchases and sale and the consequential complication or practical difficulty in maintaining the accounts and the details of the transaction to be mentioned in the returns, the quick and ready method of paying taxes by opting for composition was extended to such dealers; that the State Government had identified such class of dealers as mentioned in class [a], [b], [c] & [d] of Section 15 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 greater hardship but who were all required to maintain books of accounts other than the class of dealers who purchased outside the State but cannot be excluded from the facility of opting for composition as an option; that such class of dealers are clearly identifiable and distinguishable from the class of dealers who in fact purchase within the State; that the classification is not only reasonable but sub-serving the purpose of extending the facility of composition without any substantial loss to the exchequer, has nexus to the object of providing facility of composition and therefore have sought to defend the classification as reasonable and passing the test of Article 14 of the Constitution of India.
20. The State Government has filed normal statement of objections on 4.11.2006 and on 10.2.2009 as also two additional statement of objections on 17.3.2009 and on 23.3.2009.
21. It is basically on such respective versions, submissions are made on behalf of the petitioners and the respondent - State.
22. I have heard Sri. G. Sarangan, learned senior Counsel appearing for the writ petitioner in WP No. 10135 of 2006 and instructed by Sri. Keshava Murthy, learned Counsel who has supplemented the arguments all along and Sri. Vikram, learned Counsel for the petitioner in WP No. 4328 of 2008 and Sri. Shivayogiswamy, learned Government Pleader appearing for the respondent - State.
23. Submission of Sri. G. Sarangan, learned senior Counsel appearing on behalf of the petitioners proceeds on the premise that the classification attempted in terms of the main provision of Section 15 of the Act has absolutely no reason or rhyme; that when once the State has decided to provide or extend the facility of composition to the identified class of dealers as identified under Clauses [a], [b], [c] & [d] of Section 15 of the Act there is absolutely no justification to keep out some dealers even amongst the identified class of dealers; that denying the facility of composition even amongst the identified class of dealers only to such dealers who made purchases outside the State has no rationale nor the classification is made on any justifiable basis; that the classification virtually discriminates against dealers like the petitioners who may incidentally have some purchases from outside the State; that a stipulation of this nature to keep out the class of dealers who have effected 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.
24. 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 purchases effected by them from outside the State but has come as a rude shock in the form of the impugned orders wherein the assessing authorities have not only cancelled the composition facility under Section 15 of the Act but have even the earlier period proceeded to assess the liability otherwise resulting in an additional tax burden on the petitioners and also to levy of penalty; that all such consequences have befallen the petitioners only because of the discriminatory nature of Section 15 of the Act; that the offending part of Section 15 of the Act which is one of denying the facility to dealers effecting purchases or obtaining goods from outside the State or from outside the territory of India if is exorcised from the main provision, the statutory provision would not only become valid but would also serve the purpose of extending the facility of composition to identified class of dealers and therefore has submitted that to save the entire provision from being declared unconstitutional, only the offending portion of the Section can be rendered ineffective by reading down Section 15 so as to remove the offending portion from the Section and retain the provision which is not only not falling foul of the constitutional scheme but also at the same time achieves the object of Section 15 of the Act namely of extending the composition.
25. It is the submission of learned senior Counsel appearing for the petitioner that it is a well known principle of interpretation to read down a statutory provision if the provision comprises of a benign part and an offending part to read it down in such a manner so that what remains is the benign part alone so as to make the provision constitutional by ceding the offending part even if it amounts to judicial surgery of legislation.
26. Learned senior Counsel appearing for the petitioner has placed strong reliance on the Judgment of the division Bench of the Andhra Pradesh High Court in the case of Maruthi Constructions v. Government of A.P. and Anr. reported in : 2007 [10] VST 362 [AP] wherein the division Bench of the Andhra Pradesh High Court had occasion to examine the constitutional validity of Section 5G[4] of the Andhra Pradesh General Sales Tax Act, 1957, an analogous provision similar to the provisions of Section 15 of the Act, also providing for composition but excluding the facility in respect of very type of dealers having outside the 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 effected 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 of the Act could be declared as unconstitutional and Section retained without the offending portion. Special attention is drawn to paragraphs-40 to 44 of the Judgment of the Andhra Pradesh High Court.
27. It is the submission of 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.
28. It is also pointed out by learned senior Counsel appearing for the petitioner that making a classification of dealers who have their purchases outside the State and dealers who have their purchases within the State and a provision having the effect of creating a higher liability on dealers who have their purchases from outside the State is a provision which is in contravention of the mandate of Article 301 of the Constitution of India; that it virtually impedes inter state trade and commerce; that the provision being one discouraging outside the state purchases is directly infringing upon the provision of Article 301 of the Constitution of India and for this reason the offending part should be declared as unconstitutional.
29. In support of the submission that the offending part of a statutory provision can be removed by reading down the provision in such a way that the provision is read without the offending part, Sri. G. Sarangan, learned senior Counsel appearing for the petitioner has placed reliance on the following decisions of the Supreme Court:
[a] State of T.N. and Anr. v. P. Krishnamurthy and Ors. reported in : [2006] 4 SCC 517.
[b] Satyawati Sharma [dead] by Lrs v. Union of India and Anr. reported in : AIR 2008 SC 3148.
30. Countering such submissions, Sri. Shivayogiswamy, learned Government Pleader appearing on behalf of the State and the authorities would submit with reference to the statement and additional statement of objections filed on behalf of the State Government that the provision of Section 15 of the Act is a provision providing or extending a facility to some of the dealers; that it is more like an exception to the general scheme of the Act of levying tax in terms of charging Sections 3 and 4 of the Act; that while the purpose and object of Section 15 of the Act is to provide facility to facilitate certain class of dealers who could have great difficulty in maintaining regular accounts and filing the returns giving full particulars of the turnover, input tax, output tax, net tax liability etc.; the Government did not want to lose any revenue by the extension of the facility to such class of dealers who were otherwise finding it extremely difficult to fall in line with the general scheme; that such dealers have been identified and as it was found that extending the facility to the identified class of dealers as a class was found to be detrimental to the revenue, in the sense, 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 while the total revenue generated in the State even after extending the facility of Section 15 of the Act is not substantially affected.
31. Submission is that while the 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.
32. Sri. Shivayogiswamy, learned Government Pleader in this regard also submits that the provision of Section 15 of the Act is not a provision akin to a charging section; that it is only an optional provision, in the sense, being an alternative mode of assessment and payment of tax is an option open to the assessees; that it is not thrust on the assessees that a person who has opted for payment of tax by composition cannot later turn around and complain that it is discriminatory or violative of Article 14 of the Constitution of India.
33. In this regard, Sri. Shivayogiswamy, learned Government Pleader would place reliance on the decision of the Supreme Court in the case of State of Kerala and Anr. v. Builders Association of India and Ors. reported in 104 STC 134; that the present writ petitions at the instance of the petitioners should not be entertained for the reason that the petitioners are persons who had sought for availing the benefit, of composition as it stood earlier when the scope of the provision was well known and later cannot turn around and question the legality of the very provision under which they had claimed the benefit and therefore they are estopped from filing the present writ petitions to question the legality of the provisions of Section 15 of the Act.
34. Learned Government Pleader would also draw attention to the factual details furnished in the additional statement of objections dated 17.3.2009 and 23.3.2009 filed in WP No. 4328 of 2008 providing the details of the nature of outside purchases effected by this petitioner, the possible tax liability if the same should have been purchased within the State and the possible reduced revenue to the State because of the outside purchases by this petitioner.
35. It is also pointed out that in so far as dealers who are in the business of catering/restaurant, the activity is much more than mere selling of food items; that they have been making purchases of many capital machineries from outside which necessarily does not form part of their products which is sold such as food items; that the capital machineries and other instruments in the nature of capital is used for either hiring or leasing to generate further revenue to the petitioner and it is taking into account such aspects of the particular trade or industry peculiar to the dealers in the business of catering and restaurant business and having regard to 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.
36. The following two tables as found in the additional statement of objections dated 17.3.2009 to WP 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 23.3.2009 are placed before the court.
--------------------------------------------------------------------------------Sl. Name of the goods Rate of tax Tax paid by the petitionerNo. Under Section company4 of the VAT Act--------------------------------------------------------------------------------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 12.5% 4% - loss by 8.5%machines---------------------------------------------------------------------------------4. Hiring charges 12.5% 4% - loss by 8.5%received for hiringout coffee vendingmachines--------------------------------------------------------------------------------5. Capital goods like 12.5% These purchase, turnoversair-cooler, are not declared at all by arefrigerators, hotelier or caterer for thefurniture, pressure reason that these goods arecookers etc., used as capital goods andthey would not be sold.Hence there is a loss to theState by 12.5%--------------------------------------------------------------------------------6. Any ingredients 4% or 12.5% These goods are used in therequired in the as the case process of manufacture ofmanufacture of may be eatables and drinks andeatables and drinks based on therefore no tax would begoods payable by thepurchased hoteliers/caterers, becausethey are not sold generallyas it is.------------------------------------------------------------------------------------------------------------------------------------------------------------Sl. Name of the Goods Gross value How it Tax U/KVATNo. Dealer purchased of the goods has Act that shouldpurchased been have beenused purchased fromlocal RDs - as aprecondition toavail thecompositionbenefit.-------------------------------------------------------------------------------1. Machinery Coffee Rs. 98,91,750/- Used Rs. 12,36,469/-., Tea premixMumbai------------------------------------------------------------------------------7. BN Roy Wood Wooden Rs. 29,852/- Used Rs. 3,732/-Industries, Coffee for [12.5%]Calcutta Stirrers sales-------------------------------------------------------------------------------TOTAL Rs. 1,23,20,723/ TOTAL Rs. 15,40,092/---------------------------------------------------------------------------------
37. The first of the table while is sought to support the argument that there is some revenue losses to the State Government by the purchases effected by the dealer which are purchased from outside the state, the second table is to demonstrate the actual state of affairs i.e., the possible reduced revenue to the State etc.
38. With reference to these factual details, it is sought to be submitted that the keeping out the dealers effecting purchases from outside the state and from outside the country from availing the facility of composition achieves the object of preventing possible revenue losses by the operation of scheme of Section 15 of the Act and also achieves the object of a uniform spread of the tax burden on dealers who have their purchases from inside the state alone and those who have their purchases from outside the state.
39. Reliance is also placed on the single Bench decision of this Court in the case of Cauvery Theatre and Ors. v. Union of India and Ors. rendered on 17.9.2008 in WP No. 19802 of 2007 upholding the validity of Section 3-C of the Karnataka Entertainments Tax Act, 1958 which had also been attacked on the ground of discrimination and it is submitted that the facility of composition being more in the nature of concessional exemption the ratio of the decision in Cauvery Theatre's case equally applies and therefore also it is urged that the provisions of Section 15 of the Act cannot be said to be a discriminatory provision.
40. It is in the light of such pleadings and submissions, the validity of Section 15 of the Act is to be examined.
41. Section 15 of the Act is a provision which is one providing a facility and even as understood by the Supreme Court an alternative scheme of assessment and tax payment Though Section 15 of the Act is an optional scheme and therefore one cannot complain unless one is compelled to follow the same, the argument of the learned Government Pleader that just because an 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 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 petitioners' right as such which is involved and examined but the action of the State whether in the exercise of legislative power or executive power, the State is acting in a fair manner, in a non-arbitrary manner, whether the State is discriminating between person and person that is examined by the courts. When viewed from this angle, it cannot be denied that the petitioners have locus to maintain the petitions; even to question the constitutional validity of the provisions, particularly, as the operation of the provision has affected them though the petitioners did avail of the benefit knowing fully well that they could not have availed the benefit if they should have effected or likely to make any purchases from outside the State. The provisions as enforced on the petitioners is not merely making a difference in the tax liability under the Act but also has resulted in orders levying penalty under Section 72[2] of the Act and such consequences does give cause for the petitioners to seek relief before the courts for declaration with regard to the constitutional validity and it is because of this reason, the petitions are examined for declaring the validity of Section 15 of the Act.
42. Section 15 of the Act as noticed is not a charging Section but a provision providing a facility and alternative scheme for payment and collection of tax in lieu of the liability under the charging section. It is not a provision for creating any additional tax liability. The complaint also is not one of burden of tax liability but the complaint is only in the matter of classification of dealers who get the facility.
43. Whenever a statutory provision is challenged as discriminatory by differentially treating the persons, the question will be as to whether the persons with whom the comparison is made are identical or similarly situated. There is no absolute equality nor all persons are alike. Therefore a differential treatment having regard to the differently situated persons is not one resulting in discrimination.
44. The only requirement when differential treatment is being meted out to different types of persons is that the difference or the distinguishing features between the two classes should be identifiable by itself and that should have some purpose to be achieved in the context of the provisions of the law. Celebrated principle of the classification being on an intelligible 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.
45. 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 sweetmeat stall, but in the sense, who are selling edible items or who is a mechanized crushing unit producing granite or any other metals. The general scheme as indicated for identifying these dealers is that their inputs are numerous and in small quantities. Maintenance of the details of such purchases and input taxes may be cumbersome and as a alternative scheme of taxation by composition is extended to them as a rough and ready method but at the same time not losing sight of the main object of the Act of raising revenue, it cannot be said that the provision does not pass the test of Article 14 of the Constitution of India.
46. Therefore, an attempt to balance the two, extending the facility of composition for facilitating such dealers who may lace hardship if are required to strictly comply with the procedural requirements of maintaining the accounts and filing returns and at the same time the State not willing to forego its revenue appreciably, definitely is an object and if this object is to be achieved i.e., classification of dealers amongst the identified dealers as to who should be provided the facility and who should not be to achieve this object of extending the facility and not diminish the revenue to the State, it can be said that classification in such a manner has a nexus to the object.
47. Though the statement filed by the State in the counters and additional counters is with reference to one single petitioner and is not necessarily an example for generalizing the same, it is more symptomatic of the kind of transactions which possibly the persons like the petitioners, caterers/restaurateurs have been doing and to demonstrate the consequences of such persons having purchases outside the state and the possible results on revenue.
48. The table definitely indicates that when dealers identified as hoteliers, restaurateurs and caterers are provided the facility in all situations, there will be reduced revenue to the State attributable to the dealers even amongst them who have purchased from outside the State. The classification here need not be absolute and precise. The provision also being not a charging Section it is also not necessary for the State to demonstrate that the burden is more or less uniform. The provision being one to provide for a facility and while extending the facility if the State has made a classification on a plausible method and so long 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 having purchased from outside the State and those who do not have, can be said to be a reasonable classification and having some purpose and nexus to the object of providing 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 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 within them a further sub-classification i.e., in the first instance, the petitioners are identified as class of dealers who alone get the facility and not others in general. Such being the nature of the provision, a further sub-classification to fine tune the provisions cannot be one characterized as discriminatory as the object of classification is only in furtherance of the main purpose of extending the facility and at the same time retaining the revenue to the State at more or less the same level. So long as the provision is achieving this object the provision passes the test of Article 14 of the Constitution of India and that is what is found in the present situation and it is therefore to be declared that the provision does not infringe Article 14 of the Constitution of India as being discriminatory.
49. Though Sri. Sarangan, learned senior Counsel appearing on behalf of the petitioners has urged that when a provision is found to be bad and that part of the provision which is found to be bad can be identified and principle of reading down can be employed by retaining the benign part and quashing the offending part, such a situation does not arise.
50. One another argument advanced by Sri. G. Sarangan, learned senior Counsel appealing for the petitioners to impugn the validity of Section 15 of the Act is that the provision denying the facility of payment of tax by way of composition to dealers who have purchased goods from outside the State or from outside the country is in the teeth of the provisions of Article 301 of the Constitution of India, being in the nature of a provision restricting interstate trade, commerce and movement of goods and is therefore to be declared as unconstitutional.
51. The argument though would have been a good one if it was a case of the provision really coming in the way of free movement of trade and commerce, particularly of the goods in which the petitioners deal with, overlooks the obvious position that in the first instance Section 15 of the Act is a scheme of payment of tax as an alternative mode of payment of tax and offered as a choice to the dealers. It is not thrust on any dealer. It is not even a Section creating a liability for payment of tax. The complaint is that while offering the facility a distinction is made from one dealer to another depending upon the purchases of goods being within the state and from outside the state; that the very basis of distinction is bad in law etc.
52. 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.
53. In fact, the obstruction, for attracting Article 301 of the Constitution of India is said to be the denial of facility to dealers having outside the 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 composition the argument that the provision is violative of Article 301 of the Constitution of India and therefore unconstitutional, fails and is accordingly rejected.
54. That still leaves the question of challenge to the validity of Section 72[2] of the Act as has been done in the case of writ petitioner in WP No. 10135 of 2006 and in the other writ petitions though it is not challenged there is the effect of levy of penalty under Section 72[2] of the Act in the context of cancellation of facility of composition under Section 15 of the Act and in the other four writ petitions, namely, WP Nos. 10329 of 2008, 11279 of 2008, 14595 of 2008 and 6493 of 2009, the challenge is again to the validity of Section 72[2] of the Act the petitioners having suffered penalty under Section 72[2] of the Act either as the consequence of availment of composition or otherwise the validity is required to be examined.
55. On the question of the constitutional validity of Section 72[2] of the Act, submission of Sri. G Sarangan, learned senior Counsel appearing for the petitioners is that the provision seeks to impose a penalty on a dealer just because the authorities when notice a difference of more than 5% between the tax paid by the dealer and the actual liability to tax, which difference is noticed as a result of the actual tax paid by the dealer falls short due to the subsequent reassessment of the liability of the dealer on cancellation of composition; that the penalty levied under this provision varied from 10% to 20% depending upon the point of time when the provision was operative; that the penalty being levied not because of any default on the part of the dealer but because of the denial of composition and therefore the levy of penalty and a provision of this nature are both bad in law.
56. Section 72[2] of the Act reads as under:
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.
[b] a further penalty equal to:
[i] five percent of the tax due, if the default is for more than ten days;
[ii] ten percent of the tax due, if the default is for more than 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 ore 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 percent of the amount of such tax under or overstated.
[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 writing against the imposition of a penalty, shall be liable to pay penalty of thirty per cent of the amount of tax payable by him as assessed under Section 38 or reassessed under Section 39.
[6] 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.
57. As can be noticed, the percentage of penalty was at 20% at the beginning of the statutory provision upto 31.3.2006 and thereafter it has been at 10%.
58. The challenge is on the premise that a penalty of this nature is levied statutorily whether or not there is any contumacious conduct on the part of the petitioners and even when the difference is attributable to no fault of the dealer but to any other reasons not within the control of the dealer. Submission is that penalty being a levy in the nature of a deterrence it should visit only those who are committing violation with some intention or design, so that they are dissuaded from repeating the same; that the automatic levy of penalty under the statute works at cross purposes to the very object of levying penalty on erring persons, particularly, the person who errs consciously and is opposed to the principles of punishing a person as a measure of deterrent.
59. It is also submitted that just because there is an infraction it need not necessarily result in a penalty; that it is always necessary to examine the facts and circumstances before passing any order of penalty and in support of this submission reliance is placed on the law declared by the Supreme Court in the case of Hindustan Steel Limited v. State of Orissa reported in [1970] 25 STC 211 and therefore it is submitted that a levy of penalty statutorily without giving an opportunity to the dealer to explain before the authority levying penalty as to why a penalty is not justified amounts to denial of an opportunity and the provision becomes arbitrary and is therefore violative of Article 14 of the Constitution of India and it is on such grounds, the provisions of Section 72[2] of the Act are questioned and sought to be declared as unconstitutional.
60. Learned senior Counsel appearing for the petitioners would draw attention to the existence of other reparatory provisions under the Act such as provision for not only levy of interest but also other penal 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.
61. In support of such submissions, reliance is placed on the Judgment of the Supreme Court in the case of The Cement Marketing Co. of India Ltd. v. The Assistant Commissioner of Sales Tax, Indore and Ors. reported in 45 STC 197.
62. 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 an element of mensrea 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 provide for penal provisions in the enactment to ensure its compliances; that providing for penalty of this nature wherein there is a difference of more than 5% in the matter of payment and actual tax liability, is a provision which is provided for ensuring better compliance with the payment of taxes; that the provision ensures the dealers do not err liberally, as the scheme of the Act is one to provide for payment of tax voluntarily by the dealers and is the norm excepting the cases which are chosen for scrutiny and reopening of assessment and therefore the provision of this nature ensures dealers by themselves to comply with the tax liability promptly and has the object of achieving such compliance and submits that levy of penalty at 10% or even 20% is reasonable rate of levy, particularly, when penalties at such high rates as 30% penalty levied under the analogous provisions of the other states has been upheld and in support of the submission has placed reliance on the following decisions:
[1] State of Rajasthan and Anr. v. D.P. Metals reported in 124 STC 611.
[2] Guljag Industries v. Commercial Tax Officer reported in : [2007] 9 VST [1] SC.
63. The absence of mensrea being not a material factor in a provision providing for penalty in fiscal statutes is an accepted legal principle for quite some time. The above two decisions of the Supreme Court does affirm this view.
64. Whether the dealers intended to create a difference of more than 5% or otherwise is not a criteria any more and the penalty is attracted the moment in reality there is difference of more than 5% in the payment and the actual tax liability. So long as there is a difference which is payable by the dealer and can be collected by the State and it cannot be denied that but for the order that would have gone unnoticed, providing for penalty in the case of whether it is so actually noticed cannot be said to be unreasonable provision. The rate of 10% as it stands now and even 20% as was earlier cannot also be said to be so very unreasonably high as amounting to a penalty in the nature of confiscatory penalty. It should be noticed that penalty is with reference to the actual tax liability which had not reached the coffers of the state and at a percentage and having regard to the fact that penalty is meant to serve the purpose of deterrence that an element of mensrea is read into statutory penal provisions, that purpose still being achieved by levy of penalty, it cannot be said that the very levy makes it unreasonable or unconstitutional.
65. 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 5% if it exists or otherwise. To that extent, the levy being not automatic but only in cases where there exists difference of more than 5% in the actual tax liability, levy of penalty cannot be characterized as quite very unreasonable levy.
66. 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 officer having assessed the tax without this facility under the provisions of Section 4 of the Act. It is therefore submitted that in such cases, there is no scope for levy of penalty under Section 72[2] of the Act and if the provision should be declared as unconstitutional, penalty orders are not sustainable and should be quashed.
67. Learned Government Pleader appearing for the state points out that this question having not been examined as it is now contended by the petitioners, is a matter for the authorities to examine and not one involving the question of validity of the statutory provisions and therefore the petitioners should be relegated to the statutory remedies so far as this aspect of the matter is concerned.
68. In the light of the rival submissions, I deem it fit to permit the petitioners to avail of the statutory remedies only in so far as levy of penalty under Section 72[2] of the Act is concerned as this Court will not be in a position to examine the rival contentions in these petitions while examining the constitutional validity of Section 72[2] of the Act which was an independent question and which was examined and answered against the petitioners.
69. It is also pointed out by learned Counsel for the petitioners that so far as levy of penalty is concerned, the assessing authority did not give an opportunity of showing cause in writing against the proposition of imposition of penalty under Section 72[2] of the Act after the authority had actually determined difference of 5% of the tax liability by the petitioners but had merely indicated along with the proposition notice for reassessment the possibility of levy of penalty etc.
70. An examination of the provisions of Section 72[2] indicates that before levy of penalty under Section 72[2] of the Act, an opportunity is a must and that too enabling the dealer to show cause in writing.
71. To this extent, opportunity being as indicated in the statutory provision, it is not a mere formality but one which has to be ensured for compliance. The show cause notice for levy of penalty should clearly recite that there are ingredients such as the actual determination of the under statement of the liability by the dealer is indicated in concluded assessment order and it is only thereafter such levy of penalty under Section 72[2] of the Act can be taken up and if a penalty is imposed even before going through these procedures and opportunities, the levy of penalty will be bad for want of not giving an opportunity and being in violation of Section 72[2] of the Act itself.
72. Though learned Government Pleader would suggest that the matter can go back to the appellate authority to adjudicate the matter, I am of the view that as the penalty is levied even without providing proper opportunity to the petitioners and without proper proposition in this regard, it is only necessary that the petitioners are enabled to file written explanation and thereafter the assessing authority may examine the same and if need be affording an opportunity of hearing and then proceed to orders and therefore so far as the penalty part of the orders are concerned, they stand quashed by issue of a writ of certiorari and the levy of penalty as indicated earlier can be taken as proposition and petitioners are permitted to file their objections within six weeks from today before the concerned assessing authority.
73. Writ petitions are allowed in part. Rule issued only to the limited extent.