2001 (10) TMI 881 - SC - VAT and Sales Tax

Whether section 78(5) of the Rajasthan Sales Tax Act, 1994, was unconstitutional and ultra vires - Penalty levy - Held that - The penalty so fixed is meant to be a deterrent and we do not see anything wrong in this. The quantum of penalty under the circumstances enumerated in section 78(5) cannot, in our opinion, be regarded as illegal. The quantum of tax levied by the taxing statute, the conditions subject to which it is levied, the manner in which it is sought to be recovered, are all matters within the competence of the Legislature, and in dealing with the contention raised by a citizen that the taxing statute contravenes article 19, courts would naturally be circumspect and cautious as such there cannot, in the present case, be any valid challenge to the rate of penalty provided for in section 78(5) of the Act. Thus the provisions of section 78(5) of the Rajasthan Sales Tax Act, 1994, are valid and the impugned decision of the High Court in this regard is not correct. These appeals, except Civil Appeals No. 1321 of 2001, are accordingly allowed. Civil Appeal No. 1321 of 2001 is dismissed.

Issues Involved:
1. Constitutionality of Section 78(5) of the Rajasthan Sales Tax Act, 1994.
2. Legislative competence of the State under Entry 54 of List II of the Constitution.
3. Validity of the penalty provisions and their nexus with tax evasion.
4. Requirement of mens rea for imposing penalties under Section 78(5).

Detailed Analysis:

1. Constitutionality of Section 78(5) of the Rajasthan Sales Tax Act, 1994:
The Supreme Court examined the High Court's decision, which declared Section 78(5) unconstitutional and ultra vires. The High Court had found that the penalty provisions were excessive, arbitrary, and unreasonable, thus violating Articles 14, 19(1)(g), 301, and 304 of the Constitution. However, the Supreme Court upheld the constitutionality of Section 78(5), stating that it was a valid exercise of legislative power aimed at preventing tax evasion.

2. Legislative Competence of the State under Entry 54 of List II of the Constitution:
The appellants argued that Section 78(5) was within the legislative competence of the State under Entry 54 of List II, which pertains to taxes on the sale or purchase of goods. The Supreme Court agreed, citing previous judgments that upheld similar provisions in other states' sales tax laws. The Court noted that provisions to prevent tax evasion are ancillary to the power to levy sales tax and fall within the legislative competence of the State.

3. Validity of the Penalty Provisions and Their Nexus with Tax Evasion:
The Supreme Court analyzed the scheme of Section 78, which includes the establishment of check-posts, inspection of goods, and the imposition of penalties for non-compliance. The Court found that the penalty provisions were designed to ensure compliance with the documentation requirements and to prevent tax evasion. The Court rejected the argument that the penalty was harsh and oppressive, stating that the fixed penalty rate of 30% was intended as a deterrent and was within the legislative competence.

4. Requirement of Mens Rea for Imposing Penalties under Section 78(5):
The respondents contended that penalties under Section 78(5) should require proof of mens rea (guilty intent). The Supreme Court, however, held that the submission of false or forged documents or the failure to produce required documents despite being given an opportunity could be presumed to indicate mens rea. The Court emphasized that the penalty provisions were not merely technical but aimed at preventing deliberate tax evasion.

Conclusion:
The Supreme Court upheld the validity of Section 78(5) of the Rajasthan Sales Tax Act, 1994, reversing the High Court's decision. The Court found that the provisions were within the legislative competence of the State and were designed to prevent tax evasion. The fixed penalty rate of 30% was deemed appropriate and not excessive. The requirement of mens rea was addressed by the presumption of guilty intent in cases of false documentation or failure to produce required documents. The appeals, except Civil Appeal No. 1321 of 2001, were allowed, and the High Court's decision was set aside.

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