2008 (8) TMI 804 - HC - VAT and Sales Tax

Constitutionality of section 26 of the VAT Act challenged - Held that - The challenge to the validity of section 26 of the VAT Act deserves to be repelled. The reasons, which have been given by the second respondent, both in the notices as also in the impugned orders as reasons to believe that the petitioner was associated in the business of her son, are really irrelevant and have no bearing on the matters in regard to which he is required to entertain a belief for the purpose of section 26 of the VAT Act. The exercise of power which led to exhibits P-12 and P-13, in the circumstances, is capable of being branded as an arbitrary exercise, violative of article 14 of the Constitution of India. The petitioner is entitled to succeed, insofar as the challenge against exhibits P-12 and P-13 orders is concerned. The writ petition is, therefore, allowed in part. Exhibits P-12 and P-13 are quashed. But, it is made clear that it is open to the second respondent to issue fresh notices under section 26 of the VAT Act, provided there are reasons to believe that the petitioner had also carried on business in association with her son Biju Anirudhan and participated in the business of M/s. Anjaneya Motors, stated to be owned by Sri Biju Anirudhan.

Summary

Issues Involved:
1. Validity of Section 26 of the Kerala Value Added Tax Act, 2003.
2. Legitimacy of penalty orders under Section 19C of the Kerala General Sales Tax Act, 1963 read with Section 26 of the VAT Act.
3. Jurisdiction of the assessing authority under Section 26 of the VAT Act.
4. Compliance with principles of natural justice.

Issue-wise Analysis:

1. Validity of Section 26 of the Kerala Value Added Tax Act, 2003:
The petitioner challenged the constitutionality of Section 26 of the VAT Act on grounds of violation of Articles 14 and 19 of the Constitution, arguing that the provision unjustly includes guarantors within its ambit. The court clarified that the jurisdictional factor under Section 26 is the actual business association between the assessee and the non-assessee, not merely the existence of a jural relationship like that of a guarantor. The court held that the challenge was misconceived, noting that the provision aims to prevent individuals from escaping tax liabilities by labeling themselves as agents, employees, or guarantors. The court emphasized judicial deference to legislative judgment in economic regulations, referencing the Supreme Court's stance on legislative competence and economic legislation's empiric nature, as seen in cases like *R.K. Garg v. Union of India* and *Government of Andhra Pradesh v. P. Lakshmidevi*.

2. Legitimacy of Penalty Orders under Section 19C of the KGST Act read with Section 26 of the VAT Act:
The petitioner received penalty notices (Exhibits P-4 to P-9) for the years 2001-02 to 2006-07, which were confirmed in orders (Exhibits P-12 and P-13) without considering her objections. The court found that the reasons cited by the second respondent to believe the petitioner was involved in her son's business were irrelevant. The mere fact that the petitioner stood as a guarantor for a loan did not suffice to invoke Section 26 of the VAT Act. The court concluded that the penalty orders were arbitrary and violative of Article 14 of the Constitution.

3. Jurisdiction of the Assessing Authority under Section 26 of the VAT Act:
The court examined whether the assessing authority had "reason to believe" that the petitioner was associated with her son's business. The court referenced the Supreme Court's interpretation of "reason to believe" in *Ganga Saran & Sons Pvt. Ltd. v. Income-tax Officer*, which requires the belief to be based on relevant and material reasons. The court found that the second respondent's reasons lacked relevance and did not justify the belief that the petitioner was involved in the business, thus failing to meet the jurisdictional conditions of Section 26.

4. Compliance with Principles of Natural Justice:
The court noted that the petitioner was not afforded a hearing before the penalty orders were passed, violating principles of natural justice. The objections raised by the petitioner were not considered, and there was ambiguity about whether the objections were received before the orders were issued.

Conclusion:
The court allowed the writ petition in part, quashing Exhibits P-12 and P-13. It permitted the second respondent to issue fresh notices under Section 26 of the VAT Act, provided there are legitimate "reasons to believe" that the petitioner was associated with her son's business. The assessing authority was instructed to adhere to the observations made in the judgment regarding the parameters for invoking Section 26.