2007 (4) TMI 640 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Violation of Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA).
2. Disregard of the interim order dated August 29, 2003.
3. Legality of the show cause notice dated September 15, 2003 and the penalty order dated September 30, 2003 under the Central Sales Tax (Orissa) Rules, 1957.

Issue-wise Detailed Analysis:

1. Violation of Section 22 of the SICA:
The petitioner-company argued that the levy of penalty violated Section 22 of the SICA, which mandates suspension of recovery proceedings once a reference is registered with the Board for Industrial and Financial Reconstruction (BIFR). The petitioner's reference was registered on May 9, 2003, and communicated to the Sales Tax Officer on May 26, 2003. The court held that upon registration of the reference, an enquiry under Section 16 of the SICA commenced, and from that time, all actions against the assets of the petitioner-company were to remain suspended. The court cited precedents, including Gram Panchayat v. Shree Vallabh Glass Works Ltd. and Real Value Appliances Ltd. v. Canara Bank, to affirm that recovery proceedings must be suspended during the pendency of the BIFR enquiry. Consequently, the court found that the show cause notice and penalty order issued during the suspension period violated Section 22 of the SICA.

2. Disregard of the Interim Order Dated August 29, 2003:
The petitioner-company contended that the Sales Tax Officer issued the show cause notice and penalty order in disregard of the interim order dated August 29, 2003, which stayed the recovery of dues. The court noted that the interim order explicitly restrained further recovery from the petitioner's bank accounts. Despite this, the Sales Tax Officer issued the show cause notice on September 15, 2003, demanding payment by September 29, 2003, and imposed a penalty on September 30, 2003. The court held that the actions of the Sales Tax Officer were in clear violation of the interim order and thus invalid.

3. Legality of the Show Cause Notice and Penalty Order:
The court examined the legality of the show cause notice and the penalty order under Rule 16 of the Central Sales Tax (Orissa) Rules, 1957. The court emphasized that the power to impose a penalty under Rule 16(2) is discretionary and must be exercised judiciously. The petitioner had responded to the show cause notice, highlighting the BIFR registration and the interim court order. The court held that the imposition of the penalty, despite the statutory protection under Section 22 of the SICA and the interim order, was an improper exercise of discretion. The court referenced the principles established in Patnaik & Co. (P.) Ltd. v. State of Orissa and Hindusthan Steel Ltd. v. State of Orissa, which mandate that discretion must be exercised according to law and justice. The court concluded that the penalty imposition was arbitrary and not in accordance with the statutory provisions.

Conclusion:
The court quashed both the show cause notice dated September 15, 2003, and the penalty order dated September 30, 2003, in all the writ petitions. The court ruled that the imposition of the penalty was invalid due to the statutory protection under Section 22 of the SICA and the interim order, and the improper exercise of discretionary power by the Sales Tax Officer. The writ petitions were allowed, and no costs were imposed.