2009 (5) TMI 868 - HC - VAT and Sales Tax

Constitutionality of section 44(10) of the Kerala Value Added Tax Act, 2003 challenged - Held that - It is not open to the petitioners to assail the validity of section 44(10). No compelling reasons have been made out to declare section 44(10) as unconstitutional. It is part of a fiscal statute, an economic measure. Apparently, the Legislature has deemed it fit to deal with a serious problem of rampant tax evasion practised through the medium of undisclosed godowns, thus resulting in better compliance. It is necessary to observe that it is certainly not the law that in every case where goods are discovered at undisclosed godowns, the penalty is to be mechanically imposed under section 44(8) at the maximum rate. Even when in a case falling under section 44(8), de hors section 44(10) where an inspection unravels the phenomenon of unaccounted goods, it becomes the duty of the officer to examine the issue as to whether penalty is to be imposed and what is the quantum of penalty to be imposed.

Issues Involved:
1. Constitutionality of Section 44(10) of the Kerala Value Added Tax Act, 2003.
2. Invocation of power under Section 44(8) based on Section 44(10).
3. Imposition of penalty at the maximum rate under Section 44(8).
4. Right of appeal and its implications on the constitutionality of the provision.

Detailed Analysis:

Constitutionality of Section 44(10):
The petitioners challenged the constitutionality of Section 44(10) of the Kerala Value Added Tax Act, 2003. They argued that the provision was unconstitutional as it extended the purport of Section 44(8) to goods found in undeclared godowns, leading to penal consequences without adequate discretion. The court, however, upheld the constitutionality of Section 44(10), stating that it was a fiscal statute aimed at curbing tax evasion. The court emphasized that the provision was designed to address the issue of goods being stored in undeclared locations, which could lead to significant tax evasion. The court found no compelling reasons to declare Section 44(10) unconstitutional, highlighting that it was part of an economic measure intended to ensure better compliance.

Invocation of Power under Section 44(8) Based on Section 44(10):
The petitioners contended that the authority could not invoke Section 44(8) based on the presumption created by Section 44(10). They argued that Section 44(10) merely raised a presumption that goods found in undeclared godowns were unaccounted, and this presumption could not be extended to impose penalties under Section 44(8). The court rejected this argument, stating that Section 44(10) was added as part of Section 44 and was intended to be read in conjunction with Section 44(8). The court noted that the Legislature intended to deal firmly with tax evasion by treating goods in undeclared godowns as unaccounted, thus justifying the imposition of penalties under Section 44(8).

Imposition of Penalty at the Maximum Rate:
The petitioners complained that penalties were imposed at the maximum rate of fifty percent of the value of the goods, which they argued was excessive and arbitrary. The court acknowledged that while Section 44(8) allowed for the imposition of penalties up to fifty percent, it did not mandate that the maximum penalty be imposed in every case. The court emphasized that the authority must exercise discretion and consider the facts of each case before determining the quantum of the penalty. The court referred to the decision in St. Michael's Oil Mills v. State of Kerala, which held that the imposition of penalty should not be arbitrary or mechanical, and the officer must act judicially and fairly.

Right of Appeal and Its Implications:
The petitioners argued that the right of appeal provided under the Act was rendered illusory if penalties were imposed at the maximum rate, as it would serve no purpose to appeal against such decisions. The court, however, noted that the petitioners had a right of appeal against the orders imposing penalties under Section 44(8). The court emphasized that the provision allowed bona fide assessees to avoid penalties by merely intimating the authority about the undeclared godowns. The court concluded that the right of appeal was a crucial safeguard and that the provisions of Section 44(10) and Section 44(8) were not arbitrary or unreasonable.

Conclusion:
The court dismissed the writ petitions, upholding the constitutionality of Section 44(10) and affirming the authority's power to impose penalties under Section 44(8) based on the presumption created by Section 44(10). The court emphasized the need for discretion in imposing penalties and highlighted the availability of a right of appeal as a safeguard against arbitrary penalties. The court made it clear that it had not gone into the merits of the petitioners' claims, leaving it open for them to approach the appellate authority.

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