2009 (3) TMI 939 - HC - VAT and Sales Tax

Scheme of payment of tax by way of composition as envisaged under section 15 of the Act questioned - effect of levy of penalty under section 72(2) of the Act in the context of cancellation of facility of composition under section 15(1) of the Act - Held that - 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. In fact the obstruction for attracting article 301 of the Constitution of India is said to be the denial of facility to dealers having out-of-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. We deem it fit to permit the petitioner s 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. As the penalty is levied even without providing a 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. Appeal allowed in part.

Issues Involved:
1. Legality of Section 15(1) of the Karnataka Value Added Tax Act, 2003.
2. Constitutionality of Section 72(2) of the Karnataka Value Added Tax Act, 2003.
3. Classification of dealers based on intra-state and inter-state purchases.
4. Denial of composition scheme benefits to dealers making inter-state purchases.
5. Levy of penalties under Section 72(2) for understated tax liabilities.

Issue-wise Detailed Analysis:

1. Legality of Section 15(1) of the Karnataka Value Added Tax Act, 2003:
The petitioners challenged Section 15(1) of the Act, arguing that it is discriminatory and violates Article 14 of the Constitution of India. The provision denies the benefit of the composition scheme to dealers who purchase goods from outside Karnataka. The petitioners contended that this classification is artificial and unreasonable, as it unfairly discriminates between dealers based on the source of their purchases.

2. Constitutionality of Section 72(2) of the Karnataka Value Added Tax Act, 2003:
The petitioners also questioned the legality of Section 72(2), which imposes penalties on dealers who understate their tax liability by more than five percent. They argued that the penalty is levied automatically without considering whether the understatement was intentional or due to other reasons beyond the dealer's control. The petitioners claimed that this provision is arbitrary and violates Article 14 of the Constitution of India.

3. Classification of Dealers Based on Intra-state and Inter-state Purchases:
The State defended the classification under Section 15(1) by arguing that it aims to balance the revenue generated from tax with the administrative ease of compliance for small dealers. The classification is based on the practical difficulties faced by dealers in maintaining detailed accounts and filing returns. The State contended that dealers who make inter-state purchases do not pay tax on their inputs, unlike those who purchase within the state, thus justifying the differential treatment.

4. Denial of Composition Scheme Benefits to Dealers Making Inter-state Purchases:
The petitioners argued that denying the composition scheme benefits to dealers making inter-state purchases is irrational and discriminatory. They contended that the classification does not consider business necessities that compel dealers to make purchases from outside the state. The State countered that the classification is reasonable and aims to prevent revenue loss while maintaining a uniform tax burden.

5. Levy of Penalties Under Section 72(2) for Understated Tax Liabilities:
The petitioners argued that the automatic imposition of penalties under Section 72(2) is unfair, especially when the understatement of tax liability is due to factors beyond their control, such as the cancellation of the composition scheme. The State maintained that the penalty provision ensures compliance with tax laws and is a reasonable deterrent against tax evasion.

Judgment Summary:

The court upheld the validity of Section 15(1) of the Act, stating that the classification of dealers based on intra-state and inter-state purchases is reasonable and has a nexus to the object of the provision. The court found that the classification aims to balance the administrative ease for small dealers with the revenue requirements of the state. The provision was deemed to pass the test of Article 14 of the Constitution of India.

Regarding Section 72(2), the court acknowledged that penalties should not be imposed automatically without considering the dealer's intent or circumstances. The court emphasized that an opportunity to show cause must be provided before levying penalties. The court quashed the penalty orders due to the lack of proper opportunity given to the petitioners and directed the assessing authorities to re-examine the penalty imposition after providing an opportunity for the petitioners to file objections.

The writ petitions were allowed in part, with the court upholding the validity of Section 15(1) but quashing the penalty orders under Section 72(2) due to procedural deficiencies. The petitioners were permitted to file objections to the penalty imposition within six weeks.

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