2011 (2) TMI 1317 - HC - VAT and Sales Tax

Whether entry 54 of List II of Seventh Schedule to the Constitution of India empowers the State Legislature to enact a provision for the penalty for non-filing of return and non-payment of tax? Whether the said provision, if such a power vests in the State Legislature, could be declared ultra vires on the ground that it is arbitrary and confiscatory in nature and as such, violative of articles 14 and 19(1)(g) of the Constitution of India? Whether the impugned provision is liable to be struck down on the ground of being violative of the principles of natural justice? Held that - Difficult to agree with the reasoning of the learned single judge who has held that the offending provision is arbitrary, confiscatory in nature, irrational and unreasonable and violative of articles 14 and 19(1)(g) of the Constitution of India. Therefore, the said order of the learned single judge is liable to be set aside and the constitutional validity of section 72(1) of the Act is to be upheld. All the writ appeals are allowed.The order passed by the learned single judge striking down section 72(1) of the Act is hereby set aside.It is declared that section 72(1) of the Act is constitutionally valid. It does not suffer from the vice of arbitrariness, irrationality and is not confiscatory in nature and is not hit by articles 14 and 19(1)(g) of the Constitution of India. The order passed by the learned single judge insofar as quashing of the demand notices and assessment orders stands, but the entire matter is now remitted back.

Summary

Issues Involved:
1. Legislative competence of the State Legislature to enact a provision for penalty for non-filing of return and non-payment of tax.
2. Whether the penalty provision is arbitrary, confiscatory, and violative of Articles 14 and 19(1)(g) of the Constitution of India.
3. Whether the impugned provision violates principles of natural justice.

Issue-wise Detailed Analysis:

1. Legislative Competence:
The court examined whether Entry 54 of List II of the Seventh Schedule to the Constitution empowers the State Legislature to impose penalties for non-filing of returns and non-payment of taxes. It was held that the legislative Lists are fields of legislation with the widest possible import and significance. The power to legislate on tax includes the incidental power to legislate for the prevention of tax evasion. The court cited multiple judgments to support that the power to impose penalties is within the legislative competence of the State Legislature under Entry 54. The court concluded that the State Legislature has the competence to enact such provisions, and this competence was not disputed by the learned senior counsels.

2. Arbitrariness and Confiscatory Nature:
The main contention was that the penalty specified in Section 72(1) is arbitrary and confiscatory, violating Articles 14 and 19(1)(g) of the Constitution. The court referred to various judgments to establish that economic legislation should be viewed with greater latitude and judicial restraint unless manifestly unjust or glaringly unconstitutional. The court found that the penalty under Section 72(1) is intended as a deterrent for tax evasion and is a civil liability, not a criminal one. The penalty is not intended to punish but to ensure compliance with tax laws. The court also noted that the penalty provisions have been amended to reduce the quantum, indicating legislative responsiveness to potential hardships. The court ultimately held that the penalty provisions are neither arbitrary nor confiscatory and do not violate Articles 14 and 19(1)(g).

3. Violation of Principles of Natural Justice:
It was argued that the penalty provision under Section 72(1) does not provide for a hearing before imposing the penalty, violating principles of natural justice. The court referred to several Supreme Court judgments to assert that principles of natural justice should be read into statutory provisions unless expressly excluded. The court held that the requirement of a show-cause notice and a hearing must be read into Section 72(1). The court also provided guidelines for when the authority may exercise discretion to waive penalties in exceptional cases, such as death or incapacitation of the person responsible for filing returns, natural calamities, or seizure of books of accounts.

Conclusion:
The court allowed the appeals, set aside the order of the learned single judge, and upheld the constitutional validity of Section 72(1) of the Karnataka Value Added Tax Act, 2003. The court remitted the matter back to the assessing officer to issue show-cause notices, provide personal hearings, and apply the amended penalty provisions retrospectively from April 1, 2005, while considering the guidelines provided for exceptional cases.