2014 (9) TMI 466 - HC - VAT and Sales Tax

Penalty levied at double the tax - Evasion of duty u/s 17 - whether the qualification in the definition clause (f) of Section 2, being the rent charged per room, per person or per day, would change the character of the levy - Held that - Petitioner s transaction having been found to be one under the Act of 1976, the next question is with respect to the sustainability of the levy of penalty. The authorities below as also the Tribunal impute contumacious act on the part of the assessee in not obtaining registration, collecting tax from the users, herein the lessee, and paying it to the State. The petitioner, however, asserts a bona fide belief that the transaction, as it is disclosed from the agreements, being not covered under the Act of 1976. It cannot be said that the non-registration of the assessee under the Act of 1976 was bona fide, coming within the legal frame-work of the statute, taking the petitioner out of the coverage under the statute. This Court is of the opinion that the mere fact of existence of two agreements, for the lease and for provision of amenities, cannot by itself take away the petitioner s coverage under the Act. Those agreements were also the result of a composite transaction as revealed from the construction agreement, providing for lease for the purpose of accommodation of trainees and provision for amenities and facilities to such inmates. The fact is that the assessee did not obtain registration despite the transaction being clearly covered under the Act of 1976. Penalty levied at the maximum rate of double the tax evaded, may not be proper in the facts and circumstances of the case. Hence, the penalty imposed for the respective years and the two months in the last year are modified and confined to the extent of the tax liability. There is also considerable force in the argument of the learned counsel for the petitioner that between 1997 and 2002, the measure on which the rate applied is to be decided, per person per day. Hence, the CTO is directed to re-do the assessment for the period upto 31.03.2002, computing the rental charges per person per day, since all the rooms provided in the petitioner s building is of double occupancy. The quantum of penalty levied would have to be as per the directions herein above, if the rent per day per person is above the assessable limit and not at all if found otherwise - Decided partly in favour of assessee.

Issues Involved:
1. Jurisdiction of the Commercial Tax Officer (Luxury Tax) [CTO (LT)] under the Kerala Tax on Luxuries Act, 1976.
2. Definition and applicability of "luxury" and "hotel" under the Act.
3. Legitimacy of the penalty imposed under Section 17 of the Act.
4. Computation of tax liability and penalty.
5. Validity of agreements and their valuation under the Kerala Stamp Act, 1959.

Issue-Wise Analysis:

1. Jurisdiction of the CTO (LT) under the Kerala Tax on Luxuries Act, 1976:
The petitioner challenged the jurisdiction of the CTO (LT) on the grounds that the services provided did not fall under the purview of the Act of 1976 and were not deemed to be "luxury." However, the court found that the petitioner's services, which included residential accommodation and amenities, did indeed fall within the definitions provided in the Act.

2. Definition and Applicability of "Luxury" and "Hotel" under the Act:
The court examined the definitions under Section 2 of the Act, where "hotel" is defined as a building providing residential accommodation for monetary consideration, and "luxury" is defined as a commodity or service that ministers comfort or pleasure. The court concluded that the petitioner's establishment qualified as a "hotel" and the services provided were "luxury" as per the definitions, thus falling under the Act's purview.

3. Legitimacy of the Penalty Imposed under Section 17 of the Act:
The penalty was imposed at double the tax found to have been evaded. The court found that the petitioner's failure to register under the Act and collect and remit the tax was a contumacious act. However, the court deemed the maximum penalty of double the tax evaded to be excessive and modified it to the extent of the tax liability.

4. Computation of Tax Liability and Penalty:
The court addressed the petitioner's argument that the charges were not levied per day, per person, or per room, but on a monthly basis. The CTO (LT) had divided the monthly rent and charges for amenities to calculate the daily room rent, finding it exceeded the taxable limit. The court upheld this method, stating it was a simple arithmetical device to apply the levy. For the period between 1997 and 2002, the court directed the CTO to recompute the rental charges per person per day, as the measure during this period was based on per person per day.

5. Validity of Agreements and Their Valuation under the Kerala Stamp Act, 1959:
The court noted the CTO (LT)'s finding that the agreements were undervalued and possibly sham. The court clarified that while the terms of the agreements were used to determine the nature of the transactions, compliance with the Kerala Stamp Act, 1959, specifically Section 33 regarding undervaluation, was necessary. The CTO (LT) was directed to examine this aspect and take appropriate action in accordance with the law.

Conclusion:
The writ petition was partly allowed, modifying the quantum of the penalty but confirming the petitioner's liability under the Act of 1976. The CTO (LT) was directed to recompute the assessment for the period up to 31.03.2002 based on the rental charges per person per day. The petitioner's coverage under the Act was affirmed, and the CTO (LT) was instructed to address the undervaluation of agreements as per the Kerala Stamp Act, 1959. The parties were left to bear their respective costs.

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