2009 (1) TMI 182 - HC - VAT and Sales Tax

Penalties under KVAT for non-filing of return Constitutional Validity The penalty provision being in addition to the compensatory provision for levying interest for the delayed period and also being in addition to other penalties under the other provisions of the Act itself, makes it all the more unreasonable, as when the penal provision of sub-section (1) of section 72 of the Act is compared with the levy of penalty under the other provisions of the Act itself, which provide for a lighter penalty for a greater violation - Consequently, the penalty orders or show-cause notices for imposing penalty, as the case may be, all stand quashed by issue of a writ of certiorari. The amount collected by way of penalty to be refunded to the respective petitioners.

Summary

Issues Involved:
1. Validity of penalty orders under Section 72(1) of the Karnataka Value Added Tax Act, 2003.
2. Constitutionality of Section 72(1) of the Act in light of Articles 14 and 19(1)(g) of the Constitution of India.
3. Legislative competence of the State Legislature to enact Section 72(1) under Entry 54 of List-II of the Seventh Schedule to the Constitution.
4. Proportionality and reasonableness of the penalties imposed.

Detailed Analysis:

1. Validity of Penalty Orders:
The petitioners, registered dealers under the Karnataka Value Added Tax Act, 2003, challenged the validity of penalty orders imposed under Section 72(1) for either failing to file returns or failing to pay the tax collected within the stipulated time. They argued that the penalties were oppressive, confiscatory, and disproportionate, violating their rights under Articles 14 and 19(1)(g) of the Constitution.

2. Constitutionality of Section 72(1):
The petitioners contended that Section 72(1) was unconstitutional as it imposed penalties without considering the causes for delays, thereby being arbitrary and unreasonable. They argued that the provision violated Articles 14 and 19(1)(g) of the Constitution. The court examined whether the penalties were arbitrary, irrational, and disproportionate to the object of ensuring timely compliance with tax laws.

3. Legislative Competence:
The petitioners argued that the penalties under Section 72(1) went beyond the legislative competence of the State Legislature under Entry 54 of List-II of the Seventh Schedule to the Constitution. They claimed that the penalties were in the nature of a tax on income, which is beyond the State's legislative power.

4. Proportionality and Reasonableness:
The court analyzed the proportionality of the penalties, noting that penalties should be commensurate with the mischief sought to be prevented. The court found that the penalties under Section 72(1) were grossly disproportionate, reaching levels that were confiscatory and oppressive. The penalties were not just deterrents but punitive to the extent of being unreasonable and arbitrary.

Conclusion:
The court held that the provisions of Section 72(1) of the Karnataka Value Added Tax Act, 2003, were unconstitutional as they violated Articles 14 and 19(1)(g) of the Constitution. The penalties imposed were found to be arbitrary, irrational, and disproportionate, failing the test of reasonableness and fairness. Consequently, the penalty orders and show-cause notices were quashed, and the amounts collected by way of penalty were ordered to be refunded to the petitioners.