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TMI Blog2011 (2) TMI 1317X X X X Extracts X X X X X X X X Extracts X X X X ..... writ petition. All the petitioners are registered dealers under the Act. Section 35 of the Act read with rule 38 prescribes that every registered dealer shall furnish a return in form VAT 100 and shall pay tax due on such return within 20 days after the end of the preceding month. The return is required to comprise the details of purchases, tax paid on the purchases, goods, sales effected within the State, sales effected in inter-State trade, output tax payable on such sale and the output tax and input tax as net amount of tax payable. Thus they should compute the tax payable by them. The Act came into force from April 1, 2005. In all these cases the petitioners have not filed the said return within the time prescribed nor have they paid the tax. Therefore, a penalty has been imposed under section 72(1) of the Act. Therefore they have preferred these writ petitions challenging the virus of section 72(1) of the Act on the ground that it is arbitrary, the penalty prescribed is excessive and there is no nexus between the object sought to be achieved and the penalty imposed. Therefore they contend that the said provision is violative of article 14 and article 19(1)(g) of the Constitu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mes a tax in the nature of tax on income being at 10 per cent of the tax liability. The 10 per cent of tax liability may not even be the entire profit of the dealer and the said levy of penalty therefore becomes an oppressive levy being confiscatory of a percentage of the tax liability. It partakes the character of a levy of tax on income as the penalty has to be inevitably borne by the dealer and cannot be passed on to the consumer/buyer and therefore travels beyond the legislative competence of the State Legislature as enabled under entry 54 of List II of the Seventh Schedule to the Constitution of India. The nature of the mischief that is sought to be curbed, being a mischief of a lesser degree in comparison to the mischief of evasion of tax itself, the penalty providing for curbing such mischief should be commensurate to the mischief intended to be remedied and it is here that the provision of sub-section (1) of section 72 of the Act fails the twin test of arbitrariness and irrationality leading to discrimination and violative of article 14 of the Constitution of India. The levy of penalty being a disproportionately high penalty, fails the test of a reasonable restriction saved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the statutory provisions and the penalty prescribed under the impugned provision is reasonable and not oppressive as contended, keeping in view the object with which this piece of legislation was enacted and therefore it does not contravene either article 14 or article 19(1)(g) of the Constitution of India. It is true that in sub-section (1) of section 72, the Legislature has not expressly provided for the issue of a notice before imposing penalty, but at the same time it is also not expressly excluded. Therefore it is well-settled, that the principles of natural justice should be read into the section and certainly before imposing the penalty a dealer would be heard. Therefore on the ground of noncompliance of the principles of natural justice the said provision cannot be struck down. In a given case the penalty prescribed under the provision even if acts oppressively, it is settled law that public interest should prevail over the private interest and on that score the validly enacted statutory provision cannot be struck down. Per contra, Sri Sarangan, the learned senior counsel, supported the impugned order passed by the learned single judge and contended as under: The pen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioners, contended that even if the court were to read the principles of natural justice into the said provision, and if any notice is given and the dealer is heard before imposing the penalty, there is no discretion in the matter of imposition of penalty. It clearly demonstrates the arbitrariness and irrationality of the said provision. In the light of the aforesaid facts and the rival contentions, the points that arise for consideration are as under: "(1) 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? (2) If such a power vests in the State Legislature, whether the said provision 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? (3) Whether the impugned provision is liable to be struck down on the ground of being violative of the principles of natural justice?" Before we consider the aforesaid facts it is necessary to know the background and the purpose of enacting this piece of legislation and in particular th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he entire tax administration. The fact is that VAT is a very effective revenue generating instrument, both in developed countries and in the PICs. It imposes a discipline on both tax collectors and tax-payers that is unparalleled in other tax instruments. It would change the nature of trade in the coming years. It avoids a cascading effect on sales tax by taxing only the value added at each stage of sale. For this reason, throughout the world VAT has been gaining favour over traditional sales taxes. Modern tax administrators require taxpayers to self-assess their tax liability. They do not examine the details of tax returns when filed, but use special selection techniques to identify appropriate cases for audit. Such a system, based on voluntary compliance provides a more effective allocation of scarce resources of a tax Department for audit and enforcement work. The basic simplification in VAT is that the VAT liability is self-assessed for dealers in terms of submission of returns upon setting off the tax credit. Return forms as well as other procedures will be simple in all States. There will no longer be compulsory assessment at the end of the each year as is existing now. If no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omply with this obligation. The maximum penalty depends on the degree of culpability of the taxpayer in relation to the particular failure. Indeed, non-filers need to be dealt with firmly and immediately. The main objective of a tax administration, when self-assessed procedures are the rule, is not only to collect the maximum amount of tax, but also to improve the level of voluntary compliance. The penalty system should be designed to help increase the level of compliance. It is in this background we have to test the validity of the impugned provision and answer the points that arise for consideration. Point No. 1-Legislative competence Dealing with the question regarding competence of the State Legislature to enact a provision prescribing the penalty for non-filing of returns and non-payment of tax within the time is concerned, the law on the point is well-settled. In the case of Balaji v. Income-tax Officer, Special Investigation Circle [1961] 43 ITR 393 (SC); [1962] 2 SCR 983, it was held that: "The legislative Lists were not powers but are fields of legislation and that the widest possible import and significance should be attached to them. So interpreting, it was observed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... person liable to pay the tax does not voluntarily pay it. The power to make a law with respect to a tax includes not only what has been set out above but also a power to make provisions in the relevant statute with respect to all matters ancillary and incidental to the levy, assessment, collection and recovery of tax. Collection of tax by the State may be either after the liability is quantified by assessment or may be prior to actual assessment by requiring the assessee to pay before any assessment is made the amount of tax admitted to be due and payable by him. This is done by making provisions such as those for advance payment of tax and for self-assessment contained in the Income-tax Act, 1961. This is also what sub-section (3) of section 8 of the Act does by requiring that the quarterly tax payable on the basis of a quarterly return required to be furnished by sub-section (2) of section 7 shall be paid before furnishing such return. This is a mode of collection of revenue in advance before quantification of the actual tax liability and the Legislature would be well within its right and would be competent to provide for recovery of such amount if it is not paid by the prescrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of sub-section (3) of section 8 under which he has to pay tax according to the quarterly return furnished by him before the date prescribed for filing such return. The assessees were, therefore, bound to pay the tax due according to the quarterly returns filed by them before filing such returns and the fact that their customers had not paid to them the sale price did not exempt them from their statutory liability in this behalf." The apex court in the case of A.B.C. (India) Ltd. v. State of Assam reported in [2005] 142 STC 88 (SC), while dealing with the intention of the Legislature to pass legislation and the matters covered by an entry 54 in List II of the Seventh Schedule held as under (page 100 in 142 STC): ". . . As per the accepted norms of taxation the jurisdiction whatever is ancillary or subsidiary provision necessary for achieving the object of a tax statute is covered by entry 54 of List II of the Seventh Schedule to the Constitution of India. The entries in the legislative List have a very wide meaning and scope and should have a broad interpretation so as to make provisions in the Act workable and in the interest of the Revenue. The obligation imposed upon the tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry of essential element for imposing penalty. Penalty under section 78(5) is attracted as soon as there is contravention of statutory obligations. Intention of parties committing such violation is wholly irrelevant. Moreover, in the present case, we find that goods in movement carried with form No. 18A/18C. The modus operandi adopted by the assessees itself indicates mens rea. This is not the case where goods in movement are carried without the declaration forms. In the present matter, as stated above, goods in movement were carried with the declaration forms. These forms were duly signed, however, material particulars were not filled in. The explanation given by the assessees in most of the cases is that they are not responsible for the misdeeds of the consignors. The other explanation given by the assessees is regarding the language problem. There is no merit in these defences. They are excuses. The declaration forms were unfilled so that they could be used again and again. The forms were collected by the consignee from the said Department. The consignee undertakes to see that the value of the goods is supplied by the consignor. It is not open to the consignee to keep the column ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h a legislation as the impugned provision intends to prevent the evasion of tax. The power to legislate includes the incidental power to legislate for evasion of tax for which the entry provides. The power to make a law with respect to a tax comprehends within it the power to levy that tax and to determine the persons who are liable to pay such tax, the rates at which such tax is to be paid and the event which will attract the liability in respect of such a tax. It will also comprehend within it the power to provide for collection of tax including prescribing the methods of recovery of the amount of tax due if the person liable to pay the tax does not voluntarily pay it. The power to make a law with respect to a tax includes a power to make provisions in the relevant statute with respect to all matters ancillary and incidental to the levy, assessment, collection and recovery of tax. The taxing power of the State will also comprehend within it the power to provide for quantification of the liability of the persons made liable to pay the tax. Therefore, the power of the State Legislature to enact the provision in the nature of imposition of a penalty for non-compliance of the obliga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive months and during the succeeding twelve months . . . the law gives an option to agriculturists to adopt an alternative method in case the rate fixed on the basis of average annual income would be disadvantageous to them. The fact that they do not keep such an account could not be an argument to support the arbitrariness of the legislation. But these advantages or disadvantages to individual assessees are accidental and inevitable and are inherent in every taxing statute as it has to draw a line somewhere and some cases necessarily fall on the other side of the line. . ." The apex court in the case of State of Madras v. V.G. Row reported in AIR 1952 SC 196, has held as under: ". . . It is important in this context to bear in mind that the test of reasonableness, wherever prescribed, should be applied to each individual statute impugned, and no abstract standard, or general pattern of reasonableness can be laid down as applicable to all cases. The nature of the right alleged to have been infringed, the underlying purpose of the restrictions imposed, the extent and urgency of the evil sought to be remedied thereby, the disproportion of the imposition, the prevailing conditions a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by itself, cannot be a constitutional challenge as morality is essentially a subjective value. The terms 'reasonable, just and fair' derive their significance from the existing social conditions." The apex court in the case of Mardia Chemicals Limited v. Union of India [2004] 120 Comp Cas 373 (SC); AIR 2004 SC 2371 at para 66 held as under (pages 410 and 411 in 120 Comp Cas): "66. On behalf of the petitioners one of the contentions which has been forcefully raised is that existing rights of private parties under a contract cannot be interfered with, more particularly putting one party to an advantageous position over the other. For example, in the present case, in a matter of private contract between the borrower and the financing bank or institution through impugned legislation rights of the borrowers have been curtailed and enforcement of secured assets has been provided for without intervention of the court and above all depriving them the remedy available under the law by approaching to the civil court. Such a law, it is submitted, is not envisaged in any civilised society governed by rule of law. As discussed earlier as well, it may be observed that though the trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tutional, the courts must show judicial restraint in interfering with its applicability. Merely because a statute comes up for examination and some arguable point is raised, the legislative will should not be put under a cloud. Every legislation, particularly in economic matters, is essentially empiric and is based on experimentation. There may be possibilities of abuse, but on that account alone it cannot be struck down as invalid. These can be set right by the Legislature by passing amendments. The court must, therefore, adjudge the constitutionality of such a legislation by the generality of its provisions. The laws relating to economic activities should be viewed with greater latitude than the laws touching civil rights such as freedom of speech, religion, etc. The Legislature understands and correctly appreciates the needs of its people and its laws are directed to problems manifest by experience and its discretion is based on adequate grounds. It is true that taxation law cannot claim immunity from the equality clause of the Constitution. The taxation statute shall also not be arbitrary and oppressive. But at the same time the court cannot, for obvious reasons, meticulously ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on-payment of tax under the Act. Section 10(3) is enacted to protect public revenue. It is enacted as a deterrent for tax evasion. If the statutory dues of the State are paid, there is no question of imposition of heavy penalty. Everything which is incidental to the main purpose of a power is contained within the power itself. The power to impose penalty is for the purpose of vindicating the main power which is conferred by the statute in question. Deterrence is the main theme or object behind the imposition of penalty under section 10(3)." In the case of M.A. Rahman v. State of Andhra Pradesh reported in [1961] 12 STC 392 (SC); AIR 1961 SC 1471, held as under (pages 396 and 397 in 12 STC): ". . . Collection of revenue is necessary in order that the administration of the State may go on smoothly in the interest of the general public. The State has therefore armed itself with one more coercive method in order to realise the tax in such cases. It is true that cancellation of registration may result in a dealer being unable to carry on the business, but the same result may even follow from the application of other coercive processes for realisation of dues from a trader, for his ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for attracting the civil liability as in the case of prosecution. Section 78(2) is a mandatory provision. If the declaration form 18A/ 18C does not support the goods in movement because it is left blank then in that event section 78(5) provides for imposition of monetary penalty for non-compliance. Default or failure to comply with section 78(2) is the failure/default of statutory civil obligation and proceedings under section 78(5) are neither criminal nor quasi-criminal in nature. The penalty is for statutory offence. Therefore, there is no question of proving of intention or of mens rea as the same is excluded from the category of essential element for imposing penalty. Penalty under section 78(5) is attracted as soon as there is contravention of statutory obligations. Intention of parties committing such violation is wholly irrelevant. Moreover, in the present case, we find that goods in movement carried with form No. 18A/18C. The modus operandi adopted by the assessees itself indicates mens rea. This is not the case where goods in movement are carried without the declaration forms. In the present matter, as stated above, goods in movement were carried with the declaration for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est of the general public. The State has therefore armed itself with one more coercive method in order to realise the tax in such cases. It is an additional coercive process which is expected to be immediately effective and enables the State to realise its revenues which are necessary for carrying on the administration in the interest of the general public. The fact that in some cases restrictions may result in the extinction of the business of a dealer would not by itself make the provision an unreasonable restriction on the fundamental right guaranteed by article 19(1)(g). The object behind the enactment of section 72 which gives no discretion to the competent authority in the matter of quantum of penalty fixed, is to provide to the State a remedy for the loss of revenue. It is not the object of the said section to punish the offender for having committed an economic offence and to deter him from committing such offences. The penalty imposed under section 72 is a civil liability. Wilful disobedience is not an essential ingredient for attracting the civil liability as in the case of prosecution. Default or failure to comply with section 72 is the failure/ default of a statutory c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the dealer themselves in terms of submission of returns by setting off the tax credited. Return forms as well as other procedures are very simple. There will no longer be a compulsory assessment at the end of each year. If no specific notice is issued proposing departmental audit of the books of accounts of the dealer within the time-limit specified in the Act, the dealer will be deemed to have been self-assessed on the basis of the returns submitted by him. Therefore the stress is on self-assessment. In the returns filed by the assessee, he has to disclose the input-tax paid and the output tax paid and if the output tax paid is more than the input tax paid, he is entitled to deduct out of the output tax the input tax paid and only that difference in the amount is to be credited by him to the Government. In the event input tax paid is more than the output tax paid, the assessee is entitled to refund of the said amount. It is in this background, for proper tax administration and for compliance with the statutory provisions, the Legislature in its wisdom thought, that a mere imposition of interest on delayed payment of tax is not sufficient and that would not enable the implementa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ult is not for more than ten days, and (ii) ten per cent of the tax due, if the default is for more than ten days; (2) to (6). . ." A perusal of the aforesaid provision makes it clear that it provides for imposing penalty for failure to furnish the return and failure to pay the tax due on any return furnished. Clause (a) of sub-section (1) provides a penalty of Rs. 50 for each day of penalty. Clause (b) provides for imposition of penalty in addition to clause (a) at five per cent if the default is not more than 10 days and at 10 per cent if the default is for more than 10 days. Assailing these provisions, the learned senior counsel contended, that if a registered dealer who is not liable to pay any tax but fails to furnish the returns within the stipulated time, the penalty that would be imposed on him is so arbitrary that it cannot stand the test of reasonableness. Therefore it was contended that ex facie, the said provision is arbitrary and liable to be struck down. We do not see any substance in the said contention. If a registered dealer is not liable to pay tax and if he has not filed his return, clause (b) is not at all applicable to him. It is only clause (a) which is ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the tax liability in rupees, default in rupees and the period of delay. It is on that basis he came to the conclusion that the penalty prescribed is more than the profit a trader would earn in the course of his business and hence the levy becomes arbitrary and irrational depending upon the quantum of tax liability being huge and resulting in a fixed penalty of 10 per cent of the tax liability also being a huge penalty in the case of smaller dealers and in the case of small tax liability, the extent of delay being large, i.e., to say, three to five years. On a proper calculation, it is clear that persons who commit default in payment of tax within the due date are liable to pay the fixed penalty and depending upon the number of days delay they are liable to pay the penalty at the rate of Rs. 50 per day. Therefore it cannot be said that imposition of penalty under this provision is irrational or unreasonable. Similarly, it was contended that in the case of credit sales the registered dealer has not received either the value of the goods nor the tax payable thereon. In such circumstances holding him as a person committing default or that he had the advantage of the tax collected a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Legislature amended the aforesaid provision twice in three years shows that the case of the petitioners that it is arbitrary and unreasonable, stands clearly established. Even if this court were to uphold the validity of the section as it stands today, the said section is only prospective in operation. The liability to pay penalty under the unamended provisions stands and therefore, those unamended provisions are liable to be struck down as being arbitrary and unreasonable. It is evident that the Legislature has successively amended this provision reducing the quantum of penalty payable. As it stands today, if it is compared to the earlier provisions the earlier provisions appear to be unreasonable. As the said provisions are not on the statute as on date, as the substituted provision is not made retrospective in operation and the penalty is imposed on the basis of these earlier provisions, it was made retrospectively only from April 1, 2004 and it has no application to the earlier case, the penalties imposed on these petitioners for the period prior to April 1, 2007 would act oppressively. In these circumstances, we deem it proper to extend the benefit of the amended pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly valid. It is not the object of the said provision to punish the offender for having committed an economic offence and to deter him from committing such offences. The penalty imposed is in the nature of only a civil liability. It is intended as an additional coercive process which is expected to be immediately effective and enables the state to realise its revenues which are necessary for carrying on the administration in the interest of the general public. The fact that in some cases penalty imposed may affect the right of the assessee to carry on business, by itself would not constitute an unreasonable restriction on the fundamental right guaranteed by article 19(1)(g) of the Constitution of India. The question of great importance behind such a law as a whole, having farreaching effect on the economy of the country cannot be ignored, purely restricting it to individual transactions. Therefore, wherever public interest to a large extent is involved it may become necessary to achieve an object which serves the public purposes and in which event, individual rights may have to give way. Public interest has always been considered to be above the private interest. Interest of an indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orities intend to act in accordance with the principles of natural justice. But if on the other hand a statutory provision either specifically or by necessary implication excludes the application of any or all the principles of natural justice then the court cannot ignore the mandate of the Legislature or the statutory authority and read into the concerned provision the principles of natural justice. Whether the exercise of a power conferred should be made in accordance with any of the principles of natural justice or not depends upon the express words of the provision conferring the power, the nature of the power conferred, the purpose for which it is conferred and the effect of the exercise of that power." Again the Constitution Bench of the apex court in the case of Olga Tellis v. Bombay Municipal Corporation [1985] 3 SCC 545, has held as under: "44. . . . (the said section) confers on the Commissioner the discretion to cause an encroachment to be removed with or without notice. That discretion has to be exercised in a reasonable manner so as to comply with the constitutional mandate that the procedure accompanying the performance of a public act must be fair and reasonable. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing cause against an order for compulsory purchase being made by the appropriate authority concerned. . . The very fact that an imputation of tax evasion arises where an order for compulsory purchase is made and such an imputation casts a slur on the parties to the agreement to sell leads to the conclusion that, before such an imputation can be made against the parties concerned, they must be given an opportunity to show cause that the undervaluation in the agreement for sale was not with a view to evade tax. Although Chapter XX-C does not contain any express provision for the affected parties being given an opportunity to be heard before an order for purchase is made under section 269UD, not to read the requirement of such an opportunity would be to give too literal and strict an interpretation to the provisions of Chapter XX-C and, in the words of judge learned hand of the United States of America 'to make a fortress out of the dictionary'. Again, there is no express provision in Chapter XX-C barring the giving of a show-cause notice or reasonable opportunity to show cause nor is there anything in the language of Chapter XX-C which could lead to such an implication. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The constitutional validity of the said provision could be upheld, by reading the principles of natural justice into the said provision. The observance of the principles of natural justice is the pragmatic requirement of fair-play in action. In our view, therefore, the requirement of an opportunity to show cause being given before an order imposing the penalty is passed, must be read into the provisions of section 72(1). There is nothing in the said provision which would negate such an opportunity being given. In fact in several cases where orders are passed imposing penalty, it was always preceded by a show-cause notice. However, in some cases no such notice was issued. Therefore, it is clear that the authorities have understood the said provision in the light of the spirit of the law laid down by the apex court in the aforesaid decisions and have complied with the requirements of natural justice. Therefore, notwithstanding the absence of express words in the said provision stipulating a show-cause notice being issued, hearing him personally and a penalty is imposed, the rule of natural justice of hearing him before an order of penalty is passed has to be read into section 72(1) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one jurisdiction to another authority without prior intimation to the taxpayer. (8) If in law they are not liable to file return or not liable to pay tax under the Act. It is made clear that if the discretion which is conferred on the authorities by virtue of this judgment were to be liberally interpreted, the very object of enacting this provision would be defeated. Therefore, the authorities while acting under section 72(1) as a rule have no discretion in the matter of imposing penalty. When once there is a non-compliance with the statutory requirement of not furnishing returns within the stipulated time or after furnishing the returns, non-payment of tax along with the returns, the penalty should follow as a rule. However, only in exceptional cases falling under the aforesaid circumstances, the authority may in its discretion for reasons to be recorded in writing, showing the application of mind by them and their satisfaction, exercise that discretion and waive the penalty either fully or partially. That would meet the requirements of justice, in particular, when the object with which the principles of natural justice is read into this provision. Therefore, in the light of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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