20 STT 314 (KAR.)
HIGH COURT OF KARNATAKA
Philips Electronics India Ltd.
State of Karnataka
D.V. SHYLENDRA KUMAR, J.
WRIT PETITION NO. 9689 OF 2006 (T-KST) & OTHERS
JANUARY 2, 2009
Section 72 of the Karnataka Value Added Tax Act, 2003 - Penalties relating to returns - Whether provision of sub-section (1) of section 72 is violative of articles 14 and 19 of Constitution of India and, therefore, unconstitutional - Held, yes [Paras 46 and 47]
Penalty had been imposed on the petitioner-dealers under the provision of sub-section (1) of section 72. Such penalty was levied on the petitioners either for their failure to file returns of the turnover, which is a periodic return to be filed every month, in terms of section 35 or for their failure to have paid the tax, which they had collected and which had become payable within the permitted time, as stipulated in sub-section (1) of section 35. In the instant writ petition, the petitioners challenged said imposition of penalties. According to the petitioners, the quantum of penalty levied on them under sub-section (1) of section 72 had assumed an oppressive proportion; that it had virtually turned out to be confiscatory in nature of a part of their income; that the penalty levied was unreasonably high; that it had assumed a disproportionate level; that levying penalty was harsh, as the penalty was levied irrespective of the cause for the delay. In view of above, the petitioners had sought for a writ in the nature of declaration that the provisions of sub-section (1) of section 72 is unconstitutional, being violative of articles 14 and 19 of the Constitution of India and also going beyond the legislative competence of the State Legislature to make laws with reference to entry 54 of List-II of the Seventh Schedule to the Constitution and for consequential writ of certiorari to quash the penalty orders and the consequential demand notices.
Even though a legislative policy is not a matter for judicial review by the Courts, the consequence or impact of an incoherent or irrational legislative policy is definitely a matter for judicial review, as what is examined by the Court is not the policy but the effect or impact of the implementation of the policy. The policy is implemented by making legislative provision and in this case sub-section (1) of section 72, during all the periods, when it was in different forms, failed the test of both reasonableness and being proportionate to the mischief sought to be redressed by the legislative provision. [Para 31]
While a provision for the levy of penalty in a taxing statute is undoubtedly a power which is ancillary and incidental to the main power of levy of tax on sale of goods and the levy of penalty itself can be sustained on such premise, it has to remain within the scope of the ancillary and incidental powers and cannot go beyond. The power should also be exercised in a fair and reasonable manner and with all possible interpretations and understanding of the provision, if the provision is still one failing the test of either article 14 or article 19 of the Constitution, it automatically renders itself unconstitutional. [Para 32]
Unreasonableness has two dimensions. The word ‘unreasonable’ assumes its colour and meaning from the context in which it figures. What is unreasonable from the angle of article 14 perspective which basically frowns upon discrimination is different from what is unreasonable in the context of the understanding of article 19(6) vis-a-vis article 19(1)(a) to (g). [Para 33]
The word ‘unreasonable’ in the context of article 14 imbibes within itself arbitrariness whereas the word ‘unreasonable’ in the context of article 19(6) connotes the concept of disproportionality, i.e., a restriction, disproportionate to the purpose and object of curtailing the right under article 19(1) so as to achieve the common good or in the larger public interest which overrides even the right guaranteed under article 19(1)(a) to (g) only as long as the restriction is a reasonable restriction. The concept of disproportionateness of a restriction is very much prevalent in understanding the scope of article 19(6). [Para 34]
Irrationality is another concept which is more akin to arbitrariness. While all irrational acts may be arbitrary also, the converse is not necessarily true and an arbitrary action may not partake of the colour of irrationality as in the context of article 14, arbitrariness is examined from the background of discrimination. While an irrational action is also one facet of article 14, whether it always constitutes an unreasonable restriction on any of the rights guaranteed under article 19(1), is a question which is required to be examined in each case. It may or may not be also. [Para 35]
When the provision of sub-section (1) of section 72 is tested on the touchstone of articles 14 and 19, it is found that the provision fails both the tests of articles 14 and 19. The test under article 14 is not passed as the levy of penalty under sub-section (1) of section 72 becomes an arbitrary and irrational levy 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 small dealers and in the case of small tax liability, the extent of delay being large, i.e., to say, 3 to 5 years, the penalty based on the extent of delay again assuming gigantic proportions to make it an irrational levy of penalty. An arbitrary penalty, which is also an irrational levy, automatically loses the nexus of achieving the object of correcting the mischief sought to be prevented by the Legislature and, therefore, renders itself unconstitutional. [Para 36]
The provision also becomes disproportionate, as the extent of penalty reaches 100 times or more of the actual tax liability, which is grossly disproportionate to the act of failure in not complying with the requirement of filing of return within the stipulated time and paying the tax within such stipulated time. [Para 37]
The extent of levy of penalty in fact goes much beyond the scope of the power of ancillary and incidental nature, i.e., for ensuring prompt tax remittance to the State, as the only possible loss to the State is loss of revenue for the period of delay and when the loss is compensated by other statutory provisions, providing for levy of penalty should be within reasonable limits to act as a sufficient or mere deterrent and not reaching the levels of confiscation. When such levels are reached, it becomes a tax in the nature of tax on income being at 10 per cent of the tax liability. It is to be noticed that the 10 per cent tax liability may not even be the entire profit of the dealer and such levy of penalty, therefore, becomes an oppressive levy being confiscatory of a percentage of the tax liability, 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 competency of the State Legislature, as enabled under Entry 54 of List-II of the Seventh Schedule. [Para 38]
The provision of sub-section (1) of section 72 has been enacted by the Legislature with the specific intention to discourage the registered dealers not complying with the statutory periods provided for under the Act in either filing of the return or paying the collected admitted tax along with the returns, etc. The provision is to ensure prompt compliance. It is not a provision which is one to check evasion like in most of the situations which had come in for judicial scrutiny by the Supreme Court, providing for penalty provisions under different enactments. Evasion of tax in itself is taken care of separately by other statutory provisions, viz., sections 55(1), 73, 74, 75, 76 and 77, apart from providing for prosecution under section 79. So, sub-section (1) of section 72 only intends to check delay in filing of returns and delayed payment of tax and that there is no evasion. A delay even in such statutory periodic compliance also can be discouraged by providing for levy of penalty but the nature of mischief that is sought to be curbed, being a mischief of 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 fails the twin test of non-arbitrariness and irrationality leading to discrimination, violation of article 14 and the levy of penalty being a disproportionately high penalty, failing the test of reasonable restrictions saved under article 19(6) vis-a-vis article 19(1)(g). [Para 40]
The provision cannot also be saved by applying the principle of reading down the statutory provision, as it is not possible to sever any part of the provision to make it reasonable, workable and, therefore, constitutional. While the principle of reading down a statutory provision can be applied to save the statute from the vice of the provision becoming unconstitutional, this tool cannot be employed by the judiciary to save legislative provision, if it has to be stretched to impossible or unrealistic levels, so as to entirely rewrite a statutory provision or to add missing words which is essentially a legislative function. In the eagerness to save the provision from the vice of unconstitutionally, such acrobatics cannot be performed. [Para 41]
It is the duty of the Courts to declare a law as unconstitutional if it is found to be so and not to resort to artificial or unrealistic levels of interpretation of statutory provision, losing sight of the object of the provision, the nature of mischief and the manner and method by which the mischief is sought to be prevented. [Para 42]
While it is true that there is an initial presumption of constitutionality in favour of all legislative provisions, when once it is demonstrated that the provision has failed the test of articles 14 and 19 and the challenge is not satisfactorily met, it is the duty of the Court to declare the provision as unconstitutional. [Para 43]
The argument on behalf of the State that a registered dealer can very well avoid getting into a situation of such nature by ensuring early compliance and not by waiting till the last date for compliance, was an argument only to be rejected, as when once the law provides for an outer limit for compliance, the test is not as to whether the dealer could have acted well within the last date to avoid falling foul of the statutory provision and avoid attraction of the penalty under sub-section (1) of section 72 but as to what will be the consequences on a registered dealer in terms of the provisions of sub-section (1) of section 72 when the dealer has made bona fide effort to ensure compliance within the permitted limits of law and even when non-compliance occurs due to a reason beyond the control of the dealer. The statutory provision fails this test of reasonableness also and, therefore, the defence on behalf of the State had to be rejected. [Para 44]
The writ petitioners succeeded in the challenge to the validity of the provisions. 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 is compared with the levy of penalty under the other provisions of the Act itself, which provides for a lighter penalty for a greater violation, such as in the case of section 71 which provides for penalties for failing registration, section 73 - penalties in relation to unauthorized collection of tax, section 74 - penalty relating to keeping of records - section 75 - penalties relating to production of records and furnishing of information - section 76 - penalties relating to tax invoices, bills of sale, credit notes and debits notes - Section 77 - penalties relating to seals and unaccounted stocks, etc., the irrationality of providing such a harsh penalty under sub-section (1) of section 72 becomes very obvious. [Para 45]
The argument of the State that in the larger public interest, private interest of individual dealers has to yield and on this principle, the validity of sub-section (1) of section 72 has to be upheld, failed, for the reason that the argument of larger public interest prevailing over a smaller private or individual interest has to be made good within the limits of being fair or non-arbitrary action, in the wake of article 14 and also being a reasonable restriction imposed on the right saved within the protective provisions of article 19(6) and in the instant case, the provision of sub-section (1) of section 72 failed both these tests. The legal principle of larger public interest prevailing over smaller private interest, cannot be put on a higher pedestal than the rights under articles 14 and 19 and to save the provisions under article 14, the classification should be a reasonable classification with nexus to the object sought to be achieved by the legislative provision and the restriction should be a reasonable restriction within the meaning of article 19(6) and as the examination reveals that the provision even on such examination is violative of articles 14 and 19, the argument fails and was, therefore, rejected. [Para 46]
In the result, the petitioners succeeded. All these petitions were allowed. Provisions of sub-section (1) of section 72 as they stood during the different periods in respect of which the validity was challenged in these writ petitions, were declared unconstitutional. Consequently, the penalty orders or show-cause notices for imposing penalty, as the case may be, all stood quashed by issue of a writ of certiorari. The amount collected by way of penalty was to be refunded to the respective petitioners. [Para 47]
CASES REFERRED TO
ABC India Ltd. v. State of Assam  142 STC 88 (SC) (para 10), Tripura Goods Transport Association v. Commissioner of Taxes  112 STC 609 (SC) (para 10), State of West Bengal v. EITA India Ltd.  131 STC 111 (SC) (para 10), Guljag Industries v. CTO 9 VST 1 (SC) (para 12), Chairman, SEBI v. Shriram Mutual Fund  68 SCL 216 (SC) (para 12), Director of Enforcement v. MCT.M. Corpn. (P.) Ltd. AIR 1996 SC 1100 (para 12), Gujarat Travancore Agency v. CIT  177 ITR 455/44 Taxman 278 (SC) (para 12), Hindustan Steel Ltd. v. State of Orissa  25 STC 211 (SC) (para 16), State of Haryana v. Sant Lal  4 SCC 380 (para 18), Kantilal Babulal v. H.C. Patel  21 STC 174 (SC) (para 18), Consolidated Coffee Ltd. v. Agrl. ITO  248 ITR 417/ 113 Taxman 697 (SC) (para 18), State of Madras v. V.G. Row AIR 1952 SC 196 (para 18), Abdul Quader & Co. v. Sales Tax Officer  15 STC 403 (SC) (para 18), Om Kumar v. Union of India  2 SCC 386 (para 18), A. Sanyasi Rao v. Government of Andhra Pradesh  178 ITR 31/43 Taxman 271 (AP) (para 18), Union of India v. A. Sanyasi Rao  219 ITR 330/85 Taxman 321 (SC) (para 18), Kunnathat Thathunni Moopil Nair v. State of Kerala AIR 1961 SC 552 (para 19), Badri Prasad v. CCE AIR 1971 SC 1170 (para 19), Union of India v. Dharmendra Textile Processors  174 Taxman 571 (SC) (para 20), Salem Advocate Bar Association, Tamilnadu v. Union of India AIR 2005 SCW 3827 (para 20), Mardia Chemicals Ltd. v. Union of India  51 SCL 513 (SC) (para 21), Bombay Dyeing & MFG Co. Ltd. v. Bombay Environmental Action Group  67 SCL 107 (SC) (para 21), State of Rajasthan v. D.P. Metals  124 STC 611 (SC) (para 27) and M.A. Rahman v. State of Andhra Pradesh AIR 1961 SC 1471 (para 27).
G. Rabinathan, M. Thirumalesh, R.V. Prasad, B.P. Gandhi, C.R. Pandit, Atul K. Alur, H.S. Hayath Khan Naushad, C. Basavaiah, H.B.V. Patil, Shalini Patil, M.N. Shankare Gowda, N. Nagaraju, G. Saragan, Smt. Vani H., G. Saragan, T.N. Keshavamurthy, A. Satyanarayan, A. Nagaraja Naidu, E.R. Indra Kumar, E.I. Sanmathi and K.S. Ramabadran for the Petitioner. K.M. Shivayogiswamy for the Respondent.