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2009 Supreme(Kar) 1
High Court of Karnataka
THE HONOURABLE MR. JUSTICE D.V. SHYLENDRA KUMAR
Government of Karnataka Represented by its Principal Secretary, Finance Department & Others - Appellants
Versus
M/s Brigade Enterprises (P) Limited - Respondent
Writ Petition No. 9689 of 2006 (T-KST) C/w No. 14926 of 2006 (T-Res) etc
Decided on : 02-01-2009
For the Appearing Parties:G. Rabinathan, Thirumalesh, R.V. Prasad, B.P. Gandhi, C.R. Pandit, Atul K. Alur, H.S. Hayath Khan Naushad, C. Basavaiah, H.B.V. Patil and Shalini Patil, Advocates, K.M. Shivayogiswamy, HCGP
Headnote:CONSTITUTION OF INDIA - Articles 226 & 227: [D.V. Shylendra Kumar, J] Legislative provisions -Unconstitutionality of - Judicial Review - Held, It is the duty of 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 provisions, 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. 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 provisions have failed the test of Articles 14 and 19 of the Constitution of India and the challenge is not satisfactorily met, it is the duty of the court to declare the provision as unconstitutional. The provisions of sub-Section (1) of Section 72 of the Act fail 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 19of the Constitution of India 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) of the Constitution of India and as the examination reveals that the provision even on such examination is violative of Articles 14 and 19 of the Constitution of India. The provisions of sub-section (1) of Section 72 of the Act as it stood during the different periods in respect of which the validity is challenged in these writ petitions, are declared unconstitutional 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.
KARNATAKA VALUE ADDED TAX ACT, 2003 - Section 35 (1): [D.V.Shylendra Kumar, J] Failure to file periodic return and the tax within the permitted time stipulated under - Penalty levied under Section 72 (1) - Challenge as to - Declaration sought to declare that the provision of sub-Section (1) of Section 72 of the Act is unconstitutional, being violative of Articles 14 and 19 of the Constitution of India and also 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 - Held, When the provisions of sub-Section (1) of Section 72 of the Act are tested on the touchstone of Articles 14 and 19 of the Constitution of India, it is seen that the provision fails both the tests of Articles 14 and 19 of the Constitution of India. The test under Article 14 is not passed as the levy of penalty under sub-Section (1) of Section 72 of the Act becomes an arbitrary and irrational levy depending upon the quantum of tax liability being huge and resulting in a fixed penalty of 10% 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, 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. The extent of levy of penalty in fact goes much beyond the scope of the power of ancillary and incidental power 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% of the tax liability. It is to be noticed that the 10% tax liability may not even be the entire profit of the dealer and such levy of penalty while 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 7th Schedule to the Constitution of India. The levy of penalty being a disproportionately high penalty, failing the test of reasonable restrictions saved under Article 19(6) of the Constitution of India vis-a-vis Article 19(1)(g).
Shylendra Kumar, J.
Writ petitioners are all persons who are dealers as the expression occurs in Section 2(12) of the Karnataka Value Added Tax Act, 2003 [for short, the Act] and also dealers who are registered under Section 22 of the Act.
2. Petitioners have a common grievance and complaint against the validity of the penalty orders, which penalty has been imposed on the petitioners under the provisions of sub-section (1) of Section 72 of the Act. Such penalty is 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 of the Act or for their failure to have paid the tax, which they have collected and which had become payable within
the permitted time, as stipulated in sub-section (1) of Section 35 of the Act.
3. Writ petitioners are complaining that the quantum of penalty levied on them under the provisions of sub-section (1) of Section 72 of the Act, has assumed an oppressive proportion; that it has virtually turned out to be confiscatory in nature of a part of their income; that in the guise of levying the penalty for either a delayed filing of return or a delayed payment of tax on the return so filed i.e. for their failure to comply with the twin requirements of filing of return and paying tax within the stipulated periods, the penalty levied is unreasonably high; that it has assumed a disproportionate level; that levying penalty is harsh, as the penalty is levied irrespective of the cause for the delay; that the orders are also bad for not taking into consideration the genuine explanation which the petitioners had offered; that the penalties are levied notwithstanding the absence of a failure on the part of the petitioners in securing compliance with the requirements of Section 35 of the Act; that while the orders levying such penalties are per se bad, legislative provisions under which the authorities are enabled to levy and collect such a penalty i.e. the provisions of sub-section (1) of Section 72 of the Act, which achieves such result of levying penalty unreasonably and at disproportionate levels, is a provision which is violative of Articles 14 and 19(1)(g) of the Constitution of India; that in the guise of making a provision for ensuring compliance with the levy and collection of tax on the sale of goods, a subject within the domain of the State legislature under Entry 54 of List II of the seventh schedule to the Constitution of India, what is actually collected as penalty is something which goes beyond even the scope of the main subject matter of Entry 54 of List-II; that such penalties partake the character of not only levying tax on income, but also leading to disproportionate levels as to throw out the petitioners from their very business and interfering with the rights of the petitioners to have their trade and business of their choice guaranteed under Article 19(1)(g) of the Constitution of India.
4. Each of the petitioners has questioned not only the legality of the orders under which the penalty is levied under sub-section (1) of Section 72 of the Act and has sought for quashing the same, but also has sought for a writ in the nature of declaration to declare that the provisions of sub-section (1) of Section 72 of the Act 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.
5. In all the above writ petitions, while the differing facts in each of the petitioners case are narrated, several permutations and combinations of the basic grounds, as indicated above, are urged in support of the writ petitions praying for the relief of declaration that the provisions of sub-section (1) of Section 72 of
