Kerala High Court
M/S. Kunnel Engineers&Contractors ... vs Assistant Commissioner (Wc<) on 20 June, 2024
Author: P Gopinath
Bench: P Gopinath
W.P.(C)No.17559/2016 1
IN THE HIGH COURT OF KERALA AT ERNAKULAM
PRESENT
THE HONOURABLE MR. JUSTICE GOPINATH P.
THURSDAY, THE 20TH DAY OF JUNE 2024 / 30TH JYAISHTA, 1946
WP(C) NO. 17559 OF 2016
PETITIONER/S:
M/S. KUNNEL ENGINEERS&CONTRACTORS PRIVATE LIMITED
3RD FLOOR, PUTHURAN PLAZA, KPCC JUNCTION,M.G.ROAD,
ERNAKULAM-682 011, REPRESENTED BY ITS AUTHORISED
SIGNATORY, K.J.FRANCIS XAVIER, AUTHORISED
SIGNATORY.
BY ADV SRI.JOSE JACOB
RESPONDENTS:
1 ASSISTANT COMMISSIONER
OFFICE OF THE DEPUTY COMMISSIONER,COMMERCIAL
TAXES, MATTANCHERY, KERALA-682 002.
2 STATE OF KERALA
REPRESENTED BY THE SECRETARY, COMMERCIAL TAXES,
GOVERNMENT OF KERALA, THIRUVANANTHAPURAM-695 001.
OTHER PRESENT:
ADV. DR. THUSHARA JAMES- GP
THIS WRIT PETITION (CIVIL) HAVING COME UP FOR ADMISSION ON
20.06.2024, THE COURT ON THE SAME DAY DELIVERED THE
FOLLOWING:
W.P.(C)No.17559/2016 2
"C.R"
JUDGMENT
The petitioner, a Private Limited Company, was a registered dealer under the Kerala Value Added Tax Act, 2003 ('the KVAT Act'). It is engaged in the execution of consultancy, design, civil construction and mechanical works. For the year 2014-15, the petitioner filed an annual return under the KVAT Act declaring a turnover of Rs.22,49,70,407/- (Twenty-two crores forty-nine lakhs seventy thousand four hundred and seven only) and discharged value added tax at Rs.20,31,634/- (Twenty lakhs thirty-one thousand six hundred and thirty-four only). While completing the audit in terms of the provisions contained in Section 42 of the KVAT Act it was noted that the petitioner was also liable to pay tax on the work in progress. The petitioner had declared and discharged tax only on the amounts that had been actually billed in the year 2014-15. According to the petitioner, in order to avoid any disputes, the petitioner sought permission to revise the quarterly returns for the quarter ending 31-03- 2015. On permission being granted, the petitioner revised the returns and paid differential tax amounting to Rs.41,52,843/- (Forty-one lakh fifty-two thousand eight hundred and forty-three only) and interest of Rs.4,84,070/- (Four lakh eighty-four thousand seventy only). The W.P.(C)No.17559/2016 3 petitioner was thereafter served with Ext.P5 notice dated 20-04-2016 calling upon the petitioner to remit Rs.9,68,140/- (Nine lakh sixty- eight thousand one hundred and forty) as 'settlement fees'. Though, in Ext.P5 the amount is stated as the amount towards 'settlement fees', it appears that the demand was on the basis of the provisions contained in Section 42 (2) of the KVAT Act, where the petitioner was required to pay twice the amount of interest as penal interest owing to an increase in the tax liability following the revision of return. This writ petition has been filed challenging the constitutional validity of the provisions of Section 42 (2) of the KVAT Act as also identical provisions in Section 21 (2) of the same enactment to the extent they provide for the levy of penal interest at twice the rate of interest, even in cases where the assessee himself comes forward and files a revised return on noticing mistakes in the returns already filed.
2. Sri. Jose Jacob, the learned counsel appearing for the petitioner submits that the provisions of Section 42 (2) apply in the case of an assessee who is subjected to an audit while the provisions of Section 21 (2) apply in the case of other assessees who are not required to be subjected to audit. It is submitted that both these provisions provide for levying penal interest at twice the rate of interest payable when the assessee comes forward and seeks permission to file a revised W.P.(C)No.17559/2016 4 return after noting a defect in the returns already filed. He submits with reference to the provisions of Section 22 (2) of the KVAT Act that where any defect in the returns filed by an assessee is noted by the Department and the same is rejected, the assessee is permitted to file a revised return and then the assessee required only to pay tax and interest. In other words, it is the submission of the learned counsel that the provisions of Sections 21 (2) and 42 (2) of the KVAT Act to the extent they call upon an assessee who comes forward on his own to file a revised return to pay penal interest at two times the amount of interest payable is arbitrary and unconstitutional. It is submitted that, in the facts of the present case, the petitioner discharged the tax liability and also paid interest of Rs.4,84,070/- and that would have been the only liability of the petitioner, had the Department noticed the defect in the returns filed by the petitioner. It is pointed out that on account of the petitioner itself coming forward and filing a revised return, it is now mulcted with the liability to pay an additional amount of Rs.9,68,940/- as penal interest in terms of the provisions contained in Section 42 (2) of the KVAT Act.
3. Smt. Thushara James, the learned Senior Government Pleader appearing for the respondents referred to the provisions of Section 21, 22, 31 and 42 of the KVAT Act and Rule 22 of the Kerala Value Added Tax Rules, 2005 (hereinafter referred to as 'the KVAT Rules') to W.P.(C)No.17559/2016 5 contend that there is absolutely no arbitrariness in the provisions of Section 22 (2) or in the similar provisions of Section 42 (2) of the KVAT Act. It is submitted that the provisions of Section 22 (5) of the KVAT Act indicate that where the assessee does not file a revised return after the return filed is rejected by the Department, the assessee is called upon to pay double the amount of interest as a penalty. It is submitted that when the legitimate tax due to the State has been denied to it on account of a mistake in the returns submitted by the assessee, the State was entitled to penalise the assessee by requiring the assessee to pay some amount as penal interest. It is submitted that such provisions contained in Section 22 (2) and Section 42 (2) of the KVAT Act cannot be said to be arbitrary or unconstitutional. The learned Senior Government Pleader also placed reliance on the judgment of a learned single Judge of this Court in Alwaye Sugar Agency (M/s) v. Assistant Commissioner (Assessment), Commercial Taxes Special Circle, Mattanchery and others; 2017 (5) KHC 638 and in particular to paragraph 6 thereof to contend that after noticing the provisions contained in Section 21, Section 22, Section 31 and Section 42 of the KVAT Act and also Rule 22 of the KVAT Rules, this Court found no arbitrariness in the provisions and only observed that assessees who come forward on their own to revise the returns must be rewarded for their honesty by permitting W.P.(C)No.17559/2016 6 them to revise the returns after payment of tax and interest as provided for in the provisions of Sections 21 (2) and 42 (2). The learned Government Pleader also submits that there is a clear distinction between the scheme of assessment under Section 42 and the scheme of self-assessment under Section 21 of the KVAT Act and both these cases therefore stand on a different pedestal.
4. Having considered the submissions made across the bar, I am of the opinion that the petitioner is entitled to succeed. The provisions of Section 21 of the KVAT Act (after its amendment with effect from 1.4.2015) read as follows:-
"21. Self assessment.- (1) Where the return submitted under sub-section (1) of section 20 is in the prescribed manner and accompanied by the prescribed documents, the assessment relating to the return period shall, subject to the provisions of sections 22, 24 and section 25, be deemed to have been completed on the receipt of such return.
(2) Where the dealer detects any omission or mistake in the monthly return submitted under sub-section (1), he shall file a revised return rectifying the mistake or omission within two months from the last day of the return period to which the return relates. As a result of such revised return, if the tax payable by the dealer increases, the dealer shall furnish along with such revised return, proof of payment of tax, interest due thereon at the rate specified in Section 31 and penal interest calculated at twice the said rate. Subject to the provisions of Sections 22, 24 and 25, the assessment relating to the return period shall be deemed to have been completed on the receipt of such revised return."
Provisions almost identical to the provisions of sub-section (2) of Section 21 are incorporated in sub-section (2) of Section 42. Sub- W.P.(C)No.17559/2016 7 section (2) of Section 42 reads as follows:-
"(2) Where any dealer detects any omission or mistake in the annual return submitted by him with reference to the audited figures, he shall file revised annual return rectifying the mistake or omission along with the audit certificate. Where, as a result of such revision, the tax liability increases, the revised return shall be accompanied by proof of payment of such tax, interest due thereon under sub-section (5) of section 31, and penal interest, calculated at twice the rate specified under sub-section (5) of section 31:
Provided that this sub-section shall not apply to a dealer against whom any penal action is initiated in respect of such omission or mistake under any of the provisions of this Act."
A perusal of the provisions contained in Section 21 (2) and Section 42 (2) indicates that where the assessee detects any defects in the return filed by him and approaches the Department with a request for revising the returns and where as a result of revision of returns there is an increase in the tax liability, the assessee is called upon to remit tax + interest + two times the amount of interest by way of penal interest. On the other hand, the provisions of Section 22 of the KVAT Act, provide for a situation where the Department rejects the return filed by the assessee. Such an assessee is permitted to revise the return and when there is an increase in the tax liability on account of such revision, the assessee is only required to pay tax + interest and is not called upon to pay any penal interest as contemplated by the provisions of sub-section (2) of Section 21 and sub-section (2) of Section 42 of the W.P.(C)No.17559/2016 8 KVAT Act. It is only where the assessee fails to file a revised return in terms of the provisions contained in Section 22 (2) that a provision for levying penal interest is provided for in sub-section (5) of Section 22. The provisions of Section 22 of the KVAT Act read as follows:-
"22. Assessment in case of non-filing of return and filing of defective return.-
(1) Where the return submitted under sub-section (1) of section 20 is not in the prescribed manner or not accompanied by the prescribed documents or with incorrect particulars, the Assessing Authority shall, after recording its reasons, reject the return with due notice to the dealer.
Provided that the payment of any tax declared as payable as per the return shall be provisionally accepted.
(2) A dealer whose return is rejected under sub-section (1) may, file a fresh return curing the defects in such manner and within such time as may be prescribed and accompanied by such documents as provided under sub-section (1) of section 20 together with proof of payment of interest on the tax payable at the rates provided under section 31 for the period from the due date of filing of return till the date of filing of such fresh return. On the receipt of such return by the Assessing Authority, the assessment for the return period shall, subject to the provisions of section 24 and section 25, be deemed to have been completed. (3) If any dealer fails to submit any return as provided under sub-section (1) of section 20 or files incorrect return and fails to file a fresh return as provided under sub-section (2), the Assessing Authority shall estimate the turnover of the return period and complete the assessment to the best of its judgment. (4) No assessment under sub-section (3) of this section shall be completed without affording the dealer an opportunity of being heard.
(5) On receipt of the notice under sub-section (4), if the dealer files a return for the return period as provided under sub-section (1) of section 20 and accompanied by proof of payment of tax payable and interest on this amount from the due date for filing W.P.(C)No.17559/2016 9 of return till the date of filing of return at the rates specified in section 31 and double the amount of interest so due as penalty the Assessing Authority shall drop the proposal for assessment under sub-section (3) and the assessment for the return period shall be deemed to have been completed on receipt of such return. (6) Any assessment, levy and collection of tax under this Act shall be in such manner as may be prescribed.
(7) Where on scrutiny of returns or verification of accounts in any proceedings under this Act, in respect of dealers paying tax under sub section (5) of section 6, it is found that the amount of tax, if any, paid by such dealer is less than the amount of tax he is liable to pay on finalising such proceedings, the Assessing Authority shall direct the dealer to pay difference of tax between the amount of tax already paid and that fixed in such proceedings, together with thrice the amount of such difference as penalty.
(8) No proceeding made under sub-section (7) shall be completed without affording the dealer an opportunity of being heard. Explanation:- For the purposes of this section and Section 21, a return shall be deemed to have been received as and when the Assessing Authority acknowledges the receipt of the return in such manner as may be prescribed.
(9) Notwithstanding anything contained in this Act, where an offence has been detected under the Act in respect of a return filed by a dealer or otherwise and proceedings initiated under this Act, the dealer shall not be permitted to revise the return till such proceedings are finalised.
(10) Where the proceedings referred to in the above sub-section are finalised under section 74 on payment of tax due along with the compounding fee, the dealer may thereafter file a revised return incorporating such turnover covered in such proceedings within a period of three months from the finalisation of such proceedings and on the receipt of such return by the Assessing Authority, the assessment for the return period or periods shall, subject to the provisions of sections 24 and 25, be deemed to have been completed:
Provided that where a pattern of suppression is detected the Assessing Authority shall proceed with best judgment assessment W.P.(C)No.17559/2016 10 in accordance with the provisions of Sections 24 and 25, as the case may be."
The rule of manifest arbitrariness as a ground to strike down plenary legislation was considered most recently in Shayara Bano v.
Union of India and others; (2017) 9 SCC 1 it was held:-
" 101. It will be noticed that a Constitution Bench of this Court in Indian Express Newspapers (Bombay) (P) Ltd. v. Union of India stated that it was settled law that subordinate legislation can be challenged on any of the grounds available for challenge against plenary legislation. This being the case, there is no rational distinction between the two types of legislation when it comes to this ground of challenge under Article 14. The test of manifest arbitrariness, therefore, as laid down in the aforesaid judgments would apply to invalidate legislation as well as subordinate legislation under Article 14. Manifest arbitrariness, therefore, must be something done by the legislature capriciously, irrationally and/or without adequate determining principle. Also, when something is done which is excessive and disproportionate, such legislation would be manifestly arbitrary. We are, therefore, of the view that arbitrariness in the sense of manifest arbitrariness as pointed out by us above would apply to negate legislation as well under Article 14."
Comparing the provisions contained in Section 21 (2) and Section 42 (2) with the provisions contained in Section 22, it appears to me that the provisions contained in Section 21 (2) and Section 42 (2), to the extent they provide for the levy of penal interest are manifestly arbitrary and therefore, unconstitutional. As already noticed, a dealer who comes forward on his own to revise his returns to pay the tax is W.P.(C)No.17559/2016 11 mulcted with the liability of paying penal interest as set out above. While under the provisions of Section 22, when an assessee whose returns were rejected by the Department files a revised return such assessee is only called upon to pay tax and interest.
5. In Alwaye Sugar Agencies (supra), this Court on a consideration of the question as to whether an honest dealer who comes forward to revise his returns on noticing a defect must be allowed to do so observed as follows:-
"6. On a consideration of the facts and circumstances of the case as also the submissions made across the bar, I find that, in the instant case, the petitioner, on detecting an omission in the returns originally filed by it, came forward to rectify the defects, by expressing his readiness to pay the differential tax and interest in respect of the transactions that were omitted in the return that was originally filed. Since the petitioner voluntarily came forward to rectify the omissions and pay the differential tax, and the action of the petitioner is not pursuant to the detection of any suppression by the Department, the mere apprehension that, on the petitioner being permitted to pay the differential tax, he might lay claim to the input tax credit of tax paid on purchases that were not reported, cannot, in my view, be a ground to deny the petitioner the opportunity to come forward and rectify an anomaly in the returns, so as to ensure a compliance with the statutory provisions. The statutory provisions which deal with the revision of returns, and the procedure to be complied there for, are to be found in Sections 22, 31 and 42 of the KVAT Act and Rule 22 of the Kerala Value Added Tax Rules [hereinafter referred to as the 'KVAT Rules']. A perusal of the said provisions would indicate that an opportunity is granted to an assessee to revise returns, on his detecting omissions, and then, if no objections are raised by the Department, the assessment itself is deemed to be complete based on the returns filed by the assessee. Rule 22 of the KVAT Rules enables a dealer to revise returns within a W.P.(C)No.17559/2016 12 period of two months from the last date of the return period to which the return relates. A proviso to the said Rule suggests that the Rule will not apply to a dealer against whom penal action is initiated for the same materials as necessitated the revision of the returns. The statutory provisions are silent, however, with regard to the course of action to be adopted in respect of a dealer, who has filed his returns and paid tax in accordance with the returns, and who, after completion of the self assessment to tax detects an omission in the returns that he had filed, and wishes to correct the said mistake and pay the correct tax due to the Government after revising his returns suitably. In my view, going by the object of the Statute, which is to ensure that tax due from a dealer is duly levied and collected, in situations where no proceedings have been initiated against a dealer for a differential tax demand or non-compliance with the statutory provisions, an honest dealer, who voluntarily comes forward to pay his taxes, ought not to be prevented from doing so. On the contrary, such dealers should be rewarded for their honesty, by permitting them to revise the returns and pay the differential tax and interest applicable, and extending to them the concessions envisaged in the Statute such as input tax credit, based on their compliance with the statutory provisions."
The observations of this Court in Alwaye Sugar Agencies (supra) fortify my view that the provisions of Section 21 (2) and Section 42 (2) of the KVAT Act are manifestly arbitrary. They amount to imposing a higher burden on an honest taxpayer who comes forward to revise his returns by imposing a condition for the levy of twice the amount of interest as a penalty while absolving dealers whose returns are rejected by the Department from such liability. Thus on an application of the principles laid down in Shayara Bano (supra), I am constrained to hold that the provisions of Section 21 (2) and Section 42 (2) to the extent it requires a dealer who comes forward on his own to revise his W.P.(C)No.17559/2016 13 return on noticing a defect to pay tax + interest + twice the amount as penal interest while relieving an assessee whose returns were rejected by the Department from paying any amount other than tax + interest (if he files a revised return) are manifestly arbitrary in the sense that term is understood in Shayara Bano (supra) as those provisions are clearly 'without adequate determining principle' and 'irrational'.
The writ petition is therefore allowed by declaring that the provisions contained in Section 21 (2) of the KVAT Act and Section 42 (2) of the KVAT Act to the extent they require an assessee (who comes forward to revise his returns on his own after noticing a defect in such returns) to pay penal interest at the rate of twice the amount of interest are unconstitutional. The provisions are therefore struck down to the above extent. As a result of the above declaration, Ext.P5 demand notice issued to the petitioner will stand quashed. It is clarified that this declaration will not affect any concluded demands against other assessees (demands that have been paid up by such assessees) by applying the provisions contained in Section 21 (2) and Section 42 (2) of the KVAT Act. Sd/-
GOPINATH P. JUDGE acd W.P.(C)No.17559/2016 14 APPENDIX OF WP(C) 17559/2016 PETITIONER EXHIBITS P1 COPY OF THE ANNUAL RETURN DTD.9.8.2015.
P2 COPY OF THE LETTER DTD.22.3.2016.
P3 COPY OF THE REVISED ANNUAL RETURN
DTD.30.3.2016.
P4 COPY OF THE CHALLAN DTD.30.3.2016.
P5 COPY OF THE DEMAND NOTICE DTD.20.4.2016.