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
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
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
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
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-
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
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
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
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
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
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
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
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.
