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Penalty Drive for late returns
— Is it for better compliance ?
The Sales Tax Department through newspapers has
complimented all VAT dealers for tremendous response
in filing e-returns. On this background we expect
liberal approach from the Department regarding penalty
under Section 29(8) for late filing of returns.
Not only in the last month but whenever we got the
opportunity, we vehemently represented in the matter
for the reasons put forth from time to time. However,
it seems that the Department has not given a serious
thought and therefore has proceeded with rampant
show-cause notices followed by penalty orders to
almost all dealers whose returns are filed late
even by a single day.
There are a number of mischievous provisions under
the MVAT Act. The business community overlooked
such provisions though those were pointed out by
us. But now after four years, as the real implementation
of the Act has commenced, they will experience the
hit of such provisions. Therefore, the business
community is expected to come forward to convince
the legislators to modify such provisions in order
to have dealer-friendly approach instead of having
a punitive approach, especially towards those who
are very small and unorganised.
Section 29(8) read with Section 26(5)(b) gives
a prima facie impression that the appellate authority
including the Tribunal has no power to reduce the
penalty or to set aside the order imposing the penalty.
We are of the opinion that because of this impression,
the Department has started a penalty drive in order
to have cent percent compliance before the due date
without considering genuine reasons and difficulties.
We have doubts whether the penalty drive is for
better compliance or for fetching more income by
treating penalty as revenue.
In support of our representations, we have given
below two recent decisions; one from the Maharashtra
Sales Tax Tribunal and the other from Karnataka
High Court.
Ramniklal Nemichand (VAT Second Appeal No. 31 of
2008 decided on 5th December, 2008) :
The return for the period 01.04.2007 to 30.09.2007
was filed late by seven days. Show-cause notice
dated 01.04.2008 was served on the appellant on
03.04.2008. There was a note at the end of the notice
to the effect that if a return has been filed for
2005-06/2006-07/2007-08, then to bring the proof.
Probably for the reason that the returns were already
filed, the appellant did not respond to the said
notice. The STO levied penalty of Rs. 2000 in case
of return for the period 01.04.2007 to 30.09.2007.
The appellant preferred appeal before the Dy. Comm.
of Sales Tax (Appeals) Nashik, challenging the imposition
of penalty u/s. 29(8) as also the validity of the
show-cause notice which pertained to different years,
which was vague. The Deputy Commissioner reduced
the penalty to Rs. 1000 by applying the proviso
to Section 29(8). The matter was further taken to
Tribunal.
The Tribunal held “it is manifestly clear from
plain reading of the said provision that a specific
charge has to be levied mentioning the period of
non-filing or late filing of return and more particularly
a reasonable opportunity of hearing has to be given
to enable the dealer to explain whether there was
a reasonable cause in failure to file the return
in the prescribed time. It is needless to say that
without levying specific charge, it cannot be said
that a reasonable opportunity has been given to
the appellant. Issuance of notice is not an empty
formality. Such action will have to be initiated
with application of mind. Unfortunately, it appears
that the notice has been sent to the appellant mechanically
without application of mind, in the printed form.
There is therefore, no compliance of the provision
of Section 29(8) of the MVAT Act and the action
of imposing penalty, under the circumstances, is
not tenable in the eye of law and will have to be
quashed. The impugned first appeal order and the
penalty order are hereby quashed and set aside.”
Philips Electronics India Ltd. and others (Karnataka
High Court) decided on 02.01.2009 :
Writ Petition was to challenge the validity of
penalty orders passed under Section 72(1) of the
Karnataka Value Added Tax Act, 2003 either for failure
to file returns or for failure to pay tax within
the permitted time.
The main thrust of the arguments by the petitioners
is directed against the unreasonableness and absurdity
of providing for such a harsh penalty on the registered
dealers, who are defaulters only by mere delay in
either filing of the monthly return or in making
payments of the tax due in terms of the return;
that the very nature of the default is one that
would possibly delay the collection of admitted
tax; that even for the delay itself, there are other
provisions in the Act to compensate the loss to
the revenue by providing for charging interest and
even while it is conceded that the Legislature can
provide for a default also a provision to levy penalty
for ensuring proper enforcement of the tax laws
and realisation of the revenue, the levy of the
penalty of very huge amounts, which is the case
in the case of many of the petitioners and as is
obvious on a perusal of the penalty orders, is a
penalty that is grossly disproportionate to the
object of ensuring prompt compliance by the dealers
to adhere to the stipulated periods; that the extent
of penalty is so unrealistic and huge, it travels
beyond the power of the Legislature, which can be
characterised as a power ancillary and incidental
to the main power of levy of tax.
The High Court held “The manner in which the provisions
of sub-Section (1) of Section 72 of the Karnataka
Value Added Tax Act, 2003 have been amended every
year is an indicator of lack of clear or cogent
legislative policy. 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, the levy
of penalty becomes arbitrary and irrational in view
of the quantum being fixed and huge, especially
in the case of smaller dealers with large extent
of delay. It thus leads to discrimination and is
therefore violative of Article 14 of the Constitution
of India. The arbitrary and irrational levy automatically
loses the nexus of achieving the object of correcting
the mischief sought to be prevented by the Legislature.
The levy based on the extent of delay makes it irrational
and disproportionate to the act of failure in not
complying with the requirement of filing of return
or payment of tax within the stipulated period thereby
failing the test of reasonable restrictions saved
by Article 19(6) of the Constitution vis-à-vis
Article 19(1) (g). The extent of levy of penalty
in fact goes much beyond the scope of the ancillary
and incidental power, i.e., for ensuring prompt
tax remittance to the State. The levy should be
within reasonable limits especially when the loss
of revenue to the State is compensated by other
statutory provisions and should not reach the levels
of confiscation. When such levels are reached it
becomes a tax in the nature of tax on income. As
the penalty has to be inevitably borne by the dealer
and cannot be passed on to the consumer/buyer, it
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 penal provisions being in addition
to the compensatory provisions for levying interest
for the delayed payment and other penalties it becomes
all the more unreasonable when compared with other
penal provisions under the Act. Further, 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
of the Constitution of India.”
In the light of these judgments we hereby once
again represent to the Hon’ble Commissioner to overlook
minor delays and not to pass penalty orders so abruptly.
Moreover, if the same energy and time of the Department
is used for chasing non-filers and unregistered
dealers, it would be a great reward to the tax-paying
dealers.
Thanking you,
Yours faithfully,
Deepak Bapat
President
Study Circle Meeting
Subject Limited Liability Partnership
Speaker An eminent faculty
Day & Date Wednesday, 17th June, 2009
Time 1.15 p.m. to 2.30 p.m.
Venue The Sales Tax Practitioners’ Association
of Maharashtra
Room No. 104, Vikrikar Bhavan,
Mazgaon, Mumbai-400010.
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