IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE K.M.JOSEPH THURSDAY, THE 28TH MAY 2009 / 7TH JYAISHTA 1931 WP(C).No. 568 of 2009(P) ----------------------------------- PETITIONER(S): ---------------------- M/S.FAR EAST TRADING ESTABLISHMENT K.P. ROAD, KAYAMKULAM, ALAPPUZHA DISTRICT REPRESENTED BY ITS MANAGING PARNTER, ELSY BABU. BY ADV. SRI.V.P.SUKUMAR RESPONDENT(S): -------------------------- 1. THE INTELLIGENCE OFFICER SQUAD NO. II, COMMERCIAL TAXES, ALAPPUZHA. 2. THE STATE OF KERALA REPRESENTED BY THE SECRETARY TO GOVERNMENT TAXES DEPARTMENT, SECRETARIAT, THIRUVANANTHAPURAM. BY GOVERNMENT PLEADER SHRI C.K. GOVINDAN THIS WRIT PETITION (CIVIL) HAVING COME UP FOR ADMISSION ON 28/05/2009 ALONG WITH W.P.(C).NOS.6271/09D, 6374/09N & 6432/09Y, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: K. M. JOSEPH, J. -------------------------------------- W.P.C. NOS. 568/09P, 6271/09D, 6432/09Y & 6374/09N -------------------------------------- Dated this the 28th May, 2009 JUDGMENT Common question arises in these Writ Petitions and they are disposed of by a common Judgment. 2. Petitioners call in question the constitutionality of Section 44(10) of the Kerala Value Added Tax Act, 2003 (hereinafter referred to as the Act). Petitioners have been visited with orders imposing penalty under Section 44(8) of the Act. It is, at once, necessary to extract the aforesaid provisions: “44. Power to order production of accounts and powers of entry, inspection etc. - (8) If any Officer, while inspecting any place of business under sub-section (2) or searching any place under sub-section(3) finds therein any goods not accounted for by the dealer in his accounts and other records required under Section 40 to be kept and maintained by him such Officer may, after giving the dealer a reasonable opportunity of being heard, by order, direct the WPC.568, 6271, 6374&6432/09 2 payment of a penalty, not exceeding fifty per cent of the value of the goods not accounted for, as may be fixed by such Officer. (10) If any Officer, in the course of any inspection or search of any business place, building or any other place finds that goods are stored in undeclared godown, such stock shall be treated as stock outside the regular books of accounts of the dealer; Provided, that godowns in respect of which prior written intimation had been given to the registering authority by the dealer shall not be treated as undeclared godowns.” It is also necessary to refer to Sections 44(2) and (3) of the Act. They read as follows: “44. Power to order production of accounts and powers of entry, inspection etc. - (2) Any Officer, not below the rank of an assessing authority may - (a) enter any place of business; and (b) inspect any accounts, registers, records or other documents relating to his business and WPC.568, 6271, 6374&6432/09 3 the goods in his possession. (3) If any Officer not below the rank of an assessing authority has reason to believe that a dealer is trying to evade any tax under this Act, he may, for reasons to be recorded, enter and search, - (a) the place of business of the dealer ; or (b) any other place where the dealer is keeping or is reasonably suspected to be keeping any goods, accounts, registers, records or other documents relating to his business: Provided that no residential accommodation (not being a shop-cum-residence) shall be entered into or searched unless such Officer is specially authorized in writing by the Commissioner to search that accommodation. Explanation.- For the purposes of clause (b) “place” includes any godown, building, vessel, box or receptacle.” 3. Inspections were conducted at the petitioners' godowns which were found to be undeclared within the meaning of Section 44(10) of the Act. Recourse was taken to the power under Section 44(8) and penalty has been imposed at the WPC.568, 6271, 6374&6432/09 4 maximum rate which is fifty per cent of the value of the goods. 4. I heard Shri V.P. Sukumar, learned counsel appearing for the petitioners and Shri C.K. Govindan, learned Government Pleader. 5. Learned counsel for the petitioners would submit that assistance cannot be drawn from Section 44(10) of the Act for the purpose of invoking the power under Section 44(8). In other words, it is firstly contended that while it may be open to the Authority to invoke Section 67 of the Act and impose penalty thereunder for any transgression as would arise from flouting the law, it is impermissible for the Authority to invoke Section 44 (8) of the Act on the strength of the goods being found at an undeclared godown. It is pointed out that Section 44(8) provides for imposition of penalty. It has penal consequences. It may be true that Section 44(10) provides for a presumption that the goods found at an undeclared godown are to be treated as not being accounted. It is nothing more, nor nothing less. There is no scope for extending the purport of Section 44(10) WPC.568, 6271, 6374&6432/09 5 further and to read it in conjunction with the power under Section 44(8), it is contended. It is further contended that the goods are all accounted. It so happened that they were located in the godowns which are undeclared. However, it is complained that penalty has been imposed at the maximum rate, namely at fifty per cent of the value of the goods which comes to a huge amount. It is contended that if it is to be treated as the law that in respect of goods found at an undeclared godown, there is to be no discretion in the matter of imposition of penalty and invariably, irrespective of circumstances including whether the goods are accounted otherwise, assuming that Sections 44(8) and (10) are to be read together and power under Section 44(8) can be invoked in cases covered by Section 44(10), Section 44 (10) is clearly unconstitutional. In this connection, learned counsel for the petitioners sought to draw assistance from the following decisions: (1) Suraj Mall Mohta And Company v. A.V. Visvanatha Sastri And Another (AIR 1954 SC 545). WPC.568, 6271, 6374&6432/09 6 (2) Kunnathat Thathunni Moopil Nair v. State of Kerala (AIR 1961 SC 552). (3) St. Michael's Oil Mills v. State of Kerala ((1988) 68 STC 360). (4) B. Ganesha Krishna Bhat v. State of Kerala And Another ((1989) 73 STC 267 (Kar.). (5) Commissioner of Income Tax (Central), Calcutta v. Moon Mills Ltd. (AIR 1966 SC 870). 6. Learned counsel for the petitioners contended that the purport of Section 44(10) is merely to raise a presumption that the goods found at the undeclared godown are to be treated as unaccounted and the presumption or the fiction stops there. He contended that when a fiction is created by provisions of law, it cannot be extended beyond its true scope. In this regard, he relied on the decision of the Apex Court in Commissioner of Income Tax (Central), Calcutta v. Moon Mills Ltd. (AIR 1966 SC 870). It is necessary to notice the short facts. The assets of the respondent Company had been insured. The Company received Rs.65 Lakhs on 27th March, 1950 as compensation for WPC.568, 6271, 6374&6432/09 7 loss due to a fire. The Income Tax Officer took the view that the same is to be included as taxable income for the assessment year 1949 - 1950 as the amount had become receivable on 13th December, 1948. The Appellate Assistant Commissioner, the Income Tax Tribunal and the High Court on a reference, took the view that it could be assessed to tax only when the Company actually received it. The Revenue appealed the decision. It is necessary to refer to the proviso to Section 10(2) of the Income Tax Act, 1922 which reads as under: “Provided further that where any insurance, salvage or compensation moneys are received in respect of any such building, machinery or plant which has been discarded or demolished or destroyed, and the amount of such moneys does not exceed the written down value, the amount allowable under this Clause shall be the amount, if any, by which the difference between the written down value and the scrap value exceeds the amount of such moneys: Provided further that where any insurance, salvage or compensation moneys are received in WPC.568, 6271, 6374&6432/09 8 respect of any such building, machinery or plant as aforesaid, and the amount of such moneys exceeds the difference between the written down value and the scrap value, no amount shall be allowable under this Clause and so much of the excess as does not exceed the difference between the original cost and the written down value less the scrap value, shall be deemed to be profits of the previous year in which such moneys were received......The proviso, therefore, introduces a fiction. What is not a profit in the previous year is deemed to be a profit in that year. The previous year is that year in which such moneys were received. The fiction is an indivisible one. It cannot be enlarged by importing another fiction, namely, that if an amount was receivable during the previous year, it must be deemed to have been received during that year. In dealing with the scope of the fiction in S.10(2)(vii), proviso 2, this Court in Commissioner of Income-tax, Madras v. Ajax Products Ltd., 1965- 55 ITR 741 at pp. 748, 751: (AIR 1965 SC 1358 at pp.1362-1363) observed: Though the surplus contemplated by the proviso is not in the technical sense WPC.568, 6271, 6374&6432/09 9 of the term profits of the previous year, it is deemed to be the profits of the previous year.” (9) The same idea is developed thus: The fiction in the second proviso is a limited one. The surplus is deemed to be the profits of the previous year. As we have pointed out earlier, it adequately serves the purpose of the Section. To sustain the argument of the revenue, it has to be enlarged in its scope. Many words have to be read into it which are not there. We cannot accept this argument.” 7. I feel that the decision of the Apex Court is clearly distinguishable. As the Apex Court observed, it would have required the addition of many words to produce the result which the Revenue canvassed. When the proviso contemplated the amount being received, it was noted that re-writing of the proviso to import the concepts apposite to the mercantile system of accounting and transform the word “received” to the word “receivable” was necessary to sustain the case of the Revenue. It is to be noted that as far as Section 44(10) is concerned, it is in WPC.568, 6271, 6374&6432/09 10 the first place added by way of an amendment and by the amendment it is not irrelevant to notice that it has been added as part of Section 44. Further, more and more significantly, there are clear indications in the wording of Section 44(10) to indicate that the legislature intended that penal consequences emanating from the power conferred under Section 44(8) were to apply in the case of an undeclared godown. Section 44(8) clearly contemplates power to impose penalty in a situation where goods are found not to have been accounted. The menace of the tax evasion is one which is constantly engaging the attention of the law giver. Apparently, it found that goods were being stored in many cases at places which were not declared to the Authorities. The law provides for the assessee to intimate their place of stocking the goods (godowns) and it being entered in the Certificate of Registration. The law also contemplates inspections being conducted from time to time, with a view to unearth cases of tax evasion. If the assessee is permitted to escape with impunity, the requirement that they should declare WPC.568, 6271, 6374&6432/09 11 the place at which the goods are stocked, it is not difficult to imagine that there could be large scale evasion of taxes by not accounting those goods. This is clearly a public mischief which has the effect of a State losing its legitimate income by way of tax under the Act. It is also important to notice that Section 44 (8) also speaks about the power to impose penalty when goods are found to be unaccounted. The language of Section 44(10) is clearly patterned on the core and indispensable requirement to be found in Section 44(8) as well. The mere fact that Section 44 (10) is not added by way of either of an Explanation to Section 44(8) or as a Proviso would not, in my view, militate against its functional integrity being interwoven with the power under Section 44(8). The legislature by Section 44(10) apparently intended to deal firmly with the phenomenon of tax evasion being practised by stacking away the goods at undisclosed places, the assessee intending to put it beyond the scrutiny of the official. I do not think it requires any uncalled for straining of the language or torturing out of shape of the provisions to WPC.568, 6271, 6374&6432/09 12 produce the result which the Learned Government Pleader commends for my acceptance. A reference to sub-section (8) would also reveal that the word “place” as it is contemplated in Section 44(3) also includes godown. Search can be conducted at any other place other than the place of business of the dealer. There can be no doubting the fact that when the assessee stores his goods at an undisclosed location, normally and generally, he intends to place the veil of secrecy over his transactions and it makes the already vexed problem of tax evasion, even more intractable. The legislature which knows the felt necessities of the times, has declared it to be so. It may not be apposite for the Court under our constitutional scheme of things to veto the will of the people expressed through the legislative device unless the petitioners succeed, no doubt, in establishing that the law cannot pass-muster on the anvil of any of the fundamental freedoms or any other ground available. It is true that Section 67 of the Act provides for levy of penalty in various situations. It is necessary to Section 67(1) of the Act which reads as follows: WPC.568, 6271, 6374&6432/09 13 “67. Imposition of penalty by authorities.- (1) Notwithstanding anything contained in Section 71, if any authority empowered under this Act, is satisfied that any person.- (a) being a person required to register himself as a dealer under this Act, did not get himself registered; or (b) has failed to keep true and complete accounts; or (c) has failed to submit any return as required by the provisions of this Act or the rules made thereunder; or (d) has submitted an untrue or incorrect return; or (e) has made any bogus claim of input tax credit, special rebate or refund; or (f) has continued the business during the period of suspension of registration; or (g) has failed to return the unused statutory Forms and Declarations under this Act after the cancellation or suspension of the registration; or (h) has not stopped any vehicle or vessel when required to do so; or (i) has failed to comply with all or any of WPC.568, 6271, 6374&6432/09 14 the terms of any notice or summons issued to him by or under the provisions of this Act or the rules made thereunder; or (j) has acted in contravention of any of the provisions of this Act or any rule made thereunder for the contravention of which no express provisions for payment of penalty or for punishment is made by this Act; or (k) has abetted the commission of the above offences; or (l) has abetted or induced in any manner another person to make and deliver any return or an account or a statement or declaration under this Act or rules made thereunder, which is false and which he either knows to be false or does not believe to be true, such authority may direct that such person shall pay, by way of penalty, an amount not exceeding twice the amount of tax or other amount evaded or sought to be evaded where it is practicable to quantify the evasion or an amount not exceeding Ten thousand rupees in any other case. Provided that the authority empowered WPC.568, 6271, 6374&6432/09 15 under this Section shall dispose of the case within one year from the date of detection of offence mentioned under this Section except where the extension of time is granted by the Deputy Commissioner.” 8. Having regard to the scheme of the Act, the context and the purpose, the public mischief that was intended to be dealt with as also the location of the provision in question, I see no reason to agree with the learned counsel for the petitioners that there is no power to impose penalty under Section 44(8) upto a maximum of fifty per cent of the value of the goods in a case where the goods are located in an undisclosed godown. I do not see how the provisions of Section 44(8) become inapplicable, merely on account of the provisions of Section 67. 9. The further question which is posed before me is as regards the constitutionality of the provision. Learned counsel for the petitioners contended that a right of Appeal is created under the Act. If in a case, even assuming that the power under Section 44(8) can be invoked on the basis of Section 44(10), if WPC.568, 6271, 6374&6432/09 16 penalty is to be imposed at the maximum rate, then the right of Appeal is rendered illusory, as no purpose would be served by appealing the decision. He would submit that the goods have been accounted and it is only for certain reasons that the goods happened to be located in the places where they were found in the inspections. In Kunnathat Thathunni Moopil Nair v. State of Kerala (AIR 1961 SC 552), the Apex Court was concerned with the challenge to the constitutionality of the Travancore - Cochin Land Tax Act, 1955 as amended by the Land Tax (Amendment) Act of 1957. Essentially, the challenge was upheld on the ground of the offending provisions being violative of Article 14 of the Constitution as also Article 19(1)(f). In the course of the Judgment, it was held as follows: “The whole thing, from beginning to end, is treated as of a purely administrative character, completely ignoring the legal position that the assessment of a tax on person or property is at least of a quasi-judicial character. Again, the Act does not impose an obligation on the Government to undertake survey proceedings WPC.568, 6271, 6374&6432/09 17 within any prescribed or ascertainable period, with the result that a land-holder may be subjected to repeated annual provisional assessments on more or less conjectural basis and liable to pay the tax thus assessed. Though the Act was passed about five years ago we were informed at the Bar that survey proceedings had not even commenced. The Act thus proposes to impose a liability on land-holders to pay a tax which is not to be levied on a judicial basis, because (1) the procedure to be adopted does not require a notice to be given to the proposed assessee; (2) there is no procedure for rectification of mistakes committed by the Assessing Authority; (3) there is no procedure prescribed for obtaining the opinion of a superior Civil Court on questions of law, as is generally found in all taxing statutes, and (4) no duty is cast upon the Assessing Authority to act judicially in the matter of assessment proceedings. Nor, is there any right of appeal provided to such assessees as may feel aggrieved by the order of assessment. That the provisions aforesaid of the impugned Act are in their effect confiscatory is WPC.568, 6271, 6374&6432/09 18 clear on their face. Taking the extreme case, the facts of which we have stated in the early part of this Judgment, it can be illustrated that the provisions of the Act, without proposing to acquire the privately owned forests in the State of Kerala after satisfying the conditions laid down in Art. 31 of the Constitution, have the effect of eliminating the private owners through the machinery of the Act. The petitioner in petition 42 of 1958 has been assumed to own 25 thousand acres of forest land. The liability under the Act would thus amount to Rs.50,000/= a year, as already demanded from the petitioner on the basis of the provisional assessment under the provisions of S.5(A). The petitioner is making an income of Rs.3,100/= per year out of the forests. Besides, the liability of Rs.50,000/= as aforesaid, the petitioner has to pay a levy of Rs.4,000/= on the surveyed portions of the said forest. Hence, his liability for taxation in respect of his forest land amounts to Rs.54,000/= whereas his annual income for the time being is only Rs.3,100/= without making any deductions for expenses of management. Unless the petitioner is very WPC.568, 6271, 6374&6432/09 19 enamoured of the property and of the right to hold it may be assumed that he will not be in a position to pay the deficit of about Rs.51,000/= every year in respect of the forests in his possession. The legal consequences of his making a default in the payment of the aforesaid sum of money will be that the money will be realised by the coercive processes of law. One can, easily imagine that the property may be sold at auction and may not fetch even the amount for the realisation of which it may be proposed to be sold at public auction. In the absence of a bidder forthcoming to bid for the offset amount, the State ordinarily becomes the auction purchaser for the realisation of the outstanding taxes. It is clear, therefore, that apart from being discriminatory and imposing unreasonable restrictions on holding property, the Act is clearly confiscatory in character and effect. It is not even necessary to tear the veil, as was suggested in the course of the argument, to arrive at the conclusion that the Act has that unconstitutional effect. For these reasons, as also for the reasons for which the provisions of ss.4 and 7 have been declared to be WPC.568, 6271, 6374&6432/09 20 unconstitutional, in view of the provisions of Art. 14 of the Constitution, all these operative sections of the Act, namely 4, 5A and 7, must be held to offend Art.19(1)(f) of the Constitution also. The petitions are accordingly allowed with costs against the contesting respondent, the State of Kerala.” 10. It is to be noted that admittedly, the petitioners have a right of Appeal as against the orders imposing penalty under Section 44(8) of the Act. Thus, it cannot be said that there is no right of Appeal. It is most crucial also to notice that opprobrium of Section 44(8) can be circumvented by merely intimating the Authority about the godown which is not yet entered in the Certificate of Registration. In other words, this provision allows a bonafide assessee who intends to store goods in a place which is not yet permitted to him in terms of the Certificate of Registration, to merely intimate the Authority about the place. Thus, all bonafide assessees who do not intend to scree the goods from the purview of the Authorities are immune from the net of the provisions contained in Section 44(10) read with WPC.568, 6271, 6374&6432/09 21 Section 44(8). If the assessee is not even prepared to intimate the location where he is storing the goods which is not a declared godown, then, he cannot be heard to urge that the provision is arbitrary or unreasonable. As already noticed, allowing stacking of goods in undisclosed locations, effectively curbs the powers of the Authorities to collect the revenue due to the State. The proviso in Section 44(10) is a safe-guard against it being enforced against honest assessees. 11. No doubt, in St. Michael's Oil Mills v. State of Kerala (68) STC 360), the question arose under Section 28(8) of the KGST Act, 1963. It corresponds to Section 44(8) of the Act. Therein, the Court has held