IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE C.K.ABDUL REHIM FRIDAY, THE 10TH JULY 2009 / 19TH ASHADHA 1931 WA.No. 1300 of 2009() --------------------- AGAINST THE JUDGEMENT IN WPC.6432/2009 Dated 28/05/2009 .................... APPELLANT/PETITIONER: ------------------------ T.B.SAJEEV, PROPRIETOR, EMERALD CORPORATION, NALANCHIRA, THIRUVANANTHAPURAM-698 015. BY ADV. SRI.V.P.SUKUMAR RESPONDENT(S): --------------- 1. THE INTELLIGENCE OFFICER, SQUAD NO.1, COMMERCIAL TAXES, THIRUVANANTHAPURAM. 2. THE DEPUTY COMMISSIONER(APPEALS), COMMERCIAL TAXES, THIRUVANANTHAPURAM. 3. THE STATE OF KERALA, REP. BY THE SECRETARY TO GOVERNMENT (TAXES DEPARTMENT), SECRETARIAT, THIRUVANANTHAPURAM. BY G.P. SRI.MOHAMMED RAFIQ THIS WRIT APPEAL HAVING BEEN FINALLY HEARD ON 10/07/2009, ALONG WITH WA NOS.1345, 1346 & 1347 OF 2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.R. C.N.RAMACHANDRAN NAIR & C.K.ABDUL REHIM, JJ. .................................................................... Writ Appeal Nos.1300, 1345, 1346 &1347 of 2009 .................................................................... Dated this the 10th day of July, 2009. JUDGMENT Ramachandran Nair, J. Appellants are registered dealers under the Kerala Value Added Tax Act, 2003 (hereinafter called "the Act") engaged in stocking and sale of various goods in the State. As required under the provisions of the Act and the KVAT Rules, they have declared godowns, the details of which are incorporated in the certificates of registration issued in Form No.4. When inspections were carried out by the departmental officers of the Taxes Department, they noticed stocking of goods by all the appellants in undeclared godowns. Based on the fiction introduced under Section 44(10) of the Act by Finance Act, 2008 with effect from 1.4.2008, the goods found in the undeclared godowns were treated as stock outside the regular books of accounts and penalty was levied at 50% of the value of such goods under Section 44(8) of the Act. The appellants challenged the constitutional validity of Section 44(10) and 2 the validity of follow-up penalty orders issued under Section 44(8) of the Act before the learned Single Judge, who upheld the validity of the Section but without going into the merits of the penalty orders, gave freedom to the appellants to file statutory appeal against penalty orders. It is against this common judgment of the learned Single Judge the connected appeals are filed before us. We have heard counsel appearing for the appellants and the Government Pleader appearing for the respondents. 2. The provision under challenge namely, Section 44(10) and the provision under which penalty is levied namely, Section 44(8) are extracted hereunder for easy reference. “S.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 payment of a penalty, not exceeding fifty per cent of the value of the goods not 3 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 to be noted that Section 44(8) was there in the statute as it was originally enacted and Section 44(10) is the provision introduced by the Kerala Finance Act, 2008 only with effect from 1.4.2008. 3. The first contention raised by counsel for the appellants is that Section 44(10) is illegal and unconstitutional as it violates Article 19(1) (g) and Article 14 of the Constitution of India in as much as the provision authorises treatment of accounted goods also as unaccounted goods by virtue of the fiction provided therein. There is also an alternate contention raised by the appellants that since no separate penal provision is introduced by way of amendment or addition to the 4 existing provision, Section 44(8) has no application and levy of penalty through the impugned orders is therefore without jurisdiction. Even though Section 44(8) corresponds to Section 28(8) of the KGST Act, 1963 the validity of which was upheld by Division Bench of this court in KUNHI AHAMMED HAJI V. INTELLIGENCE OFFICER (1985) 60 STC 359, there was no provision corresponding to Section 44(10) of the KVAT Act in the KGST Act. The Government Pleader produced the Budget Speech of the Minister introducing Finance Bill 2008, wherein it is stated that it came to the notice of the Government that dealers are keeping goods in undeclared godowns and unaccounted business is carried on leading to evasion of tax. The purpose of introduction of sub-section (10) of Section 44 is therefore, to provide for a deterrent penalty against dealers keeping goods in undeclared godowns, and selling the same, thereby evading payment of tax. The validity of the provision has to be necessarily considered with reference to the object with which it is introduced and the other provisions of the Act relating to the discipline required to be maintained by registered 5 dealers under the Act engaged in trade. We notice that a dealer applying for registration should provide in clause (6) of Form 1, the address of all the godowns in which he proposes to store goods for sale, which is expressly provided in Rule 17(28) of the KVAT Rules. The certificate of registration issued to the delaer contains the address of the approved godowns where dealer is permitted to keep the goods. From these it is very clear that it is mandatory for a dealer to store the goods only in declared godowns. Until the introduction of sub-section (10) of Section 44 it was open to the dealer who is found to have stored goods in undeclared godowns to prove before the authorities that such goods are also accounted by him in the books of accounts maintained by him under Section 40 of the Act. The effect of sub-section (10) of Section 44 is such that goods seen in undeclared godown shall be treated as stock outside the regular books of accounts of the dealer. In fact, the Section introduced an irrebutable presumption to the effect that any goods stored in undeclared godown shall be treated as goods not accounted by the dealer. In other words, even if the goods so 6 stored was accounted by the dealer in the books of accounts, the same has to be treated as unaccounted by virtue of the deeming provision contained in the Section. Though this provision is very harsh, we notice in the proviso that a dealer can avoid this harsh consequence if he has given prior written intimation about storing of goods in such undeclared godown to the registering authority at any time prior to storage of goods in any undeclared godown. In other words, even without observing the required procedure of getting an amendment to the certificate of registration, the dealer can avoid the drastic consequence of accounted goods being treated as unaccounted under sub-section (10) of Section 44, if at any time prior to such storage in undeclared godown, he informs the matter in writing to the registering authority. Counsel for the appellants submitted that there may be case of emergency for shifting goods from declared godowns to undeclared godowns on account of fire, damage and other contingencies which may not give an opportunity to the dealer to give written advance intimation to the registering authority about storage of goods in the 7 undeclared godwon. However, we do not think the validity of the statutory provision should be considered based on such rare and extreme situations which may arise in rare cases. Further, we feel even in such cases, the dealer could make some effort to give a written communication to the registering authority intimating the immediate shifting done by him. We are of the view that going by the Rule abovestated that a dealer is required to comply with in regard to storage of goods in declared godowns, the fact of storage of goods in undeclared godowns even without reliance on Section 44(10) will give rise to a presumption that such goods may not be recorded in the books of accounts because there is no reason why a dealer should not store goods in the declared godown only. Therefore, in effect the statutory presumption is by way of deterrence against dealers trying to keep goods outside the godown not known to the department. Further, we notice that even though the presumption available under Section 44(10) is irrebuttable, there is no provision providing for absolute penalty for the violation. On the other hand, existing provision available namely, 8 Section 44(8) gives discretion to the officer to limit the penalty upto 50% of the value of goods. In other words, quantum of penalty is a matter of discretion to the officer and it is for the dealer to explain the circumstances that led to storage of goods in the undeclared godown if the goods were accounted, with the proof of the same, so that he does not suffer maximum penalty. The discretion in regard to penalty in the context of Section 28(8) of the KGST Act was explained by this court in the decision in ST. MICHAEL'S OIL MILLS V. STATE OF KERALA ((68) STC 360). As already found by us, the proviso to Section 44(10) gives permission to the dealer to store goods in undeclared godowns with prior intimation to the officer and the discretion in regard to penalty contained in Section 44(8) of the Act, mitigates much of the rigour of the main clause. We, therefore, hold that the provision is not intended to harass any dealer engaged in bonafide business, but is intended to act as a deterrent against tendency in dealers to store goods in undeclared godowns. The Supreme Court has in ASHOK LEYLAND LIMITED V. STATE OF TAMIL NADU 9 & ANOTHER ((2004) 3 SCC1) held that a legal fiction created by statute should be given it's full effect. We are not able to understand how Section 44(10) stands in the way of the right of a dealer in carrying on bonafide business when the statute says that registered dealers are entitled to store goods in the declared godowns and by virtue of the proviso to Section 44(10), they are permitted to store goods even in undeclared godowns without getting amendment to the certificate of registration, but by giving just prior intimation in writing to the registering authority. The provision provides sufficient safeguards to the dealers and to our mind, it does not stand in the way of any bonafide dealer carrying on business under the Act. We do not find any violation of Article 14 because dealers engaged in storing goods in undeclared godowns without giving prior intimation to the registering authority are a class different from the other class of dealers who store the goods in declared godowns and in undeclared godowns after prior intimation in writing to the registering authority in terms of the Rules. So much so, we are of the view that there is no violation of 10 Article 14 as well. Therefore, the challenge against constitutional validity of Section 44(10) was rightly turned down by the learned Single Judge and we uphold the judgment in this regard. 4. Appellants have raised the contention that Section 44(8) does not provide for any penalty as a consequence of treatment of goods as unaccounted based on the presumption available under Section 44(10) of the Act. Counsel pointed out that along with or subsequent to introduction of Section 44(10), no penal clause either adding or amending the existing provision including Section 44(8) was brought to the statute. This being the factual position, we have to consider only whether existing provisions particularly, Section 44(8) can be invoked for levying penalty in a case where the dealer is found to have stored goods in undeclared godown. Section 44(8) authorises an Inspecting Officer to levy penalty upto a maximum of 50% of the value of goods, if goods found on inspection either in the business place or in any other place are not accounted by the dealer in the accounts maintained under Section 40 of the Act. The inspection referred to in sub-clause (8) read 11 with sub-clause (3) of Section 48 certainly covers inspection in place of business including godown of the dealer and any other place which includes an undeclared godown. Government Pleader pointed out that after introduction of Section 44(10), no amendment is required to Section 44(8) because the said sub-section authorises levy of penalty for the stock treated as unaccounted goods as contemplated under Section 44(10). Penalty provided under Section 44(8) is "for any goods not accounted for by the dealer in his accounts and other records required under Section 40." When a deeming provision is introduced in the Act by Section 44(10) which says that the goods seen in the undeclared godown shall be treated as unaccounted goods or goods kept outside the books of accounts of the dealer, then the words "any goods not accounted for" in sub-section (8) will take in goods treated as "not accounted" under Section 44(10) of the Act also. So much so, Section 44(8) applies to a case falling under Section 44(10) also. As already stated, even though penalty under Section 44(8) read with Section 44(10) is mandatory, by virtue of the abovereferred 12 discretionary powers conferred on the officer, a dealer is given opportunity to state emergency which led to his keeping the goods in undeclared godown without prior intimation and if he proves it and if such goods were found accounted, then the same should certainly be taken into account by the Inspecting Officer while levying penalty. In other words, by applying the fiction alone under Section 44(10), the officer cannot levy maximum penalty at half the value of the goods under Section 44(8), if the dealer proves the extreme circumstances that led to his storage of goods in undeclared godown and that the goods are accounted. We do not want to visualise or narrate mitigating circumstances that will help a dealer to reduce the penal consequences for storing goods in undeclared godowns. However, we make it clear that the officer is bound to consider all facts and circumstances proved by the assessee while fixing the quantum of penalty. We confirm the judgment of the learned Single Judge upholding the validity of Section 44(10) of the Act. 5. In view of our above findings, the maximum penalty levied at 13 half the value of goods found in undeclared godowns under Section 44 (8) read with Section 44(10) is not tenable. Discretion provided to the officer in regard to quantum of penalty itself indicates that he has to consider facts relating to each case and penalty should be levied based on the gravity of the offence. Accordingly, the Writ Appeals are partly allowed vacating the penalty orders, but with direction to the Officer to reconsider penalty after giving opportunity to the appellant to produce records and evidence in support of their contentions. However, we make it clear that penalty is mandatory and quantum is the only matter left to the discretion of the officer. C.N.RAMACHANDRAN NAIR Judge C.K.ABDUL REHIM Judge pms