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2008 DIGILAW 353 (KAR)

INDIA HERITAGE FOUNDATION v. STATE OF KARNATAKA

2008-07-03

D.V.SHYLENDRA KUMAR

body2008
ORDER D. V. SHYLENDRA KUMAR J. - The writ petitioner is a trust owning certain properties which it appears it is developing for putting up certain structures. It is claimed that the buildings constructed in the form of flats are being sold to the members or the beneficiaries of the petitioner - trust. It is in the context of this activity that the petitioner appears to have filed a "nil" return of liability under the provisions of the Karnataka Value Added Tax Act, 2003 (for short, "the Act") for the months October, November and December, 2006. The controversy in the writ petition relates to filing of this "nil" return as in the view of the respondents - officials of the commercial taxes department, the petitioner was liable to pay the tax as a dealer in respect of the sale transactions with its members which form part of the turnover. The authorities it appears were not in agreement with the claim of the petitioner that it is not liable to tax and file "nil" return for the reason that in terms of the judgment of the Supreme Court in the case of K. Raheja Development Corporation v. State of Karnataka reported in [2005] 141 STC 298, such activities are also activities attracting the tax liability under the corresponding earlier law, namely, Karnataka Sales Tax Act, 1957. The background leading to this development was that the officials of the commercial taxes department had issued a notice dated January 19, 2007 under section 38(1) of the Act (copy at annexure C) apprising the petitioner - trust that the case of the petitioner has been selected for audit visit and calling upon the petitioner to make available the books of account pertaining to the business transactions for the period from April 2005 up to date. It transpires that at this stage, the petitioner came to know that the petitioner may be made liable for payment of tax on the basis of the law declared by the Supreme Court in Raheja's case [2005] 141 STC 298. It transpires that at this stage, the petitioner came to know that the petitioner may be made liable for payment of tax on the basis of the law declared by the Supreme Court in Raheja's case [2005] 141 STC 298. The petitioner being not very sure of the applicability of the ruling of the Supreme Court in Raheja's case [2005] 141 STC 298 to their case, particularly, by contending that in view of the peculiar facts of their case, it may not be applicable, it appears they had sought advance ruling before the authority for clarification and ruling under section 60 of the Act. The authority clarified in terms of its clarification dated March 26, 2007 (copy at annexure D) indicating, inter alia, that the receipt of payments from the members by the trust before handing over possession of the flat as consideration for the flat is amount assessable to tax as works contract under the provisions of the Act. This clarification was immediately followed up by the issue of a notice under section 79 read with section 82 of the Act dated April 9, 2007 (copy at annexure E) indicating, inter alia, that the "nil" return filed by the petitioner for the periods October, November and December 2006 is not correct; that the turnover for the period being Rs. 19,30,09,919 and after providing for necessary deductions, the tax liability works out to sum of Rs. 82,34,299; that the petitioner having failed to pay this amount and having failed to file true and proper return and that being an attempt to evade payment of tax, proposed to launch prosecution against the petitioner, but gave an option in terms of section 82 of the Act to enable the petitioner to compound the offence in terms of section 82 of the Act which reads as under : "82. Compounding offences - (1) Where any dealer has committed an offence under sub-section (1) of section 77 or section 79, the prescribed authority may, on admission by such dealer in writing and upon his option to compound at any time prior to the commencement of the court proceedings relating thereto, compound such offence and order the dealer to pay such sum of money as specified by the prescribed authority, which shall not exceed the amount of the fine prescribed for the offence, in addition to any tax and interest due. (2) Furnishing of a cheque or any other instrument towards payment of a sum by any such dealer shall be deemed to be an application for compounding the offence. (3) Where the prescribed authority compounds an offence under this section, the order referred to in sub-section (1) - (a) shall be in writing and specify the offence committed, the sum of money to be paid and the due date for the payment; and (b) shall be served on the dealer who committed the offence; and (c) shall be final and not subject to any appeal; and (d) may be enforced in the same manner as a decree of a court for the payment of the amount stated in the order. (4) When the prescribed authority compounds an offence under this section, the dealer concerned shall not be liable to prosecution in respect of such offence or to any further penalty under this section and such dealer shall not appeal against the said proceedings." that a dealer is relieved of any possibility of being prosecuted before the criminal court. Though the communication at annexure E dated April 9, 2007 is termed as a show-cause notice and the petitioner is given an opportunity to show cause as to why charge sheet should not be filed against the petitioner, instead of showing cause the petitioner has approached this court raising various legal contentions. On issue of notice, Smt. Niloufer Akbar, learned Additional Government Advocate has entered appearance for the respondents and statement of objections has also been filed. With consent of learned counsel for the parties, the matter is taken up for disposal. Heard Smt. Vani, learned counsel for the petitioner and Smt. Niloufer Akbar, learned Additional Government Advocate. The first contention is that the facts of the present case are such that the ruling of the Supreme Court in Raheja's case [2005] 141 STC 298 does not apply to the petitioner's case. Heard Smt. Vani, learned counsel for the petitioner and Smt. Niloufer Akbar, learned Additional Government Advocate. The first contention is that the facts of the present case are such that the ruling of the Supreme Court in Raheja's case [2005] 141 STC 298 does not apply to the petitioner's case. The second contention is that when under the similar circumstances a distinction was sought to be made and this court did not agree and the division Bench affirmed the view in the judgment dated August 6, 2007 rendered in Writ Appeal No. 1409 of 2007 in the case of Larsen & Toubro Limited v. State of Karnataka [2008] 17 VST 457 (Karn) the appellant therein has pursued the matter further to the Supreme Court; that the matter will be coming up before the Supreme Court and this court should wait to know the outcome, etc. The third contention is that the advance ruling is bad as though on facts the judgment of the Supreme Court in Raheja's case [2005] 141 STC 298 is not applicable, nevertheless, the advance ruling authority has opined it is applicable and it is based on this clarification the authorities are now rushing to launch prosecution against the petitioner and therefore submitted that the advance ruling given by the authority in terms of annexure D also deserves to be quashed. The last contention is that annexure E proposition notice to launch prosecution is not valid in law; that there is no determined tax liability by any competent authority determining the tax liability for non-payment or evasion of which, prosecution could have been launched; that the authority who has indicated the amount as liability in the so-called show-cause notice at annexure E is not the competent authority to determine the liability assuming that there is if any on the part of the petitioner for the period in question, the determination and quantification can only be done by the competent authority that too in the proceedings under section 39 of the Act and not in a proceedings either under section 79 or section 82 of the Act. Countering such submissions, Smt. Niloufer Akbar, learned Additional Government Advocate would submit that the petitioner cannot urge before this court that the ruling of the Supreme Court cannot be made applicable to the present case on the facts of this case for the simple reason that the facts have not even been examined by the authorities and it need not be examined by this court in writ jurisdiction. It is secondly submitted that once the petitioner concedes that the facts of the present case are similar to the case of Larsen & Toubro Limited [2008] 17 VST 457 (Karn) and when this court has opined that in such cases the ruling of the Supreme Court in Raheja's case [2005] 141 STC 298 does apply, it is not possible for the petitioner to make a distinction yet again in this case; that no useful purpose will be served by retaining this petition before this court as even the division Bench had observed that such is not an exercise which can be undertaken by this court and if at all the petitioner can urge anything with regard to the ruling of the Supreme Court, it can be done only before the Supreme Court as the ruling binds this court. The third submission is that the clarification being one sought by the petitioner and having been rightly given does not call for any interference by this court. Last submission is that the notice under annexure E issued under section 79 read with section 82 of the Act is a valid notice for the reason that though there is no assessment order determining the tax liability to be Rs. 82,34,299, it is only tentative determination to impress upon the extent of evasion and the kind of fraudulent act indulged in by the petitioner and it is always open to the petitioner to show cause instead of approaching this court which the authority will consider and then only proceed further in the matter and it is therefore urged that the writ petition should be dismissed. I have bestowed by anxious consideration to the submissions made at the bar. So far as the applicability or otherwise of the ruling of the Supreme Court, particularly, on the premise that the facts of the present case whether it is either distinguishable or not applicable, it is not a matter this court will normally examine in writ jurisdiction. I have bestowed by anxious consideration to the submissions made at the bar. So far as the applicability or otherwise of the ruling of the Supreme Court, particularly, on the premise that the facts of the present case whether it is either distinguishable or not applicable, it is not a matter this court will normally examine in writ jurisdiction. Disputed facts are not examined in the first instance by this court, but it is proper for the authorities to examine and if at all the matter reaches this court on the basis of the enabling provision provided under the Act itself, it can be so examined. While Smt. Vani, learned counsel for the petitioner, is right in submitting that even before a proper determination and quantification of the liability assuming that the petitioner is liable is made, it is not open for the authorities to issue the proposition notice as under section 79 or 82 of the Act. The show-cause notice at annexure E itself indicates that the assessee had filed "nil" return for the periods in question. If a "nil" return is filed, it is open to the assessing authority to examine that return. But, once the return is filed in terms of section 35, it is taken to be a deemed assessment on the return unless in terms of section 38(1) of the Act, which reads as under : "38. If a "nil" return is filed, it is open to the assessing authority to examine that return. But, once the return is filed in terms of section 35, it is taken to be a deemed assessment on the return unless in terms of section 38(1) of the Act, which reads as under : "38. Assessment of tax - (1) Every dealer shall be deemed to have been assessed to tax based on the return filed by him under section 35, except in cases where the Commissioner may notify the dealer of any requirement of production of accounts before the prescribed authority in support of a return filed for any period and such authority shall proceed to assess such dealer - (a) on the basis of the return filed where he is satisfied that the return filed is correct and complete, or (b) to the best of its judgement, where the return filed appears to be incorrect or incomplete, after giving the dealer an opportunity of showing cause against such assessment in writing and any additional tax assessed shall be paid within ten days from the date of service of such assessment on the dealer." the Commissioner has notified the dealer of the requirement of production of accounts before the prescribed authority in support of the return filed for any period and the authority on the basis of such books of account produced may proceed to assess such dealer. The only way of correcting that is by having recourse to section 39 of the Act. Section 39 of the Act provides for reassessment proceedings and contemplates the proposition notice, opportunity and then quantification. With the assessee having filed "nil" return and action in terms of section 38(1) of the Act having not been pursued, it is inevitable that it is taken to be a deemed assessment of "nil" return and therefore the only way that it can be varied thereafter is by having recourse to section 39 of the Act. The so-called tentative determination while issuing show-cause notice quoting either section 79 or section 82 of the Act is not the proper way of determining that liability which should have been determined in terms of section 39 of the Act by the competent authority. The so-called tentative determination while issuing show-cause notice quoting either section 79 or section 82 of the Act is not the proper way of determining that liability which should have been determined in terms of section 39 of the Act by the competent authority. If the authority who has issued the notice under section 79 or section 82 of the Act also happens to be the very authority who can pass reassessment order, even then the reassessment order should be passed first and then further action under any other enabling provision can be taken. The so-called proposition notice quoting sections 79 and 82 of the Act on the face of it appears to be a mischievous notice issued for the purpose of creating evidence or to plant information in that notice indicating a possible tax liability on the part of the assessee even without a proper determination by a competent authority. As rightly submitted by learned counsel for the petitioner and by drawing attention to section 83 of the Act, which reads as under : "83. Validity of assessments not to be questioned in prosecution. - The validity of the assessment of any tax or of the levy of any fee or other amount, made under this Act, or the liability of any person to pay any tax, fee or other amount so assessed or levied shall not be questioned in any criminal court in any prosecution or other proceeding, whether under this Act or otherwise." a dealer against whom prosecution proceedings are initiated cannot question the validity or legality of the order of assessments for non-compliance with which prosecution is being launched. Correctness of the order can only be questioned in an appeal as provided under the Act. The criminal court is also not enabled to either set aside or modify the assessments as expressly provided in section 85 of the Act. The compounding of offence in terms of section 82 of the Act is by admitting the tax liability and in addition to discharging the tax liability, by paying an amount as specified by the prescribed authority not exceeding the amount of fine prescribed for the offence. The compounding of offence in terms of section 82 of the Act is by admitting the tax liability and in addition to discharging the tax liability, by paying an amount as specified by the prescribed authority not exceeding the amount of fine prescribed for the offence. To compound the offence the assessee should know what exactly is the tax liability and the sum of the money which is specified by the prescribed authority in lieu of fine which again is linked to the amount of tax sought to be evaded fraudulently as under section 79 of the Act. Therefore, unless the actual amount of tax which is evaded or sought to be evaded fraudulently has been determined by the competent authority, launching prosecution is a futile exercise and notice of the nature questioned in the present writ petition which is not even contemplated under the provisions of the Act is not a valid notice, not even a bona fide exercise of the powers under the Act. While it is no doubt true that the Act recognises a fraudulent evasion of tax as an offence and provides for penalty as well as imprisonment, a prosecution proceeding being a serious proceeding needs to be resorted not casually but only when it is really warranted and when the authorities are fully satisfied that it is a definite case of fraudulent evasion. In fact, there is a safeguard provided under the Act even for this as prosecution can be launched only with the sanction of the Commissioner. It is no doubt true that in the present case, the petitioner also could have approached the Commissioner to impress upon the Commissioner that it is not a fit case for prosecution and it should not be permitted, etc., but that does not come in the way of the petitioner seeking relief in writ jurisdiction as the proposed action on the part of the third respondent - officer is an instance of mala fide exercise of authority. In the present set of facts and circumstances, I am of the view that annexure E proposition notice is definitely not tenable in law for the reason that in the guise of a proposition notice which in fact is not warranted in terms of section 79 of the Act, the so-called notice seeks to plant information with regard to the liability of the petitioner though such liability is not actually determined by the competent authority in terms of the statutory provisions under the Act. Though it is contended by Smt. Niloufer Akbar, learned Additional Government Advocate that it is only a tentative determination or proposal for launch of prosecution, even that is not permitted in law as the determination can only be made by the competent authority and in terms of section 39 of the Act and not by any other mode or means. In such circumstances, it is obvious that the issue of the so-called notice under section 79 read with section 82 of the Act is not proper use of the power under the Act. In fact, it can be noticed even in terms of section 82, the compounding will be only on the dealer admitting the tax liability and not otherwise. In the present case whether right or wrong, the petitioner is disputing the tax liability. In such an event, it is more appropriate that the competent authority first determines the tax liability and takes up further action in accordance with the statutory provisions. It is for this reason, the proposition notice bearing No. JCCT/INT/Assistant Commissioner-XII/INS-49/06-07 dated April 9, 2007 (copy at annexure E) issued by the third respondent alone is quashed by issue of a writ of certiorari and in all other respects the authorities are free to proceed against the petitioner in accordance with law for determining the tax liability and on the basis of the law as declared by the Supreme Court and as has been noticed and held to be applicable in the similar facts and circumstances in Larsen & Toubro Limited's case in Writ Appeal No. 1409 of 2007 ([2008] 17 VST 457). The advance ruling clarifying the applicability of the ratio of the judgment of the Supreme Court in Raheja's case [2005] 141 STC 298 is in consonance with the judgment of this court in Writ Appeal No. 1409 of 2007 ([2008] 17 VST 457) and does not call for any interference. But, whether the petitioner's case is also similar and identical with the facts of the case of the appellant in Larsen & Toubro Limited's case [2008] 17 VST 457 (Karn) is a matter which has to be examined by the authorities and then apply the ruling, as the advance ruling authority has passed the order earlier to the judgment rendered by this court in Larsen & Toubro Limited's case [2008] 17 VST 457 (Karn). Writ petition is allowed in part, but only to the limited extent indicated above. Rule issued and made absolute.