Judgment :- 1. All these appeals are preferred by the State, challenging the order passed by the learned Single Judge in Writ Petition No.9689/2006 and other connected matters, wherein the provisions of sub-Section(1) of Section 72 of the Karnataka Value Added Tax, 2003, (hereinafter referred to as ‘the Act’ for short) were declared unconstitutional. 2. For the purpose of convenience the parties are referred to as per their rank in the Writ Petition. 3. All the petitioners are registered dealers under the Act. Section 35 of the Act read with Rule 38 prescribes that every registered dealer shall furnish a return in Form VAT 100 and shall pay tax due on such return within 20 days after the end of the preceding month. The return is required to comprise the details of purchases, tax paid on the purchases, goods, sales effected within the State, sales effected in interstate trade, output tax payable on such sale and the output tax and input tax as net amount of tax payable. Thus they should compute the tax payable by them. The Act came into force from 1-4-2005. 4. In all these cases the petitioners have not filed the said return within the time prescribed nor have they paid the tax. Therefore, a penalty has been imposed under Section 72(1) of the Act. Therefore they have preferred these Writ Petitions challenging the virus of Section 72(1) of the Act on the ground that it is arbitrary, the penalty prescribed is excessive and there is no nexus between the object sought to be achieved and the penalty imposed. Therefore they contend that the said provision is violative of Article 14 and Article 19(1)(g) of the Constitution of India. The learned Single Judge who heard the matter at length, after taking note of the various Judgments relied on by the Advocates and also taking note of the object with which this legislation was brought into effect, held, that while a provision for the levy of penalty in a taxing statue is undoubtedly a power which is ancillary and incidental to the main power of levy of tax on sale of goods, but the levy of penalty itself cannot be sustained on such premise. It has to remain within the scope of ancillary and incidental powers and cannot go beyond it. The power should also be exercised in a fair and reasonable manner. It has to remain within the scope of ancillary and incidental powers and cannot go beyond it. The power should also be exercised in a fair and reasonable manner. If the provision fails the test of Article 14 or Article 19 of the Constitution of India, it automatically renders itself unconstitutional. Further, he recorded a finding that the provisions of subsection (1) of Section 72 of the Act fails both the tests of Article 14 and 19 of the Constitution of India. The test under Article 14 is not passed as the levy of penalty under sub-Section (1) of Section 72 of the Act is arbitrary and irrational. The levy depending upon the quantum of tax liability, being huge and a fixed penalty of 10% of the tax liability, also being a huge penalty in the case of smaller dealers and in the case of small tax liability, the extent of delay being large i.e., to say 3 to 5 years, the penalty based on the extent of delay assumes gigantic proportions to make it an irrational levy depending upon the quantum of tax of penalty. An arbitrary penalty, which is also an irrational levy, automatically loses the nexus of achieving the object of correcting the mischief sought to be prevented by the Legislature and therefore renders itself unconstitutional. The provision also becomes disproportionate, as the extent of penalty reaches 100 times or more of the actual tax liability, which is grossly disproportionate to the act of failure in not complying with the requirement of filing a return within such a stipulated time and paying the tax within the stipulated time. The extent of levy of penalty in fact goes much beyond the scope of the power of ancillary and incidental power i.e., for ensuring prompt tax remittance to the State. The same should be within reasonable limits to act as a sufficient or a mere deterrent and not by reaching the level of confiscation. When such levels are reached, it becomes a tax in the nature of tax on income being at 10% of the tax liability. The 10% of tax liability may not even be the entire profit of the dealer and the said levy of penalty therefore becomes an oppressive levy being confiscatory of a percentage of the tax liability. When such levels are reached, it becomes a tax in the nature of tax on income being at 10% of the tax liability. The 10% of tax liability may not even be the entire profit of the dealer and the said levy of penalty therefore becomes an oppressive levy being confiscatory of a percentage of the tax liability. It partakes the character of a levy of tax on income as the penalty has to be inevitably borne by the dealer and cannot be passed onto the consumer/buyer and therefore 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 nature of the mischief that is sought to be curbed, being a mischief of a lesser degree in comparison to the mischief of evasion of tax itself, the penalty providing for curbing such mischief should be commensurate to the mischief intended to be remedied and it is here that the provision of sub-Section(1) of Section 72 of the Act fails the twin test of arbitrariness and irrationality leading to discrimination and violative of Article 14 of the Constitution of India. The levy of penalty being a disproportionately high penalty, fails the test of a reasonable restriction saved under Article 19(6) of the Constitution of India vis-à-vis Article 19(1)(g) of the Constitution of India. The provision cannot also be saved by applying the principle of reading down the statutory provision, as it is not possible to severe any part of the provision to make it reasonable, workable and therefore constitutional. The legal principle of a larger public interest prevailing over smaller private interest, cannot be put on a higher pedestal than the rights under Article 14 and 19 of the Constitution of India. To save the provisions under Article 14, the classification should be a reasonable classification with a nexus to the objects sought to be achieved by the Legislative provisions and the restriction should be a reasonable restriction within the meaning of Article 19(6) of the Constitution of India. Therefore, the learned Single Judge held that the provisions of sub-Section (1) of Section 72 of the Act, as it stood during different periods in respect of which the validity is challenged in these writ petitions, were declared unconstitutional and proceeded to pass consequential orders. 5. Therefore, the learned Single Judge held that the provisions of sub-Section (1) of Section 72 of the Act, as it stood during different periods in respect of which the validity is challenged in these writ petitions, were declared unconstitutional and proceeded to pass consequential orders. 5. Aggrieved by the said order of the learned Single Judge the State is in appeal. 6. The learned Government Advocate Smt. Sujatha, assailing the impugned order of the learned Single Judge contended as under: Entry-54 of List-II of the VII Schedule of the Constitution empowers the State Legislature to impose a Tax on the sale or purchase of goods other than newspaper. As per the accepted norms of taxation an ancillary or a subsidiary power which is necessary for achieving the object of a taxing Statute, is covered by the said Entry or Entries in the Legislative List. It has a very wide meaning and scope and therefore should be given a broad interpretation so as to make the provisions in the Act workable. Therefore it is incorrect to state that the State Legislature has no competence to enact a provision providing for imposition of penalty for non-compliance of the statutory requirements under the Act. While considering the scope of an economic legislation as well as a tax legislation, the Court must bear in mind that unless the provision is manifestly unjust or glaringly unconstitutional, the Court must show judicial restraint in interfering with its validity. The penalty provided is for a statutory offence. It is a civil liability for default or failure to comply with the statutory provisions and the penalty prescribed under the impugned provision is reasonable and not oppressive as contended, keeping in view the object with which this piece of legislation was enacted and therefore it does not contravene either Article 14 or Article 19(1)(g) of the Constitution of India. It is true that in sub-Section(1) of Section 72, the Legislature has not expressly provided for the issue of a notice before imposing penalty, but at the same time it is also not expressly excluded. Therefore it is well settled, that the principles of natural justice should be read into the Section and certainly before imposing the penalty a dealer would be heard. Therefore on the ground of non-compliance of the principles of natural justice the said provision cannot be struck down. Therefore it is well settled, that the principles of natural justice should be read into the Section and certainly before imposing the penalty a dealer would be heard. Therefore on the ground of non-compliance of the principles of natural justice the said provision cannot be struck down. In a given case the penalty prescribed under the provision even if acts oppressively, it is settled law that public interest should prevail over the private interest and on that score the validly enacted statutory provision cannot be struck down. 7. Per contra, Sri Sarangan, the learned Senior counsel supported the impugned order passed by the learned Single Judge and contended as under: The penalty is imposed under the Act under various circumstances. However, the penalty levied under Section 72(1) is highly excessive. There is no rationality behind the said imposition. The delay in filing the return for payment of tax is compensated by levying interest on such delayed payment of tax. In the event of a dealer not liable to pay tax, but fails to file the return, the penalty levied under the said provision is exorbitant, unreasonable and arbitrary. Even in respect of dealers who commit default in payment of tax, the penalty payable by a person who has delayed payment by 11 days and a person who has delayed payment of tax by a year is one and the same and therefore it is violative of Article 14 of the Constitution of India. Secondly, he contended that the arbitrariness and oppressiveness of the levy is inherent in the Section itself and it is an admitted fact and therefore even after reduction, the penalty levied is exorbitant, irrational, arbitrary and therefore is liable to be struck down. Thirdly he contended that the amendment would demonstrate that probably the legislature did not apply its mind properly. It shows lack of a clear and cogent policy. They did not even allow sufficient time for the provision to work. All these things inevitably demonstrate that the provision is irrational and on that ground alone the provision is liable to be struck down. Lastly, he contended that the imposition of penalty is in the nature of a penal action. In the Section there is no provision for hearing the person before the penalty is levied. Therefore, it violates the principles of natural justice and therefore the said provision cannot be sustained. Lastly, he contended that the imposition of penalty is in the nature of a penal action. In the Section there is no provision for hearing the person before the penalty is levied. Therefore, it violates the principles of natural justice and therefore the said provision cannot be sustained. Further even as it stands, it would act oppressive in so far as credit sales are concerned when the dealer has not even received the value of the goods let alone the tax payable thereto. 8. Sri. E.S. Indra Kumar, the learned Senior counsel appearing for the petitioners in another batch of matters, contended that in all fiscal legislation wherein penalty is provided for, a provision is also provided for, to find out whether the said violation is intentional or without reasonable cause and if there is any reasonable cause shown there could be waiver of such penalty. Such a provision is conspicuously missing in the present legislation without any reason. 9. Sri Thirumalesh, the learned counsel appearing for some of the petitioners contended that even if the Court were to read the principles of natural justice into the said provision, and if any notice is given and the dealer is heard before imposing the penalty, there is no discretion in the matter of imposition of penalty. It clearly demonstrates the arbitrariness and irrationality of the said provision. 10. In the light of the aforesaid facts and the rival contentions, the points that arise for consideration are as under:- 1) Whether Entry 54 of List-II of VII Schedule to the Constitution of India empowers the State Legislature to enact a provision for the penalty for non-filing of return and non-payment of tax? 2) If such a power vests in the State Legislature, whether the said provision could be declared ultravires on the ground that it is arbitrary and confiscatory in nature and as such, violative of Article 14 and 19(1)(g) of the Constitution of India? 3) Whether the impugned provision is liable to be struck down on the ground of being violative of the principles of natural justice? 11. Before we consider the aforesaid facts it is necessary to know the background and the purpose of enacting this piece of legislation and in particular the impugned provisions. 12. 3) Whether the impugned provision is liable to be struck down on the ground of being violative of the principles of natural justice? 11. Before we consider the aforesaid facts it is necessary to know the background and the purpose of enacting this piece of legislation and in particular the impugned provisions. 12. Prior to the introduction of the Act the sale and purchase of goods was governed by the provisions of the Karnataka Sales Tax Act, 1957. Replacing the said sales tax system in line with the national consensus for bringing in reforms in commodity taxation, the Karnataka Value Added Tax 2003 was enacted by the Karnataka Act No.32 of 2004 which came into effect on 1-4-2005. The Statement of Objects and reasons are as under:- “Statement of Objects and Reasons: It is considered necessary to introduce Value Added Tax to replace the present sales tax system in line with the national consensus for bringing in reforms in commodity taxation. The new legislation provides for the following, namely:- Widens the tax base by levying tax on sale of goods at every point of sale; Makes the levy of tax transparent and removes cascading; Compels issues of tax invoices by dealers indicating the tax charged separately; Provides for set off of all tax paid at the earlier points in respect of goods sold (that would include tax paid, defined as input tax on capital goods, raw materials, components and other inputs including consumables with some restrictions and packing materials that are used in the re-sale or manufacture or processing of goods being sold) against tax payable, defined as output tax, at any point, the set off scheme being called as input rebating; Tax paid on inputs purchased within the State is provided to be rebated against goods sold within the State, in the course of inter-State trade; Provides limited rebating of tax paid in excess of 4% to input used in the goods sent out of the State on stock or consignment; Promotes voluntary compliance by providing for acceptance of returns filed by dealers on self-assessment basis and for scrutiny of books of account only in selected cases. Enhances compliance by providing for non-discretionary automatic penalty for offences of noncompliance and contravention of the various provisions of law; and Minimises disputes regarding the time of sale by defining the same and thereby ensuring payment of tax without delay and also requires dealers to issue tax invoices within reasonable time to the buying dealers. Certain other incidental and consequential provisions are also made.” 13. Thus the VAT was considered as a catalyst to modernize the entire tax administration. The fact is that VAT is a very effective revenue generating instrument, both in developed countries and in the PICs. It imposes a discipline on both tax collectors and tax payers that is unparalleled in other tax instruments. It would change the nature of trade in the coming years. It avoids a cascading effect on sales tax by taxing only the value added at each stage of sale. For this reason, throughout the world VAT has been gaining favour over traditional sales taxes. Modern tax administrators require tax payers to self assess their tax liability. They do not examine the details of tax returns when filed, but use special selection techniques to identify appropriate cases for audit. Such a system, based on voluntary compliance provides a more effective allocation of scarce resources of a tax Department for audit and enforcement work. The basic simplification in VAT is that the VAT liability is self assessed for dealers in terms of submission of returns upon setting off the tax credit. Return forms as well as other procedures will be simple in all States. There will no longer be compulsory assessment at the end of each year as is existing now. If no specific notice is issued proposing departmental audit of the books of account of the dealer within the time limit specified in the Act, the dealer will be deemed to have been self assessed on the basis of the returns submitted by him. The value added tax (VAT) is a form of consumption tax. From the prospective buyer, it is a tax on the purchase price. From that of the seller, it is a tax on the value added to a product, material or service. The buyers remits to the Government the difference between these two amounts and retains the rest for themselves to offset the taxes he had previously paid on the inputs. From the prospective buyer, it is a tax on the purchase price. From that of the seller, it is a tax on the value added to a product, material or service. The buyers remits to the Government the difference between these two amounts and retains the rest for themselves to offset the taxes he had previously paid on the inputs. It is the value added to a product in the sale price charged to its customer, minus the cost of materials and other taxable inputs. A VAT is like a sales tax. Ultimately only the end consumer is taxed. It differs from the sales tax in that, with the latter, the tax is collected and remitted to the Government only once, at the point of purchase by the end consumer. With the VAT, collections, remittances to the Government and credits for taxes already paid, occur each time a business in the supply chain purchases products from another business. VAT is nothing but sales tax at source. Instead of collecting it after five months or so the State Governments would collect the same in advance and then allow set-offs to the businessmen. All tax paid on inputs, subject to rules made, shall be allowed to be set-off against the tax on output. There would be exceptions like CST not allowed to be set off if sales are made locally in some other state; octroi not to be set off against output tax, etc., Under the Value Added Tax Act, issue of invoice would be mandatory. No set off/input credit would be allowed unless the original tax invoice is produced, wherein tax is clearly charged separately in the invoice. The basic account books required for the purpose of VAT Act are Purchase and Sale Register. Both the registers would be the basis on which the calculation of payment of tax would be made. The normal practice of entering the gross value of Purchase bill would be changed. The assessee would be required to enter the value of goods in the goods Account and the amount of tax in the Tax Account separately. The maintenance of proper records is vital for the effective administration of VAT. Consequently, substantial penalties could be imposed on a tax payer who fails to comply with this obligation. The maximum penalty depends on the degree of culpability of the taxpayer in relation to the particular failure. The maintenance of proper records is vital for the effective administration of VAT. Consequently, substantial penalties could be imposed on a tax payer who fails to comply with this obligation. The maximum penalty depends on the degree of culpability of the taxpayer in relation to the particular failure. Indeed, non-filers need to be dealt with firmly and immediately. The main objective of a tax administration, when self-assessed procedures are the rule, is not only to collect the maximum amount of tax, but also to improve the level of voluntary compliance. The penalty system should be designed to help increase the level of compliance. 14. It is in this background we have to test the validity of the impugned provision and answer the points that arise for consideration. 15. Dealing with the question regarding competence of the State Legislature to enact a provision POINT No.1 – LEGISLATIVE COMPETENCE prescribing the penalty for non-filing of returns and non-payment of tax within the time is concerned, the law on the point is well settled. In the case of BALAJI VS. INCOME TAX OFFICER, SPECIAL INVESTIGATION CIRCLE (1962) 2 SCR 983 , it was held that: “The legislative Lists were not powers but are fields of legislation and that the widest possible import and significance should be attached to them. So interpreting, it was observed that the relevant entry must cover such legislation as the impugned provision intended to prevent the evasion of tax; it is a settled proposition that in matters of taxation, the power of legislate includes the incidental power to legislate for evasion of tax for which the entry provides.” The Supreme Court in the case RAHIMBHAI NAGRIWALA Vs. B.B.PATEL reported in (1974) 97 ITR 660 (GUJ) held as under:- “Everything which is incidental to the main purpose of a power is contained within the power itself so that it extends to matters which are necessary for the reasonable fulfillment of the legislative power over the subject-matter and, therefore, the power to impose penalty is for the purpose of vindicating the main power, which is conferred by the Act. The object of the legislature in levying such penalty is to provide deterrence against tax evasion and to put a stop to a practice which the legislature considers to be against the public interest. The object of the legislature in levying such penalty is to provide deterrence against tax evasion and to put a stop to a practice which the legislature considers to be against the public interest. It has been further observed that while Article 14 forbids class legislation, it does not forbid reasonable classification for the purposes of legislation. The Supreme Court has permitted a very wide latitude in classification for taxation. The object of the legislature in enacting the impugned provision is not to provide for confiscation but to provide a penalty for concealment of income and that too by providing a deterrent penalty.” The Apex Court in the case of KHAZAN CHAND OTHERS Vs. STATE OF JAMMU AND KASHMIR reported in (1984) 2 SCC 456 dealing with the question as to who is liable to pay sales tax, it held as under: “12. It would follow from the above decisions that the power to make a law with respect to a tax comprehends within it the power to levy that tax and to determine the persons who are liable to pay such tax, the rates at which such tax is to be paid and the event which will attract liability in respect of such tax. This is done by the charging sections of the particular tax law. The taxing power of the State will also comprehend within it the power to provide for quantification of the liability of persons made liable to pay the tax. This is done by the provisions relating to assessment. The taxing power will also comprehend within it the power to provide for collection of tax including prescribing the methods of recovery of the amount of tax due if the person liable to pay the tax does not voluntarily pay it. The power to make a law with respect to a tax includes not only what has been set out above but also a power to make provisions in the relevant statute with respect to all matters ancillary and incidental to the levy, assessment, collection and recovery of tax. Collection of tax by the State may be either after the liability is quantified by assessment or may be prior to actual assessment by requiring the assessee to pay before any assessment is made the amount of tax admitted to be due and payable by him. Collection of tax by the State may be either after the liability is quantified by assessment or may be prior to actual assessment by requiring the assessee to pay before any assessment is made the amount of tax admitted to be due and payable by him. This is done by making provisions such as those for advance payment of tax and for self-assessment contained in the Income Tax Act, 1961. This is also what sub-section (3) of Section 8 of the act does by requiring that the quarterly tax payable on the basis of a quarterly return required to be furnished by sub-section (2) of Section 7 shall be paid before furnishing such return. This is a mode of collection of revenue in advance before quantification of the actual tax liability and the Legislature would be well within its right and would be competent to provide for recovery of such amount if it is not paid by the prescribed time.” 16. …. It is clear from the above statutory provisions that the liability to pay sales tax is that of the dealer and not of the person who purchases goods from him and for the purposes of sales tax, it is immaterial whether the price of goods has been paid to the dealer or is payable to him. The fact that a dealer has sold goods on credit is, therefore, wholly immaterial. The Act imposes the liability to pay sales tax on dealers. This liability is irrespective of the fact whether he has made profit or loss in his business and whether he has received the sale price or not. When the liability to pay sales tax is cast by the statute on the dealer, he may pass on to his customer the amount of tax payable by him but he can only do so as a term of the contract of sale. Unless and until the purchaser agrees to pay to his vendor the amount of sales tax payable by the vendor, he is not bound to pay it to the vendor. Where, however, the purchaser agrees to pay such amount, it forms part of the sale price on which sales tax would be payable to the State. Under the sales tax laws of some States, a dealer is permitted to recover or collect from the purchaser the amount of sales tax payable by him. Where, however, the purchaser agrees to pay such amount, it forms part of the sale price on which sales tax would be payable to the State. Under the sales tax laws of some States, a dealer is permitted to recover or collect from the purchaser the amount of sales tax payable by him. Even then the dealer can recover or collect such amount only if the purchaser agrees to pay it. In such cases, under those sales tax laws the amount so recovered or collected is not treated, either in whole or in part, as part of the sale price and not taxed, provided the amount not taxed is paid over to the State or tax on the full amount, that is, including the amount of tax so recovered or collected, is required to be paid along with the quarterly or monthly return, as the case may be, and then at the time of assessment refund of the whole or part of the tax on the amount so collected is given to the dealer.” “18. Under Section 8-B of the Act, where a registered dealer realizes any amount by way of tax from the purchaser, he is required to deposit it in the Government Treasury or in the office of the Deputy Sales Tax Commissioner within one month of its realization. Where a dealer so deposits the tax, he would get credit for it against the amount of tax payable by him, but from this it does not follow that where he has not been able to recover the amount of tax or sale price from his customers, he is not bound to comply with the statutory requirements of sub-section (3) of Section 8 under which he has to pay tax according to the quarterly return furnished by him before the date prescribed for filing such return. The assesses were, therefore, bound to pay the tax due according to the quarterly returns filed by them before filing such returns and the fact that their customers had not paid to them the sale price did not exempt them from their statutory liability in this behalf.” The Apex Court in the case of A.B.C. (INDIA) LTD Vs. The assesses were, therefore, bound to pay the tax due according to the quarterly returns filed by them before filing such returns and the fact that their customers had not paid to them the sale price did not exempt them from their statutory liability in this behalf.” The Apex Court in the case of A.B.C. (INDIA) LTD Vs. STATE OF ASSAM AND ANOTHER reported in (2005) 142 STC 88 while dealing with the intention of the Legislature to pass legislation and the matters covered by an Entry 54 in list II of the VII Schedule held as under:- “As per the accepted norms of taxation the jurisdiction whatever is ancillary or subsidiary provision necessary for achieving the object of a tax statute is covered by entry 54 of List II of the Seventh Schedule to the Constitution of India. The entries in the legislative List have a very wide meaning and scope and should have a broad interpretation so as to make provisions in the Act workable and in the interest of the revenue. The obligation imposed upon the transporters under Sections 42 and 44 of the Act is also a part of such preventive measures against any evasion of taxes and the same should not be read in a narrow sense.” The Supreme Court in the case of GULJAG INDUSTRIES Vs. COMMERCIAL TAXES OFFICER reported in (2007) 9 VST 1 (SC) held as under:- “There is dichotomy between contravention of Section 78(2) of the said Act which invites strict civil liability on the assessee and the evasion of tax. When a statement of import/export is not filed before the A.O. it results in evasion of tax, however, when the goods in movement are carried without the declaration form No.18A/18C then strict liability comes in, in the form of Section 78(5) of the said Act. Breach of Section 78(2) imposes strict liability under Section 78(5) because as stated above goods in movement cannot be carried without form No.18A/18C. We are not concerned with non-filing of statements before the A.O. We are concerned with the goods in movement being carried without supporting declaration forms. The object behind the enactment of Section 78(5) which gives no discretion to the competent authority in the matter of quantum of penalty fixed at 30 per cent of the estimated value is to provide to the State a remedy for the loss of revenue. The object behind the enactment of Section 78(5) which gives no discretion to the competent authority in the matter of quantum of penalty fixed at 30 per cent of the estimated value is to provide to the State a remedy for the loss of revenue. The object behind enactment of Section 78(5) is to emphasis loss of revenue and to provide a remedy for such loss. It is not the object of the said section to punish the offender for having committed an economic offence and to deter him from committing, such offences. The penalty imposed under the said Section 78(5) is a civil liability. Willful consignment is not an essential ingredient for attracting the civil liability as in the case of prosecution. Section 78(2) is a mandatory provision. If the declaration form 18A/18C does not support the goods in movement because it is left blank then in that event Section 78(5) provides for imposition of monetary penalty for non-compliance. Default or failure to comply with Section 78(2) is the failure/default of statutory civil obligation and proceedings under Section 78(5) are neither criminal nor quasi-criminal in nature. The penalty is for statutory offence. Therefore, there is no question of proving of intention or of mens rea as the same is excluded from the category of essential element for imposing penalty. Penalty under Section 78(5) is attracted as soon as there is contravention of statutory obligations. Intention of parties committing such violation is wholly irrelevant. Moreover, in the present case, we find that goods in movement carried with form No.18A/18C. The modus operandi adopted by the assessee’s itself indicates mens rea. This is not the case where goods in movement are carried without the declaration forms. In the present matter, as stated above, goods in movement were carried with the declaration forms. These forms were duly signed, however, material particulars were not filled in. the explanation given by the assessees in most of the cases is that they are not responsible for the misdeeds of the consignors. The other explanation given by the assessees is regarding the language problem. There is no merit in these defences. They are excuses. The declaration forms were unfilled so that they could be used again and again. The forms were collected by the consignee from the said department. The consignee undertakes to see that the value of the goods is supplied by the consignor. There is no merit in these defences. They are excuses. The declaration forms were unfilled so that they could be used again and again. The forms were collected by the consignee from the said department. The consignee undertakes to see that the value of the goods is supplied by the consignor. It is not open to the consignee to keep the column in respect of the description of goods as blank. Even the column dealing with nature of transaction is left blank. The consignee is the buyer of the goods. He knows the descriptions of the goods which he is supposed to buy. There is no reason for leaving that column blank. Therefore, there are no special circumstances in any case for waiver of penalty for contravention of Section 78(2). The assessees were fully aware that the goods in movement had to be supported by form ST 18A/18C. Therefore, they made the goods travel with the forms. However, the said forms are left blank in all material respects. Therefore, A.O. was right in drawing inference of mens rea against the assessees.” 16. Therefore from the aforesaid Judgments it follows that the Entries in the legislative List have a very wide meaning and scope and should have a broad interpretation so as to make the provisions of the Act workable and in the interest of the revenue. The legislative Lists were not powers but are fields of legislation and that the widest possible import and significance should be attached to them. As per the accepted norms of taxation, the jurisdiction whether ancillary or subsidiary, the provision necessary for achieving the object of a taxing statute is covered by entry 54 of List II of the Seventh Schedule to the Constitution of India. Everything which is incidental to the main purpose is contained within the power itself so that it extends to matters which are necessary for the reasonable fulfillment of the legislative power over the subject-matter. Therefore, the power to impose penalty is for the purpose of vindicating the main power which is conferred by the Act. The Legislature enjoys a greater latitude for classification in the field of taxation. The courts, in view of the inherent complexity of fiscal adjustment of diverse elements, permit a larger discretion to the legislature in the matter of classification, so long as it adheres to the fundamental principles underlying the said doctrine. The Legislature enjoys a greater latitude for classification in the field of taxation. The courts, in view of the inherent complexity of fiscal adjustment of diverse elements, permit a larger discretion to the legislature in the matter of classification, so long as it adheres to the fundamental principles underlying the said doctrine. The power of the legislature to classify is of a “wide range and flexibility” so that it can adjust its system of taxation in all proper and reasonable ways. 17. It is well-settled that the State Legislature, while providing for the levy of tax, also has the power to provide for incidental matters, including measures for prevention or evasion of tax. The relevant entry must cover such a legislation as the impugned provision intends to prevent the evasion of tax. The power to legislate includes the incidental power to legislate for evasion of tax for which the entry provides. The power to make a law with respect to a tax comprehends within it the power to levy that tax and to determine the persons who are liable to pay such tax, the rates at which such tax is to be paid and the event which will attract the liability in respect of such a tax. It will also comprehend within it the power to provide for collection of tax including prescribing the methods of recovery of the amount of tax due if the person liable to pay the tax does not voluntarily pay it. The power to make a law with respect to a tax includes a power to make provisions in the relevant statute with respect to all matters ancillary and incidental to the levy, assessment, collection and recovery of tax. The taxing power of the State will also comprehend within it the power to provide for quantification of the liability of the person made liable to pay the tax. 18. Therefore, the power of the State Legislature to enact the provision in the nature of imposition of a penalty for non-compliance of the obligations prescribed in law, falls within Entry-54 List-II of the VII Schedule of the Constitution of India and it cannot be said that the said provision is bad for want of legislative competence. 19. In fact the learned Single Judge by his Judgment has virtually upheld the legislative competence of the legislature to enact Section 72(1) of the Act. 19. In fact the learned Single Judge by his Judgment has virtually upheld the legislative competence of the legislature to enact Section 72(1) of the Act. It is only in the latter part of the Judgment he observes that such a power conferred on the legislature under the aforesaid entry should be exercised within the permissible limits. Under the guise of exercising such a power, if the penalty imposed is arbitrary, excessive, confiscatory in nature then the said provision would be invalid. In fact, the learned senior counsels appearing for the petitioners did not dispute the legal position that the State Legislature under the aforesaid Entry has the legislative competence to enact a provision for penalty. POINT No.2-IS IT ARBITRARY OR CONFISCATORY 20. The main ground of attack is that the penalty specified in the Section is arbitrary and confiscatory in nature and thus violates Article 14 and 19(1)(g) of the Constitution of India. In this context they relied on a Judgment of the Apex Court in the case of KHANDIGE SHAM BHAT Vs. AGRICULTURAL INCOME-TAX OFFICER reported in 1963 Volume 48 ITR SC 1963 at page-26 wherein it was held as under:- “It is true taxation law cannot claim immunity from the equality clause of the Constitution. The taxation statute shall not also be arbitrary and oppressive, but at the same time the court cannot, for obvious reasons, meticulously scrutinize the impact of its burden on different persons or interests. Where there is more than one method of assessing tax and the legislature selects one out of them, the court will not be justified to strike down the law on the ground that the legislature should have adopted another method which, in the opinion of the court, is more reasonable, unless it is convince that the method adopted is capricious, fanciful, arbitrary or clearly unjust. “… Whatever method is adopted, there is bound to be hardship in some cases and advantage in others. … These illustrations prove that the section does not always work to the disadvantage of assessees similarly situated like the petitioner, but its effect would depend upon fortuitous circumstances, such as the quantum of income accrued during the five months and during the succeeding twelve months….. “The law gives an option to agriculturists to adopt an alternative method in case the rate fixed on the basis of average annual income would be disadvantageous to them. “The law gives an option to agriculturists to adopt an alternative method in case the rate fixed on the basis of average annual income would be disadvantageous to them. The fact that they do not keep such an account could not be an argument to support the arbitrariness of the legislation. But these advantages or disadvantages to individual assessees are accidental and inevitable and are inherent in every taxiing statute as it has to draw a line somewhere and some cases necessarily fall on the other side of the line.” The Apex Court in the case of STATE OF MADRAS Vs. V.G. ROW reported in AIR 1952 196 has held as under:- “It is important in this context to bear in mind that the test of reasonableness, wherever prescribed, should be applied to each individual statue impugned, and no abstract standard, or general pattern of reasonableness can be laid down as applicable to all cases. The nature of the right alleged to have been infringed, the underlying purpose of the restrictions imposed, the extent and urgency of the evil sought to be remedied thereby, the disproportion of the imposition, the prevailing conditions at the time, should all enter into the judicial verdict.” The Supreme Court in the case of BHAVESH D.PARISH Vs. UNION OF INDIA (2000) 5 SCC 471 held as under:- “While considering the scope of economic legislation as well as tax legislation, the courts must bear in mind that unless the provision is manifestly unjust or glaringly unconstitutional, the courts must show judicial restraint in interfering with its applicability. Merely because a statute comes up for examination and some arguable point is raised, the legislative will should not be put under a cloud. It is now well settled that there is always a presumption in favour of the constitutional validity of any legislation unless the same is set aside for breach of the provisions of the Constitution. The system of checks and balances has to be utilized in a balanced manner with the primary objective of accelerating economic growth rather than suspending its growth by doubting its constitutional efficacy at the threshold itself.” In the case of R.K.GARG Vs. UNION OF INDIA reported in (1981) 4 SCC 675 the Supreme Court held as under:- “Every legislation, particularly in economic matters, is essentially empiric and it is based on experimentation. UNION OF INDIA reported in (1981) 4 SCC 675 the Supreme Court held as under:- “Every legislation, particularly in economic matters, is essentially empiric and it is based on experimentation. There may be possibilities of abuse but on that account alone it cannot be struck down as invalid. These can be set right by the legislature by passing amendments. The Court must, therefore, adjudge the constitutionality of such legislation by the generality of its provisions. Laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion, etc. Moreover, there is a presumption in favour of the constitutionality of a statute and the burden is upon him who attacks it to show that there has been a clear transgression of the constitutional principles. The legislature understands and correctly appreciates the needs of its own people, its laws are directed to problems made manifest by experience and its discrimination is based on adequate grounds. There may be cases where the legislation can be condemned as arbitrary or irrational, hence, violative of Article 14. But the testing every case would be whether the provisions of the Act are arbitrary and irrational having regard to all the facts and circumstances of the case. Immorality, by itself, cannot be a constitutional challenge as morality is essentially a subjective value. The terms “reasonable, just and fair” derive their significance from the existing social conditions.” The Apex Court in the case of MARDIA CHEMICALS LIMITED VS. UNION OF INDIA reported in AIR 2004 SC 2371 at para 66 held as under: 66. “On behalf of the petitioners one of the contentions which has been forcefully raised is that existing rights of private parties under a contract cannot be interfered with, more particularly putting one party to an advantageous position over the other. For example, in the present case, in a matter of private contract between the borrower and the financing bank or institution through impugned legislation rights of the borrowers have been curtailed and enforcement of secured assets has been provided for without intervention of the Court and above all depriving them the remedy available under the law by approaching to the Civil Court. Such a law, it is submitted, is not envisaged in any civilized society governed by rule of law. Such a law, it is submitted, is not envisaged in any civilized society governed by rule of law. As discussed earlier as well, it may be observed that though the transaction may have a character of a private contract yet the question of great importance behind such transactions as a whole having far-reaching effect on the economy of the country cannot be ignored, purely restricting it to individual transactions more particularly when financing is through banks and financial institutions utilizing the money of the people in general namely, the depositors in the banks and public money at the disposal of the financial institutions. Therefore, wherever public interest to such a large extent is involved and it may become necessary to achieve an object which serves the public purposes, individual rights may have to give way. Public interest has always been considered to be above the private interest. Interest of an individual may, to some extent, be affected but it cannot have the potential of taking over the public interest having an impact in the socio-economic drive of the country. The two aspects are intertwined which are difficult to be separated. There have been many instances where existing rights of the individuals have been affected by legislative measures taken in public interest. At para 67, it held as under: 67. “….. Therefore, it is clear that it has always been held to be lawful, whenever it was necessary in the public interest to legislate irrespective of the fact that it may affect some individuals enjoying certain rights. In the present we find that case the unrealized dues of banking companies and financial institutions utilizing public money for advances were mounting and it was considered imperative in view of the recommendations of experts committees to have such law which may provide speedier remedy before any major fiscal set-back occurs and for improvement of general financial flow of money necessary for the economy of the country that the impugned Act was enacted. Undoubtedly such a legislation would be in the public interest and the individual interest shall be subservient to it. Even if a few borrowers are affected here and there, that would not impinge upon the validity of the Act which otherwise serves the larger interest.” 21. Undoubtedly such a legislation would be in the public interest and the individual interest shall be subservient to it. Even if a few borrowers are affected here and there, that would not impinge upon the validity of the Act which otherwise serves the larger interest.” 21. Therefore what follows from the aforesaid Judgments is that while considering the scope of an economic legislation as well as a tax legislation, the courts must bear in mind that unless the provision is manifestly unjust or glaringly unconstitutional, the courts must show judicial restraint in interfering with its applicability. Merely because a statute comes up for examination and some arguable point is raised, the legislative Will should not be put under a cloud. Every legislation, particularly in economic matters, is essentially empiric and is based on experimentation. There may be possibilities of abuse, but on that account alone it cannot be struck down as invalid. These can be set right by the legislature by passing amendments. The Court must, therefore, adjudge the constitutionality of such a legislation by the generality of its provisions. The Laws relating to economic activities should be viewed with greater latitude than the laws touching civil rights such as freedom of speech, religion, etc. The legislature understands and correctly appreciates the needs of its people and its laws are directed to problems manifest by experience and its discretion is based on adequate grounds. 22. It is true that taxation law cannot claim immunity from the equality clause of the Constitution. The taxation statute shall also not be arbitrary and oppressive. But at the same time the court cannot, for obvious reasons, meticulously scrutinize the impact of its burden on different persons or interests. But these advantages or disadvantages to individual assessees are accidental and inevitable and are inherent in every taxing statute as it has to somewhere draw a line and in some cases it necessarily falls on the other side of the line. 23. The question of great importance behind such transactions as a whole which has a far-reaching effect on the economy of the country cannot be ignored, purely restricting it to individual transactions. Therefore, wherever public interest to a large extent is involved and it may become necessary to achieve an object which serves public purposes, individual rights may have to give way. Public interest has always been considered to be above the private interest. Therefore, wherever public interest to a large extent is involved and it may become necessary to achieve an object which serves public purposes, individual rights may have to give way. Public interest has always been considered to be above the private interest. Interest of an individual may, to some extent, be affected but it cannot have the potential of taking over the public interest having an impact on the socio-economic drive of the country. The two aspects are intertwined which are difficult to separate. There have been many instances where existing rights of the individuals have been affected by legislative measures taken in public interest. Even if a few dealers are affected here and there, that would not impinge upon the validity of the Act which otherwise serves the larger interest. 24. Dealing with the object with which the provision of penalty is provided in a fiscal legislation, the Supreme Court in the case of STATE OF U.P. vs. SUKHPAL SINGH BAL reported in (2005) 7 SCC 615 held as under:- “Penalty” is a slippery word and it has to be understood in the context in which it is used in a given statute. A penalty may be the subject-matter of a breach of statutory duty or it may be the subject-matter of a complaint. In ordinary parlance, the proceedings may cover penalties for avoidance of civil liabilities which do not constitute offences against the State. This distinction is responsible for any enactment intended to protect public revenue. Thus, all penalties do not flow from an offence as is commonly understood but tall offences lead to a penalty. Whereas the former is a penalty which flows from a disregard of statutory provisions, the latter is entailed where there is mens rea and is made the subject-matter of adjudication. In our view, penalty under section 10(3) of the Act is compensatory. It is levied for breach of a statutory duty for non-payment of tax under the Act. Section 10(3) is enacted to protect public revenue. It is enacted as a deterrent for tax evasion. If the statutory dues of the State are paid, there is no question of imposition of heavy penalty. Everything which is incidental to the main purpose of a power is contained within the power itself. The power to impose penalty is for the purpose of vindicating the main power which is conferred by the statute in question. If the statutory dues of the State are paid, there is no question of imposition of heavy penalty. Everything which is incidental to the main purpose of a power is contained within the power itself. The power to impose penalty is for the purpose of vindicating the main power which is conferred by the statute in question. Deterrence is the main theme or object behind the imposition of penalty under Section 10 (3).” In the case of M.A.RAHMAN AND OTHERS Vs. THE STATE OF ANDHRA PRADESH reported in AIR 1961 SC 1471 held as under:- “Collection of revenue is necessary in order that the administration of the State may go on smoothly in the interest of the general public. The State has therefore armed itself with one more coercive method in order to realize the tax in such cases. It is true that cancellation of registration may result in a dealer being unable to carry on the business, but the same result may even follow from the application of other coercive processes for realization of dues from a trader, for his assets may be sold off to pay the arrears of tax and lie may thereafter be not in a position to carry on the business at all. Therefore the provision for cancellation of registration for failure to pay the tax or for fraudulently evading the payment of it is an additional coercive process which is expected to be immediately effective and enables the state to realize its revenues which are necessary for carrying on the administration in the interest of the general public. The fact that in some cases restrictions may result in the extinction of the business of a dealer would not by itself make the provision as to cancellation of registration on unreasonable restriction on the fundamental right guaranteed by Art.19(1)(g).” The Apex Court in the case of GULJAG INDUSTRIES Vs. COMMERCIAL TAXES OFFICER reported in (2007) 9 VST 1 (SC) dealing with the question whether contravention of the mandatory provisions for proof of mens rea, penalty could be imposed, held as under:- “There is dichotomy between contravention of section 78(2) of the said Act which invites strict civil liability on the assessee and the evasion of tax. COMMERCIAL TAXES OFFICER reported in (2007) 9 VST 1 (SC) dealing with the question whether contravention of the mandatory provisions for proof of mens rea, penalty could be imposed, held as under:- “There is dichotomy between contravention of section 78(2) of the said Act which invites strict civil liability on the assessee and the evasion of tax. When a statement of import/export is not filed before the A.O. it results in evasion of tax, however, when the goods in movement are carried without the declaration form No.18A/18C then strict liability comes in, in the form of section 78(5) of the said Act. Breach of section 78(2) imposes strict liability under section 78(5) because as stated above goods in movement cannot be carried without form No.18A/18C. We are not concerned with non-filing of statements before the A.O. We are concerned with the goods in movement being carried without supporting declaration forms. The object behind the enactment of section 78(5) which gives no discretion to the competent authority in the matter of quantum of penalty fixed at 30 per cent of the estimated value is to provide to the State a remedy for the loss of revenue. The object behind enactment of Section 78(5) is to emphasis loss of revenue and to provide a remedy for such loss. It is not the object of the said section to punish the offender for having committed an economic offence and to deter him from committing, such offences. The penalty imposed under the said section 78(5) is a civil liability. Willful consignment is not an essential ingredient for attracting the civil liability as in the case of prosecution. Section 78(2) is a mandatory provision. If the declaration form 18A/18C does not support the goods in movement because it is left blank then in that event section 78(5) provides for imposition of monetary penalty for non-compliance. Default or failure to comply with section 78(2) is the failure/default of statutory civil obligation and proceedings under section 78(5) are neither criminal nor quasi-criminal in nature. The penalty is for statutory offence. Therefore, there is no question of proving of intention or of mens rea as the same is excluded from the category of essential element for imposing penalty. Penalty under section 78(5) is attracted as soon as there is contravention of statutory obligations. Intention of parties committing such violation is wholly irrelevant. The penalty is for statutory offence. Therefore, there is no question of proving of intention or of mens rea as the same is excluded from the category of essential element for imposing penalty. Penalty under section 78(5) is attracted as soon as there is contravention of statutory obligations. Intention of parties committing such violation is wholly irrelevant. Moreover, in the present case, we find that goods in movement carried with form No.18A/18C. The modus operandi adopted by the assessee’s itself indicates mens rea. This is not the case where goods in movement are carried without the declaration forms. In the present matter, as stated above, goods in movement were carried with the declaration forms. These forms were duly signed, however, material particulars were not filled in. the explanation given by the assessees in most of the cases is that they are not responsible for the misdeeds of the consignors. The other explanation given by the assessees is regarding the language problem. There is no merit in these defences. They are excuses. The declaration forms were unfilled so that they could be used again and again. The forms were collected by the consignee from the said department. The consignee undertakes to see that the value of the goods is supplied by the consignor. It is not open to the consignee to keep the column in respect of the description of goods as blank. Even the column dealing with nature of transaction is left blank. The consignee is the buyer of the goods. He knows the descriptions of the goods which he is supposed to buy. There is no reason for leaving that column blank. Therefore, there are no special circumstances in any case for waiver of penalty for contravention of section 78(2). The assessees were fully aware that the goods in movement had to be supported by form ST 18A/18C. Therefore, they made the goods travel with the forms. However, the said forms are left blank in all material respects. Therefore, A.O. was right in drawing inference of mens rea against the assessees.” 25. From the aforesaid Judgments it is clear that ‘penalty’ is a slippery word which has to be understood in the context in which it is used. Under a given situation, a penalty may be the subject matter of a statutory duty or a deemed subject matter of a complaint. From the aforesaid Judgments it is clear that ‘penalty’ is a slippery word which has to be understood in the context in which it is used. Under a given situation, a penalty may be the subject matter of a statutory duty or a deemed subject matter of a complaint. In ordinary parlance, the proceedings may cover penalties for avoidance of civil liabilities which do not constitute offences against the State. This distinction is necessary for any enactment intended to protect public revenue. It is enacted as a deterrent for tax evasion. If the statutory dues of the State are paid there is no question of imposition of heavy penalty. Everything which is incidental to the main purpose of a power is contained within the power itself. The power to impose penalty is for the purpose of vindicating the main power, which is conferred by the Statute in question. Deterrence is the main theme or object behind the imposition of penalty under Section 72. The Collection of revenue is necessary in order that the administration of the State may go on smoothly in the interest of the general public. The State has therefore armed itself with one more coercive method in order to realize the tax in such cases. It is an additional coercive process which is expected to be immediately effective and enables the state to realize its revenues which are necessary for carrying on the administration in the interest of the general public. The fact that in some cases restrictions may result in the extinction of the business of a dealer would not by itself make the provision an unreasonable restriction on the fundamental right guaranteed by Art.19(1)(g). 26. The object behind the enactment of section 72 which gives no discretion to the competent authority in the matter of quantum of penalty fixed, is to provide to the State a remedy for the loss of revenue. It is not the object of the said section to punish the offender for having committed an economic offence and to deter him from committing such offences. The penalty imposed under Section 72 is a civil liability. Willful disobedience is not an essential ingredient for attracting the civil liability as in the case of prosecution. It is not the object of the said section to punish the offender for having committed an economic offence and to deter him from committing such offences. The penalty imposed under Section 72 is a civil liability. Willful disobedience is not an essential ingredient for attracting the civil liability as in the case of prosecution. Default or failure to comply with section 72 is the failure/default of a statutory civil obligation and the proceedings under section 72 are neither criminal nor quasi-criminal in nature. The penalty is for a statutory offence. Therefore, there is no question of proving of an intention or of ‘mens rea’ as the same is excluded from the category of an essential element for imposing penalty. Penalty under section 72 is attracted as soon as there is a contravention of the statutory obligations. Intention of the parties in committing such a violation is wholly irrelevant. 27. It is in this background we have to see whether the penalty imposed is arbitrary, oppressive or confiscatory in nature. Under Section 72 the penalty is provided for failure to furnish a return as well as a failure to pay the tax due on any return furnished. Section 35 of the Act which finds a place in Chapter-V dealing with the collection of tax mandates that every registered dealer shall furnish a return in such form and manner including electronic methods and shall pay the tax due on such return within twenty days or fifteen days after the end of the preceding month or any other tax period as may be prescribed. Sub-Section (2) of Section 35 of the Act provides that the tax on any sale or products of goods declared on any return furnished shall become payable on the expiry of the period specified in sub-Section (1) without requiring issue of a notice for payment of such tax. The other requirement is the issue of a notice for payment of such tax. Section 38 deals with the assessment of tax which provides that every dealer shall be deemed to have been assessed to tax based on the return filed by him under Section 35. The other requirement is the issue of a notice for payment of such tax. Section 38 deals with the assessment of tax which provides that every dealer shall be deemed to have been assessed to tax based on the return filed by him under Section 35. Sub-Section (2) of Section 38 provides that where a registered dealer fails to furnish his monthly or final return on or before the date provided in this Act or the rules made thereunder, the prescribed authority shall issue an assessment to the registered dealer to the best of its Judgment and the tax assessed shall be paid within ten days from the date of service of such assessment on the dealer. Sub-Section (3) provides that when an assessment has been made under sub-Section (2) and the dealer subsequently furnishes a return for the period to which the assessment relates, the prescribed authority may withdraw the assessment, but the dealer shall be liable to penalties and interest as applicable. Therefore under the Act, the tax liability will be self assessed by the dealer themselves in terms of submission of returns by setting off the tax credited. Return forms as well as other procedures are very simple. There will no longer be a compulsory assessment at the end of each year. If no specific notice is issued proposing departmental audit of the books of accounts of the dealer within the time limit specified in the Act, the dealer will be deemed to have been self assessed on the basis of the returns submitted by him. 28. Therefore the stress is on self-assessment. In the returns filed by the assessee, he has to disclose the input tax paid and the output tax paid and if the output tax paid is more than the input tax paid, he is entitled to deduct out of the output tax the input tax paid and only that difference in the amount is to be credited by him to the Government. In the event input tax paid is more than the output tax paid, the assessee is entitled to refund of the said amount. It is in this background, for proper tax administration and for compliance with the statutory provisions, the legislature in its wisdom thought, that a mere imposition of interest on delayed payment of tax is not sufficient and that would not enable the implementation of its new taxation law. It is in this background, for proper tax administration and for compliance with the statutory provisions, the legislature in its wisdom thought, that a mere imposition of interest on delayed payment of tax is not sufficient and that would not enable the implementation of its new taxation law. Therefore, advisedly, they thought it fit to provide for penalties to ensure or coerce the registered dealers to comply with these statutory requirements. 29. Chapter VIII deals with Penalties, Offences and the Power to make rules. Section 71 deals with penalties relating to registration. Section 72 deals with penalties relating to returns and assessment. Section 73 deals with penalties in relation to unauthorised collection of tax. Section 74 for failure to keep and maintain proper records. Section 75 for refusing to produce the records when called for to do so. Section 76 deals with failure to provide tax invoice, bills of sale, credit notes and debit notes. Section 77 deals with penalties relating to seals and Section 78 penalties for offences against the officers. Section 79 the general provision prescribing penalty for fraudulent evasion of tax. Therefore the legislature comprehensively provided for imposition of penalties for proper implementation of the Act. In fact, in Section 72 itself, penalties imposed for non-furnishing of return and non-payment of tax under different circumstances are apart from what is provided under sub-Section (1) of Section 72. However, the challenge to the Constitutional validity is confined only to Section 72(1) and the rest of the provisions dealing with penalties are not under challenge. It is in this context we have to find out as to whether the penalties prescribed under Section 72(1) is so arbitrary, oppressive and confiscatory in nature, so as to strike down the said provision as being violative of Article 14 and 19 (1)(g) of the Constitution. Section 72(1) reads as under: “72. Penalties relating to returns and assessment: (1) A dealer who fails to furnish a return or who fails to pay the tax due on any return furnished as required under the Act shall be liable to pay together with any tax or interest due. Section 72(1) reads as under: “72. Penalties relating to returns and assessment: (1) A dealer who fails to furnish a return or who fails to pay the tax due on any return furnished as required under the Act shall be liable to pay together with any tax or interest due. (a) a penalty of fifty rupees for each day of default and where such default is more than five days, such penalty- (i) shall not exceed two hundred and fifty rupees if the tax due is less than the said amount: (ii) shall be calculated at fifty rupees per day not exceeding the amount of tax due, if the tax due is more than two hundred and fifty rupees; and (b) a further penalty equal to- (i) five percent of the amount of tax due or fifty rupees whichever is higher, if the default is not for more than ten days, and ten percent of the tax due, if the default is for more than ten days; (2) …. (3) …. (4) …. (5) …. (6) ….“ 30. A perusal of the aforesaid provision makes it clear that it provides for imposing penalty for failure to furnish the return and failure to pay the tax due on any return furnished. Clause (a) of Sub-Section (1) provides a penalty of Rs.50-00 for each day of penalty. Clause (b) provides for imposition of penalty in addition to clause (a) at 5% if the default is not more than 10 days and at 10% if the default is for more than 10 days. 31. Assailing these provisions, the learned Senior Counsel contended, that if a registered dealer who is not liable to pay any tax but fails to furnish the returns within the stipulated time, the penalty that would be imposed on him is so arbitrary that it cannot stand the test of reasonableness. Therefore it was contended that ex-facie, the said provision is arbitrary and liable to be struck down. We do not see any substance in the said contention. If a registered dealer is not liable to pay tax and if he has not filed his return, clause (b) is not at all applicable to him. Therefore it was contended that ex-facie, the said provision is arbitrary and liable to be struck down. We do not see any substance in the said contention. If a registered dealer is not liable to pay tax and if he has not filed his return, clause (b) is not at all applicable to him. It is only clause (a) which is applicable and the maximum punishment which can be imposed under the said provision for non-filing of the return in time, is hardly Rs.300-00 in all, which by no stretch of imagination could be said to be excessive, arbitrary, confiscatory. Therefore, there is no merit in the said contention. 32. Next it was contended, by relying on clause (b), that, if a person has not paid the tax due within 10 days and who pays the tax on the 11th day and the person who pays tax after a year i.e., on the 365th day, both are treated alike. If clause (b) is interpreted dehors clause (a), then the said argument looks attractive. However, when clause (a) and (b) are read together, the intention of the legislature would then become clear. A person who is paying the tax on 11th day and a person who is paying the tax on 365th day would not be paying the very same tax. Though the basic penalty payable in respect of both of them is one and the same, but the person who is paying tax on 11th day would pay 10% of the tax due plus Rs.50-00, whereas the person who will be paying the penalty on the 365th day would be paying 10% of the tax due and Rs.50-00 per day and that such penalty under no circumstances can exceed the total tax payable. Therefore, we do not find any merit in the second contention also. 33. Thirdly, it was argued that when once clause (a) imposes penalty at a particular rate, a further penalty cannot be imposed under clause (b) and if imposed, will be a case of double penalty. Therefore it was contended that on the face of it, it is arbitrary. It is not a case of double penalty. In so far as clause (a) is concerned, the penalty is calculated on daily basis. It depends on the number of days delayed. That amount is payable in addition to the basic penalty as prescribed under clause (b). Therefore it was contended that on the face of it, it is arbitrary. It is not a case of double penalty. In so far as clause (a) is concerned, the penalty is calculated on daily basis. It depends on the number of days delayed. That amount is payable in addition to the basic penalty as prescribed under clause (b). The Legislature in its wisdom has used a particular language to express itself. Merely because after prescribing penalty under clause (a), they have used the expression ‘further penalty’ under clause (b), it does not amount to imposing a penalty on the tax payable twice for the same default. The entire Section is to be read as a whole which would indicate the real intention behind the said provision and therefore, we do not see any substance in the said contention also. 34. The learned Single Judge dealing with arbitrariness, was carried away by the statement made available to him showing the tax liability in Rupees, default in Rupees and the period of delay. It is on that basis he came to the conclusion that the penalty prescribed is more than the profit a trader would earn in the course of his business and hence the levy becomes arbitrary and irrational depending upon the quantum of tax liability being huge and resulting in a fixed penalty of 10% of the tax liability also being a huge penalty in the case of smaller dealers and in the case of small tax liability, the extent of delay being large, i.e., to say, 3 to 5 years. On a proper calculation, it is clear that persons who commit default in payment of tax within the due date are liable to pay the fixed penalty and depending upon the number of days delay they are liable to pay the penalty at the rate of Rs.50-00 per day. Therefore it cannot be said that imposition of penalty under this provision is irrational or unreasonable. 35. Similarly, it was contended that in the case of credit sales the registered dealer has not received either the value of the goods nor the tax payable thereon. Therefore it cannot be said that imposition of penalty under this provision is irrational or unreasonable. 35. Similarly, it was contended that in the case of credit sales the registered dealer has not received either the value of the goods nor the tax payable thereon. In such circumstances holding him as a person committing default or that he had the advantage of the tax collected and consequently he is liable to pay penalty would not stand to reason and therefore, atleast a distinction should have been made between assesses who actually received the tax and who did not remit the same to the Government and the assesses who did not actually receive the tax. Otherwise, it would have a serious impact on the trading community. 36. It is clear from the above statutory provisions that the liability to pay sales tax is that on the dealer and not on the person who purchases goods from him. For the purpose of sales tax/VAT, it is immaterial whether the price of goods has been paid to the dealer or payable to him. The fact that a dealer has sold goods on credit is therefore, wholly immaterial. The Act imposes a liability to pay sales tax on dealers. This liability is irrespective of the fact whether he has made a profit or a loss in his business or whether he has received the sale price or not. When the liability to pay sales tax is cast on the dealer by statute, he may pass on the burden to his customer, the amount of tax payable by him. Where a registered dealer realizes any amount by way of tax from the purchaser, he is required to deposit the same with the Government. Where a dealer so deposits the tax, he would get credit for it against the amount of tax payable by him. From this it does not follow that when he has not been able to recover the amount of tax or the sale price from his customers, he is not bound to comply with the statutory requirements, under which he has to pay tax according to the monthly returns furnished by him before the date prescribed for filing such return. In fact in the instant case, the legislature reduced the penalty the very next year after the passing of the amendment. In fact in the instant case, the legislature reduced the penalty the very next year after the passing of the amendment. Not being satisfied with the same in the succeeding year, again they have reduced the quantum of penalty payable under the very same Section. Therefore, after seeing the working of these provisions, probably on the representation of the trading community, the legislature being convinced of the hardship that is caused to the traders have taken steps and reduced the penalty prescribed under the Act. Therefore, these are matters which are to be set right by the legislature by passing amendments. The Court must, therefore, adjudge the constitutionality of such a legislation by the generality of its provisions. 37. It was next submitted that the very fact that the legislature amended the aforesaid provision twice in three years shows that the case of the petitioners that it is arbitrary and unreasonable, stands clearly established. Even if this Court were to uphold the validity of the Section as it stands today, the said section is only prospective in operation. The liability to pay penalty under the unamended provisions stands and therefore, those unamended provisions are liable to be struck down as being arbitrary and unreasonable. 38. It is evident that the legislature has successively amended this provision reducing the quantum of penalty payable. As it stands today, if it is compared to the earlier provisions the earlier provisions appear to be unreasonable. As the said provisions are not on the statute as on date, as the substituted provision is not made retrospective in operation and the penalty is imposed on the basis of these earlier provisions, it was made retrospectively only from 1.4.2004 and it has no application to the earlier case, the penalties imposed on these petitioners for the period prior to 1.4.2007 would act oppressively. In these circumstances, we deem it proper to extend the benefit of the amended provision from the inception instead of quashing the said provisions so that this argument of arbitrariness or discrimination would not be available to the petitioners. 39. In these circumstances, we deem it proper to extend the benefit of the amended provision from the inception instead of quashing the said provisions so that this argument of arbitrariness or discrimination would not be available to the petitioners. 39. As the learned single Judge has already set aside all the demands and the orders passed, the matter is now to be remitted to the authorities to reconsider the question of imposition of penalty after issuing a show cause notice to all these petitioners, hear them and then to pass appropriate orders in the light of the observations made above. In this regard it is also necessary to note that in the Karnataka Sales Tax Act which was in force for more than 5 decades, a provision similar to Section 72(1) did not exist. When this enactment was passed and this provision was given effect to, by a stroke of a pen, the attitude of the people cannot be changed overnight. It takes some time for these registered dealers to adapt themselves to the changed circumstances. Whatever may be the advantages of this VAT; if these dealers are used to a particular way of doing things for decades, certainly they need sufficient time to bring in their activities strictly in conformity with the provisions of VAT and it is in this process if there are some omissions, defaults, non-compliance of the statutory provisions, as the object of the provisions is not to strictly impose any penalty on these dealers but in reality to bring them into the main stream to see that these statutory provisions are complied with, so that in the long run the State and the dealers could be benefited. In deciding the case of penalty in the formative years of VAT, the authority shall keep these aspects in mind and as a one time measure would be well within their jurisdiction to show such concessions as is permissible in the facts of that particular case, in the matters of imposition of penalty. That would meet the ends of justice. 40. The material furnished by the State indicates that the substantial majority of the registered dealers are complying with these statutory requirements meticulously. The number of defaults when compared to the number of registered dealers and the number of returns to be filed is miniscule. That would meet the ends of justice. 40. The material furnished by the State indicates that the substantial majority of the registered dealers are complying with these statutory requirements meticulously. The number of defaults when compared to the number of registered dealers and the number of returns to be filed is miniscule. May be in a given case as set out in the chart by the learned single Judge, some hardship may be caused to a handful of dealers. But, that by itself cannot be a ground for striking down the law which is otherwise constitutionally valid. It is not the object of the said provision to punish the offender for having committed an economic offence and to deter him from committing such offences. The penalty imposed is in the nature of only a civil liability. It is intended as an additional coercive process which is expected to be immediately effective and enables the state to realize its revenues which are necessary for carrying on the administration in the interest of the general public. The fact that in some cases penalty imposed may affect the right of the assessee to carry on business, by itself would not constitute an unreasonable restriction on the fundamental right guaranteed by Article 19 (1)(g) of the Constitution of India. The question of great importance behind such a law as a whole, having far-reaching effect on the economy of the country cannot be ignored, purely restricting it to individual transactions. Therefore, wherever public interest to a large extent is involved it may become necessary to achieve an object which serves the public purposes and in which event, individual rights may have to give way. Public interest has always been considered to be above the private interest. Interest of an individual may, to some extent, be affected, but it cannot have the potential of taking over the public interest having an impact in the socio-economic drive of the country. The two aspects are intertwined which are difficult to be separated. There are many instances where the rights of the individuals have been affected by such legislative measures taken in public interest. However, on that ground the law that is valid and validly passed cannot be invalidated. POINT NO.3-NATURAL JUSTICE 41. It was contended that though the penalty is imposed for non-compliance of a statutory provision, it is penal in nature. There are many instances where the rights of the individuals have been affected by such legislative measures taken in public interest. However, on that ground the law that is valid and validly passed cannot be invalidated. POINT NO.3-NATURAL JUSTICE 41. It was contended that though the penalty is imposed for non-compliance of a statutory provision, it is penal in nature. There is no provision made for hearing the party, before imposing the penalty. It is violative of the principles of natural justice and is hit by Article 14 of the Constitution. In the absence of hearing the person affected, if an order is passed imposing a penalty it would cause great injustice. In fact in Section 72 itself, except sub-section (1), in respect of all other sub-sections the statute provides for giving an opportunity of showing cause in writing against the imposition of a penalty. Similar provisions are incorporated in respect of other penalty provisions and, therefore, it was contended that this sub-section (1) of Section 72 is clearly violative of the principles of natural justice and liable to be struck down. 42. It is true that a reading of sub-section (1) of Section 72 makes it clear that there is no provision for giving the assessee an opportunity of being heard before passing an order imposing the penalty as prescribed under Section 72(1). The Supreme Court dealing with such a situation in the case of UNION OF INDIA Vs. COL.J.N.SINHA [ 1970 (2) SCC 458 ] has held as under:- “8. Rules of natural justice are not embodied rules nor can they be elevated to the position of fundamental rights. As observed by this court in Kraipak. A.K. v. Union of India “the aim of rules of natural justice is to secure justice or to put it negatively to prevent miscarriage of justice. These rules can operate only in areas not covered by any law validly made. In other words they do not supplant the law but supplement it’. It is true that if a statutory provision can be read consistently with the principles of natural justice, the courts should do so because it must be presumed that the Legislatures and the statutory authorities intend to act in accordance with the principles of natural justice. In other words they do not supplant the law but supplement it’. It is true that if a statutory provision can be read consistently with the principles of natural justice, the courts should do so because it must be presumed that the Legislatures and the statutory authorities intend to act in accordance with the principles of natural justice. But if on the other hand a statutory provision either specifically or by necessary implication excludes the application of any or all the principles of natural justice then the court cannot ignore the mandate of the Legislature or the statutory authority and read into the concerned provision the principles of natural justice. Whether the exercise of a power conferred should be made in accordance with any of the principles of natural justice or not depends upon the express words of the provision conferring the power, the nature of the power conferred, the purpose for which it is conferred and the effect of the exercise of that power.” Again the Constitution Bench of the Apex Court in the case of OLGA TELLIS Vs. BOMBAY MUNICIPAL CORPORATION [ 1985 (3) SCC 545 ] has held as under: “44… (the said section) confers on the Commissioner the discretion to cause an encroachment to be removed with or without notice. That discretion has to be exercised in a reasonable manner so as to comply with the constitutional mandate that the procedure accompanying the performance of a public act must be fair and reasonable. (The Court) must lean in favour of this interpretation because it helps sustain the validity of the law. 45. It must further be presumed that, while vesting in the commissioner the power to act without notice, the Legislature intended that the power should be exercised sparingly and in cases of urgency which brook no delay. In all other cases, no departure from the audi alteram partem rule (‘Hear the other side’) could be presumed to have been intended. Section 314 is so designed as to exclude the principles of natural justice by way of exception and not as a general rule. There are situations which demand the exclusion of the rules of natural justice by reason of diverse factors like time, place the apprehended danger and so on. Section 314 is so designed as to exclude the principles of natural justice by way of exception and not as a general rule. There are situations which demand the exclusion of the rules of natural justice by reason of diverse factors like time, place the apprehended danger and so on. The ordinary rule which regulates all procedure is that persons who are likely to be affected by the proposed action must be afforded an opportunity of being heard as to why that action should not be taken. The hearing may be given individually or collectively, depending upon the facts of each situation. A departure from this fundamental rule of natural justice may be presumed to have been intended by the Legislature only in circumstances which warrant it. Such circumstances must be shown to exist, when so required, the burden being upon those who affirm their existence.”. Yet another Constitution Bench of the Apex Court in the case of C.B.GAUTAM Vs. UNION OF INDIA AND OTHERS [ 1993 (1) SCC 78 ] has held as under:- “28. It must, however, be borne in mind that courts have generally read into the provisions of the relevant sections a requirement of giving a reasonable opportunity of being heard before an order is made which would have adverse civil consequences for the parties affected. This would be particularly so in a case were the validity of the section would be open to a serious challenge for want of such an opportunity. 30. In the light of what we have observed above, we are clearly of the view that the requirement of a reasonable opportunity being given to the concerned parties, particularly, the intending purchaser and the intending seller must be read into the provisions of Chapter XX-C. In our opinion, before an order for compulsory purchase is made under Section 269-UD, the intending purchaser and the intending seller must be given a reasonable opportunity of showing cause against an order for compulsory purchase being made by the appropriate authority concerned. …. …. The very fact that an imputation of tax evasion arises where an order for compulsory purchase is made and such an imputation casts a slur on the parties to the agreement to sell lead to the conclusion that before such an imputation can be made against the parties concerned, they must be given an opportunity to show cause that the undervaluation in the agreement for sale was not with a view to evade tax. Although Chapter XX-C does not contain any express provision for the affected parties being given an opportunity to be heard before an order for purchase is made under Section 269-UD, not to read the requirement of such an opportunity would be to give too literal and strict an interpretation to the provisions of Chapter XX-C and in the words of Judge Learned Hand of the United States of America “to make a fortress out of the dictionary”. Again there is no express provision in Chapter XX-C barring the giving of a show-cause notice or reasonable opportunity to show cause nor is there anything in the language of Chapter XX-C which could lead to such an implication. The observance of principles of natural justice is the pragmatic requirement of fair play in action. In our view, therefore, the requirement of an opportunity to show cause being given before an order for purchase by the Central Government is made by an appropriate authority under Section 269-UD must be read into the provisions of Chapter XX-C. There is nothing in the language of Section 269-UD or any other provision in the said Chapter which would negate such an opportunity being given. Moreover, if such a requirement were not read into the provisions of the said Chapter, they would be seriously open to challenge on the ground of violation of the provisions of Article 14 on the ground of noncompliance with principles of natural justice.” 43. In the instant case as the provision stands, penalty could be imposed for non-furnishing of returns or failing to pay the tax due on any returns furnished. It is penal in nature. Such an order imposing penalty will have serious civil consequences. Though in the other sub-sections of Section 72, an express provision is made for the issue of a show cause notice and hearing the assessee before imposing the penalty, such a provision is conspicuously missing in Section 72(1). It is penal in nature. Such an order imposing penalty will have serious civil consequences. Though in the other sub-sections of Section 72, an express provision is made for the issue of a show cause notice and hearing the assessee before imposing the penalty, such a provision is conspicuously missing in Section 72(1). That by itself would not lead to the conclusion that the legislature has by implication excluded the principles of natural justice. No express words are used in the said provision excluding the application of principles of natural justice. When the aforesaid statutory provision either specifically or by necessary implication does not exclude the application of any or all the principles of natural justice, then the Court cannot ignore the mandate of the Legislature or the statutory authority and exclude the application of principles of natural justice. A departure from this fundamental rule of natural justice may be presumed to have been intended by the Legislature only in circumstances which warrant it. Such circumstances must be shown to exist. When so required, the burden being upon those who affirm their existence. If the principles of natural justice are not read into the provisions of Section 72(1), thereby denying a reasonable opportunity of being heard, and an order imposing penalty is made, such an order would entail adverse civil consequences for the assessee and it would seriously pose a challenge to the validity of the said provision itself. The constitutional validity of the said provision could be upheld, by reading the principles of natural justice into the said provision. The observance of the principles of natural justice is the pragmatic requirement of fair play in action. In our view, therefore, the requirement of an opportunity to show cause being given before an order imposing the penalty is passed, must be read into the provisions of Section 72(1). There is nothing in the said provision which would negate such an opportunity being given. In fact in several cases where orders are passed imposing penalty, it was always preceded by a show cause notice. However, in some cases no such notice was issued. Therefore, it is clear that the authorities have understood the said provision in the light of the spirit of the law laid down by the Apex Court in the aforesaid decisions and have complied with the requirements of natural justice. However, in some cases no such notice was issued. Therefore, it is clear that the authorities have understood the said provision in the light of the spirit of the law laid down by the Apex Court in the aforesaid decisions and have complied with the requirements of natural justice. Therefore, notwithstanding the absence of express words in the said provision stipulating a show cause notice being issued, hearing him personally and a penalty is imposed, the rule of natural justice of hearing him before an order of penalty is passed has to be read into Section 72(1) of the Act. Once the rules of natural justice are read into the Section, the Section would withstand the test of constitutional validity. 44. It is next contended that even if a show cause notice is issued and the assessee is heard in the matter, having regard to the language in the said Section, there is absolutely no discretion with the competent authority to consider as to whether it is a case for imposing penalty or not imposition of penalty is automatic in which event, following the principles of natural justice would be a mere empty formality. Merely because no discretion is left with the authorities under the aforesaid provision in imposing the penalty once the condition prescribed for imposing penalty is satisfied, it would not render the said provision unconstitutional. But, at the same time if the rule of “audi alterm partem” has to be meaningful and in a genuine case where the non-compliance of the statutory requirement is beyond the control of the assessee and is not intentional, the authority who is vested with the power to impose penalty should have the power and the discretion not to impose penalty. In fact the reason why such a discretion is not left with the authority is, that the experience shows, that such a power and discretion is not properly exercised and in many cases abused, rendering the provision imposing the penalty otiose. When the object of introducing this provision for penalty in the Act is to enforce strict compliance of the statutory provisions, the legislature in its wisdom has not conferred any discretion on the authority concerned. That would not by itself denude the power of the authority to reduce or waive penalty in a genuine deserving case. When the object of introducing this provision for penalty in the Act is to enforce strict compliance of the statutory provisions, the legislature in its wisdom has not conferred any discretion on the authority concerned. That would not by itself denude the power of the authority to reduce or waive penalty in a genuine deserving case. In our considered view, the circumstances under which such a benefit can be given to the assessee should be as under:- 1. Death of the proprietor/proprietrix. 2. Death or incapacitation or any person authorised to file returns in the case of tax payers who are firms or companies. 3. Natural calamities including fire accidents. 4. Seizure of books of accounts and other documents of the tax payer by any statutory authority. 5. Sealing or closure of business premises of the tax payer by any statutory authority. 6. Non-issue of TDS certificates by Government departments and other authorities to the tax payers who are works contractors. 7. Transfer of the tax payer’s file from one jurisdiction to another authority without prior intimation to the tax payer. 8. If in law they are not liable to file return or not liable to pay tax under the Act. 45. It is made clear that if the discretion which is conferred on the authorities by virtue of this judgment were to be liberally interpreted, the very object of enacting this provision would be defeated. Therefore, the authorities while acting under Section 72(1) as a rule have no discretion in the matter of imposing penalty. When once there is a non-compliance with the statutory requirement of not furnishing returns within the stipulated time or after furnishing the returns, non-payment of tax along with the returns, the penalty should follow as a rule. However, only in exceptional cases falling under the aforesaid circumstances, the authority may in its discretion for reasons to be recorded in writing, showing the application of mind by them and their satisfaction, exercise that discretion and waive the penalty either fully or partially. That would meet the requirements of justice, in particular, when the object with which the principles of natural justice is read into this provision. 46. That would meet the requirements of justice, in particular, when the object with which the principles of natural justice is read into this provision. 46. Therefore, in the light of the above discussions, we find it difficult to agree with the reasoning of the learned single Judge who has held that the offending provision is arbitrary, confiscatory in nature, irrational and unreasonable and violative of Articles 14 and 19(1)(g) of the Constitution of India. Therefore, the said order of the learned single Judge is liable to be set aside and the constitutional validity of Section 72(1) of the Act is to be upheld. Hence, we pass the following order:- (a) All the Writ Appeals are allowed. (b) The order passed by the learned single Judge striking down Section 72(1) of the Act is hereby set aside. (c) It is declared that Section 72(1) of the Act is constitutionally valid. It does not suffer from the vice of arbitrariness, irrationality and is not confiscatory in nature and is not hit by Articles 14 and 19(1)(g) of the Constitution of India. (d) The order passed by the learned single Judge in so far as quashing of the demand notices and assessment orders stands, but the entire matter is now remitted back to the assessing officer with a direction. (i) To issue a show cause notice calling upon the petitioners to show cause as to why the penalty contemplated should not be imposed. (ii) After the appearance of the petitioners to give them a personal hearing. (iii) After considering the cause shown, to find out whether their case falls under any of those circumstances set out in para 44 above and if it falls under any of those circumstances to drop the penalty proceedings. (iv) If it does not fall under these categories, let him keep in mind the observations made by this Court as a one time measure and also give the benefit of the amended Section retrospective effect from 1.4.2005 and pass appropriate orders in accordance with law. Parties to bear their own costs.