Karnataka High Court
J.S. Udupi vs Commissioner Of Commercial Taxes In ... on 24 June, 1992
Equivalent citations: [1993]88STC411(KAR)
JUDGMENT K. Shivashankar Bhat, J.
1. The appellant before us is a restaurant owner. For the period from 1st April, 1976 to 31st March, 1977, in the order of assessment, the turnover relating to the supply of food and drinks was also included. The assessment order was made on 30th September, 1977. On 20th March, 1978, a demand notice was served on the appellant. To complete the narration, we may also state here that if the tax demanded is not paid within 21 days from the said date of demand which was 12th April, 1978 in the instant care, penalty under section 13(2) of the Karnataka Sales Tax Act, 1957, stood attracted automatically. In the meanwhile, on 4th January, 1972, the Supreme Court held (The State of Punjab v. Associated Hotels of India Ltd. ) that the turnover relating to the supply of food and drinks by a "composite hotel" (i.e., a hotel comprised of boarding and lodging) is not liable to sales tax on the supply of food and drinks because such supply is part of the services in the hotel. On 7th September, 1978, in Northern India Caterers' case , the same principle was applied declaring that restaurants are also not liable to sales tax in respect of the supply of food and drinks. To get over the difficulty caused to the State revenue, the Constitution was amended by the Constitution (Forty-sixth Amendment) Act, 1982, which came into force on 2nd February, 1983. Clause (b) [section 6(1)] of the Amendment Act, inter alia, validated the tax levied or collected in respect of the turnover relating to the supply of food and drinks. However, sub-clause (2) of this section 6 provides for some relief to a few dealers who had not collected the tax from their customers after the respective judgments of the Supreme Court. A composite hotelier if proves that he did not collect any sales tax from his customer for the supply of food and drink, is eligible to the exemption from the levy for the period 4th January, 1972 to 1st February, 1983 and a similar exemption is given to restaurants for the period 7th September, 1978 to 1st February, 1983.
2. In the instant case, the appellant had paid a part of the amount demanded under the earlier assessment order, but a small portion thereof was still unpaid. On 17th August, 1984, a notice was issued by the Revenue to the appellant demanding the arrears of tax and penalty thereon under section 13(2) of the Karnataka Sales Tax Act, 1957. The appellant is, however, not aggrieved by the demand of the tax arrears but is aggrieved by the penalty levied. The penalty levied was Rs. 5,418.20. Against the levy of penalty, the appellant approached the Deputy Commissioner of Commercial Taxes (Appeals) who accepted the appeal by holding :
"It was observed therefrom that the assessing authority had not intimated the appellant regarding the tax due from him by issue of simple notice and call upon them to make payment of the tax within a period of 21 days. He had straightway issued a notice under section 13(2) of the Act, on 17th August, 1984, calling upon the appellant to pay the tax of Rs. 2,956.80, along with interest at two and a half per cent up to April, 1978, i.e., Rs. 5,418.20 within 30th August, 1984. Thus, he had contravened the instructions issued by the Commissioner of Commercial Taxes at item 13 of Circular No. MSA. CR. 284/82-83, dated 2nd March, 1983 (sic). Therefore, in my considered opinion the submissions of the appellant on the above lines, are well-taken and substantiated."
3. The Commissioner opined that this was a fit case to act under section 22-A of the Act, since according to him, the order of the appellate authority was erroneous in so far as it was prejudicial to the Revenue. After affording opportunity to the appellant, he revised the order of the appellate authority. Hence this appeal.
4. The learned counsel for the appellant brought to our notice the circular issued by the Commissioner dated 11th March, 1983 and contended that under clause 13 of the said Circular, the liability to the penalty was to be enforced only in case the assessee fails to comply with the demand notice contemplated by the said clause. On the other hand, the learned Government Advocate contended that clause 13 was not applicable at all to the facts of this case because after the assessment order, a demand notice had already been issued earlier and by virtue of the 46th Amendment to the Constitution, there was nothing left except for the compliance of the demand by the assessee. According to the learned Government Advocate, it is only when there was an order of assessment earlier without a further issuance of demand notice, clause 13 gets attracted. By relying on section 13, it was further contended that payment of penalty under the said proviso is nothing but payment of an interest and this liability got statutorily attached as and when the assessee fails to comply with the demand.
5. To appreciate the rival contentions, it is necessary to refer to the aforesaid clause 13, which reads as follows :
"Recovery of arrears of tax :
13. As regards the sales tax levied in the assessment orders already concluded in respect of transactions of 'supply of articles of food and drink' (other than such supplies which would be eligible for exemption from tax during the period from 7th September, 1978 to 1st February, 1983 or from 4th January, 1972 to 1st February, 1983), it may be noted that the sales tax so levied gets revived by virtue of the validation clause of the Constitution (Forty-sixth Amendment) Act. For purposes of recovery of such taxes which are outstanding, all that is now required of the assessing officers is to intimate the hotelier/restaurateurs concerned regarding the tax due from them by issue of simple notices and call upon them to make payment of the tax within a period of 21 days. If After the expiry of 21 days, the tax due remains unpaid, they should take action for recovery of the arrears together with penalty under section 13(2) as applicable, as per provisions of the Karnataka Sales Tax Act."
6. On the face of it, clause 13 is attracted in respect of all the assessment orders, except those which are covered by the clause in the bracket. The importance given to the particular dates in clause 13 is, due to the decisions of the Supreme Court. The period between 4th January, 1972 and 1st February, 1983, is relevant regarding the levy of sales tax on supply of food/drink by a composite hotel as it was declared unconstitutional, on 4th January, 1972, by the Supreme Court. The effect of the decision of the Supreme Court stood erased by the 46th Amendment to the Constitution which came into force with effect from 2nd February, 1983. Similarly, regarding the liability of the restaurant owners, there was a declaration of law on 7th September, 1978 and the said law operated till 1st February, 1983. Therefore, during these periods, the respective dealers were entitled to take shelter under the decisions of the Supreme Court. The State also could not have enforced the levy during these periods. The 46th Amendment to the Constitution was made retrospective in the sense that the earlier levies were also validated. Technically, this validation would revive all earlier assessment orders and the statutory consequences should normally ensue. There is no doubt about this proposition.
7. If so, in the instant case, on the coming into force of the 46th Amendment to the Constitution, the appellant should have complied with the demand issued earlier. This included the automatic attraction of the statutory liability to pay the penalty, because this penalty has been declared to be nothing but an interest on the tax.
8. A Division Bench of this Court in Sha Ghelabhai Devji & Co. v. Assistant Commissioner of Commercial Taxes held :
"17. Section 13 of the Act employs the term 'penalty' and not 'interest' as payable on taxes withheld or defaulted by an assessee under the Act. But, that by itself cannot be decisive in holding one way or the other. Every word takes its colour from the context in which it occurs. A word is not a crystal with a definite and unalterable meaning to be applied mechanically to all and every situations in one and the only way. The rationale for providing for payment of interest has also been explained by this Court referring to the principles expounded by Cooley in his classic treatise on 'Taxation' in Sterling's case [1973] 32 STC 235. The Income Tax Laws in India and United States of America also provide for the same (vide World Tax Series - Taxation in India by Harvard Law School, Chapter 13, para 13/7.1 and 7.2 at pages 391 and 392 and Taxation in the United States published by Harvard Law School, Chapter 13, para 13/7.1 at page. 1262). The object is to deter a dilatory assessee, as the very petitioner, to make prompt payment of taxes found due to the State to meet the ever growing and almost insatiable demands and in default to make compensation for delayed payments. When one examines the same in that context, as that should be, applying the progressive rule of construction of statutes that has now come to stay, which has been very felicitously expressed by Lord Denning in Seaford Court Estates Limited v. Asher [1949] 2 All ER 155 at page 164 approved by our Supreme Court in State of Karnataka v. Hansa Corporation and K. P. Varghese v. Income-tax Officer and a Full Bench of this Court in C. Arunachalam v. Commissioner of Income-tax [FB]; (1984) ILR 2 Kar 1387, we are of the view that what is provided in section 13(2) of the Act is only interest and not penalty."
9. However, having regard to the lapse of time, there is every possibility that the assessees would have forgotten about their liabilities after the levy was declared by the Supreme Court as unconstitutional and it will be unfair on the part of the State to revive and enforce the said liability without any reminder to the assessees. It is in these circumstances, the Commissioner issued the circular, dated 11th March, 1983. This circular contemplates the issuance of a simple notice to the hoteliers/restaurateurs concerned, regarding the tax due from them. If within 21 days of the receipt of the simple notices, the same are not complied with, only then the action is to be taken for the recovery of the arrears together with the penalty under section 13(2). According to Sri H. L. Dattu, this Circular is applicable only to a case where there was no demand issued earlier after the assessment orders. For this purpose, the learned counsel relies on the phraseology found in the first sentence of clause 13, which reads :
"As regards the sales tax levied in the assessment orders ......
According to the learned counsel, the levy is complete on making the assessment order and a further demand notice is issued only to enforce it. When already a demand notice is issued, it is a futile exercise to issue one more notice to collect the tax levied and in the case where, after the assessment order, no demand notice was issued, this circular requires issuance of such a notice. We do not find any reason for such a distinction to be made. Every assessee was entitled to rely upon the declaration of law made by the Supreme Court and ignore the assessment order and the demand issued earlier. In such a situation, there is no reason as to why only one set of assessees (who were not issued with demand notices earlier) should be favoured by the issuance of simple notices to them under the Circular and only thereafter proceed to recover the penalty, in case the simple notices are not complied with. We appreciate the purpose behind the issuance of this Circular instruction since it is a fair procedure adopted by the Commercial Tax Department. Having devised such a fair procedure, it should cover the cases of all assessees who were entitled to take benefits of the declaration of law by the Supreme Court in the two decisions. A simple notice to each of the assessees is to remind him of the constitutional amendment and the consequences flowing therefrom. Only because, a few of the assessees were issued with demand notices earlier does not mean that they do not require any reminder of the liability revived by the amendment made to the Constitution.
10. Learned Government Advocate relied on Sha Jayantilal Khesti v. Additional Commercial Tax Officer (1966) 2 Mys LJ 614 wherein this Court held that the liability under section 13 is automatic and statutory and the liability to pay the penalty accruing thereunder is ancillary to the assessee's liability to pay the tax and the penalty payable becomes a part and parcel of the tax itself. In the instant case, question is not whether the liability to pay the penalty got attached by itself, by virtue of the demand notice issued earlier; but whether such a penalty should be recovered at all having regard to the declaration of law by the Supreme Court, which was in force till 1st February, 1983. Liability to tax stood revived by the amendment to the Constitution; if so why a simple notice demanding it, is necessary ? It was thought that fairness required issuance of such a notice. If penalty is part and parcel of the tax liability, same reasoning should govern the recovery of penalty also. The learned Government Advocate referred to section 13(2A) of the Act to contend that the Commissioner had no competence to make any order giving up of the penalty and the effect of clause 13 will be to give up the statutory penalty. It is true that under the said provision, it is only the State Government which can remit either whole or in part, the penalty payable thereunder. But here, we are concerned with the instructions issued by the Commissioner. Even if the instructions are opposed to the plain language of the statutory provision, still the instructions are binding on the subordinate authorities in view of section 3-A of the Karnataka Sales Tax Act.
11. In K. P. Varghese v. Income-tax Officer , while considering a similar provision under section 119 of the Income-tax Act, 1961, the Supreme Court held that the Circulars issued by the Central Board of Direct Taxes are binding on all officers and persons employed in the execution of the Act even if they deviate from the provisions of the Act.
12. In the view we have taken as above, this appeal deserves to be allowed. Appeal is accordingly allowed. The order of the Joint Commissioner under section 22-A of the Act is set aside.
13. It is clarified that this order would not come in the way of the Revenue taking action under clause 13 of the Circular, as interpreted above.
14. Appeal allowed.