It is well esteblished principle that the power to levy penality under taxation laws is incidental and ancillary to the power of collection of tax and is provided to make sure the compliance of tax deposits by the assessees. Taxation laws are welfare laws i.e they are for the welfare of the general public at large.
Recently I have come across section 29(8) of MVAT Act which provides for the leving of penality on the dealers who fails to file their return for any period within the prescribed time to the tune of Rs. 5000 and the word ‘shall’ has been used in the said section for leving penality. The section 29(8) of MVAT Act runs as under:
Where, any person or dealer has failed to file within the prescribed time, a return
for any period as provided in section 20, the Commissioner shall impose on him, a
sum of rupees five thousand by way of penalty. Such penalty shall be without
prejudice to any other penalty which may be imposed under this Act.
Now from the above wording of section it is clear that a mandatory penality has been provided to the tune of Rs. 5000 without affording reasonable opportunity of being heard to the person making default in filling the return within prescribed time irrespective of the fact whether the tax has been deposited within time or not or whether the defaulter has any reasonable cause for not filling the return within time or not.
Rules of natural justice are important part of fundamental rights as enshirined in our constitution. Rules of natural justice means fair play in action i.e. to save the citizens from arbitrariness in administrative or quasi judicial action. Rules of natural justice are part of Rule of law as ensured under article 14 of our constitution. Violation of rules of natural justice result in arbitrariness and violation of fundamental rights as provided by our constitution to the citizens of India. The rules of natural justice ensures that any person is not subjected to arbitrariness and justice not only appear to have been done with him but manifestly have been done.
Since rules of natural justice are part of the fundamental rights provided by our constitution the same have to be followed while taking any quasi judicial or administrative action under every law and the taxation laws are no exception to it. Any authority whether appellate or not has to follow the rules of natural justice while making any order.
Issue of show cause notice before taking any action against a person is also a vital part of rules of natural justice, since it provides the person a reasonable oppurtunity of being heard which ensures fair play in action.
The Rules of Natural justice can be excluded by statutory provisions expressly or impliedly. The rule of Audi Alteram Partem I.e Rule of fear hearing can be excluded where having regard to the nature of the action to be taken, its object and purpose and scheme of the relevant statutory provisions, fairness in action does not demand its application and evan warrants its exclusion. If imposing the right to be heard has the effect of paralyzing the administrative process or the need for promptitude or the urgency of the situation so demand, natural justice can be avoided.
Now the question is whether the object and purpose of MVAT Act (which I have understood is to levy VAT on sale and purchase of goods) is such that it warrants the exclusion of Rules of Natural Justice or the fairness in action under section 29(8) of MVAT Act. Will the inclusion of Rules of natural justice in section 29(8) of MVAT Act result in paralyzing the administrative process of collection of tax where the dealer or assessee is prevented by sufficient cause to file his return within prescribed time or evan in the cases where no tax is due to the revenue or there is refund against the revenue or when the tax has been deposited within time but the return could not be filled within prescribed time?
I think the answer is that in cases where the dealer does not have any tax liability or have refund claim against the revenue due to excess payment of tax paid at the time of purchase of goods or where tax has been deposited within time but the return couldnot be filled within prescribed time due to some sufficient cause, the penality should not be levied for mere an irregularity like late filing of return as there is no tax due to the revenue and no loss is caused to the revenue.
For example there is no VAT leviable on export of goods outside India and the tax paid by the exporters at the time of purchase of goods is refunded to them or there are cases where a person sells good outside the state after purchasing them from local dealers within the state and he gets the refund on account of difference in rate of CST and local VAT rate. In such cases it doesnot make any sense to levy penality without a reasonable opportunity of being heard and with no right to appeal.
The State VAT Acts were enacted for the purpose of leving and collecting value added tax on the sales or purchase of goods and the matters connected therewith and incidental thereto. Thus the power to levy penality is also provided with as it is neccessary for tax compliance but is only an incidental and ancillary power to the levy and collection of tax. That means the power to levy penality should be such that it does assist in making tax compliance and it should not become disprpotionate to the amount of tax and becoming confiscatory in nature.
I think the rationale behind exclusion of rules of natural justice while taking action u/s 29(8) of MVAT Act needs to be examined by the higher judiciary.
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