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Judgment
Writ Petition Nos. 8091, 5232 and 5349 of 2007
Petitioners in these petitions claim to be builders and developers of lands. It is the version of the petitioners that the activities carried on by them is not in the nature of activity which can render the petitioners-dealers under the provisions of the Karnataka Value Added Tax Act, 2003 (for short, ''the Act''), and therefore the petitioners have no liability for payment of any tax in respect of the transactions carried out by the petitioners.
Petitioners are aggrieved by the series of protective assessment orders passed by the second respondent, determining the tax liability of the petitioners for the period from April 2003 to July 2006, except for the month of September 2005. The orders are passed by the second respondent in exercise of the powers under the provisions of Section 52 read with Section 38 of the Act, to be precise, all these orders are titled as orders passed under Section 38(1) read with Section 52(1) of the Act.
Though in the normal course, such orders are appealable to the Joint Commissioner of Commercial Taxes under the provisions of Section 62 of the Act, the petitioners have chosen to file the present writ petitions without availing the appellate remedy, contending that the orders are blatantly illegal and without jurisdiction, as the officer was not duly enabled to exercise powers of the nature exercised at the place where the officer purports to have gathered information etc.; that the exercise of power is in a most arbitrary and whimsical manner and the manner of exercise of power is more intimidatory in nature rather than bona fide use of the powers for the purpose of the Act.
Having regard to the very serious allegations that had been made and as the petitioners complain that such highhanded action on the part of the officers of the respondent-department resulted in untold hardship to the petitioners, more so when the petitioners cannot even be termed as ''dealers'' under the provisions of the Act, emergent notices had been directed to the respondents and the learned Additional Government Advocate has entered appearance on behalf of the respondents and arguments were heard in common.
I have heard Sri B.P. Gandhi, learned Counsel appearing for the petitioner in these writ petitions.
While the legal contentions urged on behalf of the petitioners mainly revolve around the scope and understanding of the provisions of Section 38(5) and Section 52(1) of the Act, there were several factual allegations such as the officer who conducted the search and seizure had not been authorised for conducting the same etc.; that many documents had been taken away even without due acknowledgment; that it cannot be permitted to remove the documents and other material available at the place of the petitioners in such a manner; that though there was an assurance that the seized documents will be returned within a timeframe, action for returning the documents being rather tardy, it became necessary for the petitioners to obtain certain directions in this regard from this Court; that the respondents have also taken printouts from the computers installed in the office of the petitioners without any acknowledgement; that the respondents have not responded properly to challenge to the impugned orders.
In the light of the factual assertions that several documents have been taken away and in the light of the counter on behalf of the respondents that they have returned all the documents and nothing remained with the respondent, directions had been issued to the second respondent to place an affidavit before the Court. The said order reads as under:
Issue emergent notice to the respondents. Ms. Niloufer Akbar, learned Additional Government Advocate takes notice for the respondents in all these matters.
While prima facie the exercise of power under Section 38(5) of the Karnataka Value Added Tax Act, 2003 (for short, ''the Act''), for passing a protective assessment order, appears to be not in consonance with the requirement of Section 38(5) of the Act, particularly for the reason that the Competent Officer has not recorded the reasons and justification for exercising the power under this provision and the impugned orders are liable to be quashed, the further controversy in these matters is that at the time of search of the premises of the petitioners, the respondents have seized several documents and had also gathered information from the computers of the petitioners installed in their offices through print outs from such computers.
Sri B.P. Gandhi, learned Counsel for the petitioners would vehemently contend that the act of search and seizure is without proper authority and it has been done not in a just manner and the respondents have not even acknowledged the seized documents and are holding them without returning the same and further that it is proper only for the regular Assessing Officer to pass orders rather than the officer who claims to be the prescribed authority under Section 38(5) of the Act.
Learned Additional Government Advocate would submit that even if the impugned orders are not in consonance with the requirement of Section 38(5) of the Act, the interest of the revenue is nevertheless to be safeguarded and necessary directions may be issued in this regard.
Learned Additional Government Advocate on instructions from respondent 2, who is also present in the Court, submits that the materials collected had been returned to the petitioners after making copies thereof etc.
Learned Counsel for the petitioners disputes this position, contending that nothing has been returned to his clients.
In the light of this controversy, it is necessary that the second respondent files an affidavit before this Court indicating the action taken at the time of search and inspection, the material gathered or collected at that time in the form of a list and if any of such material is already returned, to indicate the same mentioning the materials returned and what has still remained in the custody of the second respondent.
It is also to be indicated that if any such material is required to be retained, further for enabling the regular Assessing Authority to make use of the material and if so for how long it is required.
List on 1-6-2007 at 2.30 p.m. for such purpose.
A memo is filed by the learned Additional Government Advocate along with an affidavit of Sri N.R. Nanaiah-second respondent herein -purporting to contain the factual developments that had taken place at the premises of the petitioners when the second respondent had entered and searched the premises etc.
While there is considerable gap between the facts as revealed by the petitioners and as stated in the counter-affidavit of the second respondent, in the matter of actual development, what is further pointed out by Sri B.P. Gandhi, learned Counsel for the petitioners is that the very manner in which the second respondent has leisurely gone about in issuing the notices under Section 38(5) of the Act after a lapse of seven months from the date of search and seizure in itself is proof enough to indicate that there was no need at all to exercise the power under Section 38(5) of the Act, which is a provision providing for protective assessment in a situation where the officer has reason to believe that the dealer may fail to pay any tax, penalty or interest which is being assessed and not otherwise.
In the normal course as pointed out by the learned Counsel for the petitioner, it was open to the Assessing Authority to have followed the procedure as contemplated under the provisions of the Act.
Ms. Niloufer Akbar, learned Additional Government Advocate had also been directed to produce the records regarding the authorisation for the purpose of Section 52 and also under Section 38(5) of the Act. While the records are placed before the Court by the learned Additional Government Advocate, what is submitted is that for the purpose of ensuring the authorised officer to enter and search the premises, the authorisation under Section 52 of the Act is by the Joint Commissioner of Commercial Taxes, though Section 52(1) recites that the officer should be duly authorised by the Commissioner and for defending the authorisation to be a valid authorisation for the purpose of Section 52, attention is drawn to the provisions of sub-section (3) of Section 59 of the Act.
While there is no express authorisation by the Commissioner himself, as contemplated under the provisions of Section 52 of the Act for the purpose of conferring power of search in favour of second respondent, even assuming for the argument''s sake that the submission of the learned Government Advocate is acceptable and Section 59(3) of the Act enables even such officer as authorised by the Additional Commissioner or Joint Commissioner to perform such function, what is of significance is to note that the authorisation issued under Section 52(1) of the Act will be a specific authorisation in each case of different situations contemplated under clauses (a) to (l) thereto. Section 52(1) of the Act reads as under:
"52. Production and inspection of documents and powers of entry, search and seizure.-(1) Any officer authorised by the Commissioner in this behalf shall have the power.-
(a) to enter and inspect the place of business of any dealer or any other place, where it is believed by such officer that business is being carried on or accounts including documents are being kept by such dealer;
(b) to direct such dealer to produce at such time and at such place accounts, registers and documents relating to his business activities for examination;
(c) to enter and inspect the goods in the possession of the dealer or in the possession of any other person on behalf of such dealer, wherever such goods are kept;
(d) to enter and search such places including the dealer''s place of residence, and including the search of the dealer or person acting on behalf of the dealer found there where concealment of facts relating to the business are suspected;
(e) to seize any accounts, registers or documents from the dealer, where he has reason to suspect that a dealer is attempting to avoid or evade tax or is concealing his tax liability in any manner, after recording such reasons in writing and give the dealer or any other person from whose custody such accounts, records or documents are seized, a receipt for and, if requested, copies of the same and may retain them in his custody for examination, inquiry, prosecution or other legal proceedings for such period as he considers necessary;
(f) to seal any box or receptacle, godown or building or any part of the godown or building in which accounts or taxable goods are suspected to be kept or stored, where the owner or the person in-charge of the business or any other person in-charge of the business or any other person in occupation either leaves the premises or is not available or fails or refuses to open any box or receptacle, godown or building or any part of the godown or building when called upon to do so;
(g) to break open the receptacle, godown or building or part of the godown or building where the owner or the person in-charge of the business or the person in occupation leaves the premises or, after an opportunity having been given to him to do so, falls to open the receptacle, godown or building or part of the godown or building, and to prepare a list of the goods and documents found therein;
(h) to record the statement of any dealer or his manager, agent or servant to take extracts from the records found in any premises and to put identification marks on accounts, registers, documents or goods;
(i) to take samples of goods from the possession of any dealer, where he considers it necessary to protect the revenue against mistake or fraud and provide a receipt for any samples so taken, and the samples shall, except where an offence is found, be returned to the dealer or be disposed of by the Commissioner with the consent of such dealer;
(j) to seize any stock of goods liable to tax, which are found in possession of a dealer or in the possession of any person on behalf of a dealer and which are not accounted for in his accounts, records or documents maintained in the course of his business, the value of which shall not exceed his tax liability and any penalty, including interest, and a list of goods so seized shall be prepared by such officer and a copy thereof shall be given to the dealer or any other person from whose custody such goods are seized;
(k) in circumstances where it is not possible to seize the accounts, records or documents under sub-section (1) or the goods under sub-section (3) to serve on the owner or the person who is in immediate possession or control thereof, an order that he shall not remove, part with or otherwise deal with them except with the prior consent of such officer, and after serving such order to take such steps as are deemed necessary to secure the items referred to in the order;
(l) to issue an protective assessment as specified in sub-section (5) of Section 38".
An authorisation for the purpose of clause (a) of Section 52(1) cannot be used for the purpose of other clauses of this provision and in the instant case, submission on behalf of the petitioners is that the respondents have not merely entered and inspected the premises, but searched and have taken away documents and other things without following due procedure nor acknowledged that they were taken away and therefore the action of the second respondent is highhanded.
Argument that sub-section (3) of Section 59 of the Act enables exercise of power is to be rejected for the reason that the power to authorise the officer under Section 52 of the Act is conferred by the Legislature only on the Commissioner and not on any other officer and such an authorisation cannot be put on par with the exercise of powers conferred on subordinate officers by the Additional Commissioner or Joint Commissioner for the purpose of giving effect to the provisions of the Act. An authorisation for issuing an administrative instruction issued by the Additional Commissioner or the Joint Commissioner in exercise of the power under Section 59(3) of the Act can never be put on par with the conferment of power for issuing an authorisation by the Commissioner under sub-section (1) of Section 52 of the Act. The authorisation relied upon as contained in the records is not an authorisation for the purpose of conducting any search or seizure or entering a premises for the purpose of Section 52 of the Act.
Learned Counsel for the petitioners also vehemently urged that no safeguard is observed; that the officers have behaved in a highhanded manner and the affidavit filed by the second respondent is nothing short of misleading this Court and an affidavit of this nature will also not acceptable in law, in the light of the ruling of this Court in the case of Neminath Brothers v Commercial Tax Officer (Intelligence IV), North Zone, Belgaum, 1980(2) Kar. L.J. 21.
In support of the submission that no due procedure has been followed and therefore the entire proceedings got vitiated, particularly for such search and seizure, the learned Counsel for the petitioners has relied on the decision in the case of Commissioner of Commercial Taxes, Board of Revenue, Madras and Another v Ramkishan Shrikishan Jhaver and Others, (2004)6 SCST 6625. Reliance is also placed in the case of Harikisandas Gulabdas and Sons and Another v State of Mysore and Another, (1971)27 STC 434 (Mys.) (DB).
Learned Counsel for the petitioners points out that in all matters of search and seizure, even as contained under Section 52(3) of the Act, due safeguards as are required to be observed for a search and seizure under the provisions of Criminal Procedure Code, 1973 are also to be observed and no such safeguard has been observed in the present case.
Apart from the numerous irregularities, which can even be characterized as illegality, what is further pointed out is that the exercise of power under Section 38(5) of the Act is also more a misuse and abuse of the power rather than for any bona fide purpose.
While the facts by themselves support this submission of the learned Counsel for the petitioners as the second respondent had received material and the gathered information with him for a period of seven months before invoking the provisions of Section 38(5) of the Act for a protective assessment, what is pointed out is that the information could have been easily either passed on to the regular Assessing Authority or the very officer could have utilised it and while the officer had slept over the matter for seven months, has thereafter passed the impugned order in a hurried manner without even taking into consideration the objections filed by the petitioners, which had been filed by the petitioners as on 24-1-2007. Further, complaint of the petitioners is that when the time for a personal hearing was sought for, that was also denied.
While the learned Counsel for the petitioners has vehemently contended that unless the petitioners are persons who are registered dealers under the Act, the officer does not get jurisdiction to pass assessment orders even under Section 38 of the Act and for such purpose, points to the provisions of Sections 23 and 24 of the Act and submits that even in a case where a person who is required to be registered as a dealer and has not registered himself as a dealer, even then also, the Competent Officer can pass an assessment order only after following the procedure as contemplated under Section 24 of the Act and for this reason also, the assessment order is bad in law. It is not necessary to examine this contention, as I find that the impugned orders are even otherwise not tenable in law and such a question need not be examined for the purpose of this case.
While the manner in which the premises of the petitioners have been searched and certain documents were seized from their premises, on the face of it, is wholly unauthorised and at any rate not properly authorised by the authority competent to issue such authorisation, even the officer has acted in a most highhanded manner and has thrown to winds the safety procedures that are required to be observed.
Such searches and seizures are always an inroad into the rights of citizens, rights of persons to carry on an activity which may be akin to business activity, an inroad into the privacy of the individual. The law tolerates an intrusion into the rights of a person only to the extent that it is permitted and reasonable and when it is utilised for a legitimate bona fide purpose. But when the exercise of such powers becomes arbitrary, whimsical and in a highhanded manner, the purpose for which such drastic powers are conferred takes a back seat and the personal views and prejudices of the person exercising such power enters the forefront, and the action gets vitiated. In the present case, the power exercised is, to say the least, in a most arbitrary and highhanded manner and when a citizen is affected and complains, this Court cannot shut its eyes to such highhanded actions.
The present development clearly indicates that there was no warrant or justification to resort to an order of protective assessment under the provisions of Section 38(5) of the Act also. The learned Government Advocate has fairly conceded that the file relating to the authorisation for the purpose of Section 38(5) of the Act does not record any reasons for exercise of such power nor a justification or necessity for the exercise of such power recorded for passing an order of protective assessment.
The safeguard contemplated under the provisions of the Act are not empty formalities but are safeguards which are required to be duly observed and followed by the officers exercising such drastic powers, but are only flouted in the present case.
In the result, these writ petitions are allowed and the impugned assessment orders are quashed by issue of a writ of certiorari. Having regard to the manner in which the second respondent has exercised the powers rather misused of the power under Section 38(5) of the Act and there being no proper authorisation initially for the purpose of search and seizure under Section 52 of the Act, the conduct does not inspire this Court to remand the matter to the very second respondent and moreover when there is no need or justification for exercise of power under Section 38(5) of the Act, the matter need not go back to the second respondent. However, this does not mean that an inquiry into the possible liability of the petitioners under the provisions of the Act is prevented by allowing these writ petitions. It is open to the regular Assessing Authority to follow the due procedure as contemplated under the provisions of Section 38 of the Act and any other enabling provision of the Act for the purpose of determining the actual liability if any of the petitioners under the provisions of the Act in respect of the activities of the petitioners and to raise a demand for the same in accordance with the provisions of the Act after following the procedure contemplated under the Act and after giving proper opportunity to the petitioners in this regard. Writ Petition No. 5136 of 2007.
While in this writ petition, Sri M. Thirumalesh, learned Counsel for the petitioner has not only reiterated the legal grounds urged by Sri B.P. Gandhi, learned Counsel for the petitioners in the other three writ petitions, it is urged that the activity carried on by the petitioner is not even an activity in the nature of a trading activity for the purpose of the Act; that the petitioner does not transact in any goods whether by way of sale of goods directly or as part of any works contract.
Sri Thirumalesh, learned Counsel for the petitioner submits that the petitioner, who is the owner of a piece of land -an immovable property, had entered into an agreement with a developer for an exchange transaction under which the petitioner while yields some part of the land in favour of the developer, the developer constructs apartments in the portions of land retained by the petitioner-owner of the land and the petitioner thereafter sells such land with constructed portion to intending buyers with whom the petitioner has agreement. What is urged is that the petitioner does not execute any works contract and therefore there is no liability on the petitioner even in terms of Section 4(1)(b) of the Act. It is also the submission that there is no liability even as per Section 4, as it stood prior to the amendment to the Act in the year 2006, which has come into effect from 1-4-2006.
Further submission of the learned Counsel for the petitioner is that even in the case of this petitioner also, the third respondent has acted in a highhanded manner and has not even given proper opportunity; that though considerable time had elapsed between the date of inspection/search and the seizure i.e., 6-11-2006 and thereafter the provisions of Section 38(5) was invoked by issue of notice only on 22-2-2007 and even though the petitioner sought for 30 days'' time for filing objections and the petitioner filed his objections as on 17-3-2007, the third respondent has proceeded to pass the impugned order without referring to the objections raised by the petitioner; that the order is not a speaking order, suffers from violation of principles of natural justice etc.
One another submission urged on behalf of the petitioner is that the petitioner is a lady; that the premises searched is her residence, without observing any safeguards as contemplated under Section 165 of the Criminal Procedure Code, 1973; that the statement was recorded in a coercive manner; that no lady officer had accompanied the inspecting officer and no safeguards had been observed.
While there cannot be any two opinions that due safeguards as contemplated under the provisions of Section 165 of the Cr. P.C. should always be observed and most scrupulously when the officers went to search a lady''s residence there is nothing to indicate that the officer had shown any awareness to any of the procedural safety requirements that are required to be observed.
While it is not necessary for this Court to go into the question as to whether these writ petitioners also can be characterized as dealers for the purpose of the Act or as to there is any liability at all on the part of the petitioners having regard to the nature of the transaction carried out by the petitioners, as it would be a hazardous venture to find an answer to such questions in writ jurisdiction, the petition is primarily examined for the purpose of scrutinizing the actions of the respondents and the manner in which they have exercised the powers of search and seizure under Section 52 of the Act and also the power for passing protective assessment order under Section 38(5) of the Act. It is open to the petitioners to urge all such contentions regarding tax liability before the regular Assessing Authority who will be required to examine such contentions and record proper findings and answers on such issues. On the question of validity of the action taken, in the exercise of powers conferred under Sections 38(5) and 52(1) of the Act, the exercise of power being not any different in the case and being wholly arbitrary, they are also liable to be quashed, for the very reasons discussed above in other three cases.
In the result, this writ petition (W.P. No. 5136 of 2007) is also allowed and the impugned assessment orders are quashed by issue of a writ of certiorari. The regular Assessing Authority having jurisdiction in the matter may proceed in accordance with the provisions of the Act for determining the liability, if any, on the part of the petitioner under the provisions of the Act.
Though once the writ petitions are allowed and impugned orders are quashed, all the interim orders granted in the petition come to an end and the petitioners could have demanded for refund of amount they have deposited in pursuance of the interim orders of this Court and also entitled for return of Bank guarantees, as the learned Counsel for the petitioners had agreed to comply with commensurate conditions for grant of interim order and to show bona fides of the petitioners and as the liability on the part of the petitioners is yet to be determined, I am of the view that in those cases where certain amounts had been deposited and Bank guarantees have been furnished, while cash deposit shall be returned to the petitioners, the Bank guarantee already furnished may be retained and shall await the outcome of the assessment orders. In the case of petitioner in W.P. No. 8091 of 2007, I am of the view that the Bank guarantee in favour of the respondent-department to the extent of 50% tax liability as determined under each assessment orders shall be retained.
The Bank guarantees to be valid for a period of one year, within which time proper Assessing Officer shall decide the matter in accordance with law. The Bank guarantee in the case of petitioner in W.P. No. 8091 of 2007 shall be furnished within three weeks from today. Liberty is reserved to the respondents to move the case in the event of failure to comply with the above conditions by the petitioners.
Accordingly all these petitions are allowed as stated above with cost of Rs. 5,000/- (Rupees five thousand only) in each petition. The respondent-department is at liberty to recover the cost to be paid by it to the petitioners from the second respondent in W.P. Nos. 8091, 5349 and 5232 of 2007 and third respondent in W.P. No. 5136 of 2007 personally.
In all these cases, rule is issued and made absolute.