Karnataka H.C : What precisely is the effect of an order of ad interim stay granted by a superior Court, exercising writ jurisdiction, on the statutory liability of an assessee to pay penalty in the event of default in the payment of the amount of tax determined against it ?

High Court Of Karnataka

Lalithadri Coffee Estate & Ors. vs. Agricultural Income Tax Officer & Ors.

Sections 220(3), 221, KAR Agrl. 41, KAR Agrl. 42

Tirath S. Thakur, J.

Writ Petns. Nos. 13852, 27963, 28355, 31365 & 31366 of 1992, 24707 & 24743 of 1993 &

4913, 13100 to 13103, 17468, 25636 & 25637 of 1994

24th January, 1995

Counsel Appeared

G. Sarangan, Vasan Associates, S.P. Bhat & K.S. Ramabadran, for the Assessees : Smt. V. Vidya, for the Revenue

TIRATH S. THAKUR, J.:

What precisely is the effect of an order of ad interim stay granted by a superior Court, exercising writ jurisdiction, on the statutory liability of an assessee to pay penalty in the event of default in the payment of the amount of tax determined against it ? Does the interim stay against recovery of the dues extinguish even temporarily the liability of the assessee to pay or it only postpones the recovery process till such time the order is vacated or discharged ? In other words, does an interim order of stay provide a lasting defence or immunity to the assessee, against its being treated a defaulter, for the period during which any such order was in force, so as to protect it against the imposition of a penalty for non-payment of the amount during the said period? These questions arise in this bunch of writ petitions, in the backdrop of near identical facts which may be stated immediately.

2. The petitioners are assessees under the Karnataka Agrl. IT Act, 1957. They appear to have been assessed to the payment of firm tax under the Act for different years which assessments and the consequential demands were brought under challenge by them in different writ petitions filed in this Court. Interim orders of stay against the recovery of the amount of tax demanded from the petitioners were issued by this Court, but with the eventual dismissal of the writ petitions, the said orders were also vacated. Then followed notices, issued by the assessing authorities concerned, under s. 42(1) and (2) of the Act, calling upon the petitioners to pay the amount of tax together with interest at the stipulated rates. The petitioners objected to the demand of penalty by way of interest on the ground that the interim order issued by this Court had stayed the recovery of the amount determined against them and, therefore, they could not be deemed to be defaulters under the Act so as to attract the imposition of a penalty by way of interest on the amount remaining unpaid. The assessing authority did not find favour with this argument and on the authority of the judgment of the Supreme Court in Haji Lal Mohd. Biri Works vs. State of U.P. (1973) 32 STC 496 (SC), held that the liability to pay interest was automatic and that an interim order of stay did not have the effect of preventing the running of interest under the Act. Aggrieved, the petitioners have come up to this Court to contend that the view taken by the respondent authority was not legally sound and that the demand raised should, therefore, be quashed.

3. I have heard learned counsel for the petitioners who were led by Shri Sarangan, senior advocate, and the Government advocate appearing for the respondents in all these writ petitions. Shri Sarangan argued that the effect of the interim order of stay issued by a superior Court like the High Court, in exercise of its writ jurisdiction was to extinguish the liability of the assessee to pay up the amount of tax held payable against it. He urged that the power

exercised by the High Court to issue prerogative writs was very wide and surpassed any statutory provision to the contrary, with the result that once the High Court decided to stay the recovery of the amount against an assessee, it brought to a halt all proceedings and provisions made in any statute to the contrary. This, contended learned counsel, amounts to extinguishment of the liability during the period the order of stay issued by this Court remained operative. Consequently any demand that proceeds on the assumption that the assessee was in default during the period covered by an order of stay from this Court was legally bad and unsustainable.

4. The argument advanced by Mr. Sarangan sounds attractive, but does not stand a closer scrutiny. It proceeds on a basic fallacy about the effect of an interim order of stay issued by this Court. While it cannot be disputed that a writ Court exercises an all-pervasive power to grant such relief as it may deem fit even in the teeth of a statutory provision, being interpreted by it, there is no sound or principled basis for holding that the very plenitude of the power or the superiority of the source from which the same flows should imply that all statutory provisions regardless of their purpose and setting should be deemed to have been obliterated during the period an interim order of stay from this Court remains in force. As to what is the effect of an order of stay would depend upon the nature of the order issued, the purpose behind the issue thereof and the mischief which the same is meant to prevent. There may be cases where the operation of the statutory provision itself is stayed by the Court, while there may be a much larger number in which a temporary protection against the proposed action, whether by way of recovery of taxes or otherwise, is meant to be granted to the person aggrieved till such time the Court examines in depth the merits of the challenge to the same. As to what would be the effect of an order of stay against the operation of a statutory provision is a question which does not fall for consideration in the present proceedings, for, admittedly, in the cases, the orders of stay which the petitioners have made the sheet anchor of their respective cases were not meant to nor did they purport to suspend the operation of any provision of the Karnataka Agrl. IT Act, 1957. What these orders stayed were further proceedings in pursuance of the assessment orders impugned and the demand notices issued in consequence thereof.

The question then is whether the orders of stay against recovery or further proceedings could be said to extinguish the liability to pay during the period the same remained in force. Mr. Sarangan’s submission that the very nature of the power exercised by this Court must give rise to the inference that the liability to pay stood extinguished does not appeal to me. That is so because even when the power exercised by this Court flows from the Constitution itself, yet, the true import of the exercise of the said power would vary from situation to situation and case to case depending upon the nature of the order or the protection the same extends to the party to whom it is granted. If the orders do nothing more than grant a temporary protection against the making of the recovery of the amount of tax determined or taking of further proceedings under the Act as is the position in the present cases, it would not be possible to interpret the orders as extinguishing the liability of the assessee concerned under the Act. All that the stay order does in such a case is to cast a cloud upon the recovery or other proceedings, without obliterating either the liability of the assessee, or extinguishing the right of the Revenue to recover the amount once the cloud passes off. Any such liability would in fact re-emerge, once the stay order is vacated, and may be enforced as if there never was any hindrance or obstruction caused by the intervention of a superior authority like the Court. Any other view will, in my opinion, create an anomalous situation. Take for instance a case where the Court, upon a prima facie examination, comes to the conclusion that the petitioner before it should be protected though temporarily till such time the matter is examined in detail and depth. Finally, the Court finds no merit in the petitioner’s case and dismisses the same. Now, if it were to mean that merely because the Court had granted an interim order the rights which otherwise accrued to the respondent under the provisions of a valid law enacted by the legislature should get defeated or scuttled, it would amount to giving to the petitioner an undue and unfair advantage over the respondent who may have finally won the case, but would all the same have lost a valuable right for no fault of his merely because the Court had decided to intervene and grant an interim stay. The respondent cannot in such a situation be compensated or relegated to the position held by him. Such an interpretation and consequence cannot be countenanced and has, therefore, to be eschewed. There is yet another aspect of the matter to which I must turn at this stage. This relates to the nature of the penalty that is envisaged under s. 42 of the Karnataka Agrl. IT Act, 1957. It is in this regard useful to reproduce in extenso the provisions of ss. 41 and 42 of the Act, which prescribe the mode and time of recovery of the tax determined under the Act. These provisions read thus : “41(1) Any amount specified as payable in a notice of demand under s. 31 or an order under ss. 32, 32A, 34 or 35, shall be paid within the time, at the place and to the person mentioned in the notice or order or if a time is not so mentioned, then on or before the first day of the second month following the date of the service of the notice or order and any assessee failing so to pay shall be deemed to be in default. (2) If an assessee makes an application within the time mentioned in the notice of demand in s. 31, for being allowed to pay the tax due, the Agrl. ITO may, in his discretion, by order in writing, allow the assessee to pay the tax due, in instalments not exceeding four in number at such intervals as the said officer may fix in his discretion or extend the time for the payment of the entire tax due for such reasonable period as he may fix, if the assessee undertakes in writing to pay interest at the rate charged by the scheduled banks for unsecured loans :…. Provided that if, on being allowed to pay the tax due by instalments, the assessee defaults in the payment of any one instalment, he shall be deemed to be a defaulter in respect of the total remaining amount of tax due.” and “42(1) Where any assessee is in default in making payment of the tax or any other amount due under this Act : (i) the whole of the amount outstanding on the date of default shall become immediately due and shall be a charge on the properties of the person or persons liable to pay the tax or any other amount due under this Act, and (ii) the person or persons liable to pay the tax or any other amount due under this Act shall pay a penalty equal to— (a) one and one-half per cent of the tax remaining unpaid for each month for the first three months after the expiry of the time specified under sub-s. (1) or allowed under sub-s. (2) of s. 41; an (b) two and one-half per cent of such tax for each month subsequent to the first three months as aforesaid. Explanation.—For the purposes of cl. (ii), the penalty payable for a part of a month shall be proportionately determined. (2) Any tax assessed or any amount due under this Act from any assessee or any other person may, without prejudice to any other mode of collection, be recovered— (a) as if it were an arrear of land revenue; or

(b) notwithstanding anything contained in the Code of Criminal Procedure, 1973 (Central Act 2 of 1974), on an application to any Magistrate, by such Magistrate, as if it were a fine imposed by him : Provided that where an assessee or other person who has appealed against or applied for revision of any order made under this Act and has complied with an order made by the appellate or the revising authority in regard to the payment of tax or other amount, no proceedings for recovery under this sub-section shall be taken or continued until the disposal of such appeal or application for revision. (3) The High Court may either, suo motu, or on an application made by the Commissioner or any person aggrieved by the order revise an order made by a Magistrate under cl. (b) of sub-s. (2).” A plain reading of the above provisions makes it fairly obvious that an assessee is deemed to be in default, in case he fails to make the payment of the amount within the time mentioned in the notice of demand or order as the case may be and in case no such time is mentioned, before the first day of the second month following the date of service of any such notice or order. In terms of s. 42 an assessee in default becomes liable to pay the entire amount of tax along with penalty at the rates prescribed by sub-s. (1)(i), (ii)(a) and (b), thereof. Two things which stand out in these provisions are : (i) that the liability to pay the penalty is automatic once the assessee commits default in the payment of the amount of tax determined, and (ii) the penalty is in the nature of compensation by way of interest at the rate of 18 per cent per annum for a period of the first three months and 30 per cent per annum for the period beyond three months after the default is committed. That the penalty prescribed is in effect and substance a provision for payment of interest on the amount of tax withheld by the assessee is apparent from the fact that the Act does not provide for any payment by way of interest on the amount of tax withheld by the assessee except of course in a case where the competent authority has granted the request of the assessee for payment of the amount of tax in instalments in terms of s. 41(2) of the Act. In any such case there is no default, because once the assessee’s request for grant of instalments is accepted, he cannot be deemed to be in default, with the result that the provision for payment of interest with instalments is not the same thing as a general provision for interest in the case of a default by the assessee. There is, however, no provision of the latter kind, as pointed out earlier, which fact clearly leads one to the inference that a provision for penalty in such a scenario is in reality a provision only for payment of interest as a compensatory measure.

Now, if that be the real purpose behind the provision prescribing penalty on default, there is no rationale or other justification for interpreting the stay order issued by this Court to mean that the Revenue should lose the right to recover the amount of interest which is nothing but compensation for non-payment of the tax amount by the assessee during the period the said amount was not paid by the assessee but was utilised by him for his own purposes.

7. I may, at this stage, turn to the judgments that were cited at the Bar by learned counsel for the parties. In Satishchandra & Co. vs. Dy. CCT ILR 1994 Kar 2716, a Division Bench of this Court, to which I was a party, was considering the question as to whether the assessee appellants in the said case could be treated to be a defaulter within the meaning of s. 13(2) of the Karnataka Sales-tax Act, 1957, for the period during which there was a stay order from the Supreme Court, prohibiting recovery of the tax amount determined against it. The Division Bench held that even though coercive steps could not have been taken against the appellant in view of the order of stay granted by the Supreme Court in its favour, still there was nothing which prevented the appellant from making the payment of the tax amount without prejudice to its right and contentions, in order to safeguard against the possibility of a penalty being imposed upon it should the stay order be ultimately vacated and the case lost by it. It was further held that an assessee who has the protection of an interim order of stay also has an option to make the payment of the amount demanded by way of abundant caution in case he was keen to avoid any liability by way of penalty being fastened upon him. The Division Bench observed thus : “It is true that there was a stay against coercive recovery of that amount. Still there was no prohibition for the appellant without prejudice to his rights and contentions to pay the amount of tax demanded guarding against the possibility of liability to pay penalty if ultimately the stay order got vacated and he lost before the Supreme Court which eventuality actually happened in the facts of the present case. By way of abundant caution, in order to avoid liability to pay the penalty, the demanded tax could have been paid. That would not be in violation of the stay order. It has to be appreciated that there was no provision in the Act for imposing any liability of interest on the assessee for late payment of tax except in cases where the assessing authority, while granting instalments to the assessee to pay the tax, can impose interest but otherwise there is no provision for levying of interest on the tax due if the delayed payment was occasioned by the assessee. Consequently, sub-s.(2) of s. 13 which deals with the payment of penalty, in substance, amounts to payment of interest by way of compensation to the Revenue for having been deprived of the use of the money which ultimately was found to be payable to it by the assessee when he lost the litigation. Therefore, the net effect of the order of the Supreme Court was that the assessing authority could not have enforced coercive recovery of the amount during the currency of the stay order and the assessee was allowed the use of the tax amount till the final decision of the case. But ultimately when he lost the litigation, and it was found that the amount was due and payable to the Revenue, he had to make good the tax amount with the penalty which started running automatically after 21 days of service of the notice of demand as per s. 13(2). Consequently, the first point has to be answered against the assessee-appellant.”

As is apparent from the above passage, the Division Bench further held that, since there was no provision in the Karnataka Sales-tax Act for the recovery of interest on delayed payment of tax, the provision of interest on delayed payment of tax and the provision for payment of penalty as contained in s. 13(2) of the said Act, was in substance a provision for interest on tax amounts not paid. The Court also affirmed the view taken by another Division Bench judgment in Sha Ghelabhai Devji & Co. vs. Asstt. CCT (Asst) (1986) 62 STC 418. In the said case, the question whether an interim order of stay had the effect of destroying the liability or simply postponing the same was considered. The Division Bench held that an order of stay did not extinguish the liability but simply postponed the same till such time the Court vacated the interim order. The Court observed thus : “For the period from 10th Nov.,

1975 to 9th June, 1978, the petitioner had the benefit of an order of stay in Writ Appeal No. 555 of 1975 subject to his furnishing security. In the present case also, the petitioner has the benefit of a similar order made on 5th April, 1979, which has continued ever since then without any further modification. We are of the view that those stay orders only postponing the liabilities or preventing the recoveries, cannot be read as destroying the liability created by s. 13(2) of the Act, which operates notwithstanding the interim orders made by this Court. In any event, those orders obtained by the petitioner at his own risk, do not touch on the validity of s. 13(2) of the Act. We are of the view that these factors neither touch on the construction of s. 13(2) nor its validity at all.”

8. In Haji Lal Mohammed Biri Works vs. State of U.P. (supra), the Supreme Court was considering the question whether the liability to pay interest under s. 8(1A) of the U.P. Sales-tax Act was automatic and arose by operation of law. One of the arguments advanced on behalf of the assessee was that the liability to pay interest did not arise on account of an order of stay issued by this Court against the recovery of the tax amount. The Supreme Court, however, repelled the contention raised by the assessee and held that there was nothing in s. 8(1A) of the said Act which could prevent the running of interest against the assessee upon non-payment of the amount by him only because of the operation of an order of stay against recovery issued by a Court. The Supreme Court in that regard observed thus : “Argument has also been advanced by Mr. Sen that the interest on arrears of sales-tax could not be realised for the period during which the recovery of sales-tax was stayed. We find it difficult to accede to this contention because there is nothing in the language of s. 8(1A) of the Act which prevents the running of interest because of the operation of any stay order. Indeed, the liability to pay interest is created by the statute and the STO has no discretion to grant any exemption from the payment of interest.” To the same effect is a judgment of the Single Bench of this Court in Writ Petn. No. 32309 of 1994 where in identical circumstances, Raveendran J., relying upon the Division Bench judgment of this Court in Satishchandra’s case (supra), held that an interim order of stay against the recovery of the amount of tax determined against the assessee did not imply that the assessee could not be deemed to be in default under s. 42 of the Karnataka Agrl. IT Act, if otherwise the default was complete on account of the non-payment of the amount of tax within the period prescribed by s. 41. Raveendran J. observed thus : “Hence, following the decision in Satishchandra’s case, it has to be held that the penalty (which is in substance interest for the period of default) has to be paid for the period of default, including the period when a stay granted by the appellate or revisional authority or any Court was in operation.

The learned counsel for the petitioner relied on the Division Bench decision of this Court in Abdul Shakur Umar Sahigara & Co. vs. CTO (1968) 21 STC 77 (Kar), wherein this Court held that when the State Government granted instalments to pay the arrears of tax and the assessee paid the instalments within the dates fixed for payment of instalments, penalty under s. 13(2) does not accrue. The facts of the said case are completely different. Grant of instalments under a provision in the statute would mean that there is no default. But stay of recovery by a Court pending decision is a completely different situation. Therefore, the said decision is not applicable.”

9. From a conspectus of the judgments referred to above and keeping in view the language employed in ss. 41 and 42 of the Karnataka Agrl. IT Act, the following conclusions can be safely drawn : (i) That, the liability to pay penalty under s. 42 of the Karnataka Agrl. IT Act arises automatically on the failure of the assessee to pay the amount of tax determined within the period prescribed under s. 41(1) of the said Act; (ii) That there is nothing in the language of s. 42 of the said Act which may prevent the imposition of the penalty because of the operation of an order of stay issued by a competent Court; (iii) That the issue of an interim order of stay preventing recovery of the amount of tax determined against the assessee, does not disable the assessee concerned from making the payment of the amount so determined as a measure of abundant caution if he is otherwise keen to avoid the imposition of a liability by way of penalty; (iv) That in the absence of any provision making interest recoverable on the delayed payments of the tax by an assessee, the provision regarding imposition of penalty is in substance a provision for payment of interest on such delayed payment; (v) That an order of stay against the recovery of tax does not extinguish the liability but simply casts a cloud and postpones the same as long as the order of stay remains operative.

10. Mr. Sarangan, however, argued that ss. 41 and 42 of the Act aforesaid have to be read together and when so read there is a specific provision for payment of “interest” on delayed payments. I do not find any merit in this submission. As already pointed out earlier, “interest” is payable only in a case where the competent authority has granted to the assessee the facility of paying the amount of tax in instalments. A provision for payment of “interest”, in such a situation, cannot be confused with a general provision for payment of “interest” on the delayed payment of the tax amount. Since, however, there is no such general provision making “interest” recoverable from the assessee in default for the period during which the amount remains unpaid, the provision regarding penalty has to be read and understood as a provision making “interest” payable only as a measure of compensation to the Revenue. Equally untenable is the other submission made by Mr. Sarangan, that since s. 42 of the Act refers only to an assessee in default, the consequences flowing out of such a default must stop the moment a Court grants an order of stay. In other words, the argument was that s. 42(1) will have no application during the period an order of stay is operative from a competent Court. There is nothing, as already pointed out by me, earlier, in the language employed in s. 42, as was the case with s. 8(1A) of the U.P. Sales-tax Act, interpreted by their Lordships of the Supreme Court in Haji Lal Mohammed Biri Works’ case (supra), to suggest that the automatic consequence flowing in terms of s. 42 upon a default committed by the assessee would be prevented by an order of stay issued by a Court which order is eventually vacated with the dismissal of the cause in which the same is issued.

11. Mr. Sarangan then argued that the Division Bench judgment of this Court in Satishchandra’s case (supra) was distinguishable inasmuch as the provisions of s. 13 of the Karnataka Sales-tax Act, 1957, were not pari materia with the provisions of ss. 41 and 42 of the Karnataka Agrl. IT Act. I find no substance even in this submission of learned counsel. On a comparative reading of the two provisions, namely, (i) s. 13 on the one hand, and (ii) ss. 41 and 42 on the other, I find no material difference whatsoever so as to justify the taking of a view different from the one taken by the Division Bench in the said case. In that case also, upon a default in the payment of the tax within the time prescribed, the entire amount outstanding became payable under s. 13(2) and the persons in default became liable to penalty at 1-1/2 per cent of the amount for the period subsequent to the said three months. The view taken by the Division Bench that the consequences of default in the nature of penalty under s. 13(2)(ii) were automatic is, therefore, applicable with equal force to a default committed within the meaning of s. 41, sub-s. (2), of the Karnataka Agrl. IT Act also. There is, therefore, no merit in the submission of Mr. Sarangan that the effect of an order of stay as interpreted by this Court in the aforesaid case cannot be accepted in the case of a default under the provisions of the Agrl. IT Act.

12. In the result, these writ petitions have no merit and must fail and are hereby dismissed but, in the circumstances of the case, without any orders as to costs.

[Citation : 213 ITR 602]

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