Supreme Court holds Periyar & Pareekanni Rubbers Ltd. liable for sales tax dues as an agent of its lessee: Periyar & Pareekanni Rubbers Ltd. vs. State of Kerala (2008)

Date of the Judgment: March 7, 2008

Citation: Civil Appeal Nos. 1804-1807 of 2008 (Arising out of SLP (C) Nos. 18346 – 18349 of 2004)

Judges: S.B. Sinha, J., Harjit Singh Bedi, J.

Can a lessor be held responsible for the sales tax dues of its lessee if the lessee defaults? The Supreme Court of India, in Periyar & Pareekanni Rubbers Ltd. vs. State of Kerala, examined this issue, focusing on whether the lessor could be deemed an agent of the lessee and thus liable for the unpaid taxes. The case delves into the responsibilities of registered dealers under the Kerala General Sales Tax Act, particularly when a business is leased out. The judgment was delivered by a two-judge bench comprising Justice S.B. Sinha and Justice Harjit Singh Bedi.

Case Background:

Periyar & Pareekanni Rubbers Ltd. (hereinafter referred to as “the Appellant”), a company registered under the Companies Act, 1956, operated a distillery under the trade name “Normandy Breweries and Distilleries.” The Appellant held a license for manufacturing liquor under the Kerala Abkari Act and was a registered dealer under both the Kerala General Sales Tax Act and the Central Sales Tax Act.

On December 1, 1984, the Appellant demised the factory to Eagle Distillery (P) Ltd. (hereinafter referred to as “the Lessee”) through a lease deed. The Government of Kerala approved this lease on or about April 27, 1985. The Sales Tax Authorities were duly informed of this arrangement via communications dated May 4, 1985, and May 30, 1985.

The Lessee applied for registration under the Kerala General Sales Tax Act. However, the registration process faced delays. Consequently, the Lessee requested permission from the Appellant to use the Appellant’s existing registration number. This permission was granted through various communications, although it was stated that the permission was not renewed after December 31, 1985.

Despite the above, the Lessee continued to file returns under its own name but failed to deposit the collected sales tax. Furthermore, the Lessee continued using Forms ‘C’ and ‘D’ (required for inter-state and intra-state sales), which had been supplied to the Appellant by the revenue department.

Subsequently, the Appellant received a notice for the recovery of Sales Tax for the Assessment Years 1984-85, 1986-87, and 1987-88.

Timeline:

Course of Proceedings:

The Appellant initially challenged the legality of the sales tax recovery notice by filing a writ application. The High Court, considering the arguments from both the Appellant and the Lessee regarding their respective liabilities, directed the assessing authority to complete the final assessment for the years 1986-87 and 1987-88, with notice to both parties.

Following this direction, a pre-assessment notice dated November 16, 1993, was served on both the Appellant and the Lessee. The notice proposed to reject the filed returns and accounts as incorrect and incomplete, and to finalize the assessment based on a best judgment assessment. The Lessee did not respond to this notice, and only the Appellant participated in the assessment proceedings.

The assessing authority then passed an order holding both the Appellant and the Lessee jointly and severally liable for the sales tax dues under both the Kerala General Sales Tax Act and the Central Sales Tax Act for the assessment years 1986-87 and 1987-88. The Appellant filed statutory appeals against this order. The appellate authority allowed the appeals, absolving the Appellant of liability and directing recovery of the dues only from the Lessee. The Revenue Department then filed second appeals before the Tribunal.

The Tribunal, by its order dated December 20, 2001, allowed the appeals of the Revenue, reinstating the joint and several liability. The Appellant subsequently filed revision applications before the High Court, which were dismissed. The High Court upheld the assessment orders as confirmed by the Appellate Tribunal for the years 1986-87 and 1987-88 under both the KGST Act and the CST Act.

However, the High Court directed the assessing authority to first proceed against the Lessee for the recovery of the arrears and allowed recourse to be taken against the Appellant only if any amounts remained outstanding after exhausting all steps against the Lessee. The Appellant was directed to furnish security for the due payment of the dues in case they could not be recovered from the Lessee.

Legal Framework:

The primary legislation governing this case is the Kerala General Sales Tax Act (the Act), which provides for the levy of a general tax on the sale or purchase of goods in the State of Kerala. Key provisions and concepts include:

• Registered Dealer: Defined as a dealer registered under the Act. Registration serves the purpose of enabling the State to levy and collect taxes effectively.
• Tax Liability: Taxes are generally levied on the sale of goods. The Act fastens the tax liability not only on the registered dealer but also on agents or transferees involved in the business.
• Obligations of Registered Dealers: Registered dealers have several obligations, including maintaining proper records, filing returns, and paying taxes on time. They are also required to inform the department if they cease to continue their business.

Rule 51 of the relevant rules mandates that a dealer must inform the authorities when they cease to continue the business for which they were registered. This ensures that the department is aware of the operational status of the registered entity.

The registration of a dealer has a statutory purpose, which is to facilitate the levy and collection of tax. It enables the State to identify and hold liable those parties responsible for tax payments.

Arguments:

Arguments by the Appellant (Periyar & Pareekanni Rubbers Ltd.):

• The assessing authority was fully aware that the distillery was being operated by the Lessee, hence, no liability could be imposed on the Appellant.
• Even if the sales of manufactured goods were made under the Appellant’s registration number, the Appellant should only be liable for the period from November 7, 1985, to December 31, 1985.
• The High Court erred by relying on Section 19C of the Act, which came into effect only from August 29, 1989, and does not have retrospective application.
• Liability to pay tax falls upon ‘a dealer’ as defined under Section 2 sub-section (8) of the Act, and therefore, assessment proceedings against the Appellant were not justified.

Arguments by the Respondent (State of Kerala):

• The Tribunal’s finding of fact indicates that the Appellant and the Lessee committed fraud, and therefore, the impugned judgment should not be interfered with.
• The Appellant allowed the Lessee to use its registration number and prescribed forms ‘C’ and ‘D’, which were supplied by the department at the Appellant’s request. Thus, the Appellant cannot now claim it is not liable to pay any tax.
• The writ petition challenged the liability as a garnishee, not the order of assessment itself, making the impugned judgment unassailable.
• Even if Section 19C of the Act is not applicable, the pre-assessment notice and assessment proceedings were conducted following the High Court’s direction in its judgment dated February 12, 1993, which was not challenged.

Issues Framed by the Supreme Court:

The Supreme Court did not explicitly frame specific issues in the provided text. However, the central issue that the court addressed was:

1. Whether the Appellant (lessor) could be held liable for the sales tax dues of the Lessee, given that the Lessee was operating the business and had defaulted on tax payments.

Treatment of the Issue by the Court: “The following table demonstrates as to how the Court decided the issues”

Authorities:

The Supreme Court considered several authorities to arrive at its decision. These authorities helped to establish the principles and legal precedents relevant to the case.

• M.A. Rahman and others vs. State of Andhra Pradesh and others: AIR 1961 SC 1471 (Supreme Court of India)
  ✓ This case was cited to emphasize the purpose and object of the Act, which is to levy and collect tax for the general revenues of the State. The Court highlighted that the Act requires registration of dealers to ensure the State knows who is selling and from whom the tax is due.
• Pramod Foods Pvt. Ltd. vs. State of Kerala: 69 (1988) STC 257 Ker. (Kerala High Court)
  ✓ This case, though from the Kerala High Court, supports the argument that registration is essential for the State to keep track of taxable entities.
• Lalji Haridas vs. Income-tax Officer and another: [1961] 43 ITR 387(SC) (Supreme Court of India)
  ✓ This case was referenced regarding the procedure to be followed when it is unclear who has received the income and is liable to pay the tax. The Court noted that it is permissible to initiate proceedings against multiple parties to determine the correct assessee.
• Commissioner of Income-tax, Madhya Pradesh, Nagpur vs. M/s. Hukam Chand Mohanlal: AIR 1971 SC 2591 (Supreme Court of India)
  ✓ This case was cited to argue that there must be a specific provision in the Act to hold a successor in business or a legal representative liable for the tax. However, the Court distinguished this case by noting that the Appellant was found to be an agent of the Lessee.
• Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam vs. Gopal Trading Company: [84 (1992) STC 294] (Supreme Court of India)
  ✓ This case was mentioned to address the situation where a purchaser has a valid registration certificate. The Court noted that a fresh opportunity should be given to the assessee to establish the facts.
• State of Karnataka and another vs. Shreyas Papers Pvt. Ltd. and others: [(2006) 1 SCC 615] (Supreme Court of India)
  ✓ This case was cited to support the argument that if there is a transfer of ownership of properties, the charged property may be sold to recover the dues.
• Section 19C of the Kerala General Sales Tax Act
  ✓ The Court acknowledged that Section 19C, which allows for assessing two persons by fastening joint and several liability, came into effect from August 29, 1989, and could not be applied retrospectively. However, the Court noted that the High Court had evolved a procedure acceptable to all parties, and the Appellant had submitted to the jurisdiction of the assessing authority.
• Rule 33 A (3) of the Kerala General Sales Tax Rules and Rule 11(6) of the Central Sales Tax (Kerala) Rules, 1957.
  ✓ Appellant had a duty to surrender the unused delivery note on discontinuance of the business or cancellation of its certificate of registration or on its ceasing to be an assessee under Rule 33 A (3) of the Kerala General Sales Tax Rules and Rule 11(6) of the Central Sales Tax (Kerala) Rules, 1957.
• Rule 51 of the relevant rules
  ✓ Rule 51 mandates that a dealer must inform the authorities when they cease to continue the business for which they were registered.

Judgment:

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• M.A. Rahman and others vs. State of Andhra Pradesh and others: AIR 1961 SC 1471 – The Court used this case to support the importance of registration for tax collection purposes.
• Pramod Foods Pvt. Ltd. vs. State of Kerala: 69 (1988) STC 257 Ker. – This case was used to reinforce the necessity of registration for tracking taxable entities.
• Lalji Haridas vs. Income-tax Officer and another: [1961] 43 ITR 387(SC) – This case was cited to justify the procedure of initiating proceedings against multiple parties to determine tax liability.
• Commissioner of Income-tax, Madhya Pradesh, Nagpur vs. M/s. Hukam Chand Mohanlal: AIR 1971 SC 2591 – The Court distinguished this case, noting that the Appellant was found to be an agent, unlike the successor in business in the cited case.
• Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam vs. Gopal Trading Company: [84 (1992) STC 294] – This case was distinguished as the facts were different, and the principle did not apply to the present situation.
• State of Karnataka and another vs. Shreyas Papers Pvt. Ltd. and others: [(2006) 1 SCC 615] – This case was used to support the power to sell charged property for tax recovery.

What weighed in the mind of the Court?:

The Supreme Court’s decision in Periyar & Pareekanni Rubbers Ltd. vs. State of Kerala was influenced by several factors, primarily revolving around the conduct of the Appellant and the need to prevent tax evasion. The Court emphasized the following points:

• Collusion and Fraud: The Court found that the Appellant and the Lessee colluded to evade tax payments. This was evidenced by the Lessee’s use of the Appellant’s registration number and statutory forms, as well as the Appellant’s failure to take timely action against the Lessee despite breaches of the lease agreement.
• Agency Relationship: The Court determined that the Appellant acted as an agent of the Lessee. This agency relationship made the Appellant liable for the Lessee’s actions, including the failure to pay sales tax.
• Statutory Obligations: The Court noted that the Appellant failed to comply with statutory obligations, such as surrendering unused delivery notes and informing the authorities about the cessation of business activities.
• Prevention of Tax Evasion: The Court was keen to prevent tax evasion and ensure that the State’s revenues were protected. The Court stated that a statute, particularly a fiscal one, must be construed in such a manner as to give effect thereto.

Fact:Law Ratio

The court’s reasoning involved a detailed examination of the facts, including the conduct of the parties and the breaches of statutory obligations. The legal considerations primarily focused on the interpretation and application of the Kerala General Sales Tax Act and related rules.

Key Takeaways:

• Lessor’s Responsibility: Lessors must ensure that lessees comply with all statutory requirements, including tax payments. Failure to do so may result in the lessor being held liable for the lessee’s dues.
• Due Diligence: Lessors should exercise due diligence in managing their business affairs, including monitoring the activities of lessees and taking timely action in case of breaches.
• Compliance with Statutory Obligations: Registered dealers must comply with all statutory obligations, such as surrendering unused delivery notes and informing authorities about changes in business operations.

Development of Law:

The ratio decidendi of this case is that a lessor can be held liable for the sales tax dues of its lessee if the lessor’s conduct indicates collusion to evade tax payments and if the lessor fails to comply with statutory obligations. This decision reinforces the importance of due diligence and compliance with tax laws in business operations.

Conclusion:

In conclusion, the Supreme Court dismissed the appeals, holding Periyar & Pareekanni Rubbers Ltd. liable for the sales tax dues of its lessee. The Court emphasized that the Appellant’s conduct indicated collusion to evade tax payments and that the Appellant failed to comply with statutory obligations. This decision underscores the importance of due diligence and compliance with tax laws in business operations, ensuring that lessors cannot evade responsibility by leasing out their businesses.