REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS. 1804-1807 OF 2008

(Arising out of SLP (C) Nos. 18346 – 18349 of 2004)

Periyar & Pareekanni Rubbers Ltd. …. Appellant

Versus

State of Kerala …. Respondent

J U D G M E N T

S.B. SINHA, J.

Leave granted.

1.Appellant is a company registered under the Companies Act, 1956. It

runs a distillery. It obtained a licence under the trade name of “Normandy

Breweries and Distilleries” for manufacture of liquor under the Kerala

Abkari Act (1 of 1077).

2.It was registered as a dealer both under the Kerala General Sales Tax

Act (the Act) as also under the Central Sales Tax Act.

3.It demised the factory in favour of one “Eagle Distillery (P) Ltd.”

(Lessee) by a Deed of Lease dated 1

st

December, 1984, wherefor requisite

approval was granted by the Government of Kerala on or about 27

th

April,

1985.

4.The Sales Tax Authorities were intimated thereabout by

communications dated 4

th

May, 1985 and 30

th

May, 1985.

The said letters read as under :-

“4

th

May, 1985

I am writing this letter to inform you that I have

leased out the Distillery unit in Cheemeni, Kasargod

District to Eagle Distilleries Pvt. Ltd., having their

registered office at Bangalore, Karnataka, for a period of

5 years from 1

st

December, 1984. The specific reason we

have not renewed the registration this year, is this. We

have asked Eagle Distilleries to take a new registration in

their name. I am enclosing herewith a copy of the lease

deed for your reference. Kindly acknowledge receipt of

the same.”

“30

th

May, 1985

Further to our Regd. Ack. Due letter alongwith the

copy of the lease deed which you have acknowledged on

7.5.85. We wish to inform you that our Distillery unit at

2

Cheemeni known as “Normandy Breweries &

Distilleries” Cheemeni will not be in any way

responsible for the tax due after the 1

st

December, 1984.

For any tax dues after that date will have no claim over

the assets and properties of Normandy Breweries &

Distilleries. As these Supplies have been made by the

lessees and they have collected the payments and they

have only lease right on the unit subject to the lease

conditions.”

5.The ‘lessee’ applied for registration under the said Act. The process

for registration, however, got delayed. It asked the appellant to allow it to

use the old registration number. By communications of diverse dates the

same was allowed. It is, however, stated that permission to use the

registration number of the appellant had not been renewed after 31

st

December, 1985.

6.The ‘lessee’, however, continued to file returns in its own name. It

did not deposit the amount of sales tax collected by it. It furthermore

appears that the requisite forms for carrying out inter trade sale and intra

trade sale, namely Forms ‘C’ and ‘D’, which at the request of the appellant

had been supplied by the revenue, were continued to be used by the ‘lessee’.

A notice for recovery of Sales Tax for the Assessment Years 1984-85, 1986-

87 and 1987-88 was served upon the appellant.

3

7.Appellant filed a writ application questioning the legality and validity

thereof. Before the High Court, however, its liability in regard to the

payment of tax for the year 1984-1985 by the appellant was not pressed.

8.By a judgment and order dated 12

th

February, 1993, a learned Single

Judge of the said Court in view of the rival contentions raised therein by the

appellant and the ‘lessee’, as regards their respective liability, opined that

the question as to who is liable for payment of tax relating to those two

Assessment Years, when admittedly the business was carried out by the

‘lessee’ under the deed of lease, is a question which would arise for

consideration before the assessing authority, when the final assessment is to

be carried out. It was directed :-

“12I accordingly quash Exts. P13 and P17 and the

proceedings for recovery which have culminated in those

proceedings. The assessing authority namely the 4

th

respondent is directed to compelte the final assessment

under the Kerala General Sales Tax Act, 1963; for the

years 1986-87 and 1987-88 with notice to the first

petitioner Company and to the 6

th

respondent.”

Pursuant to or in furtherance of the said direction, a pre-assessment

notice dated 16

th

November, 1993 was served both upon the appellant and

the ‘lessee’ proposing to reject the returns and accounts as incorrect and

incomplete and to finalise the assessment on the basis of the best judgment

4

assessment as specified therein. The ‘lessee’ did not respond thereto. Cause

was shown by the appellant. In the assessment proceeding only the

appellant represented.

The assessing authority passed an order of assessment holding both

the appellant as also ‘the lessee’ jointly and severally liable for the sales tax

dues both under the Act as also Central Sales Tax Act for the Assessment

Years 1986-87 and 1987-88. Statutory appeals were preferred thereagainst

and by a judgment and order dated 30

th

January, 1995 the appellate authority

allowed the said appeals in so far as the appellant was concerned and

directed recovery of the dues only from ‘the lessee’. The Revenue preferred

second appeals before the Tribunal. The Tribunal by its order dated 20

th

December, 2001 allowed the appeals of the Revenue. Revision applications

filed thereagainst by the appellant before the High Court have been

dismissed holding :-

“27.The question in such circumstances is as to

whether the lessee can also be made liable. It is

unnecessary for us to consider the same since the lessee

has not questioned its liability fixed under the

assessment orders dated 31.1.1984. In the above

circumstances, we uphold the assessment orders as

confirmed by the Appelalte Tribunal for the years 1986-

87 and 1987-88 both under the KGST Act and under the

CST Act.

28.However, since the assessments against the lessee,

M/s. Eagle Distillery (P)_ Ltd. have not been questioned

5

by it and since it has become final, considering the

peculiar facts and circumstances of this case, we direct

the assessing authority to proceed first against the said

company for realization of the arrears of sales tax due for

these two under both the enactments. After exhausting

the steps against the said company, if any amounts are

outstanding towards sales tax dues for the aforesaid two

years, the assessing authority is entitled to proceed

against the petitioner and its assets. However, petitioner

is directed to furnish sufficient security for the due

payment of the dues in case the said amount cannot be

recovered from the lessee as directed above, to the

satisfaction of the assessing authority within a period of

two months from the date of receipt of a copy of this

judgment.”

9.Mr. Joseph Markose, learned Senior Counsel appearing on behalf of

the appellant, would inter alia submit :-

i)That the assessing authority being aware of the fact that the

distillery was being run by ‘the lessee’, no liability in resoect

thereof could have been fastened on the appellant.

ii)Assuming that it effected sales of the manufactured goods

under the registered number of the appellant, it was liable for

payment of Sales Tax only for the period from 7

th

November,

1985 to 31

st

December, 1985

6

iii)The High Court committed a serious error in passing the

impugned judgment relying on or on the basis of Section 19C

of the Ac which had no application in the instant case, as it was

brought to the statute book only with effect from 29

th

August,

1989 and had no retrospective effect.

iv)Liability to pay tax being upon ‘a dealer’ within the meaning of

Section 2 sub-section (8) of the Act, no assessment proceedings

could have been initiated against the appellant.

10.Mr. Y. Yashobant Das, learned Senior counsel appearing on behalf of

the respondent-State, on the other hand, would submit :

i)That a finding of fact having been arrived at by the Tribunal

and that a fraud had been committed by the appellant and ‘the

lessee’, the impugned judgment should not be interfered with.

ii)Appellant having allowed its alleged ‘lessee’ to use the

registration number as also the prescribed forms ‘C’ and ‘D’,

which were supplied by the department to it on its asking, now

it cannot turn round and contend that it was not liable to pay

any tax.

7

iii)Since in the Writ Petition the subject matter of challenge was

not the order of assessment but the liability as a garnishee, the

impugned judgment is unassailable.

iv)Assuming Section 19C of the Act is not applicable, the pre-

assessment notice as also the assessment proceedings having

been conducted pursuant to the direction issued by the High

Court in its judgment dated 12

th

February, 1993, the correctness

whereof having not been questioned, the impugned order

cannot be found fault with.

11.We may not, for the purpose of the present case, consider the

assessment orders as also the appellate orders. The Tribunal upon analysing

the materials placed before the assessing authority, inter alia held :-

“Thus the conduct of the parties lead to the inference

that, the Lessee acted as an Agent of the Lessor and

hence, the lessor is also responsible for the business

conducted during that period. So, the assessment

completed in the name of both Lessor and Lessee by

fixing the liability jointly and severally is proper.”

Despite the fact that the Lessee had applied for the registration, it

requested the department to keep in abeyance the said application for

registration, which stood rejected with an observation that they could apply

8

for registration afresh when they started business in the new name.

Registration of the appellant thereafter continued without being cancelled.

12.The High Court directed the assessing authority to issue notice and

complete the final assessment by posing a question for its decision in regard

to the liability of either the appellant or the Lessee.

13.The Lessee used the statutory forms as also the registration number of

the appellant. In the aforementioned fact situation the Tribunal opined :-

“13.Again relying on the letter dt. 20.3.89, purported

to have been issued by the General Manager. Normandy

Breweries and Distilleries Ltd. (Periyar & Pareekanni

Rubber Ld.) i.e. the lessor, and addressed to the Officer

of the Assessing Authority, it was submitted by the

learned State Representative who appeared for he

Revenue that, even though there was a clear provision

for termination of the lease deed when the lessee makes

default for a continuous period of 4 months, the Lessor

has not taken any action to terminate the lease deed till

the rent arrears accumulated to Rs.30 lakhs i.e. the lessor

was keeping silent for a period of 24 months as to

accumulate the dues over Rs. 30 lakhs which an ordinary

prudent man would not be under such circumstances.

Thus, it is clearly established that the attempt made by

the Lessor & Lessee was to defraud the Revenue by non-

payment of tax which is legitimately due to the

government. More-over, since the lease deed dt. 1.12.84

was terminated into toto, with effect from the very

beginning, there is no lease deed and no relationship of

Lessor & Lessee. In such a situation, the Lessor become

liable for the tax due on the business done in the name of

M/s. Normandy Breweries & Distilleries, Cheemaeni.

Likewise, since the Lessee has admittedly conducted the

business and collected tax, and has not remitted the same

9

to the Government the Lessee becomes liable for the

business conducted. Thus, at any rate, the Lessor and

Lessee are jointly and severally liable for the tax which

is legitimately due to the Government. So, the order of

assessment has to be restored.”

It was furthermore held :-

“26.Thus, since it has come out in evidence that, the

application for Registration put in by the lessee was

dismissed under the circumstances referred to above and

the Registration of the lessor continued in force and that

the lessor has without returning the delivery notes and

the C forms issued in their favour to the department,

thereby violated the Mandatory provisions under the

Rules and permitted the lessee to continue to do the

business in the trade name of the lessor themselves, we

find that, here, the assessing authority was perfectly

justified in finding that, the Lessor and Lessee were

colluding with each other and were practicing fraud on

the Government in order to evade payment of tax which

is legitimately due to the Government.”

14.The Act was enacted to consolidate and amend the law relating to the

levy of a general tax on the sale or purchase of goods in the State of Kerala.

“Registered dealer” has been defined to mean a dealer registered under the

Act.

15.Admittedly, taxes are leviable on sale of goods. Registration in the

instant case was in the name of the registrant i.e. M/s. Periyar & Pareekanni

10

Rubbers Ltd. Despite grant of a lease, the Lessee, admittedly for a long

time used the registration number of the Lessor as also the statutory forms

supplied by the revenue to it.

16.The liability to pay sales tax, not only is fastened upon the registered

dealer within the meaning of the said Act and the Rules framed thereunder,

but also on the agent or the transferee. A finding of fact has been arrived at

that the transaction was a sham one and at all material times, the appellant

was acting as an agent of ‘the lessee’. 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. Appellant did not take any step for the

termination of lease, although a right was conferred upon it in this behalf.

As has been noticed by the High Court, the lease amount was not deposited

for more than four months. Termination of the lease was effected by it only

after a long time i.e. on 20

th

March, 1989, when the arrears of rent mounted

to about Rs.30 lakhs.

17.Rule 51 mandates a dealer to send information as to when it ceases to

continue its business for which it was registered. Registration of a dealer

11

has a statutory purpose, viz. to carry out and achieve the object of the Act

which primarily is levy and collection of tax. It also enables the State to

fasten the tax liability on the parties which may be found liable therefor so

as to enable it to realize the same.

18.In M.A. Rahman and others vs. State of Andhra Pradesh and others :

AIR 1961 SC 1471 this Court opined :-

“4. It will be clear from this analysis of the impugned

provisions of the Act that the purpose and object of the

Act to levy and collect tax for purposes of the general

revenues of the State and the liability for payment is

placed under s. 3 upon the person effecting the sale. He

is required by s. 5 of the Act to keep books of account in

the prescribed form and to submit to the Commercial

Officer and to such other officers as may be prescribed, a

return in such form, containing such particulars and at

such intervals, as may be prescribed. Along with the

return, under s. 6 he is required to pay the amount of tax

due in respect of the motor spirit sold by him in retail

during the proceeding month according to the return. In

order therefore that the State may have a check on the

person from whom the tax is due S. 4(1) provides for

registration of dealers who carry on the business in

motor spirit. Without such registration it would be

impossible for the State to know the persons who are

selling motor spirit and from whom the tax is due.”

[See also Pramod Foods Pvt. Ltd. vs. State of Kerala 69 (1988) STC 257

Ker.]

12

19.Management of business may be handed over by the owner to another

but the department must be made known thereabout. A fresh registration

certificate must be applied for and granted.

The business by the Lessee continued under the old name. It was

done at the behest of the appellant. It, therefore, cannot now turn around

and contend that it was not liable to pay any tax.

20.It may be true that Section 19C of the Act having come into effect

from 29

th

August, 1989, could not be given any retrospective effect but then

the legislature was not presumed to take into consideration a situation of the

present nature. It is presumably for the said reason, the High Court evolved

such a procedure which was acceptable to all the parties. Pursuant to or in

furtherance of the direction of the High Court also, notices were issued.

Appellant submitted itself to the jurisdiction of the assessing authority. Its

liability was held to be joint and several with that of ‘the lessee’. It

preferred an appeal thereagainst but it did not implead ‘the lessee’ as a party

therein. In absence of ‘the lessee’ as a party to the said appeal, it was

impermissible for the appellate authority to hold ‘the lessee’ alone liable for

payment of tax. Even the Tribunal and the High Court could not have, in

the said fact situation, issued any direction as to how the arrears of tax

should be recovered.

13

21.Strong reliance has been placed by the learned counsel for the

appellant on the decision of this Court in Lalji Haridas vs. Income-tax

Officer and another : [1961] 43 ITR 387(SC) wherein the question which

arose for consideration was as to who amongst the two brothers was liable

to pay tax. It was held :-

“In cases where it appears to the income-tax authorities

that certain income has been received during the relevant

assessment year but it is not clear who has received that

income and prima facie it appears that the income may

have been received either by A or B or by both together,

it would be open to the relevant income-tax authorities to

determine the said question by taking appropriate

proceedings both against A and B. That being so, we do

not think that Mr. Nambiar would be justified in resisting

the enquiry which is proposed to be held by respondent

No.1 in pursuance of the impugned notice issued by him

against the appellant.”

22.Such a procedure in this case was also followed. Such a direction has

been issued, whereupon the assessment orders have been passed. We at this

stage, therefore, cannot direct the authority to reopen the proceedings once

again, as was urged by the learned counsel.

14

23.Reliance was also placed on the Commissioner of Income-tax,

Madhya Pradesh, Nagpur vs. M/s. Hukam Chand Mohanlal : AIR 1971 SC

2591 wherein it was held :-

“The assessee, in the present case, does not fall within

any of those clauses. There is no specific provision in the

Act under which it can be said that the assessee is a

person by whom income tax is payable on the amount of

Rs. 24,341/-which came to her by way of remission on

account of what had transpired in the lifetime of her

husband. The Act does not contain any provision making

a successor in business or the legal representative of an

assessee to whom an allowance has already been granted

liable to tax under Section 41 (1) in respect of the

amount remitted and received by the successor or the

legal representative.”

24.We have noticed hereinbefore that a finding of fact has been arrived

at that for all intent and purport the appellant was the agent of ‘the lessee’.

Furthermore, a distinction must be borne in mind between the provisions of

the Income Tax Act and Sales Tax Act. Sales tax is leviable on a sale. The

manufacturer of the liquor is an assessee. It is a dealer within the meaning

of the said Act. For the purpose of realisation of the sales tax, one who

manages the business may not come to the front. Applying the doctrine of

Crown Debt the assets of the unit could be attached or sold therefor. Crown

15

Debt, as is well known, unless there is a statutory interdict, prevails over all

other debts. It is based on the principle that public interest prevail over the

private individual. [See Halsbury’s Laws of England Fourth Edition

Volume 8 paras 1076 at pg. 666-667].

25.We have referred to the doctrine of Crown Debt not for its

applicability directly but to emphasise its importance in common law. A

statute, particularly a fiscal one, must be construed in such a manner so as to

give effect thereto. Evasion of tax is looked down upon under our

constitutional and statutory schemes.

26.Reliance has also been placed on Deputy Commissioner of Sales Tax

(Law), Board of Revenue (Taxes), Ernakulam vs. Gopal Trading Company

[84 (1992) STC 294], wherein this Court, in a case involving the question as

to whether despite establishing the fact that the purchaser of the goods at

the relevant time had a valid certificate of registration and that he in fact had

purchased the goods, whether the assessing authority must accept the form

25 declaration issued by him and make the assessment accordingly, opined

that a fresh opportunity must be given to the assessee.

16

27.If the finding of fact arrived at by the Tribunal as affirmed by the

High Court is correct, we would not take recourse to a construction which

will defeat the purport and object of the Act.

28.Tax liability of the business concern is not in dispute. Correctness of

the orders of assessment is also not under challenge. The Tribunal or for

that matter the High Court were, therefore, not concerned with the liability

fastened upon the dealer. The only question was as to what extent the

appellant was liable therefor. It is impossible for the legislature to envisage

all situations. Recourse to statutory interpretations therefor should be done

in such a manner so as to give effect to the object and purport thereof.

Doctrine of purposive construction should, for the said purpose, be taken

recourse to. {See New India Assurance Company Ltd. v. Nusli Neville

Wadia and Anr. [JT 2008 (1) SC 31]}

29.Ordinarily, we would have accepted the contention that prior to

coming into force of Section 19C of the Act, there did not exist any

provision in the Act to assess two persons by fastening joint and several

liability. However, the superior courts and, in particular, this Court, would

not come on the way of the revenue to recover arrears of tax, if it is

otherwise permissible in law.

17

30.Apart from the finding of fact arrived at by the Tribunal, the appellant

upon resumption of tenancy would become liable to pay tax, if it intends to

carry on its business.

31.The Act provides for the mode and manner in which the revenue may

be recovered. The property of the dealer, namely, one in whose name the

registration stood, can be proceeded with. Its properties may be subjected to

attachment and sale.

32.In that view of the matter, it is not a case where, this Court, while

exercising its jurisdiction under Article 136 of the Constitution of India

should interfere with the impugned judgment.

33.In State of Karnataka and another vs. Shreyas Papers Pvt. Ltd. and

others [(2006) 1 SCC 615], this Court held that since there is a transfer of

ownership of properties of the transferee, as noticed in terms of Section 100

of the Transfer of Property Act, the charged property may be sold.

34.We may observe that in law the appellant is liable to pay the amount

of sales tax assessed by the assessing authority.

18

35.Appeals fail and are dismissed accordingly. There shall, however, be

no order as to costs.

………………………J.

( S.B. SINHA )

………………………J.

(HARJIT SINGH BEDI)

New Delhi

March 7, 2008

19