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 1st December, 1984, wherefor requisite

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

1985.  

4. The  Sales  Tax  Authorities  were  intimated  thereabout  by

communications dated 4th May, 1985 and 30th May, 1985.   

The said letters read as under :-

“4th 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 1st 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.”  

“30th 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

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Cheemeni  known  as  “Normandy  Breweries  & Distilleries”  Cheemeni  will  not  be  in  any  way responsible for the tax due after the 1st 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  31st

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.

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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 12th 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 :-

“12 I  accordingly  quash  Exts.  P13  and  P17  and  the proceedings for recovery which have culminated in those proceedings.   The  assessing  authority  namely  the  4th 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 6th respondent.”  

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

notice dated 16th 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

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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 30th 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 20th

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

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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 7th November,

1985 to 31st December, 1985

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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 29th 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.

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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 12th 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

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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

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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

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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 20th 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

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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.]

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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 29th 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.   

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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.  

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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

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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.   

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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.   

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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.   

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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

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