IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE ANTONY DOMINIC WEDNESDAY, THE 16TH JULY 2008 / 25TH ASHADHA 1930 WP(C).No. 30029 of 2005(Y) -------------------------- PETITIONERS: --------------- 1. K.P. SURESH, S/O. LAT K.K. PRABHAKARAN AGED 50, MAY FAIR, PATTANAKKAD P.O., CHERTHALA, ALAPPUZHA DISTRICT. 2. SHEELA SURESH, W/O. K.P. SURESH, MAY FAIR, PATTANAKKAD P.O., CHERTHALA, ALAPPUZHA DISTRICT. BY ADV. SRI.KMV.PANDALAI RESPONDENTS: ------------------ 1. THE SALES TAX OFFICER, IIND CIRCLE, ALAPPAT ROAD, ERANAKULAM, KOCHI-682 016. 2. THE DEPUTY TAHSILDAR (R.R.), CHERTHALA. BY GOVT.PLEADER SRI.K.P.PRADEEP THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 16/07/2008, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: WPC NO.30029/05 APPENDIX PETITIONERS EXHIBITS EXT.P1: TRUE COPY OF THE REGISTRATION CERTIFICATE SIGNED BY GENERAL MANAGER, DISTRICT INDUSTRIES CENTRE, ERNAKULAM DT 1.3.1988. EXT.P2: TRUE COPY OF THE ADVERTISEMENT ISSUED BY KFC IN THE MATHRUBHOOMI MALAYALAM DAILY DT 31.7.1997. EXT.P3: TRUE COPY OF the NTOICE DT 29.5.2001 ISSUED BY THE RESPONDENT. EXT.P4: TRUE COPY OF the ORDER PASSED BY THE 1ST RESPONDENT DT 5.11.2001. EXT.P5: TRUE COPY OF THE JUDGMENT IN OP NO.9176/2002 DT 19.1.2005. EXT.P6: TRUE COPY OF the LETTER DT 31.3.2005 ISSUED BY THE 1ST RESPONDENT. //TRUE COPY// P.A. TO JUDGE ANTONY DOMINIC, J. =============== W.P.(C) NO. 30029 OF 2005 Y ==================== Dated this the 16th day of July, 2008 J U D G M E N T Ext.P6 is under challenge. 2. Petitioners were Directors of a Company. In so far as this writ petition is concerned, default was committed by the Company in the payment of sales tax dues for the year 1994-95. Recovery proceedings were initiated against the Company and the Directors. Accordingly, demand notices were issued and that led to the filing of OP 9176/2002. The OP was disposed of by Ext.P5 judgment observing that the actual beneficiaries can be traced and proceeded against for recovery of arrears if the corporate veil is used for evasion of tax. Proceeding further, the learned Judge directed that an enquiry be held by the 1st respondent. It was directed to consider the personal liability of the petitioners and other Directors and that orders shall be passed on that basis. 3. In pursuance to Ext.P5 judgment, enquiry was held and Ext.P6 notice has been issued to the petitioners. In Ext.P6, it is stated that the petitioners herein are the Managing Director and Director of the Company and that they have agreed to abide by the Sales Tax Act and the WPC 30029/05 :2 : Rules and were also prepared to furnish security required by the Assessing Authority. It is also stated that the petitioners had furnished bank guarantee for Rs.10,000/- for obtaining registration. It is on the aforesaid basis Ext.P6 order was passed, holding them personally liable for the sales tax dues of the company, they were called upon to appear before the 1st respondent. 4. Learned counsel for the petitioners submit that though personal guarantee was given as stated in Ext.P6, the liability cannot exceed Rs.10,000/-, being the Bank Guarantee amount. It is also stated that there is nothing on record to indicate that the formation of the Company was with the intention of evasion of tax to lift the corporate veil. According to the counsel, since Section 26(c) of the Kerala General Sales Tax Act fastening liability on the individual Directors was introduced only w.e.f. 01/04/1999, the said section cannot be invoked for realising the dues for the assessment year 1994-95.They are also relying on the judgment of this court in Kasim v. Sales Tax Officer (2007(4) KLT 538) in support of this contention. 5. I heard the learned Government Pleader, who relies on a judgment of the learned Single Judge in OP No.39383/02, where it is held WPC 30029/05 :3 : that if the formation of the company was intended for evasion of tax, Corporation veil can be lifted and proceedings can be initiated and continued against the beneficiaries. According to the learned Government Pleader, in this case not only that there was personal guarantee furnished by the defaulters, they are also liable to be proceeded against as the formation of the company was for evasion of tax. 6. I have considered the submissions made by both sides. 7. The recovery in question pertains to the assessment year 1994-95 and the Directors of a company can be proceeded against either under Section 26(c) of the KGST Act or by lifting the corporate veil, by taking recourse to the principles laid down by the Apex Court in Commissioner of Income Tax, Madras v. Sri Meenakshi Mills Ltd. & others (63 ITR 609) and McDowell & Co Limited v. Commercial Tax Officer (154 ITR 148). 8. In so far as Section 26(c) is concerned, that section was introduced w.e.f. 1.4.1999. Since the liability in question pertains to 1994- 95, the Section can have no application. Then the question is whether the principles laid down by the Apex Court in the aforesaid judgments can be made use of and the beneficiaries could be traced and made liable. As WPC 30029/05 :4 : rightly noticed by the learned Single Judge in OP No.39383/02 relied on by the learned Government Pleader, this necessarily requires a finding that the creation of the company itself was to evade payment of tax. In this case, there is absolutely no material to come to such a finding. If that be so, those judgments can be of no assistance to the learned Government Pleader. Net result is that 26(c) cannot be invoked and that position is covered in favour of the petitioners by the judgment of this court in Kasim v. Sales Tax Officer (2007(4) KLT 538). 9. However, the fact remains that the petitioners have given a personal guarantee of Rs.10,000/- and the petitioners cannot avoid payment of this amount. Therefore, directing that the liability of the petitioners shall be confined to the amount personally guaranteed by them as is mentioned in Ext.P6 and restraining the respondents from proceeding against the petitioners for realising any amount in excess thereof, this writ petition is disposed of. Writ petition is disposed of as above. ANTONY DOMINIC, JUDGE Rp