CWP No. 2241 of 1988 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. CWP No. 2241 of 1988 Date of decision 15 .12.2009 M/s Prestige Engg (India) Pvt. Ltd. ... Petitioner Versus State of Haryana and others ... Respondents. CORAM: HON'BLE MR. JUSTICE M.M. KUMAR HON'BLE MR. JUSTICE JASWANT SINGH Present: Mr. Ashok Aggarwal, Senior Advocate with Mr. Alok Jain, ,Advocate for the petitioner Mr. R.D.Sharma, DAG Haryana. 1.To be referred to the Reporter or not ? 2.Whether the judgement should be reported in the Digest ? M.M.KUMAR, J. This order shall dispose of two writ petitions bearing CWP No. 2241 and 2240 of 1988 as the issue raised in both the petitions is common. For the purposes of this order, facts are being taken from CWP No. 2241 of 1988. The prayer made by the petitioner is for quashing notice dated 16.1.1988 (P.4) issued by the Assistant Collector (E &T) Ist Grade, Faridabad requiring them to appear before him on 21.1.1988 alongwith the amount of demand of Rs. 1,19,200/- and Rs. 6,45,346/- on account of arrears of sales tax under the Haryana General Sales Tax Act,1973 (for brevity 'the HGST Act') and the Central Sales Tax (CST) in their capacity being surety for respondent no.3 Laxmi Rattan Engg. Works. The petitioner is a private limited company. Respondent no. 3 M/s Lakshmi Rattan Engg. Works Ltd. is also a private limited company with its Head Office at Bombay and was a registered dealer under the HGST CWP No. 2241 of 1988 2 Act as also under the Central Sales Tax Act which registration has since been cancelled. The Revenue (Respondent nos. 1 and 2) made assessment of the sales tax due from respondent no.3 for the financial years 1974-75 and 1975-76 creating inter-alia liability of Rs. 7,64,546/- besides interest at the rate of 18% per annum. Against the aforesaid order, respondent no. 3 preferred an appeal before the Sales Tax Tribunal, Haryana (for brevity 'the Tribunal').The Tribunal vide its order dated 12.11.1982 directed that the appeals be heard without pre-payment of tax subject to filing of surety to the satisfaction of Assessing Authority within one month of the date of pronouncement of that order. Thereafter, petitioner on the request of respondent no.3 submitted surety bonds which were initially rejected by respondent no.2 vide order dated 7.1.1983. Then fresh surety bonds were submitted by respondent no.3. Respondent no. 2 who vide its order dated 5.12.1983 (P.1) summoned respondent no.3 alleged that the position of the sureties did not appear to be sound and therefore the surety bonds were sought to be cancelled as per claim made by the petitioner. However, there is no order on record to that effect. The petitioner have further claimed that with the passage of time, relations between the petitioner and respondent no.3 got strained and as a result petitioner issued notice dated 3.5.1986 (P.2) to respondent no.2 withdrawing his surety. Subsequently on 12.11.1987 the appeal filed by respondent no. 3 before the Tribunal was dismissed consequently, respondent no.2 issued a notice in the shape of summons to the petitioner raising, inter-alia, a demand of Rs. 1,19,2000/- and Rs. 6,45,346/- on account of alleged arrears of sales tax under the HGST Act and the CST in his capacity as surety having submitted surety bonds. It is alleged that notice of demand (P.4) issued by respondent no.2 to CWP No. 2241 of 1988 3 the petitioner is absolutely illegal, without jurisdiction, arbitrary, void, ab- initio and against the mandate of the HGST Act and the Punjab Land Revenue Act, 1887. It is alleged that in law it could not be concluded that the petitioner ever stood surety as his surety was never accepted as is apparent from letter dated 5.12.1983 (P.1) and therefore no liability could be fastened on them on the basis of the alleged surety bonds. It is claimed by the petitioner that respondent nos. 1 and 2 were bound under the law to have first made efforts to recover the amount payable by respondent no.3 from him and having failed to proceed against respondent no.3 for the recovery of the due amount by initiating proceedings for the attachment and sale of their property or by his arrest and detention, respondent nos. 1 and 2 could have only then in law proceeded to recover the amount from the petitioner. Respondent no. 3 has sufficient assets to meet the demand of tax created by respondent no.2. The liability of a surety can in law only come into play after the principal debtor has defaulted. It is not disputed that respondent no.3 is proved to be insolvent and despite efforts no recovery can be made from him. In the reply filed by respondent no. 2, the Excise and Taxation officer-Assessing Authority has taken the stand in the preliminary objection that the petitioner stood surety to pay tax in case the same is not paid by the respondent no.3 and as the tax demand has not been recovered from respondent no.3, the same is being recovered from the petitioner in accordance with law in terms of the surety bond duly executed by it , . In reply to sub para (ii) of para 8 it is submitted that surety bonds executed by the petitioner were accepted and on acceptance of the same the Tribunal heard the appeals. Therefore, the petitioner cannot wriggle out from the CWP No. 2241 of 1988 4 obligations to pay the amount of tax undertaken by him to pay by executing surety bonds. The surety bonds tendered in compliance with the orders of the Tribunal are valid, legal and enforceable in law. With regard to cancellation of surety by the petitioner it is averred in reply to sub para (iii) that no notice for cancellation of surety was ever received in the office of respondent no.2 and therefore the surety bonds are very much in force. It is further alleged that Annexure P.2 is a false document prepared in support of the new plea in order to wriggle out of its obligation. It is also alleged that notice for payment of arrears of tax was duly served on respondent no.3 but he failed to make the payment of the same and consequently recovery is being effected from the petitioner who stood surety for respondent no.3 and after satisfying that recovery of tax amount could not be effected from respondent no.3, the action against the sureties has been initiated. In terms of surety bonds steps for recovery of dues can be taken simultaneously in addition to action against the assessee. The arguments in this case have been heard on various dates. On account of variation in the stand between the petitioner and respondents 1 and 2 regarding communication of notice/ representation dated 3.5.1996 (P.2) claimed to have been sent by the petitioner withdrawing the surety bonds, we passed an order on 4.11.2009 directing the Assessing Authority- respondent no.2 to produce the record so as to ascertain the authenticity of the aforesaid notice. We had also directed the District and Sessions Judge, Faridabad to produce the file concerning Civil Suit No. 43 dated 21.1.1988 which was filed by the petitioner to ascertain the authenticity of the stand concerning the service of notice dated 3.5.1986(P.2). Accordingly record has been produced before us. A perusal of the record shows that no CWP No. 2241 of 1988 5 document in the form of notice dated 3.5.1986 (P.2) is available on record. We have further found that surety bonds dated 22.10.1983 are available on the record. of respondent no.2.As regards the judicial file concerning Civil Suit No.43 of 1988 in para 8(v) of the plaint, the petitioner had made following averments: “ That the plaintiff as a matter of abandoned caution informed the depts. On 15.5.1986 that the surety bonds alleged to have been given on behalf of the plff. Company and in favour of M/s Lakshmi Rattan Engg. Works Ltd., may be treated as revoked. In view of the expressed revocation made by the plff. Company and to the knowledge of the Deft. No. 1 and 2, the life of the surety bond at the utmost can survive till 6 months from the date of notice of revocation within the meaning of last clause of the surety bond where under the surety is entitled to terminate the surety bond after giving to the Assessing Authority six months notice in writing of the intention to do so and after the expiry of period of 6 months the liability of the surety stand terminated. The liability if any on the basis of the impugned surety bond, thus stood completely terminated and the plff. became completely exonerated from all consequences with effect after 14.11.1986 i.e. six months from the date of notice of revocation. Deft. Nos. 1 and 2 have thus no right to raise any claim against plff. on the basis of impugned surety bond which stands terminated with all consequential CWP No. 2241 of 1988 6 effects.” An application under Order 39 Rules 1 and 2 alongwith the suit read with Section 151 CPC was also filed. In para 4 of the application similar averments of revoking the surety bonds have been made. In reply to the application filed by respondent nos. 1 and 2 it has been specifically averred that the petitioner did not expressly revoke the surety bonds nor the Assessing Authority had ever rejected the surety bonds. We asked the petitioner to produce a copy of notice dated 3.5.1986 (P.2). All that has been produced before us is a photo copyof the notice with a office stamp which has the mark. It is claimed to be signature of ministerial staff. Therefore, it is not possible for us to conclude that any notice dated 3.5.1986 withdrawing surety bonds has ever been issued and we proceed the hear arguments on the aforesaid basis. Learned counsel for the petitioner has argued that surety bonds executed by the petitioner company was not accepted which infact was rejected vide order dated 7.1.1983. The petitioner furnished the fresh surety bonds which too were not accepted and the Assessing Authority- respondent no.2 vide order dated 5.12.1983 had summoned the principal debtor complaining that surety bonds for the assessment years 1974-75 and 1975- 76 under the HGST Act had been furnished whereas two surety bonds were required to be furnished under the CST Act. According to the learned counsel the principal debtor was apprised that the financial position of the petitioner sureties was not sound enough to meet the tax liability due. The principal debtor- respondent no.3 was directed to appear before respondent no.2. Therefore, it has been alleged that firstly the surety bonds were accepted and in any case the surety bonds were only confined to the CWP No. 2241 of 1988 7 payment of HGST Act and not for the payment of CST Act. Learned counsel has also placed reliance on the intimation regarding withdrawal of the surety bond dated 3.5.1986( P.2). We have already adverted to the aforesaid issue by referring to the record of the Assessing Authority – respondent no.2 and the record of the civil suit. It has further been urged that before any recovery is effected from the petitioner in any case efforts should have been made to effect recovery from the principal debtor- respondent no.3. According to the learned counsel respondent no. 3 is of sound financial position and the whole recovery could easily be effected from them. Learned State counsel on the other hand has submitted that the petitioner is making an attempt to wriggle out of the obligation incurred by the execution of the surety bonds by putting forward the false claim either by furnishing documents like notice dated 3.5.1986(P.2) or by placing reliance on the notice of appearance issued to the principal debtor- respondent no. 3 on 5.12.1986 (P.1). Learned State counsel has referred to the surety bonds, which is on record as Annexure P.3, summons of attendance and the surety bonds which have been duly executed by the petitioner. It includes the amount of CST and there is nothing on the record to show that the surety was confined only to the dues of tax under the HGST Act. Learned counsel has further pointed out that in pursuance to the order dated 20.10.1983 the surety bonds were furnished on 22.10.1983 which have not been withdrawn ever. It was in pursuance of furnishing of surety bonds that the appeals filed by the principal debtor - respondent no.3 were heard and dismissed on merit vide order dated 12.11.1987 by the Sales Tax Tribunal. Consequently the recovery was sought to be effected by issuing CWP No. 2241 of 1988 8 notice to the petitioner on 16.1.1988 (P.4). After hearing the learned counsel for the parties and perusing the record with their able assistance we are of the considered view that the petitioner cannot escape the fulfillment of obligation undertaken by them by executing surety bond on 22.10.1983. They have stood surety for the principal amount not in respect of State Sales Tax alone butalso in respect of Central Sales Tax. The principal amount stated is equal to sum of both due Sales Tax and Central Sales Tax. Under Section 128 of the Contract Act, 1872 the liability of the surety is co-extensive with that of principal debtor unless it is otherwise provided by the contract. A perusal of the terms of the surety bond executed on 22.10.1983 would show the obligtion assumed by the petitioner which reads thus : “ We (1) Pradip Kumar Gupta, Director of M/s Prestige Engg. (India) Pvt. Ltd. C8 Central Green area No.5, Faridabad (2) N.K.Gupta, Secretary of M/s Prestige Corp. Pvt. Ltd. B 103 Sector VI Noida, Ghaizabad (name and full address of the sureties) hereby declare ourselves to be sureties for the above bounden and guarantee that he/they shall do and perform all that he/they/has/have above undertaken to therein, we hereby bind ourselves jointly and severally to pay to the Government the sum of Rupees 562544000 (Rupees Five lac sixty two thousand five hundred and forty four only) in which the above bounden has bound himself or such other lesser sum as shall be deemed to be sufficient by the assessing authority to recover any sum payable by the above bounden and remaining unpaid and also to recover any loss damage, cost of expenses, which CWP No. 2241 of 1988 9 the Government may sustain, incur or pay by reasons of such omission, default or failure. AND we agree that the Government may, without prejudice to any other rights or remedies of the Government, recover the said sum from us, jointly and severally as arrears of land revenue.” Once the aforesaid stipulation has been made then the petitioner is bound to honour its obligation, which in law, is co-exentisve with that of the principal debtor- respondent no.3. It is well settled that a creditor can proceed against the principal debtor or against the surety unless it is otherwise provided in the contract. A surety cannot insist that the creditor should proceed either against the principal debtor or in case there is a co- surety then against such a co-surety first before proceeding against him. In that regard reliance may be placed on the observations made by the Hon'ble the Supreme Court in the case of Kailash Nath Aggarwal v. Pradkshiya Industrial and Investment Corporation of U.P. AIR 2003 SC 1886 and Amrit Lal Goverdhan Lalan v. State Bank of Travancore AIR 1968 SC 1432 In the present case, the stand of the respondents in para 2 of the written statement (on merits) is that notices were issued to the principal debtor- respondent no.3 to make payment of the tax due from him but he failed to make payment of tax. Accordingly even in equity it cannot be concluded that the department has not made efforts to first recover from the principal debtor- respondent no.3. Therefore, there cannot be any dispute with regard to the fact that the surety bonds executed by the petitioners have remained alive. They were neither rejected nor even successfully withdrawn by the petitioner. CWP No. 2241 of 1988 10 Reliance of the petitioner on the notice dated 3.5.1986 (P.2) is doubtful as the same has neither been found in the record nor there is any foundation for the same from the judicial record. Even otherwise such a withdrawal cannot be effective. The only possibility of the discharge of surety could be by virtue of any variance made in the terms of contract between the principal debtor and the creditor without the consent of the surety as has been contemplated by Section 133 of the Contract Act. Likewise, the surety can be discharged by the discharge of principal debtor as provided by Section 134 or in any of the situations postulated by Sections 135, 136 and 139 of the Contract Act. In the present case, there is nothing on the record which may attract application of the aforesaid provisions resulting in discharge of the petitioner as surety. Therefore, the impugned notice dated 16.1.1988 (P.4) issued by the respondent no.2 cannot be construed to suffer from any legal infirmity warranting interference of this Court. The claim made by the petitioner is wholly without any merit and is thus the petition is liable to be dismissed. For the reasons afore mentioned both these petitions fail and the same are dismissed. The record requisitioned from the office of District and Sessions Judge, Faridabad be sent back forthwith. The record of the Assessing Authority has been handed over by the Bench Secretary to the learned State Counsel. A copy of this order be placed on the file of connected case. (M.M.Kumar) Judge (Jaswant Singh) 15.12.2009 Judge okg