IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE V.GIRI TUESDAY, THE 19TH AUGUST 2008 / 28TH SRAVANA 1930 WP(C).No. 16460 of 2008(H) ----------------------------------------- PETITIONER: -------------------- VASANTHA ANIRUDHAN, S F S 5C, PATTOM SQUARE, MARAPPALLAM, PATTAM PALACE P.O, THIRUVANANTHAPURAM-695004. BY ADV. SRI.C.K.THANU PILLAI RESPONDENTS: ------------------------- 1. THE STATE OF KERALA, REPRESENTED BY THE SECRETARY TO GOVERNMENT, TAXES DEPARTMENT, SECRETARIAT, THIRUVANANTHAPURAM-1. 2. THE ASSISTANT COMMISSIONER (AUDIT ASSESSMENT), OFFICE OF THE DEPUTY COMMISSIONER (AUDIT ASSESSMENT), COMMERCIAL TAXES, THIRUVANANTHAPURAM. BY SPL. GOVERNMENT PLEADER SRI. VINODCHANDRAN THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 17/06/2008, THE COURT ON 19/08/2008 DELIVERED THE FOLLOWING: Kss WPC.NO.16460/2008 H APPENDIX PETITIONER'S EXHIBITS: EXT.P1: COPY OF CERTIFICATE NO.11016035 DTD. 13/08/1998 ISSUED BY THE SALES TAX OFFICER, IST CIRCLE, THIRUVANANTHAPURAM. EXT.P2: COPY OF CERTIFICATE NO.11011085 DTD. 13/08/1998 ISSUED BY THE SALES TAX OFFICER, IST CIRCLE, THIRUVANANTHAPURAM. EXT.P3: COPY OF STATEMENT RECORDED ON 11/03/2008 BY THE 2ND RESPONDENT. EXT.P4: COPY OF NOTICE NO.A4-11011085/01-02 DTD. 13/03/2008 ISSUED BY THE 2ND RESPONDENT. EXT.P5: COPY OF NOTICE NO.A4-22022085/02/03 DTD. 13/03/2008 ISSUED BY THE 2ND RESPONDENT. EXT.P6: COPY OF NOTICE NO.A4-11011085/03-04 DTD. 13/03/2008 ISSUED BY THE 2ND RESPONDENT. EXT.P7: COPY OF NOTICE NO.A4-11011085/04-05 DTD. 13/03/2008 ISSUED BY THE 2ND RESPONDENT. EXT.P8: COPY OF NOTICE NO.32010114104/05-06 DTD.13/03/2008 ISSUED BY THE 2ND RESPONDENT. EXT.P9: COPY OF NOTICE NO.32010114104/06-07 DTD.13/03/2008 ISSUED BY THE 2ND RESPONDENT. EXT.P10: COPY OF OBJECTION DTD. 25/04/2008 PRESENTED BEFORE THE 2ND RESPONDENT. EXT.P11: COPY OF OBJECTION DTD. 25/04/2008 PRESENTED BEFORE THE 2ND RESPONDENT. EXT.P12: COPY OF ORDER NO.32010114104/05-06 DTD. 03/04/2008 ISSUED BY THE 2ND RESPONDENT. EXT.P13: COPY OF ORDER NO.32010114104/06-07 DTD.03/04/2008 ISSUED BY THE 2ND RESPONDENT. Kss ..2/- ...2.... WPC.NO.16460/2008 H EXT.P14: COPY OF CERTIFICATE DTD. 17/05/2008 ISSUED BY THE UNION BANK OF INDIA, STATUE, THIRUVANANTHAPURAM. EXT.P15: COPY OF THE ASSESSMENT ORDER FOR THE YEAR 2001-2002 DTD. 31/03/2008. EXT.P16: COPY OF THE ASSESSMENT ORDER FOR THE YEAR 2002-03 DTD. 31/03/2008. EXT.P17: COPY OF THE ASSESSMENT ORDER FOR THE YEAR 2003-04 DTD. 31/03/2008. EXT.P18: COPY OF THE ASSESSMENT ORDER FOR THE YEAR 2004-05 DTD. 31/03/2008. EXT.P19: COPY OF THE REVENUE RECOVERY NOTICE DTD. 4/07/2008. RESPONDENT'S EXHIBITS: N I L /TRUE COPY/ P.S.TO JUDGE Kss “C.R.” V.GIRI, J. ------------------------- W.P.(C).No.16460 of 2008 ------------------------- Dated this the 19th day of August, 2008. JUDGMENT The petitioner, inter alia, challenges the validity of Section 26 of the Kerala Value Added Tax Act {hereinafter referred to as “the VAT Act”}. She also challenges the orders passed by the 2nd respondent levying penalty on the petitioner purportedly under Section 19C of the Kerala General Sales Tax Act (for short “KGST Act”} read with Section 26 of the VAT Act. The orders levying penalty, Exts.P11 and P12, are appealable in terms of the provisions of the Act. Since the learned counsel for the petitioner and learned Special Government Pleader made submissions as regards the constitutional validity of the provisions under challenge as also on the jurisdiction over the action taken by the authorities concerned, I have considered the contentions on merits, without relegating the petitioner to the alternate remedy available under the Act in circumstances where I was convinced that apart W.P.(C).NO.16460/08 :: 2 :: from the issue regarding the validity of the provisions of the Act, the question touching upon the jurisdiction of the authority to act under Section 26 of the Act genuinely arises for consideration in this writ petition. 2. The petitioner claims to be a house wife, having no business interestS whatsoever. The petitioner's husband late Anirudhan was a Government contractor. He expired on 5.11.2000. Later Anirudhan and the petitioner's son Biju Anirudhan had jointly conducted business under the name and style M/s.Vasan Enterprises. Apparently, this business was stopped on 30.5.1995. Biju Anirudhan thereafter commenced business under the name and style M/s.Anjaneya Motors, as a proprietary concern for the distribution of Opel Cars. The said concern also dealt with the spare parts of cars. M/s.Anjaneya Enterprises is registered under the KGST Act as also under the VAT Act. 3. On 21.2.2008, the petitioner received summons from the Assistant Commissioner, 2nd respondent to appear before him on 11.3.2008. Several questions dealing with the business of W.P.(C).NO.16460/08 :: 3 :: Biju Anirudhan the petitioner's son was put to her. The petitioner pointed that she has no information about her son's business as such. Her son had taken some private loans from her and these loans were repaid either in cash or by way of cheques. The petitioner's husband had two cars at the time of his death. Biju Anirudhan had taken those two cars. At the instance of her son, she stood as a guarantor for some loan taken by Biju Anirudhan from the bank. She was not a participant in the business run by Biju Anirudhan. For the purpose of enabling Biju Anirudhan to avail of a loan from State Bank of India, M.G.Road Branch, Thiruvananthapuram, the petitioner had made available the property belonging to her in Survey No.3639/2/5 of Kaudiar Village as an additional security, even at a point of time where the said property had already been mortgaged by the petitioner as a security for a housing loan availed by her. The petitioner has produced a copy of the statement recorded by the 2nd respondent on 11.3.2008 as Ext.P3. Either dissatisfied with the explanation or deposition, as it were, Exts.P4 to P9 notices W.P.(C).NO.16460/08 :: 4 :: were issued by the 2nd respondent proposing to impose a penalty on the petitioner under Section 19C of the KGST Act read with Section 26 of the VAT Act. These notices relate to the years 2001- 02 to 2006-07. Exts.P4 to P9 are almost identically worded, at least, insofar the portions therein relating to the petitioner are concerned. Since the submissions made by counsel referred to the contents of the notices and since the arguments had also centered around the exercise of jurisdiction by the 2nd respondent under Section 19C of the KGST Act or under Section 26 of the VAT Act, as the case may be, it would be useful to refer to the relevant portion of Ext.P4, which reads as follows: “6. On further enquiry also revealed that Smt.Vasantha Anirudhan, mother of the dealer has invested money to the business for a common interest of sharing profit on account of deposit of money in cash. Due to this reason,s he has mortgaged her property in Union Bank of India for raising fund for the business of M/sAnjaneya Motors which was a running business from 2000-01 in which she has invested money in cash and cheques. For example - She received cheques as follows: Federal Bank Ltd. - A/c.No.1686 W.P.(C).NO.16460/08 :: 5 :: Date Cheque No. Amount 17.07.02 504982 Rs.50000 26.04.03 555389 Rs.1,00,000 07.05.03 555394 Rs.3,00,000 07.05.03 555395 Rs.70000 09.05.03 555396 Rs.60000 Smt.Vasantha Anirudhan is therefore liable to be assessed u/s 19(c) of the KGST Act 1963.” 4. Exts.P10 and P11 are the replies given by the petitioner to Exts.P4 to P9 notices. The replies are dated 24.5.2008. The relevant portion of the replies reads as follows: “You have stated in the notices that on enquiry by you it is found that I have made investment in the business of M/s.Anjaneya Motors, stood surety for the loan raised by sri.Biju Anirudhan and shared profit from the business showing that 5 cheques for a total amount of Rs.5,80,000/- during the period from 17.7.02 till 9.5.03 has been received by me. Please note that M/s.Anjaneya Motors is a proprietary concern solely owned by Sri.Biju Anirudhan. According to my information he has obtained sales tax registration in his own name and conducted the business by he himself. I have W.P.(C).NO.16460/08 :: 6 :: absolutely no connection with his business or any other business. I am only a house- wife. I have pledged my properties with the Union Bank of India for the loan taken only on an additional collateral security. I have given the additional security as requested by my son and not because I have got any interest in his business. He has given me the above amount of Rs.5,80,000/- during the period from 17.7.02 till 9.5.03 towards the price of the cars owned by my husband and taken by him after his demise. The vehicles are one Opel Austra car bearing the Registration No.PY01 N-444 and Tata Seira bearing No.KL-01 J-4044 and it is not a sharing of profit as alleged. This has absolutely no connection with the business of my son in any way. It may please be seen that you have no materials to hold that I have participated in the business of my son M/s.Anjaneya Motors. Therefore, your statement that I have participated in the business of my son, M/s.Anjaneya Motors is false and frivolous and no details gathered were furnished to me.” 5. Apparently, the objections Exts.P10 and P11 were not taken into account by the 2nd respondent, nor was the petitioner afforded an opportunity of hearing as such. But the proposals made under Exts.P4 to P9 were confirmed and the orders in relation to the W.P.(C).NO.16460/08 :: 7 :: period of assessment 2005-06 and 2006-07, passed under Section 26 of the VAT Act, as Exts.P12 and P13 are under challenge in this writ petition. Since the counsel for the petitioner had raised a contention that the objections to the proposals to levy penalty, though dated 24.5.2008, were actually served in the office of the 2nd respondent prior to the date by Exts.P12 and P13, i.e., 3.4.2008; I had called for the files leading to Exts.P12 and P13 and Special Government Pleader Mr.Vinod Chandran has made available the same. The precise date on which the orders were despatched from the office of the 2nd respondent was not clearly available from the files as such. But the orders themselves show that an opportunity of hearing, as such, was not afforded to the petitioner before the passing of Exts.P12 and P13 orders. 6. I heard learned counsel for the petitioner Sri.C.K.Thanu Pillai and the learned Special Government Pleader Sri.Vinod Chandran. 7. I heard learned counsel on both sides on the question of validity of Section 26 of the VAT Act and on the question touching upon the W.P.(C).NO.16460/08 :: 8 :: jurisdiction of the 2nd respondent to pass an order under Section 26 of the VAT Act. 8. The challenge against the constitutionality of Section 26 of the VAT Act, I dare say, seems to be mounted on nebulous grounds. Since what is challenged is a provision in a plenary statute, the grounds available in this regard would be limited to the following: (a) Violation of the constitutional provisions. (b) Legislative competence (c) Repugnancy vis-a-vis the provisions of any Central Statute, within the meaning of Article 254 of the Constitution of India. 9. There is no challenge to Section 26 of the VAT Act on the ground that it is repugnant to the provisions of any Central Statute as such, occupying the same field. The challenge seems to be rested on the ground that the provision is violative of Articles 14 and 19 of the Constitution, to the extent to which the provision enables the competent authority to rope in the guarantor of an assessee also by way of a protective assessment under Section 26 of the VAT Act. This, it is contended, is violative W.P.(C).NO.16460/08 :: 9 :: of Articles 14 and 19. In an ambiguous way, it is also contended that since it is violative of Articles 14 and 19 of the Constitution, it should also be treated as beyond the legislative competence of the State legislature. I think, it is better to deal with the contention as posed by Sri.Thanu Pillai, in the course of his argument, than go by the pleadings in this regard in the writ petition. Section 26 of the VAT Act reads as follows: “26. Protective assessment:- Notwithstanding anything to the contrary contained in any judgment, decree, order, direction or decision of any Court, Tribunal or other Authority, where the assessing authority has reason to believe that any person is, or was carrying on business in the name of, or in association with any other person, either directly, or indirectly, whether as agent, employee, manager, Power of Attorney holder, guarantor or in any other capacity, such person and the person in whose name the registration certificate, if any, is taken, shall jointly and severally, be liable for the payment of the tax, penalty or other amount due under this Act which shall be assessed, levied and recovered from all or any of such person or persons, as if such person or persons are dealers: Provided that before taking action under this section, the persons concerned shall be W.P.(C).NO.16460/08 :: 10 :: given a reasonable opportunity of being heard.” 10. A similar view has been taken by the Supreme Court in a recent decision reported in Aslam Mohammed Merchant v. Competent Authority in {2008(3) KLT 400}. 11. Sri.Thanu Pillai's contention is that it might be open to the assessing authority to rope in any person, who is associated with the assessee as agent, employee, manager, power of attorney holder or any such like capacity. But, a guarantor as such, stands on a different footing. The contention is that an agent, in law, is entitled to represent the principal and in several cases, he is the alter ego of the latter. An employee or a manager, it is contended, would be a participant in the business. A power of attorney is another species of an agency. All these jural relationships, it is contended, contemplates a participation in the business of the principal, albeit to a limited extent. But a guarantor shares a different kind of jural relationship with the assessee. A contract of Guarantee, as defined under Section 125 of the Contract Act, treats W.P.(C).NO.16460/08 :: 11 :: the principal, creditor and guarantor as three different entities. The contract of guarantee is imprinted with certain specific characteristics and operates in a limited sphere. A guarantor, on the strength of a contract of guarantee, can never be a participant in the business run by the principal, and therefore, the legislature has acted beyond its competence in roping in the guarantor within the ambit of Section 26 of the VAT Act. 12. I am not impressed with this argument. With due respect to the learned counsel for the petitioner, the fallacy in the argument is rested on the assumption that the power under Section 26 of the VAT Act is exercised in such a manner as to rope in a person, who is associated with the business of the assessee, on the strength of or by reason of such association being relatable to the jural relationships mentioned in the provision. That is to say, the argument proceeds on the premise that agent, employee, manager or power of attorney holder of the assessee could be roped in on the strength of Section 26 of the VAT Act, W.P.(C).NO.16460/08 :: 12 :: merely by reason of such jural relationship with the assessee. But this is not what Section 26 of the VAT Act contemplates. The jurisdictional factor which enables the assessing authority to proceed under Section 26 of the VAT Act is that there should be reason to believe that any person is or was carrying on business in the name or in association with any other person. It is the actual association with the business of the assessee (or the person in whose name the registration stands) that fulfills the basic jurisdictional factor for the assessing authority to proceed against a person, other than the assessee under Section 26 of the VAT Act. If there is a business association between the assessee and the non-assessee, as the case may be, then the latter cannot claim immunity from a proceeding under Section 26 of the VAT Act by styling himself to be an agent, employee, manager, power of attorney holder or a guarantor. In other words, it is not the existence of the jural relationship between an agent and principal, employer and employee, employer and manager or a principal and Power of W.P.(C).NO.16460/08 :: 13 :: Attorney holder that gives rise to proceedings under Section 26 of the VAT Act. What the provision, therefore, provides for is that, if a person is associated with the business of another and the latter is an assessee or if the latter is actually a benami of the former, the mere fact that the non-assessee is in a position to pin on the label of an agent/employer/manager on his lapel should not give him the opportunity to escape the clutches of law. Section 26 of the VAT Act does not mean or is intended to mean that an agent/employee/manager or Power of Attorney holder of an assessee, would be automatically, vulnerable to be proceeded against under Section 26 of the VAT Act merely by reason of the fact that they are placed in such a jural relationship with the assessee as such. It is not the existence of a jural relationship between the principal and the agent, or an employee/employer or a principal and Power of Attorney that enables the assessing authority to invoke the power under Section 26 of the VAT Act. It is the association of the non-assessee with the assessee in the pursuit of W.P.(C).NO.16460/08 :: 14 :: business that would satisfy the jurisdictional factors contemplated under Section 26 of the VAT Act. 13. Once this position is accepted, then it follows, as a logical sequence that a “guarantor” as such is contemplated by Section 26 of the VAT Act only as a measure of making it clear that if a non-assessee is associated with the assessee, in the pursuit of latter's business, the mere fact that there is a jural relationship of a principal debtor and a guarantor will not stand in the way of the assessing authority legitimately proceeding under Section 26 of the VAT Act, provided the jurisdictional factors which are otherwise provided for are satisfied. In my view, the challenge mounted by the petitioner to Section 26 of the VAT Act on the ground that the legislature has no competence to rope in a guarantor also within the ambit of Section 26 of the VAT Act will, therefore, have to be held as misconceived and misplaced. 14. Further the challenge to the constitutionality or validity of a provision in W.P.(C).NO.16460/08 :: 15 :: a plenary statute carries with it in its wake an extremely onerous burden on the part of the person who mounts the challenge. The provision contained in the plenary statute reflects the will of the people and it could be interfered with only on extremely limited grounds. The law, on this point, has been referred to in extenso by the Supreme Court in Government of Andhra Pradesh and others v. P.Lakshmidevi {AIR 2008 SCW 1826). The following passage from the judgment of the Constitution Bench of the Supreme Court, in R.K.Garg v. Union of India {1981(4) SCC 675}, referred to in Lakshmidevi with respect, deserves reproduction. “Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. It has been said by no less a person than Holmes, J. that the legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrinaire or strait-jacket formula and this is particularly true in case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with, W.P.(C).NO.16460/08 :: 16 :: greater play in the joins has to be allowed to the legislature. The court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are involved. Nowhere has this admonition been more felicitously expressed than in Morey v. doud {354 US 457} where Frankfurter, J. said in his inimitable style: In the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint if not judicial deference to legislative judgment. The legislature after all has the affirmative responsibility. The courts have only the power to destroy, not to reconstruct. When these are added to the complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the judges have been overruled by events -- self- limitation can be seen to be the path and judicial wisdom and institutional prestige and stability. The Court must always remember that “legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that W.P.(C).NO.16460/08 :: 17 :: laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry”; “that exact wisdom and nice adaption of remedy are not always possible” and that “judgment is largely a prophecy based on meagre and uninterpreted experience”. Every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore, it cannot provide for all possible situations or anticipate all possible abuses. There may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid. The courts cannot, as pointed out by the United States Supreme Court in the Secretary of Agriculture v. central Reig Refining Company {94 L. Ed.381} be converted into tribunals for relief from such crudities and inequities. There may even be possibilities of abuse, but that too cannot of itself be a ground for invalidating the legislation, because it is not possible for any legislature to anticipate as if by some divine prescience, distortions and abuses of its legislation which may be made by those subject to its provisions and to provide against such distortions and abuses. Indeed, however great may be the care bestowed on its framing, it is difficult to conceive of a legislation which is not capable of being abused by perverted human ingenuity. The court must therefore adjudge the constitutionality of such legislation by W.P.(C).NO.16460/08 :: 18 :: the generality of its provisions and not by its crudities and inequities or by the possibilities of abuse of any of its provisions. If any crudities, inequities or possibilities of abuse come to light, the legislature can always step in and enact suitable amendatory legislation. That is the essence of pragmatic approach which must guide and inspire the legislature in dealing with complex economic issues.” [Emphasis supplied] 15. Sri.Vinod Chandran also refers to the judgment of a learned Judge of this Court in M/s.Kayemyes Trading Company v. State of Kerala and others {1994(2) KTR 401}, wherein a challenge against Section 19C was repelled by this court. Paragraph 10 of the said judgment eloquently speaks the mind of the court. The same also, with respect, deserves reproduction: “I do not find any substance in this contention either. Guidelines for the exercise of the power are found in the section itself, namely that the assessing authority should have reason to believe that any person is or was carrying on business in the name of or in association with any other person either directly or indirectly. The language of the section is clear without any vanguenesson ambiguity in it. It is W.P.(C).NO.16460/08 :: 19 :: clear enough as to the circumstances in which it applies. The intent of the section is obvious that the State should be able to recover the tax from the person really effecting the sale. The expression “reason to believe” is a well known term in the law of taxation (vide Section 147 of the Income Tax Act, 1961) and in administrative law and has never been understood as an expression of nebulous content, affiliated with the vice of arbitrariness. I hold that section 19C does not confer any arbitrary or undivided power making it