IN THE HIGH COURT OF KERALA AT ERNAKULAM
OP.No. 2972 of 1998(D)
1. M/S.SUNDARAM FINANCE LTD
... Petitioner
Vs
1. THE TAHSILDAR, KOLLAM
... Respondent
For Petitioner :SRI.V.R.VENKATAKRISHNAN (SR.)
For Respondent :GOVERNMENT PLEADER
The Hon'ble MR. Justice PIUS C.KURIAKOSE
Dated :18/11/2008
O R D E R
PIUS C. KURIAKOSE, J.
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O.P. No. 2972 of 1998
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Dated this the 18th day of November, 2008
J U D G M E N T
M/s.Sundaram Finance Ltd., a public limited company engaged in
the business of financing by hire purchase and otherwise is the
petitioner in this original petition under Article 226. The respondents
were originally (1) the revenue recovery Tahsildar, Kollam (2) the
Kerala State Industrial Development Corporation (3) the Sun
Refineries (P) Ltd., Kollam represented by its Director one
D.Ravindran and (4) the State of Kerala. Later one R. Kumaresan,
R.Ganesh Sundar and D.Raveendran, Directors of Sun Refineries (P)
Ltd. were impleaded as additional respondents 5 to 7. The case of the
petitioner is that in the course of its business the third respondent
approached them for finance and as a consequence, hire purchase
agreements were entered into in respect of the machineries detailed
in the hire purchase agreement. The third respondent agreed to abide
by all the terms of the hire purchase agreement and under these
agreements an amount of nearly more than Rs.37 lakhs is due to the
petitioner company from the third respondent by way of instalment.
According to the petitioner, besides the hire purchase agreement an
additional letter of guarantee, guaranteeing payment of the amounts
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due under the hire purchase agreements was also executed in favour
of the third respondent. It is stated that the directors of the third
respondent company created a mortgage by deposit of title deeds
relating to the properties belonging to the Directors themselves
personally and these properties are situated in Sy. Nos. 7316, 7317
and 7318 of Thrikkadavoor Village within the limits of Thrikkadavoor
Panchayat in Kollam District. The petitioner came to know that the
third respondent had already borrowed money from the 2nd respondent
KSIDC in respect of the machineries which are subject to the hire
purchase agreement in their favour. While matters stood so, the first
respondent revenue recovery Tahsildar came forward with a plea that
large amounts are due to it by way of salestax arrears from the third
respondent to the 4th respondent State of Kerala. The grievance of the
petitioner is that the first respondent in spite of the mortgage of the
immovable properties by deposit of title deeds in petitioner’s favour
claimed priority under section 26B of the Amended Kerala General
Sales Tax Act, 1963. Petitioner points out that the mortgage in their
favour was executed as early as 25-8-1994 and a substantial portion
of the sales tax arrears allegedly due to the Government arose much
later than 25-8-1994 when the mortgage in favour of the petitioner
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was executed. The petitioner relies on section 2C of the Act (Amended
Kerala General Salestax Act, 1963) and contends that the liability of
the Directors of the Company are subject to the provisions of the
Companies Act in respect of liability to tax. The third respondent’s
liability, it is pointed out, is not unlimited, but it is limited only to the
assets of the company. It is contended that the property belonging to
the Directors personally cannot be proceeded against for the alleged
arrears of salestax because there is no provision in the Memorandum
of Articles of Association of the third respondent company indicating
unlimited liability. The Articles of Association of the Company is
produced by the petitioner along with I.A. No.10408 of 2006. The
Articles of Association does not say that the liability of the Directors is
unlimited . Petitioner relies on Section 322 of the Companies Act and
contends that section 26C of the Amended Kerala General Salestax
Act will not be attracted and that the first respondent is not entitled to
place reliance on the same. The petitioner also submits that based on
the mortgage the petitioner company filed O.S.107 of 1997 on the files
of the Sub Court, Kollam and obtained a decree against the third
respondent for recovery of a sum of Rs.26,84,254.81 with interest at
23% per annum. It is submitted that to the above judgment and
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decree the Directors of the third respondent company were also
parties and suffered the decree. Copies of this judgment and decree
are produced by the petitioner along with IA. No.11832 of 2005.
According to the petitioner, they are entitled to realise the decree debt
in O.S.107 of 1997 by sale of the properties described in schedule-B to
the decree and hence they filed the original petition seeking the
following relief:
1. Issue a writ of prohibition seeking to restrain respondents 1
and 2 from proceeding with the properties situated in Sy.
Nos. 7316, 7317 & 7318 (ReSy. No. 443/14 & 15) situated in
Thrikkadavur Panchayat and Village, for the alleged amounts
due from the 3rd respondent to the 2nd respondent;
2. for a declaration that the sale of the properties shall not
proceeded with and for a further declaration that until the
rights of the petitioner are established and satisfied
respondents 1 and 2 shall not proceed with the sale of the
properties mentioned above; and
3. for the issue of any other appropriate writ, direction or order
as may be deemed fit and necessary in the circumstances of
the case to meet the ends of justice.
2. The contentions raised on behalf of respondents 1 and 4 are
that the mortgage decree obtained by the petitioner will not absolve or
override the crown priority available under section 26B an 26C of the
K.G.S.T. Act. On behalf of R1 and R4 the first respondent has filed a
counter affidavit on 20-11-2000. It is contended therein that the third
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respondent is a registered dealer doing business in refined oil is in the
practice of purchasing refined oil from outside the State in bulk and
effecting sales of small quantities after packing. The third respondent
is an assessee on the rolls of Assistant Commissioner (Assessment),
Special Circle, Kollam. He filed returns claiming exemption as a
medium small scale industrial units. As there was no manufacturing
activity involved in the business his claim for exemption was rejected.
Accordingly final assessment for the year 1994-95 and provisional
assessments for the years 1995-96 and 1996-97 were completed. As
the third respondent failed to pay the tax it was advised for revenue
recovery and it is based on the revenue recovery requisition that
notices were issued under sections 7 and 34 to the third respondent.
It is also contended that since the transaction between the petitioner
and third respondent is one of hire purchase there is no debtor and
creditor relationship between them. It is pointed out that a total
amount of Rs.4.22 crores is due from the third respondent by way of
salestax arrears. Under section 44 of the Kerala Revenue Act, the
Government revenue has got first charge over the property of the
defaulter. The counter affidavit refers to Supreme Court judgment and
contends that the action of the respondents in attaching the property
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for sale for realisation of the salestax arrears is valid.
3. To that counter affidavit, the petitioner filed a reply affidavit
reiterating their contentions. It is pointed out that the third
respondent Sun Refineries appear to have started functioning only
from 10-7-1994 and it is therefore un-understandable as to how there
could be an assessment for the year 1994-96. Ext.P4 copy of the
invitation card relating to the inauguration of the factory of the third
respondent is produced. Ext.P3 produced along with the original
petition is referred to and it is submitted that Ext.P3 will reveal a
declaration of the owners of the property of their intention to create an
equitable mortgage by deposit of title deeds. Petitioner is a mortgagee
and a secured creditor in 1994 itself and has a precedence and priority
over the claims of respondents 1 and 4.
4. The second respondent KSIDC has filed a counter affidavit. It
is contended therein that the second respondent had granted term
loan of Rs.90 lakhs to the third respondent company on the security of
mortgage of immovable properties of land and buildings and
hypothecation of all movable assets. As security for the said loan an
agreement of hypothecation was executed by the third respondent
company on 24-8-1993 charging and hypothecating all the movable
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assets of the company including all movable plant and machineries etc.
The hypothecation and charge created by the third respondent
company on the said immovable and movable assets have been duly
registered with the Registrar of Companies on 26-8-1993. The
petitioner has no manner of right or claim in respect of the immovable
properties mortgaged to the 2nd respondent and the movable assets
hypothecated and charged to the 2nd respondent. The claim of the
petitioner that hire purchase agreements are executed and certain
items of machineries are said to be covered by the hire purchase
agreement executed long after purchase of the machineries and
equipments. It is pointed out that the petitioner has filed OP. No. 5822
of 1997 against the second respondent. In that O.P. the second
respondent has filed a detailed counter affidavit and seeks leave to
refer to the said counter affidavit. The alleged hire purchase
agreements are all subsequent to the purchase of the machineries as
per invoices in the name of the 3rd respondent company and
hypothecation and charge executed and created by the third
respondent company in favour of the 2nd respondent. Even the
registration of charge under section 125 of the Companies Act is long
after and subsequent to registration of charge made by the 2nd
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respondent regarding the movable and immovable properties of the
third respondent company. It is then pointed out that the third
respondent company has been ordered to be wound up by the
Company Court in C.P. No. 29 of 1998 and thereafter the Official
Liquidator has taken possession of the immovable and movable
properties and assets of the company from the second respondent on
1-9-2003. Thus whatever immovable and movable properties taken
over by the 2nd respondent under section 29 of the State Financial
Corporations Act have been taken over by the Official Liquidator
pursuant to orders of the Company Court. The company court
directed the second respondent to meet the security expenses and
advertisement expenses for sale of the properties mortgaged and
hypothecated to the 2nd respondent . If at all the petitioner has any
claim it has to be made to the Official Liquidator since he is the
custodian of the immovable and movable properties of the third
respondent company.
5. On 1st August 2006 an additional counter affidavit is filed on
behalf of R1 and R4. It is stated that this additional counter affidavit
is being filed after ascertaining the registration and assessment history
of the 3rd respondent from the office of salestax assessing authority for
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traversing various allegations in the writ petition as well as in the reply
affidavit. Exts. R1(a) and R1(b) are true copies of security
bonds/additional security executed by D.Raveendran, R.Kumaresan
and Soman Pillai, Directors of the third respondent company and it is
submitted that it was against these security bonds that salestax
registration was given to the third respondent company. The
executants of R1(a) and R1(b) are wholly liable to discharge the entire
tax liability of the assessee company. At the time of registration
enquiry they have agreed before the officer to ensure payment of the
tax dues by the assessee and in default by themselves and the
assessing officer had recorded their such statements on 23-7-1993.
Exts.R1(c) and R1(d) are true copies of the statements of
D.Raveendran, Ganesh Sundaram and R.Kumaresan. R1(e), R1(f)
and R1(g) respectively are the assessment orders passed by the
assessing authority against the third respondent company for the
assessment years 1994-95, 1995-96 and 1996-97 respectively dated
11-10-96, 31-1-2000 and 29-3-2001. These assessment orders have
become final and under section 23(3) of the KGST Act the third
respondent company owes the Government a sum of Rs.2,53,76,586/-
by way of tax dues and interest. Recovery proceedings initiated
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against third respondent company and properties of Raveendran,
Ganesh Sundaram and Kumaresan is perfectly legal and in order. The
statutory liability of the company and its directors is now clear from
the terms of section 26B and 26C of the KGST Act. The liability of the
guarantors is absolute and de hors the provisions of the Companies
Act. The plea that there is a prior mortgage and a decree in favour of
the petitioner will not in any way legally obliterate the preferential
right of the State to recover its salestax dues. Legal position is
settled by a catena of judicial pronouncements.
6. To the above additional counter affidavit the petitioner has
filed an additional reply affidavit. It is contended the security bonds
produced by the first respondent do not touch the points at issue
involved in the O.P. These security bonds are personal bonds and there
is nothing to enable the first respondent to proceed with the realisation
of the alleged arrears from the third respondent by proceeding against
the personal properties of the directors. It is reiterated that these
bonds do not relate to any mortgage or hypothecation of immovable
property. They are all at best personal liabilities which the directors of
the 3rd respondent might have been compelled to undertake to meet
salestax demands but do not touch the points at issue involved in the
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original petition. These bonds do not stipulate an undertaking by
which the immovable properties of the directors of the company are
made liable. These bonds and the so called depositions do not relate
to any immovable properties and the mortgage effected by the
directors of the company is not affected and the undertakings before
the salestax department and other incidental matters do not at all, go
to show that the personal properties of the directors of the 3rd
respondent are also liable for any alleged demands made by the
salestax department.
7. Respondents 5 to 7 have filed additional counter affidavit
which deals with Exts.R1(a) to R1(d) produced from the side of the
Government. It is contended that in none of the above documents the
additional respondents have given any undertaking as the Government
contends. It is submitted that no statement than what is produced as
Exts.R1 (a) to R1(d) have been given before any authority. In the
circumstances the contention of the Government that Kumaresan and
Soman Pillai have given separate undertakings on 1-4-1995 before the
Salestax Officer agreeing for prior charge on their properties in the
event of there being tax arrears for the company can only be false. It
is also contended that these additional respondents have resigned
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from the company on 2-8-1996 consequent to which they filed Form
No.32 before the Registrar or Companies on 3-8-1996 and had
informed the Salestax Officer about their resignation on 5-8-1996.
The first assessment for the year 1994-95 was conducted only on 19-
9-1996 subsequent to the resignation of these respondents. Section
26B and 26C were amended with effect from 1-4-1999 and as the
amendment is only prospective and since the respondents had
resigned prior to the amendment and even prior to the issuance of
assessment orders the amendment will not bind these respondents
and the contention raised on this basis is legally unsustainable.
8. In the light of the above additional counter affidavit from
respondents 5 to 7 respondents 1 and 4 have filed another additional
counter affidavit. The filing of a further additional counter affidavit is
explained by pointing out that since the assessing authority, the
Salestax Officer, First Circle, Kollam was not made a party in the
original petition the details of the undertaking which was given by
Sri.Kumaresan and Soman Pillai before the Addl. Salestax Officer,
Kollam could not be placed on record. Ext.R1(h) and R1(i) dated 1-4-
1995 are produced as the separate undertakings given by
Sri.Kumaresan and Soman Pillai before the Salestax Officer agreeing
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prior charge on their property in the event of company making default
in payment of taxes. It is pointed out that these undertakings are
incorporated in the assessment records in page Nos. 315 and 317. It
is argued on the basis of R1(h) and (i) that the guarantors have
expressed their willingness in unequivocal terms, to part with their
property in the event of default by the company of the salestax dues.
9. Extensive submissions were addressed before me by
Sri.V.R.Venkitakrishnan, senior counsel for the petitioners,
Sri.V.V.Ashokan, then Special Govt. Pleader, Taxes and after him by
Sri.K.P.Pradeep Spl. Govt. Pleader (Taxes). Sri.M.Pathrose Mathai,
senior counsel addressed me on behalf of the KSIDC and Sri.V.G.Arun,
learned counsel for additional respondents 5 and 7 also addressed me.
The submissions were on the basis of the pleadings raised by the
parties and Sri.V.R.Venkitakrishnan relied on the judgment of the
Supreme Court in Dena Bank v. Bhikhabai Prabhudas Parekh & Co.,
(2000)5 SCC 694 and the judgment of the Division Bench of this
Court in Sherry Jacob v. Canara Bank, 2004(3) KLT 1089.
Sri.V.V.Ashokan, then Spl. Govt. Pleader, Taxes in his submissions
would refer to the judgment of the Division Bench of this Court in
South Indian Bank Ltd. v. State of Kerala, 2006(1) KLT 65 and the
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judgment in State of Kerala v. Rajmohan Cashew (P) Ltd. 2005(2) KLT
131. Sri.K.P.Pradeep, Spl. Govt. Pelader, Taxes in his submissions
referred to the judgment of the Division Bench of this Court in South
Indian Bank Ltd. v. State of Kerala, 2006(1) KLT 65, the judgment of
the Division Bench of this Court in Hamsa v. Asst. Commissioner,
2008(3) KLT 180, the judgment of the Supreme Court in Dena Bank v.
Bhikhabai Prabhudas Parekh & Co.(2000)5 SCC 694, the judgment of
the Supreme Court in State Bank of Bikaner & Jaipur v. National Iron &
Steel Rolling Corporation and others, (1995) 2 SCC 19, the judgment
of the Division Bench of this Court in Jaya v. State of Kerala, 2005(2)
KLT 543, the judgment of this Court in Sherry Jacob v. Canara Bank,
2004(3) KLT 1089 and the judgment of this Court in SBT v. Recovery
Officer, 2007(2) KHC 626. Sri.V.G.Arun in his submissions referred to
the dissimilarities in the signatures of the Directors in the bonds Ext.R1
(b) and R1(d) and in the undertakings Ex.R1(h) and R1(i).
10. I have anxiously considered the submissions addressed at
the Bar in the light of the ratio emerging from the various decisions
cited before me. I am of the view that the petitioner cannot be granted
any relief in view of law as settled by the Supreme Court though the
common law doctrine of priority of crown debts would not extend to
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providing preference in crown debts over secured private debts. The
Supreme Court in State Bank of Bikaner & Jaipur v. National Iron and
Steel Rolling Corporation, (1995) 2 SCC 19 analysed the scope of
statutory charge over the earlier mortgage and after referring to the
judgment of the Court in Dattatreya Shanker Mote v.Anand
Chintaman Datar, (1974) 2 SCC 799 reiterated that the charge is a
wider term as it includes also a mortgage, in that, every mortgage is a
charge, but every charge is not a mortgage. It was held by the court
in the context of the application of the second part of section 100 of
the Transfer of Property Act dealing with charges unenforceable
against a bona fide transferee of the property for value without notice,
that the phrase “transferee of property” refers to the transferee of
entire interest in the property and it does not cover the transfer of only
an interest in the property by way of mortgage etc. Their Lordships
went on to hold that the first charge which is created under section 11
AAAA of the Rajasthan Sales Tax Act will operate on the property as a
whole and not only on the equity of redemption on the property alone
if the property is already under a mortgage in favour of some other
creditor. In fact, a Division Bench of this Court in Sherry Jacob
v.Canara Bank, 2004(3) KLT 1089 following the decisions of the
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Supreme Court in State Bank of Bikaner & Jaipur v. National Iron &
Steel Rolling Corporation & others, (1995) 2 SCC 19 and State of
Mamdhya Pradesh & another v. State Bank of Indore & others, (2002)
10 KTR 366 (SC) would refer to section 26B of the Kerala General
Salestax Act and observe that the said provision is in pari materia with
section 11 AAAA of the Rajasthan Salestax Act and Section 33C of the
Madhya Pradesh General Salestax Act and held that the statutory first
charge created under section 26B of the KGST Act will prevail over any
charge or right created in favour of the mortgagee/secured creditor. It
has been ruled unambiguously that the statutory first charge shall get
precedence over an existing mortgage right and that the precedence
or priority is not confined to right of redemption alone.
11. The learned senior counsel Mr.Venkitakrishnan’s argument
based on the mortgage decree obtained by the petitioner also will have
to be turned down in view of the decision of this Court in South Indian
Bank Ltd. v. State of Kerala, 2006(1) KLT 65. That was a case where
the mortgage in favour of the bank was of the year 1984 and the civil
court decree was passed in favour of the bank in 1995. The revenue
recovery proceedings and the attachment therein were years after the
mortgage and this court held in the following terms.
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“Decree passed by the civil court is the formal expression of an
adjudication, which exclusively determines the rights of
parties,but unless and until the decree is executed the Bank
would not procure the property and the State’s overriding rights
would have precedence over that of the Bank. When a first
charge created by the operation of law over any property that
charge will have precedence over an existing mortgage and the
decree obtained by the bank against the mortgagor will not affect
the State since State was not a party to the suit. Decree has only
conclusively determined the right between the mortgagor and
mortgagee, which would not affect the statutory rights of the
State. The expression “rights of parties” used in S.2(2) means
rights of parties to the suit. State which has got a statutory first
charge under S.26B of the K.G.S.T. Act would prevail over the
rights created in favour of the Bank by an unexecuted decree.
The decree obtained by the Bank will not have any precedence
over the first charge created in favour of the State under S. 26B
of the K.G.S.T.Act”
In fact this court also held in the above case that the right of the State
to have priority in the matter of recovery of sales tax from the
defaulters over the equitable mortgages created by them in favour of
Banks and financial institutions is no more res integra and that the
Supreme Court has already recognised the statutory first charge in
respect of salestax arrears. In fact the above decision is referred to by
a Division Bench of this Court in State of Kerala v. Rajmohan Cashew
(P) Ltd. 2005(2) KLT 131also. It is to be noted in this context that the
constitutionality of section 26A of the KGST Act, 1963 was upheld by
this court by judgment in Jaya v. State of Kerala, 2005(2) KLT 543
wherein it has been held inter alia that section 26A does not restrict or
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purport to impose any restriction on any freedom of trade by the
citizen of the country, but only to safeguard public interest. This court
in State Bank of Travancore v. the Revenue Recovery Officer and
others, 2007(2) KHC 626 would consider whether the RDB Act can
have any overriding effect over the Kerala General Sales Tax Act. This
court held that the purpose of the RDB Act which is applicable to the
banking institutions is only for speedy recovery of the amounts due to
them and not for creation of any statutory charge for banks or
financial institutions. In the absence of any conferment of statutory
charge neither the banks nor financial institutions can have any priority
over the statutory first charge which is applicable to the Government
under the KGST Act.
12. One of the arguments addressed by the learned senior
counsel which was shared by Mr.V.G.Arun, counsel for the additional
respondents was that section 26B which was introduced by the Finance
Act 1999 cannot have any retrospective operation and therefore the
amounts due to the petitioner company under the decree passed by a
competent civil court should be allowed to be recovered. It is difficult
to accept the above argument since I find that the Supreme Court in
State of Madhya Pradesh v. State Bank of Indore, 126 STC 1 dealing
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with section 33C of the Madhya Pradesh General Sales Tax Act, 1958,
a provision which is almost identical to section 26B of the Kerala
General Sales Tax Act would held as follows:
“In respect of the 2nd respondent’s sales tax dues, the State
claimed a first charge under Section 33-C upon the machinery in
priority to the charge held by the Bank. The trial court and the
High Court did not accept the State’s submission in this behalf.
In the view of the High Court, the bank’s charge on the
machinery was created on 5th September, 1974, that is, prior to
the enforcement of Section 33-C, and the subsequent loans
taken on January 23, 1979 and January 25, 1979 did not alter
the position in favour of the State. In its view, “the charge
created once remained valid and operative till repayment of the
loan as borrowed.” The High Court also took the view that the
appeal before it was flawed because it challenged the judgment
of the trial court and not its decree.
Section 33-C creates a statutory first charge that prevails
over any charge that may be in existence. Therefore, the charge
thereby created in favour of the State in respect of the sales tax
dues of the 2nd respondent prevailed over the charge created in
favour of the bank in respect of the loan taken by the 2nd
respondent. There is no question of retrospectivity here, as, on
the date when it was introduced, Section 33-C operated in
respect of all charges that were then in force and gave sales tax
dues precedence over them. This position in law is discussed in
detail in the judgment of this Court in Dena Bank v. Bhikhabhai
Prabhudas Parekh & Co. (2000) 5 SCC 694.”
It is then held by the Supreme Court that as on the date when the
statutory provision was introduced the provision operates in respect
of all charges that were then in force and gave salestax dues
precedence. This judgment in my opinion is applicable to the facts of
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this case and in view of the applicability of Section 26B of the KGST
Act no priority can be claimed by the petitioner over the properties
proceeded by the Government for recovering the salestax dues even if
there is prior mortgage and an unexecuted decree.
13. The argument of Mr.V.G. Arun and the learned senior
counsel Mr.V.R.Venkitakrishnan on the basis of section 322 of the
Companies Act also has to fail. This is a case where the Directors in
their personal capacity have guaranteed assured due payment of the
tax dues payable by the company. The explanation offered by the
State for not producing the undertakings submitted by the Directors
earlier is convincing.
14. The argument of Mr.V.G.Arun highlighting the dissimilarity
in the signatures on Exts.R1(h) and R1(i) and the circumstance of
those documents not being filed in the 1st instance does not impress
me. R1(h) and R1(i) do fasten personal liability upon the directors.
The result of the above discussion is that the O.P. fails and will
stand dismissed.
(PIUS C.KURIAKOSE, JUDGE)
ksv/-
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PIUS C.KURIAKOSE, J.
O.P. No. 2972 OF 1998
JUDGMENT
18th November, 2008