The Kerala High Court has held that a tax is not a debt liable to attachment under Code of Civil Procedure (CPC).
The bench of Justice Sathish Ninan and Justice Johnson John has observed that the nature and characteristic of a “tax” and its imposition and collection being a sovereign power, is not assignable except as authorised under Statue. Maybe, once the tax is collected and forms part of the State exchequer it ceases to have the characteristic of tax. However, till then, it retains the characteristic of tax and it cannot be assigned.
The bench opined that while a debt under Section 60 CPC is assignable, a tax is not assignable. Attachment prohibits transfer. Prohibition of transfer can only be against an assignable right. There could not be attachment of an unassignable right. Tax being unassignable, is not liable to attachment. Tax does not fall within the purview of ‘debt’ under Section 60 CPC.
Background
In execution of various land acquisition awards against the State, execution courts issued order of attachment/prohibitory orders and garnishee orders against the assessee. The orders related to the tax collected by the assessee (KGST, KVAT and Central Sales Tax) but which had not become due to the Government. In compliance with the garnishee orders, the assessee deposited such amounts before the execution court. However, the State issued assessment orders followed by penalty orders, alleging non-payment of the tax due from the assessee.
The assessee claimed that, in terms of Order XXI Rule 46F CPC, compliance with the garnishee orders amounts to valid discharge of the tax liability as against the State, to such extent.
The State on the other hand contend that, Sections 49A and 79A of the KGST Act and KVAT Act respectively, prohibited attachment of the tax collected and kept with the assessee before it became due to the Government. Hence the assessee could not have made payment of such amounts before the execution court. The deposits if any made are in contravention of the KGST Act and KVAT Act and hence cannot be reckoned/recognised in the assessment orders and in reckoning the tax paid, is the contention.
Issue Raised
Is Tax collected and kept by an assessee before it became due to Government in terms of Section 49A of the Kerala General Sales Tax Act, 1963 (KGST Act) and Section 79A of the Kerala Value Added Tax (KVAT Act) attachable by the Civil Court in execution of a decree?
Is there any conflict/inconsistency between Section 49A of the KGST Act and Section 79A of the KVAT Act with, Section 60 read with Order XXI Rule 46 and 46A of the Code of Civil Procedure, 1908(CPC)? In case of conflict, which is to prevail?
Is the assessee who deposited tax before an execution court pursuant to garnishee order under Order XXI Rule 46 and Rule 46A of CPC, entitled to discharge of pro-rata tax payable?
Arguments
The assessee contended that a debt is attachable under CPC. Sections 49A and 79A of the KGST Act and KVAT Act respectively, prohibits such attachment. Thus the provisions in the State Acts namely, the KGST and KVAT are in direct conflict with the Central Act viz. CPC. In case of conflict, in terms of Articles 246 and 254 of the Constitution of India, the Central Act has to prevail. Hence, Sections 49A and 79A of the KGST Act and KVAT Act respectively, are liable to be declared as unconstitutional, is the argument.
The assessee alternatively argued that even if the provisions in the State Acts are held to be valid, the assessee had made payments into the execution court in compliance with the garnishee orders issued by the court. The payments were not gratuitous. Hence they are liable to be adjusted towards the tax payable by the assessee, and the assessee is to be given a valid discharge to such extent. The assessee relied on Section 70 of the Indian Contract Act in support of the argument. Even if Section 70 of the Indian Contract Act as such is held to be inapplicable, equity warrants direction for such appropriation, it is urged.
The department contended that Tax is not a “debt” which could be subjected to attachment under the CPC. Hence there is no inconsistency/contradiction between the Central Act and the State Acts in question. Even assuming that there is contradiction, going by the doctrine of pith and substance, the KGST Act and KVAT Act are the subject matter which falls within Entry 54 in the State list (List II) in the VII Schedule to the Constitution and CPC falls within Entry 13 in the Concurrent list (List III). Even if there is slight encroachment, the State Acts will prevail.
Conclusion
The court held that Section 49A of KGST Act and Section 79A of the KVAT Act are unambiguous that, the Court shall not order attachment of tax collected but has not become due. The provisions are clear that they create a prohibition on attachment. On the effect of the provisions, there is no contention to the contrary.
The court held that the KGST and KVAT Acts stipulate payment of interest and penalty for default. Since the non-payment was not due to the fault of the assessee but in the peculiar circumstances obtaining, it is not appropriate to cast liability for penalty. Penalty is not for technical breach or for bonafide default, but can be levied only on established contumacious, dishonest or fraudulent conduct
The court disposed of the appeal and the writ petition
Case Title: BPCL Versus State of Kerala
Case No.: WA NO. 388 OF 2014
Date: 11/09/2024
Counsel For Petitioner: V.V.Asokan, R.Jaikrishna, K.I.Mayankutty Mather
Counsel For Respondent: Arun Ajay Shankar
