Adjustment of excess tax payment defeated alleged default and made penalty unsustainable under appropriation principles.

Where a sales tax assessee had an excess amount already lying with the department, a request for adjustment of that amount could operate as valid appropriation against the tax liability. The principles in sections 59 to 61 of the Indian Contract Act, 1872 apply to such adjustment unless displaced by the taxing statute, and the Kerala sales tax laws did not exclude them. The department's retention of the excess amount, coupled with its inaction on the assessee's request, did not establish a default for the relevant period. On that basis, penalty for alleged non-payment of sales tax and surcharge was not sustainable.

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Issues: Whether the assessee was a defaulter in payment of sales tax and surcharge under the Kerala General Sales Tax Act during the relevant period so as to justify penalty, having regard to the excess amount lying with the department, the assessee's request for adjustment, and the principles governing appropriation of payments.

Analysis: The liability relating to declared goods for the same period could not be treated as creating a genuine default when the department was already holding an amount paid by the assessee in excess of the tax ultimately found due under the Central Sales Tax Act. Payment may be made by adjustment, and where money belonging to the debtor is in the hands of the creditor and is available for appropriation, the debtor may direct its application towards a particular debt and the creditor must ordinarily give effect to that direction. The general principles embodied in sections 59 to 61 of the Indian Contract Act, 1872 apply unless excluded, and nothing in the sales tax enactments displaced those principles. The assessee's letter seeking adjustment was therefore effective, and the department's inaction did not establish default during the period before the excess amount was refunded.

Conclusion: The assessee was not in default for the relevant period and penalty was not sustainable.

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