Real nature of transaction controlled sales tax liability where lease and registration were treated as a device to evade tax.

A lease arrangement for a distillery unit did not displace sales tax liability where the surrounding conduct showed the assessee continued to control the business in name and in substance. The continued registration, use of the assessee's delivery notes and C forms, common management features, and the lessee's failure to secure separate registration supported a finding that the arrangement was a device connected with tax evasion. Liability was therefore fastened on the assessee for the relevant assessment years, reflecting the real nature of the transaction and the practical continuation of business under the assessee's name. Recovery was directed to be attempted first from the lessee and then from the assessee if arrears remained unpaid.

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Issues: (i) Whether, despite the lease of the distillery unit to another company, the assessee remained liable for sales tax for the assessment years 1986-87 and 1987-88 under the Kerala General Sales Tax Act, 1963 and the Central Sales Tax Act, 1956. (ii) Whether the assessing authority was entitled to proceed first against the lessee for recovery and then against the assessee if any arrears remained unpaid.

Issue (i): Whether, despite the lease of the distillery unit to another company, the assessee remained liable for sales tax for the assessment years 1986-87 and 1987-88 under the Kerala General Sales Tax Act, 1963 and the Central Sales Tax Act, 1956.

Analysis: The lease deed, the continuation of the petitioner's registration, the use of the petitioner's delivery notes and C forms, the common management features, the absence of effective prosecution of separate registration by the lessee, and the failure to terminate the lease despite prolonged rent default together showed that the apparent arrangement did not reflect the real conduct of business. The Court applied the principle that where a business is carried on through a device or with connivance to evade tax, liability can be fastened on the person in whose name the business and registration continued, particularly where the record supported a finding of collusion and evasion. The Court also referred to the statutory principle reflected in Section 19C of the Kerala General Sales Tax Act, 1963, though it had come into force later, as indicating joint and several liability in such circumstances.

Conclusion: The assessee was liable for the sales tax dues for both years, and the assessment orders as sustained by the Tribunal were upheld.

Issue (ii): Whether the assessing authority was entitled to proceed first against the lessee for recovery and then against the assessee if any arrears remained unpaid.

Analysis: Since the assessment against the lessee had become final and the factual matrix showed that the lessee was the immediate operator of the unit during the relevant period, the Court considered it to direct recovery to be attempted first from the lessee. The direction was framed as a practical recovery sequence without disturbing the substantive finding of liability against the assessee.

Conclusion: The assessing authority was directed to proceed first against the lessee and thereafter against the assessee if recovery remained incomplete.

Final Conclusion: The tax revisions failed on the principal question of liability, and the assessments were maintained, with a recovery sequence directed in favour of the Revenue's collection efforts.

Ratio Decidendi: Where the formal lease and registration arrangements are shown to be a device and the surrounding conduct establishes that the assessee continued to control or enable the business to be carried on in its name, sales tax liability may be fastened on the assessee on the basis of the real nature of the transaction and joint responsibility for the tax dues.

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