2005 (3) TMI 736 - HC - VAT and Sales Tax

Invalid Notices: Security Deposit Not Debt. Notices Quashed.

North West Karnataka Road Transport Corporation (NWKRTC) and another Versus State of Karnataka and others

The court held that the notices issued under section 14 of the Karnataka Sales Tax Act were not sustainable as the security deposit did not constitute a ... - Issues Involved:1. Validity of notices issued under section 14 of the Karnataka Sales Tax Act, 1957.2. Obligation of the petitioner-corporation to pay the security deposit before the expiry or termination of the contract.3. Interpretation of the subsisting relationship of debtor and creditor under section 14 of the KST Act.Issue-Wise Detailed Analysis:1. Validity of Notices Issued Under Section 14 of the Karnataka Sales Tax Act, 1957:The petitioners challenged the notices issued under section 14 of the Karnataka Sales Tax Act, 1957, which directed them to pay the security deposit held for the third respondent towards his tax arrears. The court examined whether the petitioner-corporation is obligated to pay the security deposit before the expiry or termination of the contract.2. Obligation of the Petitioner-Corporation to Pay the Security Deposit Before Expiry or Termination of the Contract:The petitioners argued that the security deposit held by the corporation is intended for the due performance of the terms and conditions of the contract and would become due only after the expiry of the period of the license or termination of the license, whichever is earlier. They contended that the amount in deposit is not a debt due by the petitioner to the third respondent and that there is no contractual relationship of debtor and creditor between them. The court agreed with this argument, noting that the security deposit becomes payable only after the contract's expiry or termination.3. Interpretation of the Subsisting Relationship of Debtor and Creditor Under Section 14 of the KST Act:Section 14 of the KST Act provides for the recovery of tax or penalty from persons who owe money to the dealer or hold money on account of the dealer. The court referred to precedents, including the Madras High Court's decision in Buddha Pictures v. Fourth Income-tax Officer and the Supreme Court's decision in Income-Tax Officer, Madras v. Budha Pictures, which established that a subsisting relationship of debtor and creditor must exist for the attachment to be valid. The court also cited Shanti Prasad Jain v. Director of Enforcement, which held that a contingent debt is not a debt until the contingency happens.In this case, the court found that the relationship between the petitioner-corporation and the third respondent is that of licensor and licensee, and the security deposit is intended for the due performance of the license. The court concluded that the security deposit with the corporation cannot be treated as a debt in existence, and the corporation is not liable to pay the amount to the defaulting assessee while the contract is subsisting. Therefore, section 14 of the KST Act is not applicable for attaching the security deposit.Conclusion:The court held that the notices issued under section 14 of the KST Act are not sustainable as the security deposit does not constitute a debt due by the petitioner-corporation to the third respondent while the contract is subsisting. The court quashed the notices and allowed the writ petitions.Separate Judgments:There were no separate judgments delivered by different judges in this case.Final Order:The writ petitions were allowed, and the notices at annexures C and D dated August 7, 2003, and the endorsement of annexure F dated December 8, 2003, were quashed. Rule made absolute. Writ petitions allowed.