Reason to believe and natural justice failed where penalty orders rested only on guarantor status and collateral security.

Section 26 of the Kerala Value Added Tax Act was upheld against the constitutional challenge because it was construed as applying only where a person is actually carrying on business in the name of or in association with another, so the inclusion of a guarantor did not by itself make the provision unconstitutional. However, the penalty orders were quashed because the authority relied only on the fact that the person had stood as guarantor and furnished collateral, which was not a relevant basis to form the required reason to believe that the statutory condition was met. The objections were also not considered and no hearing was given, amounting to breach of natural justice.

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Issues: (i) whether section 26 of the Kerala Value Added Tax Act, 2003 is unconstitutional for enabling action against a guarantor associated with the business of another person; (ii) whether the impugned penalty orders under section 26 were vitiated for want of relevant reasons to believe and for breach of natural justice.

Issue (i): whether section 26 of the Kerala Value Added Tax Act, 2003 is unconstitutional for enabling action against a guarantor associated with the business of another person.

Analysis: The provision was construed as operating not merely on the basis of labels such as agent, employee, manager, power of attorney holder or guarantor, but on the substantive jurisdictional fact that the person proceeded against is or was carrying on business in the name of, or in association with, another person. The inclusion of a guarantor did not enlarge the provision beyond legislative competence, because liability depends on actual business association and not on the mere existence of a contract of guarantee. The challenge under Articles 14 and 19 of the Constitution of India was therefore not made out.

Conclusion: The constitutional challenge to section 26 failed and was rejected.

Issue (ii): whether the impugned penalty orders under section 26 were vitiated for want of relevant reasons to believe and for breach of natural justice.

Analysis: The material relied on by the authority showed only that the petitioner had stood as guarantor and had given collateral security for a loan. That circumstance, by itself, did not establish participation in the business so as to satisfy the statutory condition of reason to believe. The reasons recorded were held to be irrelevant to the jurisdictional requirement under section 26. In addition, the objections raised by the petitioner were not considered and no hearing was afforded before passing the orders, resulting in violation of natural justice.

Conclusion: The impugned orders were invalid and liable to be quashed.

Final Conclusion: The petitioner succeeded only in part, as the constitutional challenge to the provision failed, but the assessment orders were set aside for want of valid jurisdictional and for breach of fair hearing.

Ratio Decidendi: Under a protective assessment provision, liability of a person associated with another's business depends on an objectively relevant reason to believe based on actual business participation, and not on the mere status of guarantor or collateral provider; orders passed without such basis and without affording a hearing are invalid.

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