Madras High Court Quashes The Criminal Proceedings Against Guarantor Of Assessee, For Assessee’s Failure To Pay Tax; States It's Only Contractual Liability And Not Criminal

The Commercial Tax Officer (CTO) filed a private complaint before the Judicial Magistrate against the assessee as well as the petitioner, who stood as a guarantor with respect to the tax arrears of the business done by the assessee.

The Court remarked that though the petitioner had executed an undertaking or a guarantee in favour of the assessee to the Commercial Tax Department, the same was merely an agreement for which the petitioner can be attached only with contractual liability and not criminal liability.

The bench of Justice R.N. Manjula added that the guarantor cannot be implicated as an accused for the default committed by the assessee, since the guarantor was not an assessee in the eyes of the Puducherry Value Added Tax Act, 2007.

The Commercial Tax Officer (CTO) filed a private complaint before the Judicial Magistrate for the alleged offences committed by the accused- P.K. Ali (2^nd respondent/ assessee) and Santhosh (petitioner/ guarantor), under the Puducherry Value Added Tax Act, 2007, the Puducherry Goods and Service Tax Act, 2017, and for the offences under Sections 418 and 422 of the Indian Penal Code, 1860 (IPC) read with Section 34 of IPC, amongst others.

As per the case of the CTO, the 1^st accused/ assessee, Ali, who is the proprietor of M/s. Al-Safa Chicken Agencies, did not file any returns and failed to pay the tax amount for the specified period. Further, the returns filed by the 1^st accused for the relevant year were not complete, and the returns did not tally with the monthly returns filed by him as well as with the actual sales made in the business, the CTO claimed.

The CTO alleged that though tax has been imposed on the 1^st accused, however, since the 2^nd accused/ petitioner, Santhosh, stood as a guarantor with respect to the tax arrears of the business done by the assessee, a demand was raised against him to pay the tax arrears.

Alleging that the petitioner, Santhosh, neglected the demand and failed to pay the tax arrears to the Commercial Tax Department, the CTO filed the complaint before the Magistrate.

Seeking to quash the proceedings pending before the Magistrate against him, Santhosh filed a petition under Section 482 of the Code of Criminal Procedure, 1973 (CrPC) before the Madras High Court.

The petitioner, Santhosh, submitted before the High Court that he is not an assessee within the meaning of Sections 59(1)(a) and 59(2)(a) of the Puducherry Value Added Tax Act, 2007. Since he is not an assessee, he should not be mulcted with the criminal liability for the failure of the 1^st accused to file the correct returns or pay the tax due, he pleaded.

To this, the CTO contended that the petitioner had executed an undertaking on a stamped paper, revealing his intention to pay the tax dues of the 1^st accused to the Commercial Tax Department, by standing as a guarantor. The petitioner had further stated that he would clear the tax dues on behalf of the 1^st accused on receipt of return intimation from the tax department, the CTO submitted.

Therefore, since the petitioner had given an undertaking, he was equally accountable and liable to face all the charges which might be taken against the 1^st accused, Ali, in the event of the latter’s failure to pay the tax in time, the CTO averred.

The High Court ruled that the petitioner/ 2^nd accused, Santhosh, cannot be implicated as an accused for the default committed by the 1^st accused, Ali, since the petitioner is not an assessee in the eyes of the Puducherry Value Added Tax Act.

“Though it is true that the second accused had given an undertaking to pay taxes, if the first accused fails to pay the same that cannot be the sole reason to fix the second accused also for the default committed by the first accused,” the Court held.

Unless the petitioner is the assessee in the eyes of the Puducherry Value Added Tax Act, he cannot be implicated as an accused for the default committed by the 1^st accused, who alone is the assessee, the bench said.

While holding that the petitioner, Santhosh, was also liable to pay the tax arrears in view of the undertaking or guarantee given in favour of the 1^st accused, Ali, to the Commercial Tax Department, the bench remarked that the same can be done only by taking a civil action for recovery.

The bench ruled that the undertaking or the guarantee executed by the petitioner to the Commercial Tax Department, can at best be called as an agreement, and for the same the petitioner can be attached only with contractual liability and not criminal liability.

The Court concluded that there was no basis for the criminal case filed against Santhosh since the complaint had been filed by presuming culpability on his part for failing to pay the tax dues of the 1^st accused, Ali.

“In view of the above stated reasons, I feel in order to serve the ends of the justice and to prevent the abuse of the process of the Court, the proceedings against the second accused alone should be quashed,” the Court said.

The Court thus allowed the petition and quashed the proceedings against the petitioner.

Case Title: Santhosh vs. The Commercial Tax Officer & Anr.

Citation: 2023 LiveLaw (Mad) 102

Dated: 10.01.2023

Counsel for the Petitioner: Mr. Krishnaprasath for M/s. Sarvabhauman Associates

Counsel for the Respondent: Mr. Raj Sharath for Mr. V. Balamurugane, Public Prosecutor for Puducherry.

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