In Varghese John v. CTO & Ors, a division bench of the Kerala High Court categorically held that the security amount deposited through a bond in form No. 6 under the Kerala Value Added Tax Act, 2003 can be adjusted towards prior liabilities of the assessee.
The appellants/petitioners, in the instant case, have executed the security bond in form No.6 before the first respondent agreeing to satisfy any liability of the second respondent under the KVAT Act to the extent of Rs.15,00,000/-.
The sole grievance of the appellant was that the department proposed to set off the earlier arrears out of the security bond issued by the appellants.
When the order was challenged before the High Court, the Single Judge upheld the action of the department and said that the terms of the bond was clear and unambiguous, insofar as the petitioners have stood sureties for any default or failure occasioned on the part of the second respondent, the dealer in satisfying the tax liability, under the KVAT Act. “Despite the liability being limited to the extent of Rs.15,00,000/-, there cannot be any contention taken of the prior liability being not covered under the security bond”, the Court said.
On appeal, the division bench, after analyzing Rule 19 of the KVAT Rules observed that the execution of a security bond in form No.6 is one of the modes by which the security or additional security demanded by the Assessing Officer can be satisfied by the dealer. “It also speaks of deposit as security in the Government Treasury of the amounts fixed by the authority. If such amounts were so deposited, the dealer could not have taken up a contention that security amount deposited could be adjusted only towards the future debts. Likewise, when a security bond is executed in form No.6, there is no stipulation either in the Rule or in the form that the bond would apply only to the default occasioned in future. The liability though was prior to the execution of the bond by the petitioners, remained due even after the bond was executed. In such circumstances, there can be no fault found in the recovery attempted by the petitioners.”
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