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2018 (11) TMI 716 - HC - VAT and Sales TaxSurety Bond - VAT registration - Effect of Withdrawal of sureties - discharge from liability of being surety - Rule 19(4) of the Kerala Value Added Tax Rules, 2005 - Held that - Rule 19(2)(d) mandates that the bond should be in Form No.6 and that two sureties should sign it. If only one surety withdraws, then the bond remains with a single surety, though the Rule mandates it should contain two sureties. As seen from sub-rule (4), it does not provide for substitution of sureties. It only provides for the substitution of the bond, as one of many alternatives - In this case, the first bond has become unenforceable. If the Department s plea is to be accepted-that is, the second bond is to meet the additional demand on the dealer-then sub-rule (4) of Rule 19 remains unanswered. Even otherwise, Section 133 of the Contract Act may also come in the way of the Department s defence. Without the surety s consent, if the principal debtor and the creditor vary the contractual terms, then, that variation discharges the surety from the transaction and the liability. Viewed from either perspective, the Department s contention cannot be accepted. It must fail - petition allowed.
Issues:
Interpretation of Section 17 of the KVAT Act regarding sureties for tax dues and execution of bonds under Rule 19. Analysis: The judgment revolves around the dispute concerning the execution of bonds and sureties under the Kerala Value Added Tax (KVAT) Act. The case involves a dealer, the sixth respondent, who owed tax dues to the Department and had to execute a bond with two sureties under Section 17 of the Act read with Rule 19. The primary issue was whether the surety, Azeez, could be discharged from the liability of being a surety, as he requested to withdraw from the bond. The Department claimed that there were two bonds in place, one from 2011 and another from 2014, and sought to invoke both due to the dealer's default. The petitioner's counsel argued that according to the bond proforma, if one surety withdraws, the bond becomes void. Additionally, the Department had a new bond executed by the dealer with two other sureties, which should have substituted the old bond where Azeez remained the only surety. On the other hand, the Government Pleader defended the Department's actions, stating that the 2014 bond was for additional demand against the dealer and that only one surety, Kathiru Pilla, withdrew with the dealer's consent. The court examined Rule 19, which mandates the execution of a bond with two sureties and does not provide for the substitution of sureties. The court emphasized that even if one surety withdraws, the bond becomes unenforceable unless a new bond with two sureties is executed. The court highlighted that the Department's failure to take a new bond for the discharged surety rendered the first bond unenforceable. Moreover, the court pointed out that Section 133 of the Contract Act could discharge the surety if the contractual terms between the principal debtor and creditor are varied without the surety's consent. Ultimately, the court held that the Department's demand against the petitioner could not be sustained, and the Department could only proceed with the second bond. The writ petition was allowed, with no order on costs, in favor of the petitioner.
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