Writ petition filed for the issuance of a writ of certiorari to call for the records relating to the proceedings of the 1st respondent dated 17th Feb., 2004, in RC No.5735/95/A3, quash the same insofar as the petitioners are concerned.
Writ Appeal filed against the order dated 7th Sept., 2006, passed by the learned single Judge in W.P. No.14302 of 2004 as stated therein.
The writ petition was preferred by the petitioners against notice in Rc. No.5735/95/A3 dated 17th Feb., 2004, issued by the 1st respondent, Commercial Tax Officer (FAC), Ambattur Assessment Circle, whereby it has been informed that the 2nd respondent, M/s.Vinayaka Garments (P) Ltd., (hereinafter referred to as the 'Company') who did business are in arrears of Rs.13,25,868/= for the year 1993-94 to 1995-96 under the Tamil Nadu General Sales Tax Act (hereinafter referred to as the 'TNGST Act') and Central Sales Tax Act (hereinafter referred to as the 'CST Act') and the petitioners being shareholders are liable to pay tax arrears. They have been asked to clear the entire arrears within a stipulated period.
During the pendency of the writ petition, interim order of stay was passed on 19th May, 2004, but at the instance of the 1st respondent, the same was modified by order dated 7th Sept., 2006 and conditional interim order was passed subject to payment of 25% of the amount demanded. The writ appeal has been preferred against the modified conditional interim order aforesaid.
2. According to the petitioners, they are the ex-directors of the company and, therefore, no demand can be made from them u/s 19 or 19-A of the TNGST Act. The impugned notice dated 17th Feb., 2004, directing the petitioners, the directors of the company, to pay the tax payable by the company is not sustainable in law under the CST and TNGST Act and tax dues payable by the company cannot be recovered from the directors even after their resignation.
The case of the petitioners is that the company was the dealer and assessee, which was liable to pay tax under the CST and TNGST Act. The 3rd petitioner already died during the pendency of the writ petition on 26th July, 2008, who earlier resigned from the company on 28th June, 1994. Petitioners 1, 2 and 4 resigned from the company on 16th Dec., 1996 out of whom petitioners 1 and 2 were not involved in the day-to-day administration of the assessee company as they were working on the technical side and petitioners 3 and 4 were not in any way involved in the administration of the company. After resignation of the petitioners from the assessee dealer company, the company continued with business and the company was never wound up or liquidated and, hence, requested the commercial tax officer to drop further proceeding. This matter was brought to the notice of the 1st respondent by reply dated 5th April, 2004, but in the meantime as the 1st respondent took steps to recover the amount, the writ petition was preferred.
3. Learned counsel appearing on behalf of the petitioners submitted that a Company having legal entity is separate from the directors. Section 19 of TNGST Act while makes it clear that even after a partner retires from the partnership firm, is liable to pay tax of the firm assessed or unassessed, which is payable at the time of his retiring, Section 19-A of the TNGST Act, on the other hand provides that whether a partnership firm or association of persons is dissolved, then every member of the 'association of persons' or partners of the 'partnership firm' shall be jointly and severally liable to pay the tax, even if the assessment is made after the dissolution. Therefore, partners in a 'partnership firm' are made personally liable for the tax. Similarly, members, who continue as 'association of partners' are personally liable in respect of tax and other dues, but both under TNGST Act and CST Act there is no enabling provision for charging tax or for recovery of such tax and other dues personally from the directors, if amount is payable by the company. Therefore, the petitioners, ex-directors are not liable to pay tax or dues payable by the company.
Further, according to the petitioners, the only provision which deals with liability of directors of company is Section 19-B of TNGST Act and
Section 18 of CST Act, which are parimateria similar. But plain reading of such section would show that where a dealer is a private company, then only when it is wound up, every person, who is a director of such company at the time of winding up shall be jointly and severally liable to pay the tax and other dues payable by such company. Therefore, directors of private company can be made liable for payment of tax while Company is in existence.
Learned counsel appearing on behalf of the petitioners, while referred to tax liability which relates to the year 1993-94 to 1995-96, but submitted that petitioners 1, 2 and 4 having resigned on 16th Dec., 1996, and the (deceased) 3rd petitioner having retired on 28th June, 1994, cannot be held liable even though tax liability relates to assessment year prior to their resignation/retirement. Reliance was placed on decisions of one or other High Court, relevant of which will be discussed at the appropriate stage.
4. The stand of the 1st respondent Revenue is that the company is a dealer under the TNGST Act and CST Act. The registration certificates were cancelled w.e.f. 1st April, 1997 for non-renewal as per the provisions of the Act. The dealer last filed the annual return for the year 1996-97 under both the Acts on 26th June, 1997 signed by one R.R.Vasudevan as Managing Director. Since then, the dealer has stopped carrying on business activity and, therefore, according to the Revenue, the business has been wound up and there is discontinuance of the same. Rule-40 prescribes intimation to be given in case of change of partners of a firm or Director of a Company, but in the present case, the petitioners have not intimated as per the rules regarding the change of directors of the company, as Rule 40 prescribes that even partners are held jointly and severally responsible for payment of tax, fees and other amounts liable under the Act.
Referring the definition of a 'Dealer' u/s 2 (g) of TNGST Act and the meaning of the word 'person' as defined under General Clauses Act it was submitted that as the word 'company' has not been specifically defined under the TNGST Act, unlike CST Act, which has adopted the meaning assigned under the Companies Act, 1956, by virtue of the definition contained u/s 2 (g) of the TNGST Act and
Section 3 (22) of the General Clauses Act, any person who constituted as a member of any association of persons, whether in the form of a firm or company or Hindu undivided family would be made personally liable for payment of tax due by any such business entity. Moreover, nature of the levy under the TNGST Act being indirect tax capable of being passed on to the customers and collected at the time of each and every sale transaction, the persons consisted in all so-called legal entities cannot refuse or evade payment of tax. In other words, a firm, company or Hindu undivided family carrying on business and having enabled to collect tax from their customers cannot escape the recovery of the same taking refuge under the cloak of being a legal entity. Such a construction would virtually nullify the object of the Act and no collection or recovery would ever be possible from a firm, company or Hindu undivided family or other association. The stand of the 1st respondent is that even the details of property of the company or individual directors of the company has not been provided to the 1st respondent or the sales tax department.
5. The following facts were highlighted on behalf of the 1st respondent :-
1) The company carried on business from the assessment year 1993-94 to 1996-97 and thereafter its business was discontinued and registration not renewed under the Sales Tax Act.
2) The assessment orders were duly served on the company and become final; the sum of Rs.18,25,048/= is the settled arrears as against which the defaulter company has paid only a sum of Rs.37,827/= during the assessment year 1993-94 and the sum of Rs.1,671/= for the assessment year 1995-96.
3) The company is only in symbolic existence for the past ten years. Without any business activity or affairs carried on and no positive evidence is forthcoming from the petitioners to show that the company is still active in the sense of carrying on business.
4) While the petitioners are taking a plea that only the properties of the company could be proceeded against for recovery of arrears of sales tax and not against the individual Directors personally, no statement is forthcoming with regard to the properties owned by the company to enable the authorities to enforce recovery against the company.
5) The company being enabled to collect the sales tax from their customers as an agent of the State, the retention of such amounts is an act of unjust enrichment and being derogatory of public interest.
6) Some of the directors are family members and there is no proof regarding relationship of other Directors.
According to the learned counsel for the 1st respondent, the aforesaid facts would attract the 'doctrine of lifting of corporate veil'. Reliance was placed on decision of Supreme Court in Tata E & L Co. Ltd. - Vs State of Bihar reported in AIR 1965 SC 40 (para-24); the case of Jogilal Vs Lt. Commissioner, U.P. reported in AIR 1969 SC 932 (para-7); Delhi Development Authority Vs Skipper Construction Co. (P) Ltd. reported in AIR 1996 SC 205 (para-28); The Commissioner of Income-Tax, Madras Vs Sri Meenakshi Mills Ltd., Madurai reported in AIR 1967 SC 819 :: 63 ITR 609, etc.
6. We have heard the learned counsel for the parties and noticed the rival contentions.
7. It has not been disputed by the 1st respondent that the petitioners were the ex-directors of the 2nd respondent company, who either retired or resigned in the year 1994 and 1996. The assessment relates to the years 1993-94 to 1995-96. The only question to be determined in the case is :-
Whether the 1st respondent can recover any amount from the petitioners, ex-directors, under any of the provisions of the TNGST Act, if amount is due from the 2nd respondent company.
8. The petitioners have pleaded that the 2nd respondent is a company and not yet been liquidated. The counsel for the Revenue, while making submission, also submitted that the company is not under liquidation and, hence, Chapter V of CST Act has no application.
The relevant provisions are Sections 19, 19-A and 19-B of TNGST Act and Rule 40 of the TNGST Rules as referred to by counsel for the parties.
Section 19 contemplates 'liability of firms to pay any tax other amount'; under the said provision, the firm and each partners of the firm are jointly and severally liable for such payment, which reads as follows :-
19. Liability of firms :- (1) Where any firm is liable to pay any tax or other amount under this Act, the firm and each of the partners of the firm shall be jointly and severally liable for such payment.
(2) Where a partner of a firm liable to pay any tax or any amount under this Act retires, he shall, notwithstanding any contract to the contrary, be liable to pay the tax or other amount remaining unpaid at the time of his retirement and any tax or other amount due up to the date of retirement, though unassessed. U/s 19, the firm as well as each of its partners are jointly and severally liable for the tax or other amount; even a retiring partner shall also be liable to pay the tax of the firm, assessed or unassessed, if remain unpaid at the time of retiring, which even cannot be saved by a contract to the contrary.
Section 19 is not applicable to a company or its directors/ex-directors, as the provision is applicable to 'firms' and its partners.
Section 19-A provides liability to tax on partition in Hindu family, dissolved firm or other association of persons, as quoted hereunder :-
19-A. Liability to tax of partitioned Hindu family, dissolved firm, etc. :- Where a dealer is a Hindu undivided family, firm or other association of persons, and such family, firm or association is partitioned, or dissolved, as the case may be -
(a) the tax payable under this Act by such family, firm or association of persons for the period upto the date of such partition or dissolution shall be assessed as if no such partition or dissolution had taken place and all the provisions of this Act shall apply accordingly; and
(b) every person who was at the time of such partition, or dissolution a member or partner of the Hindu undivided family, firm, or association of persons and the legal representative of any such person who is deceased shall, notwithstanding such partition or dissolution, be jointly and severally liable for the payment of the tax, penalty or other amount payable under this Act by such family, firm or association of persons, whether assessment is made prior to or after such partition, or dissolution. Joint partnership firms, association and joint families cease to be legal entities on their dissolution or disruption. It is by operation of clause (a) of
Section 19-A, the dissolved firms, association and disrupted families are deemed to continue, by legal fiction, for the purpose of assessment of recovery of tax under the Act. Clause (b) is the mechanism for recovery of dues from the dissolved firms, etc. Section 19-B was introduced by Act 60 of 1997 w.e.f. 6th Nov., 1997 and is similar to
Section 18 of the CST Act and quoted hereunder :-
19-B. Liability to tax of private company on winding up :- Where a dealer is a private company and such company is wound up, every person who was a director of such company at the time of such winding up shall, notwithstanding such winding up, be jointly and severally liable for the payment of tax, penalty or other amount payable under this Act by such company whether assessment is made prior to or after such winding up unless he proves that the non-payment of tax cannot be attributed to any gross neglect misfeasance or breach of duty on his part in relation to the affairs of the company. It deals with liability on persons in a case where dealer is a 'private company' and is wound up. Every person, who was a director of such company at the time of such winding up, irrespective of winding up, is held to be jointly and severally liable for payment of tax, penalty and other amounts payable under TNGST Act by such company irrespective of assessment made whether prior to or after the winding up. Thus it can be given effect even with regard to the assessment for a period prior to 6th Nov., 1997, irrespective of the fact whether such assessment has already been made or to be made. The question of applicability of this provision will arise in the present case only if the company has been wound up. As we have already noticed and the 1st respondent has also accepted that the company has not yet been wound up, merely because the renewal of licence of the company under the TNGST Act and CST Act have not been made, it cannot be presumed that the 2nd respondent company has been wound up. In this background, no action can be taken by authorities against the ex-directors, including ex-directors u/s 19-B of the TNGST Act.
9. Counsel for the Revenue placed much reliance on Rule 40, which reads as follows :-
40. Every firm or company consisting of partners shall, at the time of submitting the application for registration under
Section 21 of the Act and every registered dealer entering into or forming a new partnership in regard to his business shall, within thirty days of such event happening, send to the registering authority and to the assessing authority if he is different from the registering authority and if the firm, company or registered dealer has more than one place of business also to the Commercial Tax Officer or the Deputy Commercial Tax Officer in whose area of jurisdiction the firm or company or registered dealer has a place of business, a declaration in Form IX signed by all the partners stating the names and addresses of all the partners and their respective shares in the business. If a partner retires without the partnership being dissolved thereby he shall send to the registering authority and to the assessing authority if he is different from the registering authority and if the firm, company or registered dealer has more than one place of business, also to the Commercial Tax Officer or the Deputy Commercial Tax Officer in whose area of jurisdiction the firm, company or registered dealer has a place of business, a declaration in Form X within thirty days of his retirement. Every partner shall be jointly and severally responsible for the payment of the tax, fee or other amount leviable under the Act. The aforesaid rule can be given effect only in the context of
Sections 19,19-A or 19-B, but all the aforesaid sections being not applicable in the present case of petitioners, we hold that Rule 40 is not attracted. Further from plain reading of Rule 40, it will be evident that the said rule relates to submission of application for registration and intimation to be given if the firm, company or registered dealer has more than one place of business and in case of retirement without the partnership being dissolved; it is not an enabling provision for notice for recovery of tax.
10. So far as lifting of corporate veil is concerned, in absence of any material fact before us, no finding can be given. Further, as no winding up order or any other order has been passed under the Companies Act, it cannot be presumed that the company has been wound up. Even if it is accepted that one or other petitioners are related to each other, in the capacity as ex-directors or shareholder, no notice can be issued against them u/s 19-B of the TNGST Act.
11. In Union of India Vs M.D.Lotlikar ((1988) 172 ITR 1) (Bombay), the Court held that the directors of any company, whether public limited or private, are not personally liable for the debts of the company unless the company court found them guilty of any misfeasance or wrongs.
In G.C.Malhotra Vs Deputy Collector ((1998) 110 STC 406) (Allahbad), the Court held that in case of a private company, recovery of tax dues from it cannot be made from its directors, unless permitted by specific provision of the law or by an agreement between the parties.
There are other decisions in this regard referred to by learned counsel for the petitioners, but in view of our finding that in absence of any order of winding up, Section 19-B is not attracted in the present case of petitioners, it is not necessary to discus other case laws.
12. From the impugned notice dated 17th Feb., 2004, it will be evident that the 1st respondent issued the notice on presumption that the 2nd respondent is a 'firm'. In the 2nd paragraph it is stated that the petitioners being shareholders of a defunct firm are liable to pay tax arrears lies upon them also, though admittedly the 2nd respondent is not a firm, nor the petitioners are shareholders of a defunct firm. The impugned notice having issued on such misconception and having issued without jurisdiction, we set aside the impugned notice dated 17th Feb., 2004, though it will be open to the concerned authority to take recourse to any action, if permitted under any law. For the same reason, we also set aside the interim conditional order dated 7th Sept., 2006, passed by learned single Judge.
Both the writ petition and the writ appeal are allowed with the aforesaid observation. Consequently, connected miscellaneous petitions are closed. There shall be no order as to costs.
GLN To The Commercial Tax Officer (FAC) Ambattur Assessment Circle No.5, High Court Colony Villiwakkam, Chennai 49