Subhash Goyal vs State of Haryana and Others

Ajay Kumar Mittal, J.—By way of instant petition filed under Articles 226/227 of the Constitution of India, the petitioner has prayed for issuance of a writ in the nature of certiorari for quashing the summons dated 18.11.2013 (Annexure P-9) and dated 21.11.2013 (Annexure P-10) issued by respondent No. 3 seeking recovery of outstanding sales tax dues of respondent No. 4 which is in liquidation from the petitioner as an arrears of land revenue. Put shortly, the facts necessary for adjudication of the present petition as narrated therein may be noticed. M/s. Bhagwati Wooltex Pvt. Ltd. was incorporated in the year 1989 and was eligible to sales tax exemption under Section 13-B of the Haryana General Sales Tax Act, 1973 (in short "the Act") read with Rule 28-A of the Haryana General Sales Tax Rules, 1975 (hereinafter referred to as "the Rules") valid from 23.12.1994 to 22.12.2001 for a quantum Of Rs. 34,00,000/-. The petitioner was a Director in the said Company. The Company could not carry on production and, therefore, the Sales Tax Exemption granted to it was withdrawn vide order dated 24.2.2004 (Annexure P-1 Colly) passed by the Deputy Excise and Taxation Commissioner (ST), Pani-pat. The appeal filed against the said order was dismissed by the Joint Excise and Taxation Commissioner (A) vide order dated 1.8.2005 (Annexure P-2). Against the order dated 1.8.2005, the petitioner filed an appeal (Annexure P-3) before the Haryana Tax Tribunal (for brevity "the Tribunal"). Company Petition No. 130 of 2005 was filed against M/s. Bhagwati Wooltex for winding up of the company. This Court vide order dated 27.7.2006 (Annexure P-4) admitted the petition and appointed Official Liquidator to take over the assets of the company. Since the assets and liabilities were taken over by the Official Liquidator after 27.7.2006, he was asked to pursue the matter before the Tribunal and the Tribunal was informed in this regard vide letter dated 29.12.2006 (Annexure P-5). The Official Liquidator directed the petitioner to hand over all the books of account vide letter dated 31.7.2007 (Annexure P-6). The assessing authority issued notice dated 10.10.2013 (Annexure P-7) for recovery of outstanding sales tax dues of the Company amounting to Rs. 88,30,010/- under the Haryana VAT Act and Rs. 99,041/- on account of Central Sales Tax (CST) under the Central Sales Tax Act, 1956 (in short "CST Act") from the petitioner. The petitioner filed reply dated 19.10.2013 (Annexure P-8) to the said notice alleging that since the Company is in liquidation, the sales tax dues cannot be recovered from him. Accordingly, respondent No. 3 issued summons dated 18.11.2013 (Annexure P-9.) in pursuance to a surety which was given by the petitioner for recovery of Rs. 1,40,000/- and dated 21.11.2013 (Annexure P-10) to the petitioner for the recovery of outstanding dues amounting to Rs. 89,29,051/- relating to M/s. Bhagwati Wooltex Pvt. Ltd. on account of sales tax liability for the exemption period as arrears of land revenue. Hence, the present writ petition: The writ petition was contested by the respondents by filing two separate replies. Respondents No. 2 and 3 in the written statement pleaded that the petitioner had alternative remedy of appeal against the impugned summons. The liability of tax under the Act/VAT Act is Rs. 50,19,719/- and under CST Act is Rs. 39,09,332/- including interest, thus total- ling Rs. 89,29,051/-. Further, it was pleaded that the Director of a company in liquidation was liable for the outstanding tax as per the provisions of Section 18 of the CST Act. Respondent No. 4 in the written statement pleaded that realizable assets were not available in the hands of the Official Liquidator and, therefore, the Official Liquidator was not in a position to settle the dues of any creditors. With regard to tax dues pertaining to the period prior to winding up order dated 27.7.2006, the same could be recovered by the authorities in accordance with law. Further, it was pleaded that the Official Liquidator has filed an application under Section 481 of the Companies Act, 1956 before this Court for dissolution of the Company (in liquidation) and the same had been published in the newspaper vide order dated 16.8.2013 passed by this Court. The other averments made in the petition were controverted and prayer for dismissal of the writ petition was made. The petitioner filed replication denying the averments made in the written statement by respondents No. 2 and 3 and reiterated those of made in the writ petition. It has further been stated in the replication that recovery of tax cannot be made from the Director in view of the fact that a notification dated 4.9.1995 (Annexure P-11) has been issued under Section 8(5) of the CST Act.

Learned counsel for the petitioner submitted that there was no provision in the Act or Haryana Value Added Tax Act, 2003 (hereinafter referred to as "VAT Act") whereby the Director of a company which was in liquidation could be fastened with liability of the company. Reliance was placed upon the following judgments:--

"1. Tikam Chand Jain Vs. State Government of Haryana and Another, ;

Mukesh Gupta v. State of Haryana (1996) 8 PHT 326 (P&H);

Arun Kapoor Vs. Assistant Collector and Another, ;

Om Parkash Walecha Vs. State of Haryana and Others, ;

A.P. Raheja and Another Vs. State of Haryana and Others, ;

Nav Bharat Enterprises Ltd. Vs. The Sales Tax Officer, Ward No. 18, New Delhi and others, ;

M. Ishwarlal and Co. and Others Vs. State of Madras and Others, ;

Varuni Biomass Energy Products Private Ltd. Vs. The District Collector and Others, ."

On the other hand, learned counsel for the revenue supported the issuance of summons to the petitioner for recovery of the amount and relied upon Section 18 of the CST Act which reads thus:--

"Section 18- Liability of directors of private company in liquidation.-Notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), when any private company is wound up after the commencement of this Act, and any tax assessed on the company under this Act for any period, whether before or in the course of or after its liquidation, cannot be recovered, then, every person who was a director of the private company at any time during the period for which the tax is due shall be jointly and severally be liable for the payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company."

It was pleaded that the petitioner has failed to exhaust the alternative remedy of appeal against the notice under Section 13 of the Punjab Land Revenue Act; 1887. It was urged that the amount of Rs. 1,40,000/- was also being recovered from the petitioner as the liability had not been discharged where he had stood as surety.

In rebuttal, learned counsel for the petitioner relied upon notification dated 4.9.1995 (Annexure P-11) issued under Section 8(5) of the CST Act whereby it has been provided that no CST can be recovered from him, where valid exemption certificate under Rule 28A of the Rules has been issued and no tax under the CST Act has been charged by such dealer on the sale of goods manufactured by him. It was also argued that in view of notification dated 4.9.2005 (Annexure P-11), no recovery can be effected even under Section 18 of the CST Act. Further, alternatively it was urged that even under Section 18 of the CST Act if recovery is to be effected, where the Director is held responsible then also in the absence of any order having been passed thereunder, the summons (Annexures P-9 and P-10, respectively) could not have been issued to the petitioner for recovering the amount due from M/s. Bhagwati Wooltex Pvt. Ltd. Additionally, it was submitted that the company is still in liquidation and not yet wound up, therefore, Section 18 of the CST Act was not applicable in the present case.

After hearing learned counsel for the parties, on the basis of pleadings and submissions of learned counsel for the parties, the following points relating to recovery emerge for consideration in this petition:--

"(i) Sales tax liability of M/s. Bhagwati Wooltex Pvt. Ltd. relating to exemption period;

(ii) Liability under the CST Act for the same period;

(iii) Summon Annexure P-9 issued for recovery of Rs. 1,40,000/- as surety."

Adverting to issue (i), it may be noticed that it is trite law that recovery proceedings can be initiated in terms of the specific provisions in the statute. There exists no particular provision either under the Act or the VAT Act whereby the liability of the private limited company can be fastened on the directors of the said company and recovered from them. Unlike Section 179 of the Income Tax Act, 1961 where a director of a company can be held liable for recovery of tax due from the company on fulfilment of conditions enumerated therein or even under Section 18 of the CST Act which provides for recovery from the Director of a private limited company which is in liquidation under certain circumstances.

Similar view has been expressed in Mukesh Gupta, Tikam Chand Jain, Arun Kapoor, Om Parkash Walecha, A.P. Raheja, and Varuni Biomass Energy Products Private Ltd''s cases (supra).

Therefore, in view of the above legal position, the recovery on account of sales tax liability under the Act or VAT Act of M/s. Bhagwati Wooltex Pvt. Ltd. relating to exemption period cannot be recovered from the petitioner.

Taking up issue No. (ii), examining the argument of learned counsel for the respondents regarding Section 18 of the CST Act, it may be noticed that under Section 18 of the CST Act, when any private company is wound up and any tax assessed on the company under the said Act cannot be recovered, then every person, who was a director of the private company at any time during the period on which tax is due, shall be jointly and severally liable for the payment of tax unless he proved that the non-recovery cannot be attributed to any gross negligence, misfeasance or breach of duty on his part in relation to the affairs of the company. In the absence of taking any specific recourse to proceedings under Section 18 of the CST Act and passing of any valid order for effecting recovery of CST from the directors of the private limited company in liquidation, the proceedings relating to recovery of arrears of CST from the petitioner is held to be not permissible in law. Further, the respondents have not shown that the amount of tax recoverable under the CST Act cannot be recovered from the company. It is also not shown as to what efforts were made to recover the arrears of CST from the assets of the company. Thus, recovery of CST from the petitioner is unsustainable. However, it shall be open for the respondents to proceed to recover the amount on account of CST after taking proper action under Section 18 of the CST Act and considering the notification dated 4.9.1995 (Annexure P-11) issued under Section 8(5) of the CST Act.

Under issue No. (iii), the liability of the petitioner on account of non-payment of the amount due from the principal where he had stood surety cannot be doubted. However, in the absence of any notice having been issued before serving Annexure P-9, the action cannot be legally sustained being violative of principles of natural justice. It shall be open for the respondents to take action for recovering the aforesaid amount of Rs. 1,40,000/- for which the petitioner had stood surety after affording an opportunity of hearing to the petitioner in accordance with law.

The preliminary contention relating to availability of alternative plea, it needs to be observed that the action of the respondents in issuing Annexures P-9 and P-10 being without jurisdiction and in violation of principles of natural justice, the said objection pales into insignificance. In view of the above, Annexures P-9 and P-10 are legally unsustainable. Consequently, the writ petition is allowed and Annexures P-9 and P-10 are quashed. It is, however, directed that:--

"(i) In so far as recovery on account of sales tax liability under the Act or VAT Act is concerned, the same can be recovered from the company in accordance with law;

(ii) Further with regard to recovery of amount under the CST Act, it shall be open to the respondents to proceed in terms of Section 18 of the CST Act after following due procedure thereunder and considering notification dated 4.9.1995 (Annexure P-11) issued under Section 8(5) of the CST Act in accordance with law;

(iii) Amount of Rs. 1,40,000/- where the petitioner had stood surety can be recovered after issuing notice and affording an opportunity of hearing to him in accordance with law."