R.Vasinathan v. The Commercial Tax Officer (FAC) Ambattur Assessment Circle No.5, High Court Colony Villiwakkam, Chennai – 49

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATE : 28.01.2009CORAMTHE HON'BLE MR. S.J.MUKHOPADHAYA, ACTING CHIEF JUSTICEANDTHE HON'BLE MR. JUSTICE V.DHANAPALANW.A. NO. 1257 OF 2006W.P. NO. 14302 OF 2004ANDM.P. NO. 1 OF 2006 & W.P.M.P. NO. 16915 OF 20061. R.Vasinathan2. S.Narendran3. Thanananda Pillay4. P.V.Marimuthu.. Petitioner/Appellant- Vs -1. The Commercial Tax Officer (FAC) Ambattur Assessment Circle No.5, High Court Colony Villiwakkam, Chennai – 49.2. M/s.Vinayaka Garments Pvt. Ltd. Rep. By its Managing Director No.25, Sathya Nagar, Padi Chennai – 50... RespondentsWrit Appeal filed against the order dated 7th Sept., 2006,passed by the learned single Judge in W.P.M.P.No.16915 of 2006.Petition presented to this Court and pray that this Hon'ble Courtmay be pleased to stay all further proceeding pursuant to the orderof the first respondent dated 17.2.2004 in R.C.No.5735/95/A3 in sofar as the petitioners are concerned pending W.P. No.14302 of 2004as stated therein.Writ petition filed for the issuance of a writ of certiorari tocall for the records relating to the proceedings of the 1strespondent dated 17th Feb., 2004, in RC No.5735/95/A3, quash thesame insofar as the petitioners are concerned.For Appellants/Petitioners: Mr. R.Saravana KumarFor Respondents :Mr.Haja Naziruddin,Spl. G.P. (Taxes) https://hcservices.ecourts.gov.in/hcservices/ COMMON JUDGMENTTHE ACTING CHIEF JUSTICEThe writ petition was preferred by the petitioners againstnotice in Rc. No.5735/95/A3 dated 17th Feb., 2004, issued by the 1strespondent, Commercial Tax Officer (FAC), Ambattur AssessmentCircle, 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/= forthe year 1993-94 to 1995-96 under the Tamil Nadu General Sales TaxAct (hereinafter referred to as the 'TNGST Act') and Central SalesTax Act (hereinafter referred to as the 'CST Act') and thepetitioners being shareholders are liable to pay tax arrears.They have been asked to clear the entire arrears within astipulated period.During the pendency of the writ petition, interim order ofstay was passed on 19th May, 2004, but at the instance of the 1strespondent, the same was modified by order dated 7th Sept., 2006 andconditional interim order was passed subject to payment of 25% ofthe amount demanded. The writ appeal has been preferred againstthe modified conditional interim order aforesaid.2. According to the petitioners, they are the ex-directors ofthe company and, therefore, no demand can be made from them u/s 19or 19-A of the TNGST Act. The impugned notice dated 17th Feb.,2004, directing the petitioners, the directors of the company, topay the tax payable by the company is not sustainable in law underthe CST and TNGST Act and tax dues payable by the company cannot berecovered from the directors even after their resignation.The case of the petitioners is that the company was the dealerand assessee, which was liable to pay tax under the CST and TNGSTAct. The 3rd petitioner already died during the pendency of thewrit petition on 26th July, 2008, who earlier resigned from thecompany on 28th June, 1994. Petitioners 1, 2 and 4 resigned fromthe company on 16th Dec., 1996 out of whom petitioners 1 and 2 werenot involved in the day-to-day administration of the assesseecompany as they were working on the technical side and petitioners3 and 4 were not in any way involved in the administration of thecompany. After resignation of the petitioners from the assesseedealer company, the company continued with business and the companywas never wound up or liquidated and, hence, requested thecommercial tax officer to drop further proceeding. This matter wasbrought to the notice of the 1st respondent by reply dated 5th April,2004, but in the meantime as the 1st respondent took steps torecover the amount, the writ petition was preferred.3. Learned counsel appearing on behalf of the petitionerssubmitted that a Company having legal entity is separate from thedirectors. Section 19 of TNGST Act while makes it clear that evenafter a partner retires from the partnership firm, is liable to pay https://hcservices.ecourts.gov.in/hcservices/ tax of the firm assessed or unassessed, which is payable at thetime of his retiring, Section 19-A of the TNGST Act, on the otherhand provides that whether a partnership firm or association ofpersons is dissolved, then every member of the 'association ofpersons' or partners of the 'partnership firm' shall be jointly andseverally liable to pay the tax, even if the assessment is madeafter the dissolution. Therefore, partners in a 'partnership firm'are made personally liable for the tax. Similarly, members, whocontinue as 'association of partners' are personally liable inrespect of tax and other dues, but both under TNGST Act and CST Actthere is no enabling provision for charging tax or for recovery ofsuch tax and other dues personally from the directors, if amount ispayable by the company. Therefore, the petitioners, ex-directorsare not liable to pay tax or dues payable by the company.Further, according to the petitioners, the only provisionwhich deals with liability of directors of company is Section 19-Bof TNGST Act and Section 18 of CST Act, which are parimateriasimilar. But plain reading of such section would show that where adealer is a private company, then only when it is wound up, everyperson, who is a director of such company at the time of winding upshall be jointly and severally liable to pay the tax and other duespayable by such company. Therefore, directors of private companycan be made liable for payment of tax while Company is inexistence. Learned counsel appearing on behalf of the petitioners, whilereferred to tax liability which relates to the year 1993-94 to1995-96, but submitted that petitioners 1, 2 and 4 having resignedon 16th Dec., 1996, and the (deceased) 3rd petitioner having retiredon 28th June, 1994, cannot be held liable even though tax liabilityrelates 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 thecompany is a dealer under the TNGST Act and CST Act. Theregistration certificates were cancelled w.e.f. 1st April, 1997 fornon-renewal as per the provisions of the Act. The dealer lastfiled the annual return for the year 1996-97 under both the Acts on26th June, 1997 signed by one R.R.Vasudevan as Managing Director.Since then, the dealer has stopped carrying on business activityand, therefore, according to the Revenue, the business has beenwound up and there is discontinuance of the same. Rule-40prescribes intimation to be given in case of change of partners ofa firm or Director of a Company, but in the present case, thepetitioners have not intimated as per the rules regarding thechange of directors of the company, as Rule 40 prescribes that evenpartners are held jointly and severally responsible for payment oftax, fees and other amounts liable under the Act.Referring the definition of a 'Dealer' u/s 2 (g) of TNGST Actand the meaning of the word 'person' as defined under GeneralClauses Act it was submitted that as the word 'company' has not https://hcservices.ecourts.gov.in/hcservices/ 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 TNGSTAct and Section 3 (22) of the General Clauses Act, any person whoconstituted as a member of any association of persons, whether inthe form of a firm or company or Hindu undivided family would bemade personally liable for payment of tax due by any such businessentity. Moreover, nature of the levy under the TNGST Act beingindirect tax capable of being passed on to the customers andcollected at the time of each and every sale transaction, thepersons consisted in all so-called legal entities cannot refuse orevade payment of tax. In other words, a firm, company or Hinduundivided family carrying on business and having enabled to collecttax from their customers cannot escape the recovery of the sametaking refuge under the cloak of being a legal entity. Such aconstruction would virtually nullify the object of the Act and nocollection or recovery would ever be possible from a firm, companyor Hindu undivided family or other association. The stand of the1st respondent is that even the details of property of the companyor individual directors of the company has not been provided to the1st respondent or the sales tax department.5. The following facts were highlighted on behalf of the 1strespondent :- 1) The company carried on business from the assessmentyear 1993-94 to 1996-97 and thereafter its business wasdiscontinued and registration not renewed under the SalesTax Act.2) The assessment orders were duly served on thecompany and become final; the sum of Rs.18,25,048/= isthe settled arrears as against which the defaultercompany has paid only a sum of Rs.37,827/= during theassessment year 1993-94 and the sum of Rs.1,671/= for theassessment year 1995-96.3) The company is only in symbolic existence for thepast ten years. Without any business activity or affairscarried on and no positive evidence is forthcoming fromthe petitioners to show that the company is still activein the sense of carrying on business.4) While the petitioners are taking a plea that onlythe properties of the company could be proceeded againstfor recovery of arrears of sales tax and not against theindividual Directors personally, no statement isforthcoming with regard to the properties owned by thecompany to enable the authorities to enforce recoveryagainst the company.5) The company being enabled to collect the sales taxfrom their customers as an agent of the State, theretention of such amounts is an act of unjust enrichmentand being derogatory of public interest.6) Some of the directors are family members and thereis no proof regarding relationship of other Directors. https://hcservices.ecourts.gov.in/hcservices/ According to the learned counsel for the 1st respondent, theaforesaid facts would attract the 'doctrine of lifting of corporateveil'. 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 – SriMeenakshi Mills Ltd., Madurai reported in AIR 1967 SC 819 :: 63 ITR609, etc.6. We have heard the learned counsel for the parties andnoticed the rival contentions. 7. It has not been disputed by the 1st respondent that thepetitioners were the ex-directors of the 2nd respondent company, whoeither retired or resigned in the year 1994 and 1996. Theassessment relates to the years 1993-94 to 1995-96. The onlyquestion to be determined in the case is :-“Whether the 1st respondent can recover any amountfrom the petitioners, ex-directors, under any ofthe provisions of the TNGST Act, if amount is duefrom the 2nd respondent company.”8. The petitioners have pleaded that the 2nd respondent is acompany and not yet been liquidated. The counsel for the Revenue,while making submission, also submitted that the company is notunder liquidation and, hence, Chapter V of CST Act has noapplication.The relevant provisions are Sections 19, 19-A and 19-B ofTNGST Act and Rule 40 of the TNGST Rules as referred to by counselfor the parties.Section 19 contemplates 'liability of firms to pay any taxother amount'; under the said provision, the firm and each partnersof the firm are jointly and severally liable for such payment,which reads as follows :-“19. Liability of firms :- (1) Where any firm isliable to pay any tax or other amount under thisAct, the firm and each of the partners of the firmshall be jointly and severally liable for suchpayment.(2) Where a partner of a firm liable to pay anytax or any amount under this Act retires, he shall,notwithstanding any contract to the contrary, beliable to pay the tax or other amount remainingunpaid at the time of his retirement and any tax orother amount due up to the date of retirement,though unassessed.” https://hcservices.ecourts.gov.in/hcservices/ U/s 19, the firm as well as each of its partners are jointlyand severally liable for the tax or other amount; even a retiringpartner shall also be liable to pay the tax of the firm, assessedor unassessed, if remain unpaid at the time of retiring, which evencannot be saved by a contract to the contrary. Section 19 is notapplicable to a company or its directors/ex-directors, as theprovision is applicable to 'firms' and its partners.Section 19-A provides liability to tax on partition in Hindufamily, dissolved firm or other association of persons, as quotedhereunder :-“19-A. Liability to tax of partitioned Hindufamily, dissolved firm, etc. :- Where a dealer is aHindu undivided family, firm or other associationof persons, and such family, firm or association ispartitioned, or dissolved, as the case may be -(a) the tax payable under this Act by suchfamily, firm or association of persons for theperiod upto the date of such partition ordissolution shall be assessed as if no suchpartition or dissolution had taken place and allthe provisions of this Act shall apply accordingly;and(b) every person who was at the time of suchpartition, or dissolution a member or partner ofthe Hindu undivided family, firm, or association ofpersons and the legal representative of any suchperson who is deceased shall, notwithstanding suchpartition or dissolution, be jointly and severallyliable for the payment of the tax, penalty or otheramount payable under this Act by such family, firmor association of persons, whether assessment ismade prior to or after such partition, ordissolution.”Joint partnership firms, association and joint families ceaseto be legal entities on their dissolution or disruption. It is byoperation of clause (a) of Section 19-A, the dissolved firms,association and disrupted families are deemed to continue, by legalfiction, for the purpose of assessment of recovery of tax under theAct. Clause (b) is the mechanism for recovery of dues from thedissolved 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 quotedhereunder :-“19-B. Liability to tax of private company onwinding up :- Where a dealer is a private companyand such company is wound up, every person who was https://hcservices.ecourts.gov.in/hcservices/ a director of such company at the time of suchwinding up shall, notwithstanding such winding up,be jointly and severally liable for the payment oftax, penalty or other amount payable under this Actby such company whether assessment is made prior toor after such winding up unless he proves that thenon-payment of tax cannot be attributed to anygross neglect misfeasance or breach of duty on hispart 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 adirector of such company at the time of such winding up,irrespective of winding up, is held to be jointly and severallyliable for payment of tax, penalty and other amounts payable underTNGST Act by such company irrespective of assessment made whetherprior to or after the winding up. Thus it can be given effect evenwith regard to the assessment for a period prior to 6th Nov., 1997,irrespective of the fact whether such assessment has already beenmade or to be made. The question of applicability of thisprovision will arise in the present case only if the company hasbeen wound up. As we have already noticed and the 1st respondenthas also accepted that the company has not yet been wound up,merely because the renewal of licence of the company under theTNGST Act and CST Act have not been made, it cannot be presumedthat the 2nd respondent company has been wound up. In thisbackground, 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 partnersshall, at the time of submitting the applicationfor registration under Section 21 of the Act andevery registered dealer entering into or forming anew partnership in regard to his business shall,within thirty days of such event happening, send tothe registering authority and to the assessingauthority if he is different from the registeringauthority and if the firm, company or registereddealer has more than one place of business also tothe Commercial Tax Officer or the Deputy CommercialTax Officer in whose area of jurisdiction the firmor company or registered dealer has a place ofbusiness, a declaration in Form IX signed by allthe partners stating the names and addresses of allthe partners and their respective shares in thebusiness. If a partner retires without thepartnership being dissolved thereby he shall sendto the registering authority and to the assessingauthority if he is different from the registeringauthority and if the firm, company or registereddealer has more than one place of business, also to https://hcservices.ecourts.gov.in/hcservices/ the Commercial Tax Officer or the Deputy CommercialTax Officer in whose area of jurisdiction the firm,company or registered dealer has a place ofbusiness, a declaration in Form X within thirtydays of his retirement. Every partner shall bejointly and severally responsible for the paymentof the tax, fee or other amount leviable under theAct.”The aforesaid rule can be given effect only in the context ofSections 19, 19-A or 19-B, but all the aforesaid sections being notapplicable in the present case of petitioners, we hold that Rule 40is not attracted. Further from plain reading of Rule 40, it willbe evident that the said rule relates to submission of applicationfor registration and intimation to be given if the firm, company orregistered dealer has more than one place of business and in caseof retirement without the partnership being dissolved; it is not anenabling provision for notice for recovery of tax.10. So far as lifting of corporate veil is concerned, inabsence of any material fact before us, no finding can be given.Further, as no winding up order or any other order has been passedunder the Companies Act, it cannot be presumed that the company hasbeen wound up. Even if it is accepted that one or otherpetitioners are related to each other, in the capacity as ex-directors or shareholder, no notice can be issued against them u/s19-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, whetherpublic limited or private, are not personally liable for the debtsof the company unless the company court found them guilty of anymisfeasance 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 anagreement between the parties.There are other decisions in this regard referred to bylearned counsel for the petitioners, but in view of our findingthat in absence of any order of winding up, Section 19-B is notattracted in the present case of petitioners, it is not necessaryto discus other case laws.12. From the impugned notice dated 17th Feb., 2004, it will beevident that the 1st respondent issued the notice on presumptionthat the 2nd respondent is a 'firm'. In the 2nd paragraph it isstated that the petitioners being “shareholders of a defunct firm”are liable to pay tax arrears lies upon them also, thoughadmittedly the 2nd respondent is not a firm, nor the petitioners areshareholders of a defunct firm. The impugned notice having issuedon such misconception and having issued without jurisdiction, we https://hcservices.ecourts.gov.in/hcservices/ set aside the impugned notice dated 17th Feb., 2004, though it willbe open to the concerned authority to take recourse to any action,if permitted under any law. For the same reason, we also set asidethe interim conditional order dated 7th Sept., 2006, passed bylearned single Judge.Both the writ petition and the writ appeal are allowed withthe aforesaid observation. Consequently, connected miscellaneouspetitions are closed. There shall be no order as to costs. GLN Sd/- Assistant Registrar / True Copy / Sub. Assistant Registrar To1. The Commercial Tax Officer (FAC)Ambattur Assessment CircleNo.5, High Court ColonyVilliwakkam, Chennai – 49.2. The Section OfficerWrit Section,High Court, Madras-104.2 cs to Mr.R.Saravankumar, Advocate, SR.4116 & 41171 cc to Special Government Pleader, SR.3785km (co)dv/6.2. JUDGMENT IN W.A. NO. 1257 OF 2006 AND W.P. NO.14302 OF 2004