Mukesh D. Ramani Vs State of Maharashtra (Bombay High Court)
It is settled law that liability for duty of the company cannot be fastened upon the Directors of the company unless there is statutory provision to that effect. Since the BST Act did not contain any provision to the effect making the Directors liable for the dues of the company, no amount is recoverable under the BST Act from the Directors of the company for the dues recoverable from the Company. There were no provisions in the BST analogous to Section 44(6) of the MVAT Act or Section 18 of the CST Act or Section 89 of the MGST Act. Therefore, even for a moment we assume that the BST Act has not been repealed and continues to be in force, even then no recovery would lie in law against the Directors of the company for the company’s dues. As correctly submitted by Mr.Sridharan what cannot be done directly cannot be done indirectly. Therefore, no amounts are recoverable from petitioner as Director of the company under the BST Act. Even the Punjab and Haryana High Court in Narinder Singh vs. Union of India2 in paragraph nos.5 and 7 held [as has been held by this court in Satish D. Sanghavi (supra)] as under :
5. It is well settled that in the absence of any specific provision in the statute, the duty/penalty liability of the company cannot be recovered from the assets of its director. The Director is not personally liable towards liability of the company. This court while delving into an identical issue in Subhash Goyal vs. State of Haryana and Others, 2014(4) PLR 343 held that in the absence of taking any specific recourse to proceedings under Section 18 of the Central Sales Tax Act, 1956 and any valid order for effecting recovery of arrears of sales tax from the directors of a private limited company in liquidation, the proceedings relating to recovery of arrears of tax from the petitioner being a director were not permissible in law.
7. In view of the above, the action of the respondents in compelling the petitioner to clear the dues of the company cannot be sustained. The petition is allowed. However, the respondents shall be at liberty to proceed against the company for clearance of its dues in accordance with law.
(emphasis supplied)
Undoubtedly Section 18 of the CST Act is a statutory provision to the effect that liability for dues of the company can be fastened upon the Directors of the company. Section 18 of the CST Act at the same time provides that when a company has been wound up after the commencement of the Act (which in this case has happened) and any tax assessed on the company under the CST Act for any period, whether before or in the course of or after its liquidation (in this case it is before its liquidation) cannot be recovered, then every person who was the Director of the company, and it should be a private company (which in this case was), at any time during the period for which tax was due shall be jointly and severally liable for the payment of such tax. Section 18 also provides for an escape route for the Director. It says where the Director prove 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, he shall not be liable for the payment of tax dues under the CST Act from the company.
This provision, i.e., Section 18 of the CST Act which is analogous to Section 89 of the MGST Act in fact provides for vicarious liability of the Directors of the Company for payment of tax dues which cannot be recovered from the company. Such liability could be avoided if the Director proves that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of the duty on his part in relation to the affairs of the company. Of course, responsibility of establishing such facts is cast upon the Directors. Once the Director places before the authority his reasons why it should be held that non-recovery cannot be attributed to any of the three factors, the authority would have to examine such grounds and come to a conclusion in this respect. As long as the Director establishes that non-recovery of the tax cannot be attributed to his gross neglect or misfeasance or breach of his duty in addition to the affairs of the company, his liability under Section 18 of the CST Act or Section 89 of the MGST Act would not arise. We have to note that the legislature at the same time used the words gross neglect and not mere neglect on his part.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
1. With the consent of the parties taken up for disposal at the admission stage itself since pleadings are completed. Rule. Rule made returnable forth with.
2. Petitioners, long time ago were Directors of a company Twin City Organics Pvt. Ltd. (the company). Respondent No. 1 is the State of Maharashtra and Respondent Nos. 2 and 3 are officers exercising powers under the Maharashtra Goods and Services Tax Act, 2017 (the MGST Act) and the Bombay Sales Tax Act, 1959 (the BST Act) and the Central Sales Tax Act, 1956 (the CST Act).
Facts in all the three petitions are almost identical save and except the dates on which petitioners joined the Board of Directors of the company and their date of resignation differ. The facts mentioned in this judgment are from Writ Petition (L) No. 2121 of 2022.
3. Petitioner is impugning an order dated 27th September 2021 passed by Respondent No.3, the consequential Notice of Demand dated 27th September 2021 issued under Section 38 of the BST Act and Final Notice of Assessment dated 27th September 2021 in Form VIII (B) under the CST Act. According to petitioner, the order, consequential notice of demand and final notice of assessment are illegal, violate of the principles of natural justice and contrary to the provisions of the MGST Act, BST Act and CST Act.
4. The company was incorporated as a private limited company on 25th May 1973 and registered with the Registrar of Companies, Mumbai. The Directors of the Company as on 1st January 1990 were one Harbhajan Singh Dhillon, Rajlaxmi Babu, Prakash D. Sanghavi (Petitioner in Writ Petition (L) No. 2133 of 2022) and Satish D. Sanghavi (Petitioner in Writ Petition (L) No. 2129 of 2022).
5. On or about 26th September 1990 one Praful N. Vaghani was appointed as Director of the company. Praful N. Vaghani resigned sometime in July 1992 and the resignation was accepted on 29th July 1992. On 29th July 1992 Mukesh D. Ramani (Petitioner in Writ Petition (L) No. 2121 of 2022) was appointed as Director of the company.
Sometime in July 1994 the company closed its manufacturing unit which according to petitioner was due to coercive action by the Excise Department. Petitioner (Mukesh D. Ramani) resigned as a Director of the company sometime in March 1995 .
6. The company thereafter filed a case before the Board for Industrial and Financial Reconstruction (BIFR) constituted under the Sick Industrial Companies Act and at the hearing held on 4th February 1997 the Board noted that the company satisfied all the criteria of sick industrial company and held accordingly.
7. Prior thereto, on or about 14th July 1995, Bank of India filed suit for recovery of about Rs.1.53 Cores and further interest from the company and in April 1996 this court appointed Receiver to take possession of the manufacturing unit. In view of the BIFR accepting reference of the company as a sick unit Bank of India was appointed as Operative Agency. On 24th October 1997 a joint meeting of all interested parties to discuss proposal of rehabilitation scheme was fixed by Bank of India as Operative Agency. Bank of India, as the operating agency, submitted report dated 13th November 1997 as also Minutes of the joint meeting held on 24th October 1997. At the meeting representatives of Sales Tax Department, Central Excise Department, Income Tax Department and Reserve Bank of India etc. were present. Reasons for sickness also was mentioned. The reasons for sickness is not attributable to petitioner. The reasons are recorded as under :
Reasons for Sickness
5.1 Originally, the demand of the country for camphor was substantially met through the single manufacturer (CAMPHOR & ALLIED PRODUCTS LTD.) and imports. As the import duty was to the extent of 190%, TOPL also enjoyed a sheltered market for its products within the country. Consequent upon liberalization of the economy, the import duty was reduced to 65% in 1995 and to 30% in 1997 making imports cheaper.
5.2 Reserve Bank of India (RBI), in view of the then foreign exchange reserve crunch, imposed margin for some time in 1991-92 in respect of foreign Letter of Credit (LC) to the extent of 200%, making it impossible for TOPL to function normally as regards imported raw materials.
5.3 Duty on import of raw materials, inter alia, including Turpentine was only 35%, which was subsequently hiked to 85% in 1991-92. This compelled TOPL to go in for backward integration for manufacture of Turpentine from Oleo Pine Resin (OPR). Today the duty on Turpentine has once again come down to 35%. However, since the present duty on OPR (containing Turpentine) is only 12%, the manufacture from imported OPR still works out more remunerative rather than from Turpentine.
5.4 There was a dispute regarding the Excise Duty liabilities arising on account of classification and consequent upon the demands of Excise Authorities, the Bank did not entertain financing of the same.
5.5 The ultimate blow to the TOPL’s working was received, when the additionally inducted promoter Shri. Mukesh D. Ramani was allowed to acquire 20% of the Company’s Equity and also to bring in additional funds of Rs.60 Lakhs by way of unsecured loans for funding of working capital needs related to backward integration undertaken by the company. Ramani Group introduced funds to the tune of Rs. 22 Lakhs only as unsecured loans. Ramani Group failed to bring in the funds as committed by them and on the contrary within a year withdraw their unsecured loans to the tune of Rs.16.35 Lakhs, reducing their exposure to Rs.5.65 Lakhs. This led to serious differences among the original Promoters and Ramani Group, which in turn further aggravated the financial crunch. As a result, the company could not reap the benefits of investment made in backward integration of its production facilities.
8. Based on the rehabilitation scheme submitted by Bank of India, the scheme was sanctioned by an order dated 19th March 1998. As per the scheme the State Government was to waive of penal charges. The scheme was modified by an order dated 18th September 2000.
9. In April 2003 BIFR passed an order declaring that revival of company has failed and ordered creditors to take all assets of the company and proceed for winding up. On 30th July 2003 the company was ordered to be wound up by BIFR. The said order dated 30th July 2003 was treated by the High Court as a Company Petition and on 13th June 2007 the official liquidator of this court was appointed as liquidator of the company. The official liquidator while adjudicating claims of all creditors, adjudicated the Sales Tax Department’s claim of Rs.26,26,418/- and the said amount was paid over to the Sales Tax Department.
10. In the meanwhile, Union of India seeking to recover the excise dues attached personal property of Satish D. Sanghavi, petitioner in Writ Petition (L) No. 2129 of 2022. Challenging this order said S.D. Sanghavi had filed Writ Petition No. 2087 of 2006 in this court. The said petition came to be admitted by an order dated 28th September 2006. Later, by an order dated 22nd September 2009, this court was pleased to quash and set aside the order of the Excise Department, Union of India attaching personal property of said S.D. Sanghavi.
11. Sometime in 2018 petitioner received notice from Respondent No.3, copy whereof was sent to Co-operative Society of petitioner’s residence, seeking recovery of the company’s dues for the period 1986 to 1995. Notice was replied to by petitioner as well as the society. Similar notices dated 10th October 2018 and 15th November 2018 were issued to S.D. Sanghavi against which said S.D. Sanghavi filed Writ Petition No.6048 of 2019. By an order dated 16th January 2020 this court was pleased to remand the matters to respondents to determine whether, in law, recovery would lie against petitioner in person.
12. On 15th February 2020 petitioner received Show Cause Notice from Respondent No.3 calling upon petitioner to prove that the non- recovery of Sales Tax dues from the company was not attributed to gross neglect, misfeasance or breach of duty on petitioner’s part in relation to the affairs of the company failing which petitioner will be liable to pay a sum of Rs.3,02,01,888/-. (Similar notice was issued to petitioner in Writ Petition
(L) No. 2129 of 2022 – S.D. Sanghavi and Writ Petition (L) No. 2133 of 2022 – P. D. Sanghavi). Petitioner replied through his advocate’s letters dated 7th November 2020, 9th December 2020, 8th January 2021 and 18th March 2021. Notwithstanding receiving reply, Respondent No.3 passed impugned order dated 27th September 2021. Respondent No.3 has sought to recover the following amounts :
