Preeti Rajendra Barbhaya Legal Heir of Late Rajendra Nartothamdas Barbhaya Vs State of Gujarat & Ors. (Gujarat High Court)

Summary: In the case of Preeti Rajendra Barbhaya vs. State of Gujarat & Ors., the Gujarat High Court addressed a petition filed by the legal heir of a deceased director challenging recovery proceedings for tax dues under the Gujarat Value Added Tax (VAT) Act, 2003, and the Central Sales Tax (CST) Act, 1956. The petitioner’s husband, a former director of a company, had resigned in 2013 and passed away in 2017. However, the tax authorities initiated recovery actions in 2018, targeting the deceased director’s property for outstanding tax liabilities of the company. The petitioner contended that the company’s liabilities could not be recovered from her late husband’s estate, arguing that the company and its directors are separate legal entities. She also cited judicial precedents establishing that personal assets of directors cannot be attached for company dues unless negligence or breach of trust is proven.

The court examined the provisions of Section 53(3) of the VAT Act and Section 18 of the CST Act, which impose liability on directors only in cases of proven gross negligence or misfeasance. It noted that the tax recovery was initiated after the director’s death, rendering the proceedings invalid. Moreover, the court found no evidence of negligence or breach by the deceased. The High Court emphasized that recovery actions against personal assets must align with statutory requirements and quashed the recovery certificate and property attachment. This ruling reinforces the principle that corporate liabilities should not unfairly burden directors or their heirs without substantial evidence.

FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT

1. Heard learned advocate Mr. Apurva N. Mehta appearing for the petitioner and learned Assistant Government Pleader Mr. Raj Tanna appearing for the respondents.

2. Having regard to the controversy involved, which is in narrow compass, with the consent of learned advocates for the respective parties, the matter is taken up for final hearing.

3. Rule returnable forthwith. Learned Assistant Government Pleader waives service of notice of rule on behalf of the respondents.

4. By this petition under Article 227 of the Constitution of India, the petitioner has prayed for the following reliefs:

“(A) YOUR LORDSHIPS may be pleased to admit and allow this petition;

(B) YOUR LORDSHIPS may be pleased to issue a Writ of Mandamus or any other appropriate Writ, Order or Direction quashing and setting aside the Revenue Recovery Certificate dated NIL issued by the Respondent No. 2 under Sec.3 of the Revenue Recovery Act, 1980 qua the Petitioner;

(C) YOUR LORDSHIPS may be pleased to direct the Respondent No. 2 and 3 to lift the attachment made on immovable property being Building No.A-7, Room No. 103, Bhimashankar Co. Op. Housing Society Ltd., Sector 19-A, Nerul, Navi Mumbai;

(D) Pending hearing and final disposal of this petition, YOUR LORDSHIPS may be pleased to stay further implementation of Revenue Recovery Certificate dated Nil (Annexed at Annexure A) issued by the respondent No.2 under Section 3 of the Revenue Recovery Act, 1980;

(E) Ex-parte ad-interim relief in terms of Para (D) may kindly be granted;

(F) Such other and further relief/s as may be deemed fit in the facts and circumstances of the present case may kindly be granted.

5.1 The brief facts of the case are that the the husband of the petitioner was a Director of M/s. Oren Kitchen Appliances Private Ltd. which came to be incorporated on 22^nd September, 2009 in the State of Maharashtra.

5.2 The said Company was registered under the provisions of the Gujarat Value Added Tax Act, 2003 (hereinafter referred to as “VAT Act”) as well as The Maharashtra Value Added Tax (hereinafter referred to as “MVAT Act”) was assessed under the relevant provisions of the said VAT Act for the period of 2011-2012, 2012-2013 and 2013-2014.

5.3 It is case of the petitioner that the husband of the petitioner resigned as Director of the said Company on 7^th February, 2013 and thereafter, he expired on 11^th August, 2017.

5.4 It appears that the respondent-VAT Authorities meanwhile passed the Assessment orders for the period 2011-2012, 2012-13 and 2013-14 in case of the said Company raising the total demand of Rs.4,43,76,122/-.

5.5 The petitioner received a letter dated 6th September,2019 from Bhimashankar Co-op. Housing Society Limited informing the petitioner about the attachment of the residential premises occupied by the petitioner for recovery of the aforesaid outstanding dues of the Company in view of the communication dated 26^th August, 2019 issued by the Sales Tax Officer– respondent No.3.

5.6 The petitioner therefore addressed a letter dated 9^th September, 2019 informing the respondent No.3 that her late husband had already resigned as a Director and further contended that the Company and the Director are separate legal entities and the dues of the Company cannot be recovered from the property of the Director by attaching the same.

5.7 Thereafter, the petitioner again by letter dated 16.12.2019 addressed to the respondent No.2- Commercial Tax Officer(6) Unit-74, Vapi as well as the respondent No.3 requested to lift the attachment made on the residential property of the petitioner.

5.8 Inspite of the aforesaid representations, no action was taken and therefore, the petitioner again by letter dated 4.12.2021 reiterated the request to lift the attachment over the subject property.

5.9 The petitioner thereafter, obtained the relevant copies of the recovery certificate issued on 9.10.2018 by the respondent No.2 addressing to The Commissioner, Office of the Commissioner State Tax, Mumbai under the provisions of the Bombay Land Revenue Code to recover the dues of the Company and has challenged the same before this Court with the aforesaid prayers.

6.1  Learned advocate Mr. Apurva N. Mehta for the petitioner submitted that the dues of the Company cannot be recovered from the Director under Section 53(3) of the VAT Act read with Section 18 of the Central Sales Tax Act (for short “CST Act”) as the late husband of the petitioner had resigned on 07.02.2013.Learned advocate Mr. Mehta invited the attention of the Court to the copy of the Form No.32 filed by the late husband of the petitioner tendering the resignation as required under the provision of The Companies Act 1956.

6.2 It was further submitted that the respondents could not have initiated any recovery proceedings against the property of the late husband of the petitioner to recover the outstanding dues of the Company under the provisions of the VAT or CST Act. In support of his submissions, reliance was placed upon the decision of this Court, in case of Sadhna Ramchandra Jeswani Vs. Income Tax Officer rendered in Special Civil Application No. 5354 of 2018 and decision in the case of C.V.Cherian Vs. C.A.Patel reported in [2012] 51 VST 71 (Guj). It was submitted that the Director of Company is not personally liable for the sales tax dues of the Company.

6.3. It was submitted that as per the provision of Sub-Section (3) of Section 53 of the VAT Act, when the Company was under liquidation then also, no dues of the Company can be recovered against the properties of the Director much less when the Director has expired.

6.4 The reliance was also placed on the decision of the Hon’ble Apex Court in the case of Shankar Rudra Vs. The State of Uttarkhand and Others rendered in Civil Appeal No.(s)10433 of 2024 dated 10^th September, 2024 wherein, referring to paramateria provisions of Section 12(1) of the Uttarakhand Value Added Tax Act,2005, the Hon’ble Apex Court has held that the liability of the Directors of a private limited company will arise when a private company is wound up after the commencement of the Act and therefore, there was no provision under which dues of a limited company could have been recovered from the Directors. It was therefore, submitted that there is nothing on record to show that the Company was taken into winding up [is already ordered to be wound up].

6.5. It was further submitted that the reliance placed by the respondent on the provisions of Section 53(3) of the VAT Act and Section 18 of the CST Act which are parimateria, no recovery can be made from the property of the Director assuming for a while that the Company is taken up for winding up unless and until, if the Director proves that such recovery can be made only due to his gross negligence, misfeasance breach of trust etc. as stated in the said Sub-Section. It was submitted that the husband of the petitioner has already expired and therefore even the provision of Sub-Section (3) of Section 53 of the VAT Act cannot be pressed into service. It was therefore, submitted that the impugned recovery notice as well as the order of attachment are required to be quashed and set aside.

7.1 On the other-hand, learned Assistant Government Pleader Mr. Raj Tanna appearing for the respondents submitted that the Company was taken into liquidation and claim was made before the National Company Law Tribunal, as stated in the para 11 of the affidavit-in-reply filed on behalf of the respondents.

7.2 It was therefore, submitted that as per provision of Section 53(3) of the VAT Act read with Section 18 of the CST Act, the petitioner was eligible to make the payment of the outstanding dues of the Company.

7.3 It was further submitted that the Revenue Recovery Certificate was issued by the Commissioner at Maharashtra, Mumbai and therefore, there is an alternative efficacious remedy for the petitioner to challenge such Revenue Recovery certificate under the provisions of the Revenue Recovery Act.

7.4 It was therefore submitted that no interference be made in the impugned proceedings of recovery initiated by the respondents-authorities.

8.1 Having considered the submissions made by learned advocates appearing for the respective parties, it is not in dispute that the husband of petitioner had resigned on 07.02.2013 and has expired on 11.08.2017 whereas, the recovery proceedings were initiated after the death of the husband of the petitioner in the month of June, 2018. It also emerges from the record that the first recovery notice under Section 152 of the Bombay Land Revenue Code 1879 was issued on 07.08.2018 which is placed on record along with the additional affidavit at page 111 of the petition by the respondent.

8.2 Thus, the respondents-authorities have initiated the proceedings under the guise of Sub-Section (3) of Section 53 of the VAT Act read with Section 18 of the CST Act against the dead person. Section 53(3) of the VAT Act and Section 18 of the CST Act reads as under:-

Section 53(3) in The Gujarat Value Added Tax Act, 2003

(3)When any private company is wound up and any tax, interest or penalty assessed under this Act on the company 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 jointly and severally be liable for the payment of such tax, interest or penalty, unless he proves to the satisfaction of the Commissioner that such non-recovery is be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.

Explanation: – For the purposes of this section, the expressions “company” and “private company” shall have the meaning respectively assigned to them under clauses (i) and (ii) of sub-section (1) of section 3 of the Companies Act, 1956 (1 of 1956)

Section 18 in The Central Sales Tax Act, 1956

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 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.]

8.3 On perusal of the above provisions, it is clear that the recovery proceedings can be initiated upon the Director of the Company in liquidation, when the Director proves that non-recovery cannot be attributed to any gross negligence, misfeasance or breach of trust on his part. It is therefore necessary to give an opportunity of hearing to the Director whereas, in the facts of the case, the Director i.e. the husband of the petitioner had expired on 11.08.2017 which is much prior to the issuance of the initiation of the recovery proceedings. Moreover, in case of the C.V.Cherian (Supra), it is held as under:-

“Reliance placed by the learned AGP on the provisions of Section 78 is misconceived. The section specifically deals with offences by companies and the criminal liability is fastened on the Directors who were in charge of and were responsible for the conduct of the business of the Company, but does not at all provide for any personal liability of the Directors to pay the sales-tax dues of the Company nor does it empower the authorities to proceed against the personal properties of the Directors. The very fact that the same Legislature has in the same Act provided for criminal liability of the Directors without providing for any personal liability of the Directors or their personal properties for payment of sales-tax dues of the Company in question, the provisions of Section 78 lend support to the case of the petitioners rather than the case of the authorities.

As regards the faint plea of lifting the corporate veil, as per the settled legal position, the corporate veil is not to be lifted lightly. It is only when there is strong factual foundation for lifting the corporate veil that the question of examining the applicability of the principle of lifting such veil would be required to be examined. In neither of the two petitions raising the controversy, the authorities have passed any specific order fastening the liability on the Directors personally, much less any factual foundation has been laid to invoke the doctrine of lifting the corporate veil. Hence it is not necessary to dilate on the said principle any further.”

8.4. In case of Sadhna Ramchandra Jeswani (Supra), after referring to the decision of Previnbhai M. Kheni Vs. Assistant Commissioner of Income Tax and Others. reported in 353 ITR 585, it is held as under :-

“7. Sub-section(1) of section 179 as can be noticed provides that notwithstanding anything contained in the Companies Act, 1956, where any tax due from a private company or other company during the period when such company was a private company cannot be recovered, then, every person who was a director of the said company at the relevant time shall be jointly and severally liable for the payment of such tax. Such recovery however can be avoided, if such a person proves that 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.

8. Fundamental requirement for applicability of section 179 of the Act, of-course is that tax dues cannot be recovered from the company. In case of Bhagwandas J. Patel (supra), Division Bench of this Court had taken a similar view. Division Bench observed as under :

“A bare perusal of the provision shows that before recovery in respect of dues from the private company can be initiated against director, to make them jointly and severally liable for such dues, it is necessary for the revenue to establish that such recovery cannot be made against the company and then and then alone it can reach the directors who were responsible for the conduct of business during the previous year in relation to which liability exists.”

In case of Indubhai T. Vasa(HUF) v. Income tax Officer reported in (2006) 282 ITR 120(Guj.), this Court reiterated such proposition following the decision in case of Bhagwandas J. Patel(supra) observing :

“In these circumstances, it is not possible to accept the stand of the respondent that despite best efforts the taxes due from the Company cannot be recovered. As laid down by this Court the phrase “cannot be recovered” requires the Revenue to establish that such recovery cannot be made against the Company and then and then alone would it be permissible for the Revenue to initiate action against the director or directors responsible for conducting the affairs of the Company during the relevant accounting period. Hence, the prerequisite condition stipulated by Section 179 of the Act remains unfulfilled in context of the facts available on record by virtue of the impugned order as well as the affidavit-in reply.”

8.5 Referring to the above dictum of law, this Court in the facts of the said case for invoking Section 179 of the Income Tax Act, 1961 which is parimateria to Section 53(3) of the VAT Act and Section 18 of the CST Act held as under:-

“8. Reverting back to the facts of the case, we notice that in showcause notice the Assessing Officer has not laid down sufficient foundation for invoking section 179 of the Act leave alone broadly pointing out he has not even alleged that non-recovery was on account of gross negligent, misfeasance or breach of duty on part of the petitioner in relation to the affairs of the company. His final conclusions in the impugned order are therefore based on the material at his command which was never shared with the petitioner.

9. In the result, impugned order is set aside only on this ground making it clear that nothing stated in the order would prevent the Assessing Officer from initiating fresh exercise for the same purpose, if so advised and, if the material at his command is sufficient to permit him to do so.

8.6. The Hon’ble Apex Court in the case of Shankar Rudra (Supra) after considering the provision of Section 12(1) of the Uttarakhand Value Added Tax Act, 2005 has held as under:-

“7. On a plain reading of sub-section(1) of Section 12 of the Act, liability of the Directors of a private company will arise when a private company is wound up after the commencement of the Act. Therefore, Section 12(1) will have no application as an order of winding up has not been produced.

8. Therefore, when there was no provision under the Act under which dues of a limited company would have been recovered from its Directors, the third respondent was not justified in issuing the recovery certificate and demand notice against the appellant. These crucial factors have been ignored by the High Court. It ought to have been noted by the High Court that an attempt to recover tax payable by the Company from the appellant from its inception was illegal and, therefore, the appellant ought not to have been driven to the remedy of preferring an appeal.

8.7 Considering the above conspectus of law, we are of the opinion that the impugned recovery proceedings including the order of recovery certificate as well as the order of attachment issued by the respondents-authorities to recover the outstanding dues of the Company in default M/s. Oren Kitchen Appliances Pvt. Ltd. are not sustainable in eye of law and are accordingly quashed and set aside. Rule is made absolute to the aforesaid extent. No order as to costs.