IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HON'BLE THE CHIEF JUSTICE MR.J.CHELAMESWAR & THE HONOURABLE MR. JUSTICE BHABANI PRASAD RAY THURSDAY, THE 28TH OCTOBER 2010 / 6TH KARTHIKA 1932 WA.No. 2314 of 2008 ------------------------ AGAINST THE JUDGEMENT IN OP.39760/2002 Dated 09/01/2008 .................... APPELLANTS/PETITIONERS: ------------------------------ 1. JOSE KURIAN,PANAMKUZHAKKAL HOUSE, S.R.M. ROAD, ERNAKULAM. 2. JOSE CYRIAC, PANAMKUZHAKKAL, HOUSE,S.R.M. ROAD, ERNAKULAM. 3. P.C.ROY, PANAMKUZHAKKAL, HOUSE,S.R.M. ROAD, ERNAKULAM. BY ADV. SRI.K.M.FIROZ RESPONDENTS/RESPONDENTS: ----------------------------------- 1. THE DEPUTY TAHSILDAR (RR), KANAYANNUR TALUK, ERNAKULAM. 2. THE SALES TAX OFFICER -II, KALAMASSERY, ERNAKLAM. 3. THE STATE OF KERALA, REPRESENTED BY THE CHIEF SECRETARY, GOVERNMENT SECRETARIAT, THIRUVANANTHAPURAM. BY SPECIAL GOVERNMENT PLEADER SRI.VINOD CHANDRAN THIS WRIT APPEAL HAVING BEEN FINALLY HEARD ON ON 28/10/2010 ALONG WITH WA 2317/2008, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: J.Chelameswar, C.J. & Bhabani Prasad Ray, J. ------------------------------------------ W.A. Nos.2314 & 2317 of 2008 ------------------------------------------ Dated this the 28th day of October, 2010 JUDGMENT J.Chelameswar, C.J. These two writ appeals arise out of a common judgment dated 9th January, 2008 in W.P.(C) Nos.39383 and 39760 of 2002. The appellants herein are the writ petitioners in the abovementioned writ petitions. 2. By the judgment under appeal both the writ petitions were disposed of with certain observations, but without granting the relief as the one sought by the petitioners in the writ petitions and hence these writ appeals. 3. The three appellants common to each of these appeals were the directors of a private limited company known as 'Kurians Ink & Chemicals (P) Limited'. The said company was a registered W.A.Nos.2314 & 2317 of 2008 - 2 - dealer within the meaning of the said expression as defined under the Kerala General Sales Tax Act, 1963. The further details of the business of the company may not be necessary for the purpose of this order except to state that for the assessment years 1990-91, 1991-92 and 1992-93, the company came to be assessed under the provisions of the abovementioned Act and was found liable to pay the following amounts towards tax for the abovementioned three assessment years. “1990-91 - ` 3,60,111 1991-92 - ` 5,32,116 1992-93 - ` 6,70,795” 4. It is not very clear from the records as to the exact date of assessment with reference to each of the abovementioned assessment years. However, three separate demand notices dated 5th December, 2002 came to be issued under Section 7 of the Kerala Revenue Recovery Act, 1968 for the recovery of the above mentioned amounts. The said Section provides that if a person who is served with a demand notice under the said Section fails to W.A.Nos.2314 & 2317 of 2008 - 3 - remit the amount demanded, the said demand shall have the authority for making the attachment. Section 5 of the Revenue Recovery Act authorises attachment and sale of the defaulter's movable and immovable property or in the alternative appointment of an agent for the management of the defaulter's immovable property or in the further alternative for arrest of the defaulter and his detention in prison. 5. Challenging the abovementioned notices issued under Section 7 of the Revenue Recovery Act the appellants herein approached this Court by way of the writ petitions from out of which the present appeals arise. 6. It may be mentioned here that the impugned notices were addressed to the appellants who are the shareholders and directors of the assessee company demanding them in their individual capacity to make payment of the amount specified in the demand notices. 7. The impugned notices were challenged by the W.A.Nos.2314 & 2317 of 2008 - 4 - appellants on the ground that by virtue of the operation of the Companies Act, the liability of the shareholders and also the directors is limited and the tax liability of the company cannot be passed on to the shareholders or the directors as it is well established that a company duly incorporated under the provisions of the Companies Act has a distinct legal entity which is capable of acquiring rights and incurring obligations on its own. 8. However, a learned Judge of this Court by the judgment under appeal rejected the challenge on the ground that the petitioners/appellants herein are the exclusive beneficiaries of the business of the company. The learned Judge sought to support such a conclusion on the basis of two decisions of the Supreme Court reported in Commissioner of Income Tax, Madras v. Sri.Meenakshi Mills Ltd. & Others (63 ITR 609) and McDowell & Co. Limited v. Commercial Tax Officer (154 ITR 148). 9. Both before the learned Judge and before us an attempt was made on behalf of the respondents to justify the W.A.Nos.2314 & 2317 of 2008 - 5 - impugned notices by which the amounts due from the company are sought to be recovered from the appellants on the basis of Section 26C of the Kerala General Sales Tax Act, which reads as follows: “26C. Liability of Directors of a Private Company.- Subject to the provisions of the Companies Act 1956 (Central Act 1 of 1956) where any tax or other amount recoverable under this Act from any private company, whether existing or wound up or under liquidation, cannot be recovered for any reason whatsoever, every person who was a director of such company at any time during the period for which the tax or other amount is due under this Act shall be jointly and severally liable for the payment of such tax or other amount.” It may be mentioned here that Section 26C came to be inserted into the Act by Act 23 of 1999 with effect from 1.4.1999. 10. Though some submissions were made on either side regarding the applicability of the said provision for recovery of the tax arrears of a private company pertaining to a period anterior to the date of introduction of the said provision into the Act, we do not propose to examine those submissions in detail for the reason that in our opinion these writ appeals can be disposed of on a much narrow W.A.Nos.2314 & 2317 of 2008 - 6 - ground. 11. Assuming for the sake or argument that Section 26C of the Act is applicable to the facts of the case, on a plain reading of the Section it appears that the liability of the directors of such a company which is declared to be joint and several along with the company arises only in a situation where the Revenue cannot recover the arrears of tax from the company. From the records, it is not clear whether any effort was made by the Revenue to recover the arrears of tax from the company which is primarily responsible for the payment of tax under the Kerala General Sales Tax Act. 12. In the circumstances, we are of the opinion that the impugned demand notices by which the respondents resort to Section 26C of the Kerala General Sales Tax Act for recovering the tax dues of the company from its directors, in our view, is not sustainable. We therefore hold that the impugned notices are illegal. The writ appeals and consequentially the writ petitions stand allowed quashing the impugned notices. However, it is open W.A.Nos.2314 & 2317 of 2008 - 7 - to the respondents to recover the tax arrears of the company in accordance with law. J.Chelameswar, Chief Justice Bhabani Prasad Ray, Judge vns