Orders for Retrieval of dues can’t be initiated against a single director of a company: Delhi High Court

Sanjiv Kumar Mittal vs Deputy CommissionerCgst ... on 6 November 2020 Delhi High Court Sanjiv Kumar Mittal vs Deputy CommissionerCgst ... on 6 November 2020 IN THE HIGH COURT OF DELHI AT NEW DELHI W.P.5590 2020 & CM APPL.20200 2020 SANJIV KUMAR MITTAL ...... Petitioner Through: Ms. Pritha Srikumar Iyer Advocate with Ms. Nikita Garg Advocate versus DEPUTY COMMISSIONERCGST COMMISSIONERATE DELHI SOUTH & ORS. ...... Respondents Through: Mr. Harpreet Singh senior standing counsel with Ms. Suhani Mathur Advocate for R 1 to 4 Ms.Rashmi Advocate for R 5 Reserved on : 21st October 2020 Date of Decision: 06th November 2020 HON BLE MR. JUSTICE MANMOHAN HON BLE MR. JUSTICE SANJEEV NARULA JUDGMENT MANMOHAN J 1. Petitioner who is a former Director of respondent no.6 companyis aggrieved by the attachment of his personal bank account by respondent Service Tax Authorities towards recovery of dues from the assessee company under the Finance Act 1994Cgst ... on 6 November 2020 confirmed the demand and recovery of service tax along with interest and penalties against the 5. It is averred that the attested copy of the aforesaid order in original dated 08th August 2018 was returned undelivered with the remark "refused" by the assessee company and subsequently two demand notices dated 21st May 2019 and 08th November 2019 were issued to the assessee company through the petitioner in his capacity as its Director ARGUMENTS ON BEHALF OF PETITIONER 6. Ms. Pritha Srikumar Iyer learned counsel for petitioner stated that Mr. Ram Mohan Gupta the founder Director of the assessee company had signed an affidavit dated 22nd November 2019 wherein he had admitted that it was at his request that the petitioner was inducted as an Additional Director and that the petitioner was not responsible for the dues of the assessee company 7. She further stated that even though the petitioner had clarified that he was not involved with the assessee company since 08th July 2015 vide his letter dated 26th December 2019 yet the respondent no.1 had issued the impugned letter attachment order dated 08th June 2020 under Section 87(b)(i) of the Finance Act read with Section 174(1) of the Central Goods and Services Tax 2017for recovery of service tax determined against the 8. Learned counsel for the petitioner submitted that the impugned attachment order was beyond the purview of Section 87(b)(i) of the Finance Act as the said provision provides for a garnishee order i.e. attachment of funds of an assessee lying with third parties. According to her the impugned attachment order was without jurisdiction inasmuch as there was no basis for proceeding against the petitioner personally while acting under Section 87(b)(i) of the Finance Act as there was no material to indicate that the funds in the petitioner s personal bank account were due and payable to or held on behalf of the assessee company 9. She also submitted that there was no provision in the Finance Act making Directors personally liable for the tax liabilities of a company or empowering the respondent authorities to recover such liabilities of the company from the personal assets of its Directors 10. She emphasised that under the statutory scheme relating to Service Tax as provided under the Finance Act no proceeding was ever initiated against the petitioner by issuing a show cause notice or otherwise and he was not even granted an opportunity to be heard before the impugned demand notices dated 21st May 2019 and 08th November 2019 or attachment order dated 08th June 2020 were issued. She pointed out that even the show cause notice issued to the assessee company had no reference to the petitioner in his personal capacity ARGUMENTS ON BEHALF OF RESPONDENT Indian Kanoon Sanjiv Kumar Mittal vs Deputy CommissionerCgst ... on 6 November 2020 11. Mr. Harpreet Singh learned senior standing counsel for the respondent stated that the petitioner was a Director in the assessee company i.e. M s Unickon Real Estate Pvt. Ltd. between 22nd August 2014 and 08th July 2015 during which period service tax investigations were continuing having begun on 27th February 2014) and the statements were recorded 12. He submitted that being a Director in a Company a person is deemed to have knowledge of the affairs of the same and a bald assertion that he took up Directorship "in good faith and was not actively involved" cannot be accepted 13. He stated that it is not a matter of dispute that there is evasion of Service Tax by the assessee company as confirmed by the Order in Original dated 08th August 2018. He pointed out that the adjudication proceedings were conducted and held against the assessee company which would essentially mean recovery of dues from not only the assessee company but also from the then Directors and Additional Directors who are deemed to have played an active role in such evasion of 14. Mr. Harpreet Singh submitted that a vicarious liability is cast upon the Directors of the company to pay deposit service tax with the Government exchequer. He stated that Section 87(b)(i) of Chapter V of the Finance Act as amended provides for a mode of recovery of any amount due to the 15. He clarified that as the dues to the Government of India vide the Order in Original had attained finality the recovery provisions of Section 87 of the Finance Act were applicable and they did not envisage any further or separate notice to the petitioner as being claimed 16. Learned counsel for respondents stated that the impugned notice had been issued under Section 87(b)(i) of the Finance Act read with Section 174 of the CGST Act. He submitted that Section 174(2)(e) saves recovery proceedings of tax fine penalty allowing it to be initiated under the CGST Act and imposition thereof under the repealed Acts. Since Section 87(b)(i) was heavily relied upon by learned counsel for respondent the relevant portion of the same is reproduced hereinbelow: Section 87 Where any amount payable by a person to the credit of the Central Government under any of the provisions of this Chapter or of the rules made there under is not paid the Central Excise Officer shall proceed to recover the amount by one or more of the modes mentioned below: b)(i) the Central Excise Officer may by notice in writing require any other person from whom money is due or may become due to such person or who holds or may subsequently hold money for or on account of such person to pay to the credit of the Central Government either forthwith upon the money becoming due or being held or at or within the time specified in the notice not being before the money becomes due or is held so much of the money as is sufficient to pay the amount due from such Indian Kanoon Sanjiv Kumar Mittal vs Deputy CommissionerCgst ... on 6 November 2020 person or the whole of the money when it is equal to or less than that amount 17. Mr. Harpreet Singh repeatedly and vehemently emphasised that the Directors of a company and other persons in management are vicariously liable to pay deposit service tax. In support of his submission he relied upon Section 9AA of the Central Excise Act 1944Section 89 of the current CGST Act and Section 168(2) of the Companies Act 2013 which stipulate that a Director who has resigned shall be liable even after his resignation for the offences committed by the company during his tenure Thus according to him the penal statutory liability is deemed to have been imposed by a statute upon the petitioner in this case under Section 87 of Finance Act in line with Section 9AA of Central Excise Act 1944 and proviso to sub sectionof Section 168 of the Companies Act 2013 COURT S REASONING A COMPANY AND ITS DIRECTORS ARE SEPARATE AND DISTINCT JURISTIC ENTITIES AND THIS DISTINCTION CANNOT BE JETTISONED UNLESS THERE IS A SPECIFIC STATUTORY PROVISION TO THE CONTRARY OR TILL A CASE FOR LIFTING OF THE CORPORATE VEIL IS MADE OUT 18. Having perused the paper book and having heard learned counsel for the parties this Court finds that after completion of investigation a notice was issued to the assessee company a separate legal entity on 24th April 2017 i.e. subsequent to the petitioner s resignation as its Director on 08th July 19. Further the assessment proceedings culminated by way of the Order in Originaldated 08th August 2018 against the assessee company alone 20. It is well settled that a company is a distinct juristic entity separate from its Directors. In Bacha F. Guzdar Bombay vs. Commissioner of Income Tax Bombay AIR 1955 SC 74 the Supreme Court has held as under: 9. It was argued that the position of shareholders in a company is analogous to that of partners inter se. This analogy is wholly inaccurate. Partnership is merely an association of persons for carrying on the business of partnership and in law the firm name is a compendious method of describing the partners. Such is however not the case of a company which stands as a separate juristic entity distinct from the shareholders. In Halsbury s Laws of England Vol. 6p. 234 the law regarding the attributes of shares is thus stated A share is a right to a specified amount of the share capital of a company carrying with it certain rights and liabilities while the company is a going concern and in its winding up. The shares or other interest of any member in a company are personal estate transferable in the manner provided by its articles and are not of the nature of Indian Kanoon Sanjiv Kumar Mittal vs Deputy CommissionerCgst ... on 6 November 2020 21. From the above extract it is apparent that the distinction between a company and its Director cannot be jettisoned unless there is a specific statutory provision to the contrary or till a case for lifting of the corporate veil is made out SECTION 87(b)(i) OF THE FINANCE ACT PROVIDES FOR A GARNISHEE ORDER ONLY i.e PROVIDES FOR ATTACHMENT OF FUNDS OF AN ASSESSEE LYING WITH THIRD PARTIES THERE IS NO PROVISION IN THE FINANCE ACT MAKING AN EX DIRECTOR EVEN IF HAVING KNOWLEDGE OF AFFAIRS OF THE COMPANY VICARIOUSLY OR JOINTLY LIABLE FOR THE DUES OF THE COMPANY 22. Though Section 174(2) of CGST Act saves any duty or tax that is due or may become due under the repealed Act including Chapter V of the Finance Act yet there is no provision in the Finance Act making the Directors personally liable for service tax liabilities of a company 23. It is clarified that Section 89 of the current CGST Act is confined only to liabilities assessed under the CGST Act and cannot be used to fasten personal liability on Directors for company dues determined under the Finance Act. After all no new liability can be fastened under the CGST Act for a period prior to its enactment as it does not have retrospective operation 24. This Court is in agreement with the submission of learned counsel for petitioner that the impugned attachment order is beyond the purview of Section 87(b)(i) of the Finance Act as the said provision provides for a garnishee order only i.e. provides for attachment of funds of an assessee lying with third parties. Accordingly Section 87(b)(i) of the Finance Act does not entitle the revenue to attach personal bank accounts of a director like the petitioner for recovery of dues of the assessee company on the assumption that money is due or may become due from the Petitioner to the assessee company. This perspective is wholly misconceived contrary to the basic tenets of liability of the Company law discussed in the preceding paras 25. We have also contrasted the provisions of the Finance Act and the Central Excise Act to the extent the same are applicable to Service Tax with Section 179 of the Income Tax Act 1961 and Section 18 of the Central Sales Tax Act 1956 which for quick reference are reproduced hereinbelow A) Section 179 of the Income Tax Act 1961 179. Liability of directors of private company in liquidation.Notwithstanding anything contained in the Companies Act 1956where any tax due from a private company in respect of any income of any previous year or from any other company in respect of any income of any previous year during which such other company was a private company cannot be recovered then every person who was a director of the private company at any time during the relevant previous year 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 Indian Kanoon Sanjiv Kumar Mittal vs Deputy CommissionerCgst ... on 6 November 2020 2) Where a private company is converted into a public company and the tax assessed in respect of any income of any previous year during which such company was a private company cannot be recovered then nothing contained in sub sectionshall apply to any person who was a director of such private company in relation to any tax due in respect of any income of such private company assessable for any assessment year commencing before the 1st day of April 1962 Explanation. For the purposes of this section the expression "tax due" includes penalty interest or any other sum payable under the Act B) Section 18 of the Central Sales Tax Act 1956 18. Liability of directors of private company in liquidation. Notwithstanding anything contained in the Companies Act 1956when 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 The aforenoted provisions firstly pertain to companies in liquidation and pertinently begin with a non obstante clause. The said provisions specifically render a Director jointly and severally liable for tax dues assessed against private companies 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. However there is no such provision viz a viz Service Tax and the absence thereof is determinative. Levy and collection of tax must be with the authority of law by virtue of Article 265 of the Constitution. Consequently the impugned action against the petitioner is without jurisdiction 26. In Sunil Parmeshwar Mittal vs. Deputy CommissionerCentral Excise Mumbai Ors. 2005Mah. LJ 837 the Bombay High Court has held as under: 28. Thus notices issued to the petitioners were not only in breach of principles of natural justice but the same were in violation of section 11 A of the Excise Act. At this juncture it will not be out of place to mention that even under the provisions of the Companies Act the petitioners are not liable to discharge the liability of the company if any of which they were directors in the past. As soon as a company is incorporated it constitutes an independent juristic person in the eyes of law as distinct from its members constituting it. Even private limited company consisting of only two members has nonetheless a separate legal entity. It is entirely different from its members. From the date of its incorporation a company is endowed with certain special rights and privileges and unlike the partnership firm or a Hindu undivided family is not a mere aggregate of members. It can carry on business and can acquire and hold property in its corporate name and has other special advantages e.g. to contract with all its members and others. In short it becomes a body corporate Indian Kanoon Sanjiv Kumar Mittal vs Deputy CommissionerCgst ... on 6 November 2020 capable of exercising all functions of an incorporated company having a perpetual succession. It remains in existence irrespective of the changes in its members until it is wound up and dissolved under the provisions of the Companies Act. The characteristic of company limited by shares is that it enjoys the privilege of limited liability i.e. liability of its member is limited to the extent of the face value of the shares subscribed by each member and the amount remaining unpaid on them for the time being. Thus considering effect of incorporation of a company and its independent juristic existence a former director of the company cannot be held responsible for payment of the liabilities of the company in absence of any specific provision. No contrary provision to persuade us not to take a view taken hereunder was brought to our notice. In this view of the matter we have no hesitation to hold and declare that petitioners herein cannot be held liable to pay outstanding dues of the central excise duty sought to be demanded from them. We therefore quash and set aside the impugned last demand notice dated 1st October 2003 holding it to be without jurisdiction and without authority of law and make the rule absolutely in terms prayer clauseandwith no order as to costs 27. Consequently in the absence of a specific provision and given a company s separate legal personality the petitioner ex Director even if having knowledge of affairs of the company is not vicariously or jointly liable for the dues of the company. The onus of proof shall remain on the department respondents to show that a Director is personally liable for the dues of the company at the stage of issuing show cause notice under Section 73 of the Finance Act SECTION 9AA OF THE CENTRAL EXCISE ACT 1944 AND SECTION 168(2) OF THE COMPANIES ACT 2013 DEAL WITH OFFENCES COMMITTED BY A COMPANY WHICH IS DISTINCT FROM CIVIL LIABILITY TO PAY TAX 28. The reliance upon Section 9AA of the Central Excise Act 1944 and Section 168(2) of the Companies Act 2013 is untenable in law as these provisions deal with offences committed by a company which is distinct from civil liability to pay tax THE IMPUGNED ORDER IS IN VIOLATION OF PRINCIPLES OF NATURAL JUSTICE 29. This Court is also of the view that any show cause notices issued to the assessee company during the adjudication proceedings does not amount to notice to the petitioner in his personal capacity Admittedly no notice was ever issued to the petitioner personally prior to the passing of the impugned demand notices dated 21st May 2019 and 09th November 2019 and or the attachment order dated 08th June 2020 Indian Kanoon Sanjiv Kumar Mittal vs Deputy CommissionerCgst ... on 6 November 2020 30. In fact during the course of final hearing this Court had put a pointed question to the Principal Commissioner CGST as to whether the respondents would like to give a fresh notice to the petitioner clearly mentioning as to how the petitioner was liable for tax dues of the assessee company. However the Principal Commissioner informed this Court that the department has no material against the petitioner other than the fact that he was a Director of the assessee company 31. Consequently the impugned order is in violation of principles of natural justice 32. This Court is further of the view that recovery cannot be selectively initiated against one of the Directors only i.e. the petitioner 33. For the aforesaid reasons the present writ petition is allowed without costs and the Demand notices dated 21st May 2019as well as 08th November 2019and attachment order dated 08th June 2020are quashed. Any action taken by the respondents in pursuance to the impugned notices order and OIO dated 08th August 2018 against the petitioner are also set aside MANMOHAN J SANJEEV NARULA J NOVEMBER 06 2020 rn js Indian Kanoon 

Summary: The Delhi HC permitted the writ petition to stand still and the court decided to quash all impugned orders made by the respondent (service tax authority) because it was found to be ultra vires to Sec. 87(b) (i) of the finance act 1994. The bench in the matter of Sanjiv Kumar Mittal vs Deputy Commissioner (TRC), CGST Commissionerate Delhi South &amp; Ors, [W.P. (C) 5590/2020 &amp; CM APPL.20200/2020] was headed by J. Manmohan &amp; J. Sanjeev Narula, who opined that Single director can’t be selectively targeted to make payments in recovery of past dues on behalf of the whole company, it’s against the rule of natural justice. The petitioner was a former director in the respondent’s (no. 6’s) company &amp; he resigned from this post within a year of his appointment (22nd august 2014 to 8th July 2015). The petitioner filed the writ before the honorable Delhi HC challenging the act of the respondent (service tax authority), who initiated several orders selectively targeting only the petitioner for recovery of its tax dues from the company for which they relied upon the finance act of 1994. The council for the petitioner argued that the directors of the company and company are two separate juristic entities, further the show cause notice was not issued to the petitioner but only to the company and that had no relation or reference to the petitioner in his personal capacity. Contradicting the above view, the council for the respondent argued that the directors of the company possess a vicarious liability for all the acts of the company and can’t take the defense of being in good faith. The court here recalled the judgment of the Bacha F. Guzdar, Bombay vs. Commissioner of Income Tax, Bombay, AIR 1955 SC 74, stated that, “…a company and its directors are separate and distinct juristic entities and this distinction cannot be jettisoned unless there is a specific statutory provision to the contrary or till a case for lifting of the corporate veil is made out.” The council for respondent referred to Sec. 9AA of the central excise act 1944 to argue that the impugned order is not ultra vires to Sec.87(b)(i) of the finance act 1994. Opposing the above view the petitioner’s counsel argued that Sec. 87(b) (i) of the finance act only provides for a “garnishee order” and not otherwise. The court here supporting the arguments raised by the petitioner’s council states that, “Section 87(b)(i) of the finance act provides for a garnishee order only – i.e. Provides for attachment of funds of an assessee lying with third parties. There is no provision in the finance act making an ex-director, even if having knowledge of affairs of the company, vicariously or jointly liable for the dues of the company.”