2007 (1) TMI 254 - HC - Companies Law

Recovery of sales tax arrears - due in respect of a company from its directors - Directors resigned from the directorship - Proceedings u/s 8 of the Revenue Recovery Act - Powers of u/s 19A - HELD THAT - It is well-settled that a company is a legal entity by itself and it can sue or can be sued as a legal entity and any dues from the company has to be recovered only from the company and not from its directors. Section 19A of the Act cannot be taken assistance by the respondent for sustaining the order, which provides for the liability to tax of partitioned Hindu family, dissolved firm. Even section 19B of the Act, which provides for liability to tax private company on winding up, cannot be invoked. Thus, I am of the view that the impugned order is liable to be set aside and it is accordingly set aside. The writ petitions are allowed.

Summary

Issues:
Challenge to distraint proceedings initiated by the Commercial Tax Officer to recover sales tax arrears from the petitioners. Interpretation of liability of directors for tax dues of a company under the Tamil Nadu General Sales Tax Act.

Analysis:
The petitioners contested distraint proceedings initiated by the Commercial Tax Officer to recover sales tax arrears from them, arguing that as directors of a public limited company, they cannot be held personally liable for the company's tax dues. The company had been taken over by the Tamil Nadu Industrial Investment Corporation, rendering it defunct, and the petitioners had resigned as directors. The petitioners emphasized that a company is a separate legal entity, and any recovery should be made from the company's assets, not the directors'. The petitioners filed a writ petition challenging the distraint proceedings based on these grounds.

The Government, represented by Mr. Shanmugasundaram, contended that the company could be treated as an association of persons, allowing proceedings under section 19A of the Tamil Nadu General Sales Tax Act to be initiated against individuals asserting themselves as such.

After hearing arguments from both sides and examining the relevant statutory provisions, the court rejected the Government's argument. It affirmed that a company is a distinct legal entity capable of being sued or suing on its own, and any dues must be recovered from the company itself, not its directors. Section 19A of the Act, relating to the liability of a partitioned Hindu family or dissolved firm, could not be used to hold the directors personally liable for the company's tax dues. Similarly, section 19B, pertaining to the liability of a private company on winding up, was deemed inapplicable.

The judgment referenced several decisions from various High Courts to support its conclusion. These cases emphasized that directors cannot be held personally liable for a company's tax debts unless they have the company's assets in their possession. The court highlighted that a company's legal entity is distinct from its directors or shareholders, preventing proceedings against directors for the recovery of the company's dues.

Based on the legal precedents and the absence of statutory provisions allowing recovery from directors, the court set aside the impugned order, ruling in favor of the petitioners in the writ petitions. The judgment concluded that the directors could not be held personally liable for the company's sales tax arrears under the Tamil Nadu General Sales Tax Act.