1998 (9) TMI 647 - HC - VAT and Sales Tax

Summary

Issues:
Recovery of arrears of sales tax from directors of private limited companies under the Haryana General Sales Tax Act and the Central Sales Tax Act.

Analysis:
The judgment addresses three petitions filed under articles 226 and 227 of the Constitution, seeking to quash recovery notices issued to the petitioners by the Assistant Collector for arrears of sales tax owed by companies where the petitioners served as directors. The companies in question were involved in business activities in Sonepat, and ex parte assessments were conducted under the Haryana General Sales Tax Act, 1973, and the Central Sales Tax Act, 1956, leading to demands for sales tax payment from the directors personally.

The petitioners argued that as directors, they should not be held personally liable for the tax debts of the companies. Their counsel contended that there was no legal provision allowing the enforcement of a private limited company's tax liabilities against its directors individually. Recovery proceedings initiated against the directors were challenged as illegal.

The respondents, on the other hand, claimed that the directors could be held liable for the arrears of sales tax under section 18 of the Central Sales Tax Act, 1956. They argued that since the directors were associated with the companies in question, the tax recovery could be pursued against them personally. Additionally, they pointed out the absence of any provision in the Haryana General Sales Tax Act barring the recovery of dues from directors of private limited companies.

The Court dismissed the respondents' objection regarding the availability of an alternative appeal remedy, as the petitioners were contesting their personal liability rather than the assessments against the companies. It was established that the directors were indeed associated with the companies and could be held liable under specific circumstances outlined in the Central Sales Tax Act, 1956.

However, the Court emphasized that for directors to be held personally liable for the company's tax debts, it must be demonstrated that the tax assessed on the company under the Central Sales Tax Act cannot be recovered from the company itself. In the absence of evidence regarding the recoverability of the tax from the company's assets, the Court deemed the recovery proceedings against the directors impermissible in law.

Referring to previous judgments, the Court maintained that directors should not be personally liable for the companies' tax arrears unless specific conditions were met. Consequently, the Court ruled in favor of the petitioners, directing the respondents to cease the recovery of sales tax from the directors personally while allowing them to pursue legal actions against the company's assets or other liable parties.