2017 (8) TMI 626 - HC - VAT and Sales Tax

Recovery of Sales Tax Arrears - whether arrears of sales tax can be demanded from a person who has resigned from the post of Director long before such recovery proceedings were initiated? - section 19-B - Held that - section 19-B will apply only if a company had been wound up and to the directors who hold the said status at the time of winding up of the company - said section cannot be invoked here. As regards section 18 of the Central Sales Tax Act, even if any private company is wound up after the Act, the person who was a director, during the period for which the tax is due, is also jointly and severally liable to pay the amount. But since the company in question is not in liquidation or is not yet wound up, the impugned proceedings taken against the petitioner cannot be sustained. The fact that the petitioner had resigned from the Directorship of Entel Limited on 08.12.1998 and the same was accepted by the Board of Directors of Entel Limited on 22.12.1998 has not been disputed by the 1st respondent, as it has been admitted by him in the written instructions to the learned Additional Government Pleader - demand not sustainable - petition allowed - decided in favor of petitioner.

Summary

Issues:
- Demand notice issued for recovery of Sales Tax from a company where the petitioner was a Director.
- Legal issue of demanding arrears of sales tax from a person who has resigned from the post of Director.
- Applicability of Section 19-B of the Tamil Nadu General Sales Tax Act.
- Applicability of Section 18 of the Central Sales Tax Act.
- Comparison with a similar provision in the Andhra Pradesh Sales Tax Act.
- Previous judgments supporting the non-liability of directors for tax arrears.

Analysis:

The judgment addresses the issue of a demand notice for Sales Tax recovery from a company where the petitioner was a Director. The petitioner, a senior Advocate at the Bombay High Court, challenged the demand notice issued under the TNGST to recover arrears from M/s.Entel Limited, a company where he was a Director for a brief period. The petitioner resigned from his Directorship on 08.12.1998, which was accepted by the Board of Directors on 22.12.1998. The legal question arises whether arrears of sales tax can be demanded from a person who resigned from the Directorship long before the recovery proceedings were initiated.

The judgment extensively discusses the applicability of Section 19-B of the Tamil Nadu General Sales Tax Act, which deals with the liability of directors of private companies on winding up. It highlights that Section 19-B applies only when a company has been wound up, and the directors are liable if the non-payment of tax is due to their neglect, misfeasance, or breach of duty. Since the company in question was not in liquidation, the authorities could not take recovery proceedings against the petitioner based on this provision.

Furthermore, the judgment delves into the relevance of Section 18 of the Central Sales Tax Act, which addresses the liability of directors of private companies in liquidation. It emphasizes that under this provision, directors are jointly and severally liable for tax payments only if the company is wound up. As M/s.Entel Limited was not liquidated, the recovery proceedings against the petitioner were deemed unsustainable under Section 18.

The judgment draws a comparison with a similar provision in the Andhra Pradesh Sales Tax Act, as discussed in a previous decision by the High Court of Andhra Pradesh. The Andhra Pradesh judgment emphasized that directors of private limited companies can only be held liable for tax arrears during liquidation proceedings. Since the petitioner's company was not in liquidation, the recovery notice against the petitioner was invalidated.

Moreover, the judgment references previous judgments, including one in Jacob Vs The Commercial Tax Officer, supporting the non-liability of directors for tax arrears when the company is not in liquidation. The court highlighted that the petitioner's resignation from the Directorship and the company's status as a dormant entity further supported the decision to set aside the recovery notice.

In conclusion, the court allowed the Writ Petition, setting aside the impugned notice for Sales Tax recovery against the petitioner. The judgment clarifies the legal principles governing the liability of directors for tax arrears and establishes that such liability is contingent upon specific conditions, such as the company being in liquidation.