2018 (12) TMI 1284 - HC - VAT and Sales Tax

Validity of recovery proceedings - constitutional validity of provisions of Section 26C of the Kerala General Sales Tax Act, 1963 - validity of proceedings against the Director of a private limited company - Held that - Section 26C specifically speaks of joint and several liability of every person who was a Director of a private limited company only if the tax or other amounts recoverable under the Act cannot be recovered for any reason from the private company - Hence the proceedings has to be taken first against the company and there should also be sufficient material to show that the recovering authorities were not able to recover the amounts from the assessee company. There is no such averments made by the Government in the counter affidavit also. Since Section 26C contains a specific clause that it would be subject to the Companies Act, if any statutory right or protection is available to the Director under the Companies Act contravention of the same could be taken as a defense against the recovery. Petition allowed - decided in favor of petitioner.

Summary

Issues:
1. Constitutionality of Section 26C of the Kerala General Sales Tax Act, 1963.
2. Proceedings against the Director of a private limited company and the applicability of the Companies Act.

Analysis:
1. Constitutionality of Section 26C:
The petitioner challenged the revenue recovery proceedings based on the contention that Section 26C of the Kerala General Sales Tax Act, 1963 is unconstitutional. The court referred to a previous judgment in Jose Kurian v. The Deputy Tahsildar, where it was established that proceedings against Directors of a private limited company can only be initiated after proceedings against the company itself. The court highlighted that Section 26C mandates joint and several liability of Directors only if recovery from the company is not feasible. The court emphasized that there must be sufficient evidence showing the inability to recover from the company before proceeding against the Directors. The Government failed to provide such evidence in this case.

2. Applicability of Companies Act:
The court noted that Section 26C is subject to the provisions of the Companies Act, 1956. The petitioner's counsel argued that Directors can raise defenses under the Companies Act if recovery from the company is unsuccessful. This argument was supported by a previous decision in Mohammed Harid v. District Collector, where it was held that Directors can utilize statutory rights or protections under the Companies Act as a defense against recovery proceedings. The court upheld this argument and allowed the writ petition, setting aside the recovery against the petitioner. The State was given the opportunity to proceed lawfully.

In conclusion, the High Court of Kerala ruled in favor of the petitioner, emphasizing the need to follow the established legal principles regarding the constitutionality of Section 26C and the application of the Companies Act in proceedings against Directors of private limited companies.