2015 (10) TMI 691 - HC - Central Excise

Duty demand u/s 11A - Held that - Issue of applicability of the Customs (Attachment of property of Defaulters for recovery of Government Dues) Rules, 1995, in a case where the authorities under the Central Excise Act sought to proceed against the Director of a company for realisation of the dues of the company, came up for consideration before the Delhi High Court in the decision reported in Anita Grover v. Commissioner of Central Excise and Others - 2012 (12) TMI 802 - DELHI HIGH COURT . A Division Bench of that court, while considering the applicability of the aforementioned Rules, held that it is only the defaulter against whom steps could be taken under the Rules. It was clarified that a defaulter is a person from whom dues are recoverable under the Act and that there was no provision in the Customs Act 1962 corresponding to Section 179 of the Income Tax Act, 1961 or Section 18 of the Central Sales Tax, 1956, which enabled the revenue authorities to proceed against directors of companies, or such like third parties, who are not defaulters. On a consideration of the facts in the instant case, I find that they are similar to the case that was considered by the Delhi High Court in the aforesaid decision, and hence, following the said judgment of the Division Bench of the Delhi High Court, I allow this writ petition by quashing Ext.P2 notice, issued to the petitioner by the 1st respondent, and declaring that the petitioner is not liable to be proceeded against for the recovery of Government dues pertaining to the company. - Decided in favour of assessee.

Summary

Issues:
1. Recovery of central excise duty demand and penalty from a company.
2. Imposition of penalty on the director of the company.
3. Applicability of Section 142 of the Customs Act for recovery of dues from a director.

Issue 1: Recovery of central excise duty demand and penalty from a company

The petitioner, a Director of a private limited company, was involved in a case where a central excise duty demand and penalty were confirmed on the company. Subsequently, a notice was issued to recover the dues from the petitioner under Section 142 of the Customs Act, 1962. The petitioner challenged this notice, arguing that there was no provision under the Central Excise Act enabling the authorities to proceed against him for the company's dues. The court noted the separate legal personality of a company and its members, emphasizing that proceedings against a company cannot automatically extend to its members without specific statutory provisions. The court referenced a Delhi High Court decision to support this interpretation and ruled in favor of the petitioner, quashing the recovery notice.

Issue 2: Imposition of penalty on the director of the company

Despite the central excise duty demand and penalty being confirmed on the company, no penalty was imposed on the petitioner in his capacity as a Director. The petitioner argued that proceedings initiated against the company should not extend to him without explicit legal provisions allowing such action. The court reiterated the principle of separate legal identities of companies and their directors, emphasizing the need for specific statutory provisions to hold directors personally liable for company debts. Relying on a Delhi High Court judgment, the court ruled in favor of the petitioner, declaring him not liable to be proceeded against for the recovery of the company's dues.

Issue 3: Applicability of Section 142 of the Customs Act for recovery of dues from a director

The respondents contended that the petitioner, as a Director during the relevant period, could be held liable for the company's dues under Section 142 of the Customs Act. However, the court emphasized the necessity of specific statutory provisions enabling authorities to proceed against directors for company debts. Referring to a Delhi High Court decision, the court held that recovery actions could only be taken against the defaulter, not directors or third parties, unless expressly provided by law. Consequently, the court quashed the recovery notice issued to the petitioner, affirming that he was not personally liable for the company's government dues.

This judgment clarifies the legal principles governing the recovery of company dues from directors, emphasizing the need for explicit statutory provisions to hold directors personally responsible for company liabilities. The court's decision underscores the importance of upholding the separate legal identity of companies and their directors, ensuring that recovery actions are taken in accordance with established legal frameworks.