2005 (8) TMI 116 - HC - Central Excise

Recovery of Government dues - Liability to pay excise dues - Res judicata - Whether the former Director of the company could be held responsible and liable for payment of liabilities of the defaulting company, after ceasing to be a Director of that company - Validity Of notices issued to the petitioners - breach of principles of natural justice - HELD THAT - As seen hereinabove, Section 4 of the Act provides for valuation of excisable goods for the purposes of charging of duty of excise and makes the assessee; which includes his agent liable to pay the excise duty under the Act. It would be right to say the duty is charged on goods, but the person who is liable to pay the duty is the person known as the assessee . Clause (a) of sub-section (3) of Section 4 defines assessee exhaustively to mean the person who is liable to pay the duty of excise under the Act and includes his agent. The duty can be recovered from the person who is an assessee within the meaning of definition. Under Section 6 no person can engage in the production or manufacture of any specified goods, included in the First schedule of the Act (now the new Central Excise Tariff) except under the authority and in accordance with the terms and conditions of a licence granted under the Act. If a person produces 'excisable goods' within the meaning of that expression, he has got to obtain a licence under Section 6 of the Act. Examination of the above provisions would unequivocally go to show that none of the provisions makes the former Director personally liable to pay excise duty. The Act does not impose any obligation or liability on the former Director to pay the arrears of excise duty. If that be so, even the subordinate legislation cannot bring such a person within its fold. The word 'defaulter' has also been defined to mean any person from whom Government dues are recoverable under the Act. Rule 3 deals with the issuance of recovery certificate; whereas, Rule 4 provides for issuance of notice. Notice is required to be issued and served upon a defaulter requiring him to pay the amount specified in the certificate issued under Rule 2(iii) within seven days from the date of the service of the notice. As already stated 'defaulter' means a person from whom Government dues are recoverable under the Act. None of the provisions under the Rules of 1995 makes the former Director responsible to pay the dues of the Government. The absolute liability created under the Act and the Rules is of that person who is an assessee i.e. a person engaged in production or manufacture of any specified goods included in I schedule of the Act (now the new Central Excise Tariff). In this view of the matter, in our opinion none of the petitioners were and are liable to pay the alleged Government dues either under the provisions of the Act or Rules of 1995. Notices issued to the petitioners were not only in breach of principles of natural justice but the same were in violation of section of Section 11A of the Excise Act. At this juncture, it will not be out of place to mention that even under the provisions of the Companies Act the petitioners are not liable to discharge the liability of the company, if any, of which they were Directors in the past. As soon as a company is incorporated, it constitutes an independent juristic person in the eyes of law as distinct from its members constituting it. Even private limited company consisting of only two members has, nonetheless, a separate legal entity. It is entirely different from its members. From the date of its incorporation a company is endowed with certain special rights and privileges and, unlike the partnership firm or a Hindu undivided family, is not a mere aggregate of members. It can carry on business and can acquire and hold property in its corporate name and has other special advantages e.g. to contract with all its members and others. In short, it becomes a body corporate capable of exercising all functions of an incorporated company having a perpetual succession. It remains in existence, irrespective of the changes in its members, until it is wound up and dissolved under the provisions of the Companies Act. The characteristic of company limited by shares is that it enjoys the privilege of limited liability i.e. liability of its member is limited to the extent of the face value of the shares subscribed by each member and the amount remaining unpaid an them for the time being. Thus, considering effect of incorporation of a company and its independent juristic existence, a former Director of the company cannot be held responsible for payment of the liabilities of the company in absence of any specific provision. No contrary provision to persuade us, not to take a view taken hereunder, was brought to our notice. Thus, we have no hesitation to hold and declare that petitioners herein cannot be held liable to pay outstanding dues of the central excise duty sought to be demanded from them. We, therefore, quash and set aside the impugned last demand notice dated 1st October, 2003 holding it to be without jurisdiction and without authority of law and make the rule absolutely in terms prayer Clause (a) and (b) with no order as to costs.

Summary

Issues Involved:
1. Validity of demand notices issued to former directors for the liabilities of the company.
2. Applicability of Central Excise Act and Customs (Attachment of Property of Defaulters for Recovery of Government Dues) Rules, 1995.
3. Liability of former directors under Section 9AA of the Central Excise Act, 1944.
4. Compliance with Section 11A of the Central Excise Act regarding the issuance of demand notices.
5. Principle of res judicata and its applicability to the case.

Detailed Analysis:

1. Validity of Demand Notices Issued to Former Directors:
The petitioners challenged the demand notices dated 1st October 2003, issued by the Central Excise Department, requiring them to pay a sum of Rs. 28,21,710/- on behalf of M/s. GTL, a company where they were formerly directors. The court noted that the petitioners had resigned from their directorship years before the issuance of the demand notices and had no ongoing connection with the company. The court found that the Central Excise Act, 1944, and the Customs (Attachment of Property of Defaulters for Recovery of Government Dues) Rules, 1995, do not impose liability on former directors for the dues of the company.

2. Applicability of Central Excise Act and Customs Rules:
The court examined the relevant statutory provisions, including Section 3, Section 9AA, and Section 11A of the Central Excise Act, and the Customs (Attachment of Property of Defaulters for Recovery of Government Dues) Rules, 1995. It concluded that none of these provisions make former directors liable for the company's excise duty arrears. The court emphasized that the liability created under the Act and the Rules is of the person who is an "assessee," i.e., engaged in the production or manufacture of excisable goods.

3. Liability of Former Directors under Section 9AA:
The court analyzed Section 9AA of the Central Excise Act, which deals with offenses by companies. It stated that this section does not impose liability on former directors for the company's dues. The court highlighted that the proviso to Section 9AA(1) allows a person to prove that the offense was committed without their knowledge or that they exercised due diligence to prevent its commission. Therefore, the court held that Section 9AA does not apply to the petitioners.

4. Compliance with Section 11A of the Central Excise Act:
The court noted that the demand notices were issued without compliance with Section 11A of the Central Excise Act, which requires a show-cause notice to be served on the person chargeable with the duty. The court cited the Supreme Court's judgment in Gokak Patel Volkart Ltd. v. Collector of Central Excise, Belgaum, which held that a show-cause notice is a condition precedent to a demand under Section 11A. The court found that the demand notices issued to the petitioners were in violation of Section 11A and principles of natural justice.

5. Principle of Res Judicata:
The court addressed the argument of res judicata raised by the petitioners. It noted that the Customs, Excise & Gold (Control) Appellate Tribunal (CEGAT) had previously dismissed an appeal by Mr. S.P. Mittal, stating that the duty demand and penalty were confirmed only against the company and not against him personally. The court held that this order binds the respondents and prevents them from demanding the company's dues from the petitioners. The court cited the Supreme Court's judgment in Sulochana Amma v. Narayanan Nair, which explained the principle of res judicata, emphasizing that it applies to all judicial proceedings, including quasi-judicial proceedings of tribunals.

Conclusion:
The court concluded that the petitioners, as former directors of the company, are not liable to pay the company's excise duty arrears under the Central Excise Act, 1944, or the Customs (Attachment of Property of Defaulters for Recovery of Government Dues) Rules, 1995. The court quashed the demand notices dated 1st October 2003, holding them to be without jurisdiction and authority of law, and made the rule absolute in terms of prayer clauses (a) and (b) with no order as to costs.