2024 (12) TMI 217 - HC - VAT / Sales Tax

Recovery of dues of the Company from a deceased director s estate - Request to lift the attachment over the subject property - HELD THAT - It is not in dispute that the husband of petitioner had resigned on 07.02.2013 and has expired on 11.08.2017 whereas the recovery proceedings were initiated after the death of the husband of the petitioner in the month of June 2018. It also emerges from the record that the first recovery notice under Section 152 of the Bombay Land Revenue Code 1879 was issued on 07.08.2018 which is placed on record along with the additional affidavit at page 111 of the petition by the respondent. On perusal of provisions of Sub-Section (3) of Section 53 of the VAT Act read with Section 18 of the CST Act it is clear that the recovery proceedings can be initiated upon the Director of the Company in liquidation when the Director proves that non-recovery cannot be attributed to any gross negligence misfeasance or breach of trust on his part. It is therefore necessary to give an opportunity of hearing to the Director whereas in the facts of the case the Director i.e. the husband of the petitioner had expired on 11.08.2017 which is much prior to the issuance of the initiation of the recovery proceedings. Moreover in case of the C.V. Cherian 2012 (3) TMI 372 - GUJARAT HIGH COURT it is held that As regards the faint plea of lifting the corporate veil as per the settled legal position the corporate veil is not to be lifted lightly. It is only when there is strong factual foundation for lifting the corporate veil that the question of examining the applicability of the principle of lifting such veil would be required to be examined. In neither of the two petitions raising the controversy the authorities have passed any specific order fastening the liability on the Directors personally much less any factual foundation has been laid to invoke the doctrine of lifting the corporate veil. Hence it is not necessary to dilate on the said principle any further. The impugned recovery proceedings including the order of recovery certificate as well as the order of attachment issued by the respondents-authorities to recover the outstanding dues of the Company in default M/s. Oren Kitchen Appliances Pvt. Ltd. are not sustainable in eye of law and are accordingly quashed and set aside - Petition allowed.

Summary

Issues Involved:
1. Legality of recovering company dues from a deceased director's estate.
2. Application of Section 53(3) of the VAT Act and Section 18 of the CST Act.
3. Validity of recovery proceedings initiated posthumously.
4. Alternative remedies available under the Revenue Recovery Act.

Issue-wise Detailed Analysis:

1. Legality of Recovering Company Dues from a Deceased Director's Estate:
The petitioner contended that the recovery of company dues from the estate of her deceased husband, who was a former director, was unlawful. The petitioner's husband had resigned as a director before his death, and the recovery proceedings were initiated posthumously. The court noted that the director's resignation was effective from February 7, 2013, and he passed away on August 11, 2017. The recovery proceedings commenced in June 2018, after his demise, which raised significant legal questions about the liability of a deceased director's estate for company dues.

2. Application of Section 53(3) of the VAT Act and Section 18 of the CST Act:
The court examined the provisions of Section 53(3) of the VAT Act and Section 18 of the CST Act, which outline the conditions under which directors of a private company can be held liable for the company's tax dues. These provisions stipulate that directors may be liable if the company is wound up and the tax cannot be recovered from the company, provided there is evidence of gross neglect, misfeasance, or breach of duty by the directors. The court emphasized that these provisions require a factual foundation to establish personal liability, which was absent in this case. The court also referenced precedents, including the Hon'ble Apex Court's decision in Shankar Rudra, which clarified that directors' liability arises only when a company is wound up and not otherwise.

3. Validity of Recovery Proceedings Initiated Posthumously:
The court found that initiating recovery proceedings against a deceased individual was procedurally flawed. The legal provisions necessitate an opportunity for the director to prove that non-recovery of dues was not due to their gross neglect or breach of duty. Since the director in question was deceased, such an opportunity was inherently unavailable, rendering the proceedings invalid. The court referenced the case of C.V. Cherian, which underscored that directors are not personally liable for sales tax dues unless specifically provided by law.

4. Alternative Remedies Available under the Revenue Recovery Act:
The respondents argued that the petitioner had an alternative remedy under the Revenue Recovery Act to challenge the recovery certificate. However, the court determined that the fundamental issue was the legality of the recovery proceedings themselves, which could not be rectified merely by pursuing alternative remedies. The court emphasized that the recovery certificate and attachment orders were issued without a proper legal basis, given the circumstances of the director's resignation and subsequent death.

Conclusion:
The court concluded that the recovery proceedings and the attachment order against the petitioner's property were unsustainable in law. The impugned actions were quashed and set aside, reaffirming that directors cannot be held personally liable for company dues without a clear legal basis and due process. The rule was made absolute, and no costs were imposed.