2025 (5) TMI 225 - HC - GST

Liability of petitioner as directors in the liquidated company to pay the dues of such company - scope and applicability of Section 174 of the CGST Act concerning the repeal and saving provisions relating to the Act 1944 and the recovery of dues under repealed enactments - HELD THAT - Section 88 (3) of the CGST Act states that the tax interest or penalty of a private company which would being windup can be recovered from the directors of the company subject to certain conditions when such tax penalty and interest is determined under the CGST Act. This can only mean that tax penalty or interest which had been determined under the CGST Act alone can be recovered from the directors of private company which are under liquidation subject to the condition set out in Section 88 (3) of the CGST Act. Section-174 (2) (e) of the CGST Act provides for institution or continuation of the proceedings to recovery of tax surcharge penalty fine interest or forfeiture arising out of the Act 1944 by utilizing the provisions of the Act 1944 - In the circumstances it would be open to the respondents to initiate action if permissible under the provisions of the Act 1944 against the petitioners. However the provisions of the CGST Act would not be available for such recovery. Conclusion - i) Liability of directors for company dues under liquidation pursuant to Section 88 of the CGST Act is confined strictly to dues assessed under the CGST Act itself. ii) The repeal and saving provisions under Section 174 of the CGST Act preserve the recovery mechanisms under the Act 1944 for dues arising thereunder notwithstanding the enactment of the CGST Act. iii) Recovery of dues under the Act 1944 cannot be effected through the CGST Act and must be pursued under the legal framework of the Act 1944. These Writ Petitions are allowed setting aside the impugned notices by leaving it open to the respondents to avail of such remedies as may be available for recovery of the amounts for which the petitioners may become liable.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court are:

- Whether the provisions of Section 88 of the Central Goods and Services Tax Act, 2017 (CGST Act) apply for recovery of dues arising under the Central Excise Act, 1944 (Act, 1944) from directors of a liquidated company.

- Whether the tax, interest, or penalty determined under the Act, 1944 can be recovered using the machinery and provisions of the CGST Act, specifically Section 88.

- The scope and applicability of Section 174 of the CGST Act concerning the repeal and saving provisions relating to the Act, 1944 and the recovery of dues under repealed enactments.

- Whether the notices issued to the petitioners (directors of the liquidated company) for recovery of dues under the CGST Act are maintainable given that the dues pertain to the Act, 1944 and appeals against original orders under the Act, 1944 are pending.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Applicability of Section 88 of the CGST Act for recovery of dues under the Act, 1944

Relevant legal framework and precedents:

Section 88 of the CGST Act provides liability for directors of a private company under liquidation to pay tax, interest, or penalty determined under the CGST Act if such dues cannot be recovered from the company itself. It states that directors are jointly and severally liable unless they prove absence of gross neglect, misfeasance, or breach of duty.

Court's interpretation and reasoning:

The Court noted that Section 88(3) explicitly refers to tax, interest, or penalty "determined under this Act," i.e., the CGST Act. This restricts its applicability to dues assessed under the CGST Act only. The Court reasoned that this provision cannot be extended to cover dues assessed under a different statute, namely the Act, 1944.

Application of law to facts:

The dues sought to be recovered in these cases arose from assessments and penalties under the Act, 1944. Since these dues were not determined under the CGST Act, Section 88 cannot be invoked to hold the directors personally liable for such amounts.

Treatment of competing arguments:

The respondents contended that Section 88 could be used for recovery of dues under the Act, 1944 as well. However, the Court rejected this, emphasizing the statutory language and the specific scope of Section 88.

Conclusion:

Section 88 of the CGST Act is not applicable for recovery of dues arising under the Act, 1944 from directors of the liquidated company.

Issue 2: Effect of Section 174 of the CGST Act on recovery of dues under the Act, 1944

Relevant legal framework and precedents:

Section 174 of the CGST Act deals with repeal and saving provisions related to the repeal of the Act, 1944 and other related enactments. Subsection (2)(e) and (f) preserve the right to continue or institute proceedings, including recovery of arrears, under the repealed Acts as if those Acts had not been repealed.

Court's interpretation and reasoning:

The Court held that Section 174 explicitly provides that proceedings for recovery of dues under the Act, 1944 must continue under the machinery of the Act, 1944 itself. The repeal of the Act, 1944 by the CGST Act does not extinguish rights or liabilities under the repealed Act, nor does it transfer recovery powers to the CGST Act.

Application of law to facts:

The respondents must pursue recovery of dues under the Act, 1944 using the legal framework and procedures prescribed therein, not under the CGST Act.

Treatment of competing arguments:

While the respondents argued for recovery under the CGST Act, the Court underscored the statutory saving clauses that maintain the continued applicability of the Act, 1944 for recovery and related proceedings.

Conclusion:

Recovery of dues under the Act, 1944 must be effected through the provisions of the Act, 1944, and not under the CGST Act.

Issue 3: Maintainability of recovery notices during pendency of appeals under the Act, 1944

Relevant legal framework and precedents:

The petitioners had filed appeals against the original orders under the Act, 1944 before the Customs, Excise and Service Tax Appellate Tribunal (CESTAT). Normally, recovery of dues pending appeal is subject to statutory provisions and judicial discretion.

Court's interpretation and reasoning:

The petitioners initially sought relief against the original orders but subsequently withdrew that relief, acknowledging that appeals are pending and that recovery should not proceed during pendency of appeals. The respondents also withdrew notices of personal liability against some directors.

Application of law to facts:

The Court noted the withdrawal of relief sought against original orders and the respondents' concession to withdraw certain notices, thus limiting the scope of controversy regarding recovery during pendency of appeals.

Treatment of competing arguments:

The respondents argued that the notices were only to ascertain misfeasance and not recovery notices. The Court observed this but emphasized the statutory framework governing recovery and appeals.

Conclusion:

The relief against original orders was withdrawn by petitioners, and the Court did not interfere with pending appeals. Recovery of dues under the Act, 1944 must follow applicable procedures and cannot be enforced under the CGST Act during pendency of appeals.

3. SIGNIFICANT HOLDINGS

"Section 88 (3) of the CGST Act, states that the tax, interest or penalty of a private company, which would being windup can be recovered from the directors of the company, subject to certain conditions, when such tax, penalty and interest is determined under the CGST Act. This can only mean that tax, penalty or interest which had been determined under the CGST Act, alone can be recovered from the directors of private company which are under liquidation, subject to the condition set out in Section 88 (3) of the CGST Act."

"Section-174 (2) (e) of the CGST Act, provides for institution or continuation of the proceedings to recovery of tax, surcharge, penalty, fine, interest or forfeiture arising out of the Act, 1944, by utilizing the provisions of the Act, 1944."

"In the circumstances, it would be open to the respondents to initiate action, if permissible, under the provisions of the Act, 1944, against the petitioners. However, the provisions of the CGST Act would not be available for such recovery."

Core principles established:

- Liability of directors for company dues under liquidation pursuant to Section 88 of the CGST Act is confined strictly to dues assessed under the CGST Act itself.

- The repeal and saving provisions under Section 174 of the CGST Act preserve the recovery mechanisms under the Act, 1944 for dues arising thereunder, notwithstanding the enactment of the CGST Act.

- Recovery of dues under the Act, 1944 cannot be effected through the CGST Act, and must be pursued under the legal framework of the Act, 1944.

Final determinations:

The Court allowed the writ petitions, setting aside the impugned notices issued under Section 88 of the CGST Act for recovery of dues arising under the Act, 1944. The respondents are at liberty to pursue recovery under the Act, 1944. The relief sought against original orders under the Act, 1944 was withdrawn by the petitioners, and no order was made on costs.