2014 (3) TMI 1137 - HC - VAT and Sales Tax

Court clarifies application of Kerala Sales Tax Act, allows one appeal, dismisses another. Parties can raise procedural objections.

Mohammed Harid Versus District Collector

The Court held that Section 26C of the Kerala General Sales Tax Act applies to liabilities incurred before 1.4.1999, rejecting the argument for ... Recovery of the sales tax due from the Private Companies - section 26C of KGST Act - first contention raised by the learned counsel appearing for the parties was that S. 26C being prospective, tax due for any period prior to 01.04.1999, could not have been recovered by taking recourse to this provision - Held that:- Section 26C will be applicable for recovering the tax or other amount due under the K.G.S.T. Act from a Company either existing, wound up or is under liquidation and if the other ingredients of the section are also satisfied, every person who was a Director of such company at the time when the amount became due, shall be jointly and severally liable. This therefore means that under Section 26C, a Director, who was in office when the amount became due, is made liable for amount due from the company and such liability could have been incurred by the Company any time prior to 1.4.1999 also and if such liability is remaining outstanding and is not recoverable for any reason as stated in the Section, the Directors who were then in office are jointly and severally liable. The above elements of the Section would show that though this provision was introduced w.e.f. 1.4.1999, it applies for recovery of the liabilities incurred by the company prior to 1.4.1999 also. Section 26C of the K.G.S.T. Act cannot be taken advantage of by the State to recover amounts due to it for the periods prior to 1.4.1999. Appeal allowed. Issues Involved:1. Retrospective application of Section 26C of the Kerala General Sales Tax Act.2. Validity of recovery proceedings initiated without prior notice under Section 34 of the Revenue Recovery Act.3. Compliance with the provisions of the Companies Act in proceedings against Directors.Issue-wise Detailed Analysis:1. Retrospective Application of Section 26C of the Kerala General Sales Tax Act:The primary issue was whether Section 26C, introduced by the Kerala Finance Act 1999, which holds Directors of Private Companies jointly and severally liable for unpaid taxes, could apply to tax liabilities incurred before its enactment on 1.4.1999. The petitioners argued that Section 26C should be prospective, relying on the judgment in Kassim v. Sales Tax Officer, which held that Section 26C could not affect liabilities for assessment years prior to 1.4.1999.However, the Court examined the language of Section 26C, noting that it applies to any tax or other amount due under the KGST Act, regardless of when the liability was incurred, provided the company cannot pay. The Court found that Section 26C is not retrospective but applies to existing liabilities as of 1.4.1999. This interpretation was supported by precedents such as Dena Bank v. Bhikhabhai Prabhudas Parekh & Co., where the Supreme Court held that a similar provision in the Karnataka Sales Tax Act was prospective but applicable to past liabilities.The Court concluded that Section 26C could be used to recover tax dues from Directors for periods before 1.4.1999, rejecting the Kassim judgment as it did not consider the language of the statute and relevant precedents.2. Validity of Recovery Proceedings Initiated Without Prior Notice Under Section 34 of the Revenue Recovery Act:The petitioners contended that proceedings under Section 65 of the Revenue Recovery Act were initiated without issuing a notice under Section 34, violating procedural requirements. The Court acknowledged that proceedings under Section 65 must be preceded by those under Section 34, as established in Muralidharan v. State of Kerala.However, these contentions were deemed factual and not related to the validity of Section 26C itself. The Court left it open for the affected parties to raise these issues in their objections to the recovery proceedings.3. Compliance with the Provisions of the Companies Act in Proceedings Against Directors:The petitioners argued that Section 26C should be read subject to the Companies Act, and the State could not ignore the statutory protections available to Directors under the Companies Act. The Court agreed that Section 26C is subject to the Companies Act and that any statutory rights or protections contravened by the recovery proceedings could be contested by the Directors.The Court clarified that the State could not proceed as if Section 26C contained a non-obstante clause overriding the Companies Act. Directors could raise these issues in their objections to the recovery proceedings.Conclusion:The Court disposed of the Writ Petitions and allowed the State's appeal in W.A. No. 956/13, holding that Section 26C applies to liabilities incurred before 1.4.1999. The appeal in W.A. No. 1995/12 was dismissed, as the appellant did not merit relief under discretionary jurisdiction due to non-compliance with court orders and previous conduct. The Court left open the factual contentions regarding procedural violations and compliance with the Companies Act for the parties to raise in their objections to the recovery proceedings.