2025 (11) TMI 1640 - HC - VAT / Sales Tax

Sales tax dues from wound-up company not recoverable from director absent Section 18 CST Act negligence findings

Surinder Kumar Gupta Versus State of Haryana And Ors.

HC held that sales tax dues of a private company cannot be recovered from its director under Section 18 of the CST Act without a specific finding that ... Recovery of sales tax dues of a private company from its Directors - non-existence of provisions on this issue - case of petitioner is that the tax cannot be attributed to gross negligence, misfeasance or breach of duty on his party in relation to affairs of the company - HELD THAT:- As per Section 18 of CST Act, in case of winding up of the company, dues of a private limited company can be recovered from its Directors if conditions contemplated in the said Section are complied with. This Court by order dated 05.09.2005 permitted respondent to pass order after granting opportunity of hearing to the petitioners. Status of assets of the company is not known. The official liquidator might have taken over possession of the assets. Company stands wound up, thus, first condition of Section 18 is complied with. The petitioner has repeatedly claimed that he was 20 years old and a college going student at the time of arising of alleged liability. He has further claimed that there was no negligence misfeasance or breach of duty on his part. In the absence of specific order to the effect that non-recovery was attributed to any gross neglect, misfeasance or breach of duty on the part of petitioner in relation of the affairs of the company, it cannot be concluded that there was compliance of Section 18 on the part of respondents. A period of more than 20 years from the date of assessment orders has passed away. New taxation regime has come into force. In view of interim orders, the respondent could not recover anything from the petitioner. The respondent despite order dated 05.09.2005 of this Court did not initiate process under Section 18 of CST Act. This Court is of the considered opinion that the instant petition deserves to be allowed and accordingly allowed with liberty to respondent to lodge its claim before official liquidator, if any, appointed by Delhi High Court. The respondent would also be free to take steps with respect to CST dues as per Section 18 of CST Act after complying provision of said Section. Petition allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether sales tax dues assessed under the Haryana General Sales Tax Act, 1973 against a private limited company can be recovered personally from its Director in the absence of any specific statutory provision authorising such recovery. 1.2 Whether, and subject to what conditions, sales tax dues assessed under the Central Sales Tax Act, 1956 against a private limited company can be recovered from its Director under Section 18, particularly when: (i) the company was not yet wound up on the date of the impugned recovery notices, (ii) no notice or order under Section 18 was passed despite liberty granted by the Court, and (iii) there is no specific finding of gross neglect, misfeasance or breach of duty on the part of the Director. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Personal recovery of HGST dues from Director of private limited company Interpretation and reasoning 2.1 The liability in question was created by the Assessing Authority under the Haryana General Sales Tax Act, 1973 against the private limited company, including tax, interest and penalty. 2.2 The respondent authorities were unable to point out any provision in the Haryana General Sales Tax Act authorising recovery of the company's outstanding dues personally from a Director of a private limited company. 2.3 The Court noted the earlier interim order staying the impugned recovery notices and the reliance placed in that order on decisions holding that there is no provision under the Haryana General Sales Tax Act for making a Director personally liable for arrears of sales tax due from the company. 2.4 On the factual matrix, there was also nothing on record to show that the petitioner, who was 20 years old and a college-going student at the relevant time, was managing the affairs of the company; the company was promoted and actively managed by another Director who subsequently committed suicide. Conclusions 2.5 In the absence of any statutory provision under the Haryana General Sales Tax Act empowering recovery of a private limited company's dues from its Directors, the respondent had no authority to recover the HGST dues of the company from the petitioner. Issue 2: Recovery of CST dues from Director under Section 18 of the Central Sales Tax Act, 1956 Legal framework 2.6 Section 18 of the Central Sales Tax Act, 1956, as reproduced and applied by the Court, provides that when a private company is wound up after commencement of the Act and any tax assessed on the company under the Act cannot be recovered, every person who was a Director at any time during the relevant period shall be jointly and severally liable for payment of such tax, unless he proves that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company. Interpretation and reasoning 2.7 On the dates of the impugned recovery notices, the company had not yet been wound up. A winding up petition was subsequently filed and allowed by the Delhi High Court by order directing winding up of the company and appointment of the Official Liquidator. The parties could not produce any further order regarding the company's status, and the Court proceeded on the basis that the company stood wound up. 2.8 The respondent sought to rely on Section 18 to justify recovery of CST dues from the petitioner on the footing that he was the sole surviving Director. However, the Court observed that: 2.8.1 Section 18 is attracted only in case of a private company 'wound up' and where tax assessed cannot be recovered from the company. 2.8.2 Even where those conditions exist, the liability of Directors is subject to the statutory condition that non-recovery must be attributable to 'gross neglect, misfeasance or breach of duty' on their part in relation to the affairs of the company, and there must be an order to that effect. 2.8.3 By earlier order, the Court had expressly permitted the department to afford an opportunity of hearing to the petitioner before making any order under Section 18, and clarified that it would be open to the department to proceed under that provision. 2.8.4 Despite such liberty, no notice under Section 18 was issued to the petitioner and no speaking order was passed determining that non-recovery of tax was attributable to any gross neglect, misfeasance or breach of duty on his part. 2.8.5 The petitioner consistently asserted that he was a young, college-going investor and that there was no negligence, misfeasance or breach of duty on his part, and there was no material or specific finding to the contrary recorded by the authorities. 2.8.6 More than 20 years had elapsed since the assessment orders; an interim stay had operated, the company had been ordered to be wound up, and the status of its assets was unclear, with the Official Liquidator likely to have taken possession. 2.9 On these facts, the Court held that, although the subsequent winding up of the company satisfied the first condition of Section 18, the respondent had failed to comply with the substantive and procedural requirements of Section 18, in particular: 2.9.1 Failure to issue notice and give opportunity of hearing to the petitioner before fastening liability under Section 18. 2.9.2 Failure to pass a reasoned order recording that non-recovery of tax was attributable to gross neglect, misfeasance or breach of duty on the petitioner's part in relation to the affairs of the company. Conclusions 2.10 In the absence of compliance with the mandatory conditions of Section 18 of the Central Sales Tax Act, 1956, the CST dues of the private limited company could not be recovered personally from the petitioner on the basis of the impugned notices. 2.11 The writ petition was allowed; the impugned recovery notices seeking to recover HGST and CST dues of the company from the petitioner were set aside. 2.12 The respondent was given liberty to lodge its claim before the Official Liquidator, if any, appointed by the Delhi High Court in the company's winding up, and to take steps for recovery of CST dues in accordance with Section 18 of the Central Sales Tax Act, strictly after complying with the requirements of that provision.