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WP(C). No. 19624 of 2018

M. Joy Varghese v. State of Kerala

2018 SCC OnLine Ker 13515

In the High Court of Kerala at Ernakulam

(BEFORE DAMA SESHADRI NAIDU, J.)

M. Joy Varghese .…. Petitioner;

v.
State of Kerala Rep. by the Secretary to Govt. of Kerala .….
Respondents.
WP(C). No. 19624 of 2018
Decided on October 10, 2018
Advocates who appeared in this case :
By Adv. Sri. Manjeri Sunderraj
By Advs. Government Pleader
Smt. Sheela Devi I., SC, Central Board of Excise and Customs
Smt. Sheela Devi I. SC Central Board of Excise and Customs
Gp. Sri. Mathew George Vadakel
The Judgment of the Court was delivered by
DAMA SESHADRI NAIDU, J.:— Petitioner Joy Varghese is the Managing Director of a
Private Limited Company—Premier Footwear Products (Pvt.) Ltd.—in Kerala. The
Company owes dues to the Department of Central Excise, Customs and Service Taxes
(the Department), Tamil Nadu. To realise those dues, the Department initiated the
revenue recovery proceedings.
2. The first respondent is the State of Kerala; the second and the third petitioners
are the Assistant Commissioner and the Commissioner of the Central Excise,
respectively (both based in Tamil Nadu); the fourth respondent is the Tahsildar and
the fifth respondent is the Deputy Tahsildar, of Revenue Department, Calicut.
3. The Assistant Commissioner issued to Joy a notice, dt. 09.02.2015, demanding
him to pay over 86 lakh rupees, with an equal amount as penalty. Lest he should face
action under Section 142 of the Customs Act, 1962 (The Act). Joy's reply to that
notice yielded no result, except another similar notice. Then, the Department asked
the State Revenue authorities, that is the Tahsildar and the Deputy Tahsildar, to start
recovery under the Kerala Revenue Recovery Act.
4. Thus, acting on the Department's request, the Dy. Tahsildar, in September 2015,
issued the revenue recovery notice. Then, Joy, for the Company, filed WP (C) No.
34368 of 2018, but later withdrew it “with liberty to file this writ peition personally.”
Submissions:
Petitioner's:
5. Joy's counsel submits that the Company may have been in arrears of the taxes to
the Department. But Joy, as the Managing Director, is not liable for the Company's
debts. According to him, the Company, as a distinct legal entity, must answer the
demand. He asserts that the law is well settled that the personal properties of the
Company's Directors, including the Managing Director, cannot be attached or sold to
realise the Company's debts. This principle, he stresses, applies even vis-a-vis the
debts due to the State or its instrumentalities: the so-called sovereign debts.
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6. To support his contention, the learned counsel has relied on Sunil Parmeshwar
Mital v. Deputy Commissioner (Recovery)1 , Vandana Bidyut Chatterjee v. The Union of
India, judgment dated 13.02.2012 rendered by Bombay High Court, and Deputy
Commissioner of Cus. (Preventive) v. Ayesha A.V.2 .
Respondents':
The Department's:
7. On the other hand, the learned Standing Counsel for the Department contends
that the Company has no assets. According to her, it is a shell company because the
Managing Director and the other Directors have already ensured that the Company
would have no assets to answer any claim against it. She persistently pleads that
recovery of Central Excise dues from the Company or its Directors is a matter of public
interest. She submits that the State debts must have priority. And to realise them,
even the properties of the partners, Directors, and so on can be sold. She relies on
Dena Bank v. Bhikhabhai Prabhudas Parekh3 .
The Reveneu Department's:
8. The learned Government Pleader, in tune with the Statement filed on behalf of
the Tahsildar, has contended that the revenue authorities have only acted on the
Department's request. According to him, the revenue recovery proceedings are
unassailable.
9. Heard the learned counsel for the petitioner, the learned Standing Counsel, and
the learned Government Pleader.
Issue:
10. The Company, of which the petitioner is the Managing Director, owes central
excise dues to the Department. To realise them, the Department started the revenue
recovery proceedings. And acting on the Department's request, the Tahsildar attached
the petitioner's property. Can the Department sell the Managing Director's personal
properties for realising the Company's debts?
Discussion:
11. Indeed, the facts are not in dispute. And the issue to be resolved is a pure
question of law. But that issue must be answered in the back drop that Joy Varghese
is none other than the Company's Managing Director. Also not in dispute is the fact
that the Company is a closely held family establishment. Granted, the Company is not
a party here.
12. The Department wanted to recover from Joy, the Company's MD, Central Excise
dues: Rs. 1,73,10,345/- and interest. It invoked the Kerala Revenue Recovery Act.
Faced with the recovery proceedings, the Company filed WP (C) No. 34363 of 2015. It
obtained a stay. But on 23.01.2017, this Court dismissed the writ petition—for default.
Then, the Village Officer, Kasaba, attached Joy's immovable property: 7.61 cents in
Kasaba Village. Joy received the notice of attachment on 16.09.2017. But, later, this
Court restored the case and extended the stay. At any rate, finally the Company
withdrew the writ petition. The Court, as Joy pleads, has allowed him to file this writ
petition as an individual. So he filed this writ petition.
13. According to the Department, its recovery concerns Pollachi Division of the
Company. It has nothing to do with the arrears of the other sister concerns: Kerala
Footwear Products, or Kerala Rubber Products, or the factories of the Company in other
parts of the country. It contends that the arrears of Pollachi have “attained finality.”
14. The Department also asserts that it has, as a last resort, invoked the Revenue
Recovery Act and Section 142 of the Customs Act. The “Department is writing to the
Director/Company from 2011 onwards”. Joy is said to have misled the Department
that a review petition had still been pending about the Pollachi Unit. The dues, the
Department asserts, pertain to the period when Joy was the MD; so he is liable to pay
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the arrears.
15. Indeed, the Department has elaborately pleaded about the Company's liability
and about how the proceedings have become final. True, the Company's liability has
never been in question. The question, on the contrary, is who should pay the amounts.
The Company bereft of any assets, does the liability get fastened on its constituents—
its Directors, including the Managing Director?
16. Joy's singular contention is that the Department cannot realise the Company's
debts from the Directors or the Managing Director; their properties cannot be sold. So
we will examine the statutory scheme.
17. Section 142 of the Customs Act sets out how the ‘'sums due to the
Government” could be recovered. If “any person” has not paid any amount due under
this Act to the Government, these steps can be taken: (a) the proper officer may
deduct the amount from the money due to that person or (b) the Assistant
Commissioner or the Deputy Commissioner of Customs may recover the amount so
payable by detaining and selling any goods belonging to that person if those goods are
under that authority's control. If the amount cannot be recovered from the person in
the manner provided in clause (a) or clause (b), the Assistant Commissioner of
Customs may certify the amount due from the person and ask the Collector concerned
to recover the dues. The Collector will get jurisdiction if the defaulter owns any
property or resides or carries on his business in his jurisdiction. Then, the Collector will
recover the amounts as if it were an arrear of land revenue.
18. Here the Department has adopted this method. So the State's Revenue
authorities have invoked the Kerala Revenue Recovery Act. Now, we will see whether
this court is correct.
19. In Vandana Bidyut Chatterjee's case a Division Bench of the Bombay High
Court has examined both the Customs Act and the Central Excise Act, besides the
Customs (Attachment of Property of Defaulters for Recovery of Government Dues)
Rules, 1995. Then, it has held that under Section 142, read with Section 156, of the
Customs Act, the Recovery Rules 1995 have been framed. In terms of the Recovery
Rules 1995, the amounts which can be recovered are only those belonging to a
defaulter.
20. A “defaulter” under the Recovery Rules 1995 is any person from whom the
government dues are recoverable. Here the dues of excise duty and penalty are from
the Company. According to Vandana Bidyut Chatterjee, the recovery must be only
from the Company, as it alone is the defaulter. “There is no provision to recover the
arrears of the company” the Bombay High Court declares, “from its Directors and
or/shareholders under the said Act.” It also holds that the arrears of “dues belonging
to a limited company are recoverable only from the limited company concerned which
is an independent entity in law, particularly so, as it obtains a separate registration
under the Act.”
21. Vandana Bidyut Chatterjee further holds there is no provision in the Act, as
found under Section 179 of the Income Tax 1961 or under Section 18 of the Central
Sales Tax Act, 1956, to recover the dues of a private limited company from its
Directors when the private limited company is under liquidation, in specific
circumstances. It is a well settled position in law that a Company incorporated under
the Companies Act, 1956, is a separate person having a distinct, independent
identity—independent from its shareholders and Directors. So the Company's dues
cannot be recovered from the Directors or the individual shareholders.
22. In Ayesha A.V., the issue is whether for the dues of the “defaulter”, the
appellants, that is the defaulter's wife and children, can be proceeded against. This
question was examined on the premise that the very defaulter may have purchased
the properties and kept them in the name of the other family members, or those
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members may have succeeded to the defaulter's estate. This Court, in the end, has
held that the Department cannot avail itself of “any general principle to find a property
possessed and owned by a person as being actually owned or under the control of a
defaulter under the Act and then to proceed for recovery of such properties.” Ayesha
A. V., also observes that the provision under Rule 9 rendering void any transfer of a
property attached would be effective only from the date of notice under Rule 4—and
applicable only to the “defaulter's” properties, at that.
23. In Suman N. Agarwal v. Union of India4 , relied on in Ayesha A.V., the
certificates of recovery were issued under Section 142(1)(c)(ii) in the names of
companies. The petitioner is one of the directors of companies. The Division Bench of
the Bombay High Court, relying on Vandana Bidyut Chaterjee, has held there is no
provision in the Customs Act 1962 to recover the dues of a private limited company
from its directors. Suman N. Agarwal also acknowledges the Department's
contentions, as advanced here, that the corporate entity is a mere shell, used to
defraud the Revenue. Then, it answers that plea: “a case for lifting the corporate veil
must be made out when notices of demand are issued to the company by making the
directors/shareholders liable to pay the dues.” On facts, Suman N. Agarwal has
observed that “no such exercise was carried out and as we have noted neither was a
notice to show cause under Section 124 issued to the Petitioner nor was an order of
adjudication passed against her.” Nor here do I find any such effort.
24. Here, Joy is or was the Managing Director; the properties attached belong to
him. Technically, he is not the defaulter. So, guided by the ratio of Vandana Bidyut
Chatterjee and Suman N. Agarwal, and bound by that of Ayesha A.V., I hold that the
Department's recovery against Joy Varghese cannot be sustained.
25. True, the Directors and, here, the Managing Director may have taken advantage
of the statutory lacunae. A company is a compendium of its constituents—the
shareholders, the directors, and those at the helm of its affairs. Its profits go into their
pockets, so must its losses get compensated from their pockets. But the life of the law
has not been logic—not even of common sense. As Justice Holmes Jr., puts it, it has
been experience. To encourage commerce, the legislatures of yore have designed a
system to hedge the risks of the entrepreneurs. So the law made the companies and
other establishments artificial personas, distinct and different from its constituents,
the human elements. So the companies are the virtual realities of the yesteryear
genius. And the shareholders' liability is limited.
26. Inequitable as the evasion seems, adjudication is amoral. It avoids ethical and
emotional entanglements. Pure and simple, it reads the law, interprets it, applies it,
and arrives at whatever conclusion that interpretation leads to. There have been many
other enactments—for example, the Income Tax 1961 and the Central Sales Tax Act,
1956—that block this legislative exploitation: the duplicity of duality. It is for the
legislature to act, perhaps.
27. I therefore allow this writ petition: The Department cannot recover the
Company's dues from the assets of the Managing Director. Consequently, the recovery
proceedings the Department started through the State's Revenue Authorities cannot
be sustained. Those proceedings are set aside.
28. No order on costs.
———
1 2005 (188) ELT 268 Bombay
2 2014 (300) ELT 167 (Ker.)
3
(2000) 5 SCC 694
4
2013 (289) ELT 281 (Bom.),
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