M. Joy Varghese v. State of Kerala and Others

## IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT ## THE HONOURABLE MR. JUSTICE DAMA SESHADRI NAIDU WEDNESDAY, THE 10TH DAY OF OCTOBER 2018 / 18TH ASWINA, 1940 WP(C).No. 19624 of 2018 ## PETITIONER: ## M. JOY VARGHESE AGED 61 YEARS, SON OF LATE M.C VARGHESE, RESIDING AT 19/1908, JOGY', CHALAPURAM POST,KASABA VILLAGE, KOZHIKODE THALUK,DISTRICT,PIN 673 002, KERALA. ## BY ADV. SRI.MANJERI SUNDERRAJ ## RESPONDENTS: 1 THE STATE OF KERALA REP. BY THE SECRETARY TO GOVT. OF KERALA,REVENUE RECOVERY DEPARTMENT,SECRETARIAT, TRIVANDRUM. - 2 THE ASST. COMMISSIONER CENTRAL EXCISECUSTOMS AND SERVICE TAXES POLLACHI POLLACHI DIVISION, PIN 642 001TAMIL NADU. - 3 THE COMMISSIONER OF CENTRAL EXCISE TRC SECTION, COIMBATORE,PIN 640 018 - 4 THE TAHSILDARREVENUE RECOVERY CIVIL STATION, KOZHIKODE, CALICUT PIN 673 020. - 5 THE DY. TAHSILDAR RR0 CIVIL STATION, KOZHIKODE,CALICUT PIN 673 020. 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 WP(C).No. 19624 of 2018 2 ## OTHER PRESENT: ## GP. SRI. MATHEW GEORGE VADAKEL THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 10.10.2018, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: WP(C).No. 19624 of 2018 3 ## JUDGMENT 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 WP(C).No. 19624 of 2018 4 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. WP(C).No. 19624 of 2018 5 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 Parekh_[3] . - 2 2014(300) ELT 167(Ker.) - 3 2000(5) SCC 694 1 2005(188) ELT 268 Bombay WP(C).No. 19624 of 2018 6 ## **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 WP(C).No. 19624 of 2018 7 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.” WP(C).No. 19624 of 2018 8 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 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 WP(C).No. 19624 of 2018 9 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 WP(C).No. 19624 of 2018 10 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 WP(C).No. 19624 of 2018 11 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 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 India_[4] _,_ 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 42013 ( 289 ) ELT 281 (Bom.), WP(C).No. 19624 of 2018 12 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 WP(C).No. 19624 of 2018 13 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. I therefore allow this writ petition: The Department cannot recover the Company's dues from the assets of the Managing Director. Consequently, the WP(C).No. 19624 of 2018 14 recovery proceedings the Department started through the State’s Revenue Authorities cannot be sustained. Those proceedings are set aside. No order on costs. Sd/DAMA SESHADRI NAIDU JUDGE WP(C).No. 19624 of 2018 15 ## APPENDIX ## RESPONDENT'S EXHIBITS: EXHIBIT R2(A): TRUE COPY OF THE CASE STATUS OF R.P. (C)NO.1865/2012 DATED 12.09.2012 OBTAINED FROM THE WEBSITE "COURT.NIC.IN". EXHIBIT R2(B): TRUE COPY OF THE ORDER IN R.(C)NO,.1865 OF 2012 DATED 12.09.2012 OBTAINED FROM THE WEBSITE OF "COURT.NIC.IN". - EXHIBIT R2(C): TRUE COPY OF THE ORDER-IN-ORIGINAL NO.06/2005 DATED 08.06.2005 OF THE 3RD RESPONDENT. EXHIBIT R2(D): TRUE COPY OF THE FINAL ORDER NO.817 TO 819/2006 DATED 31.08.2006 ISSUED BY THE CUSTOMS, EXCISE AND SERVIE TAX APPELLATE TRIBUNAL, CHENNAI. EXHIBIT R2(E): TRUE COPY OF THE ORDER-IN ORIGINAL NO.02/2008 DATED 31.03.2008 OF THE 3RD RESPONDENT. EXHIBIT R2(F): TRUE COPY OF THE FINAL ORDER NO.493/2011 DATED 05.04.2011 ISSUED BY THE CUSTOMS, EXCISE AND SERVICE TAX APPELLANT TRIBUNAL, CHENNAI. EXHIBIT R2(G): TRUE COPY OF THE COMMUNICATION NO.C.NO.IV/16/07/2011-TRC DATED 02.02.2015 ISSUED BY THE 3RD RESPONDENT TO KOZHIKODE COMMISSIONERATE AND ITS ENCLOSURE LETTER DATED 09.11.2015. EXHIBIT R2(H): TRUE COPY OF THE COMMUNICATION NO.GL1032/2015 DATED 08.10.2015 ISSUED BY THE 16 WP(C).No. 19624 of 2018 DISTRICT REGISTRAR(GENERAL) TO THE 2ND RESPONDENT AND THE DETAILS OF TRANSACTIONS. EXHIBIT R2(I): TRUE COPY OF THE LETTER C NO.90/15 DATED 0412.08.2015 ISSUED BY THE SUB REGISTRAR, MEENCHANDA TO THE 2ND RESPONDENT. EXHIBIT R2(J): TYRUE COPY OF LETTER C.NO.IV/16/38/2011 ARR.CELL/15532 DATED 27.12.2011 ALONG WITH DETENTION ORDER DATED 16.12.2011 ISSUED BY THE KOZHIKODE COMMISSIONERATE. ## RESPONDENTS' EXHIBITS NIL // TRUE COPY // P.A. TO JUDGE SD