PARAS SHANTILAL SAVLA vs. STATE OF GUJARAT

C/SCA/7801/2019 ORDER IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 7801 of 2019 ========================================================== PARAS SHANTILAL SAVLA Versus STATE OF GUJARAT ========================================================== Appearance: UCHIT N SHETH(7336) for the Petitioner(s) No. 1 MS MAITHILI MEHTA, AGP (1) for the Respondent(s) No. 1,2 ========================================================== CORAM: HONOURABLE MR.JUSTICE J.B.PARDIWALA and HONOURABLE MR.JUSTICE A.C. RAO

Date : 27/06/2019

ORAL ORDER (PER : HONOURABLE MR.JUSTICE J.B.PARDIWALA) 1. Rule returnable forthwith. Ms. Maithili Mehta, the learned AGP waives service of notice of rule for and on behalf of the respondents. 2. By this writ-application under Article 226 of the Constitution of India, the writ-applicant has prayed for the following reliefs: “A. This Hon’ble Court may be pleased to issue a writ of mandamus or a writ in nature of mandamus or any other appropriate writ or order directing the learned Respondent authorities to forthwith comply with the order of the learned first appellate authority (annexed Page 1 of 15

C/SCA/7801/2019 ORDER at Annexure D) and withdraw/delete the attachment entered in revenue records on property located at Survey No. 968 (Old Survey No. 1310/1), Manij, Taluka Mahemdabad, District Kheda; B. Pending notice, admission and final hearing of this petition, this Hon’ble Court may be pleased to direct the learned Respondent authorities to forthwith comply with the order of the learned first appellate authority (annexed at Annexure D) and withdraw/delete the attachment entered in revenue records on property located at Survey No. 968 (Old Survey No. 1310/1), Manij, Taluka Mahemdabad, District Kheda; C. Ex parte ad interim relief in terms of prayer B may kindly be granted; D. Such further relief(s) as deemed fit in the facts and circumstances of the case may kindly be granted in the interest of justice for which act of kindness your petitioner shall forever pray.” 3. The case of the writ-applicant in his own words as pleaded in the writ-application is as under: “2. The Petitioner is a co-owner of land along with plant and machinery located at Survey No. 968 (Old Survey No. 1310/1), Manij, Taluka Mahemdabad, District Kheda. The 1st Respondent is the State of Gujarat. The 2nd Respondent is an officer of the State of Gujarat entrusted with the task of collecting tax under the Sales Tax Act and thereby being a State within the meaning of Article 12 of the Constitution is amenable to the writ jurisdiction of this Hon. Court. 3. The Petitioner was a director of a company named Yash Organics Ltd. (herein after referred to as “the company”) The Petitioner had given land along with factory building, plant and machinery co- Page 2 of 15

C/SCA/7801/2019 ORDER owned by him along with his family members on lease to the company by a lease deed dated 16.1.1997. 4. The company faced a legal issue in assessments for the years 1998-99 and 1999-00 under the Central Sales Tax Act, 1956 (herein after referred to as “the CST Act”) because of allegedly false C form declarations sent by customers of the company located outside the State of Gujarat. Other issues were also raised in assessments resulting in total dues of Rs. 8,70,27,390 in the case of the company. 5. For recovery of such dues the learned 2nd Respondent authority attached by order dated 27.11.2001 the land, building and plant/machinery which was owned by the Petitioner but given on lease to the company. 6. Thereafter the Petitioner along with the company filed appeal before the learned Deputy Commissioner of Commercial Tax for challenging the attachment order dated 27.11.2001 on the ground that personal property of the lessor i.e. the Petitioner could not be attached for dues of the company. 7. The learned first appellate authority was pleased to allow the appeal so filed by the Petitioner along with the company and the attachment order was quashed and set aside on the ground that property of the lessor could not be attached under the Sales Tax Act for dues of the company. 8. Despite the fact that the learned first appellate authority have quashed and set aside the attachment of property, the learned Respondent authorities are not withdrawing/deleting the attachment from the revenue records. 9. In the meantime the Petitioner along with other co-owners had filed civil suit against the Sales Tax department regarding the attachment of personal property of the Petitioner and other co- owners for alleged dues of the company. The civil court by judgement dated 31.3.2014 while holding that personal property of the Petitioner could not be Page 3 of 15

C/SCA/7801/2019 ORDER attached for dues of the company, refused to decree the suit on the ground that it did not have jurisdiction to do so because of Section 94 of the Sales Tax Act. 10. The Petitioner has been repeatedly requesting for implementation of order of the learned first appellate authority with his jurisdictional officer orally as well as in writing. 11. Despite the fact that the learned first appellate authority has quashed and set aside the attachment order dated 27.11.2001 the learned Respondent authorities are not giving effect to such order by withdrawing/deleting the attachment from the revenue records. 12. It may be noted that the company also preferred appeals for challenging the assessment orders passed under the CST Act. While the dues as raised in assessment were substantially reduced in appeals, partial dues came to be confirmed by the appellate authorities as well as by this Hon. Court. 13. While the learned Respondent authorities have reduced the amount for which attachment was made in the revenue records, they have failed to withdraw/delete the attachment pursuant to order of the learned first appellate authority. 14. In the respectful submission of the Petitioner non-deletion of attachment on the property co- owned by the Petitioner from the revenue records despite the fact that the learned first appellate authority quashed and set aside such attachment by order dated 13.6.2006 and such order was accepted by the learned Respondent authorities is absolutely arbitrary, mechanical, bad and illegal. 15. The first appellate authority constituted under the Sales Tax Act/Vat Act is a quasi judicial authority whose orders are binding on the Government unless such orders are carried forward in appeal. Non- compliance of order of the learned first appellate authority is completely without authority of law, arbitrary and illegal. Page 4 of 15

C/SCA/7801/2019 ORDER 16. In any case it is respectfully submitted that attachment of property of lessor and director for alleged dues of the company is arbitrary and illegal. It is well settled that a private/public limited company is a separate legal entity and dues in respect of such company cannot be recovered from property of a lessor or director. The Petitioner is supported on all fours by a judgement of this Hon. Court in the case of M. R. Chokshi v/s State of Gujarat 51 VST 73 (Guj.) which was subsequently followed in the case of C.V. Cherian v/s C.A. Patel (2012) 51 VST 71 (Guj.).” 4. Mr. Sheth, the learned counsel invited our attention to the order passed in Appeal by the Deputy Commissioner of Commercial Tax, Appeal-3, Gandhinagar dated 13.06.2006 which reads thus: “ANNEXURE D “Taken into consideration: (1) Registration File of M/s Yash Organics Ltd., Mu. Mahij, Ta. Mahemadabad, Registration Number – 21804398 (2) Order dated 17/11/05 bearing number Nakga/Appeal- 3/05-06/Ja. 2714/16 (3) Memo of Appeal dated 17/1/2006 Heard: Shree M.N. Vyas, Sales Tax Consultant and Bharatbhai Suthar, Accountant Sr. No. Nakaga/Appeal-3/2006-07/Ja. 639/82 Office of Deputy Commissioner of Commercial Tax Appeal-3, Kuber Bhavan, 5th Floor, Sector 10, Behind Krushnabhavan, Gandhinagar Date: 14/6/2006 Order (Under Section 65 of the Gujarat Sales Tax Act, 1969) In respect of appeal in relation to (1) above Shree M.N. Page 5 of 15

C/SCA/7801/2019 ORDER Vyas, Sales Tax Consultant, has remained present. The appellant has on 7/01/2002 filed an appeal in time against order dated 27/11/01 attaching its property passed by the Sales Tax Officer (3) Division -1 Nadiad. The appellant has remained present for hearing on 31/5/2006 in connection with the order mentioned at Sr. No. (2) herein above. Business:- Is of manufacture and sale of industrial solvent. Ground of Appeal: For recovery of dues of the appellant attachment has been placed on leasehold land/plant/machinery which being illegal is liable to be quashed. Submission of the appellant: The appellant is carrying on business by taking land and machinery on lease. Appellant is limited company. Accounting records have been seized in the case of the appellant. Assessment was thereafter undertaken in which dues of Rs. 8,70,27,390 had arisen for which security has been demanded. The assessment of the dealer has been made on the basis of seized records. And property attachment has been made which is prayed to be set aside. In assessment of the appellant dated 12/4/06 Rs. 8,00,00,000 (Rupees Eight crores only) stands deleted and recovery of Rs. 72,00,000 (Rupees Seventy Two Lakhs only) remains outstanding. The plant, land and machinery in the case of the appellant is leasehold and the property is not owned by the company but obtained on lease. Therefore for the dues of the company attachment cannot be put on property belonging to someone else. Further following judgements of Hon. Supreme Court and different High Courts have been delivered: (1) E.S.I.C. Chandigarh vs Gurudayal Singh and Others (Supreme Court – 1991) (2) E.S.I.C. v/s S.K. Agrawal and Others (Supreme Court – 1998) (3) Peter J.R. Prabhu v/s Assistant Commissioner of Commercial Tax (S.T.C. 124/238 Karnataka High Court (4) Mai Svarna v/s Commercial Tax Officer (S.T.C. 201/203 Andhra Pradesh High Court) It is established from the aforementioned judgements that Page 6 of 15

C/SCA/7801/2019 ORDER for dues of the company attachment cannot be put on leasehold premises. Thus, considering these judgements, the order of attachment of property being illegal is ordered to be set aside. Appeal Allowed. Place: Gandhinagar Deputy Commissioner of Commercial Tax Date: 13/6/2006 Appeal-3, Gandhinagar Copy to: (1) M/s Yash Organics Ltd. Mu. Mahij, Ta. Mahemdabad (2) For information of Commercial Tax Officer (3), Ghatak-1, Nadiad (3) For information of Commercial Tax Officer (1), Ghatak-4, Vadodara Copy with complements to: For information to Joint Commissioner of Commercial Tax, Appeal-1, Ahmedabad True Copy Deputy Commissioner of Commercial Tax Appeal-3, Gandhinagar” 5. The facts in this case are not in dispute. The short controversy in this matter is whether personal property Page 7 of 15

C/SCA/7801/2019 ORDER belonging to the Director of a company can be attached and sold for the realisation of the dues from the company under the Gujarat Value Added Tax Act, 2003. The issue is no longer res integra in view of the decision in the case of CHOKSI V. STATE OF GUJARAT (Special Civil Application Nos. 243, 3103 and 7578 of 1991 decided on June 17, 2004).

C/SCA/7801/2019 ORDER Gujarat Sales-tax Act, 1969 (for brevity, "the Act") and consequential reliefs are prayed for. 3. Special Civil Application No.7578 of 1991 is filed by the two Directors of the Kutch Agro Industries Pvt. Ltd. and similar proceedings initiated by the Sales- tax Officer, Bhuj and the Recovery Officer, respondents No.1 and 3 herein, for recovery of sales- tax dues of the said Company from the petitioners. In this petition also the proceedings are challenged on the same ground as in Special Civil Application No.243 of 1991. 4. Since these petitions raise common question about constitutional validity of sub-section (4A) of Section 47 and/or about personal liability of Directors for the sales-tax dues of their respective Companies, we have heard Mr Hasurkar and Mr YS Mankad learned counsel for the petitioners and also heard Mr Gori, learned AGP for the respondent-authorities. 5. At the relevant time, sub-section (4A) of Section 47 of the Act as under:- “(4-A) If a dealer does not pay any amount of tax within the time prescribed for its payment under sub- section (1), (2) or (3) or on or before the date specified in a notice issued under sub-section (4) in respect of the amount of tax falling under sub-clause (ii) of clause (a) thereof, there shall be paid by such dealer for the period commencing on the date of expiry of the aforesaid prescribed time or the specified date and ending on the date of payment of the amount of tax, simple interest at the rate of twenty four per cent per annum on the amount of tax not so paid or on any less amount thereof remaining unpaid during such period; Provided that where a penalty is levied under sub- section (6) of section 45 in respect of the difference and the period referred to in that sub-section, no interest shall be payable under this sub-section on such difference for such period.” However, by Amendment Act No. Guj.20 of 2001, S.6, the rate of interest is reduced from 24 per cent Page 9 of 15

C/SCA/7801/2019 ORDER to 18 per cent w.e.f. 1.9.2001. 6. As regards challenge to the constitutional validity of sub-section (4A) of Section 47 of the Act, our attention is invited to the decision of another Division Bench of this Court in Ashapura Mineral Company vs. State of Gujarat & Ors., (1993) 89 STC 289 wherein the same challenge was raised before this Court. After examining the provisions under challenge and the relevant authorities and after examining various submissions, this Court turned down the challenge and held as under:- “Section 47(4-A) of the Gujarat Sales Tax Act, 1969, which provides for payment of interest at the rate of 24 per cent per annum on amounts of tax not paid within the prescribed time or within the time specified in notices issued under Section 47(4) or on any amounts remaining unpaid, is a provision for payment of interest by a dealer who does not pay tax within the time prescribed for its payment, or on or before the date specified in the notice issued under sub-section (4). The liability to pay interest arises when tax becomes due, either as a result of furnishing of declaration or return by the dealer or on assessment or reassessment as the case may be. Interest is made payable on that HC-NIC Page 3 of 8 Created On Fri Jun 28 12:52:40 IST 2019 amount of tax which ought to have been paid earlier, i.e. within the prescribed time or the specified period and which has not been paid. Interest is made payable because Government to that extent is deprive of the use of money which otherwise it could have got at an earlier point of time. The liability arising under section 47(4-A) is absolute in nature. The rate of interest payable is fixed by the Legislature itself and no discretion in that behalf is left with the sales tax authorities. Once it is found that the dealer has not paid tax within the prescribed time the liability to pay interest arises under the Act and it is not open to the sales tax authorities to waive it for any reason. Separate provision has been made by the Legislature for levy of penalty. The rate of interest under section 47(4-A) is also not so high as to render it penal in nature. Considering the purpose for which the withheld amount can be utilised by the State Page 10 of 15

C/SCA/7801/2019 ORDER Government, the prevailing rate of interest in the market, the rate of 24 per cent per annum cannot be regarded as too high to retain its compensatory character. Section 47(4-A) is in reality and substance not a provision for imposition of levy of penalty and, therefore, it was not necessary for the Legislature to lay down guidelines and to provide for an inquiry. Provision for payment of interest being a method of collecting or recovering revenue, it is for the State to decide what is most efficacious for this purpose, and the defaulter has no moral right to make any grievance in this behalf. If the rate of interest fixed for non-payment of tax within time is not unreasonably high, then it cannot be said to be arbitrary or unreasonable.” The Court also considered the contention that the State which had to refund the amount of excess tax paid either voluntarily by the dealer or as a result of an assessment order had to pay lower rate of interest under Section 54 of the Act. The Court negatived the contention about discriminatory treatment and held that the dues of the Government of a State being the dues of the entire people of the State, there is a valid basis for differentiation between dues of the Government of a State and dues of an individual. Whereas the State Government utilises its funds for public welfare, an individual ordinarily uses money for his private HC- NIC Page 4 of 8 Created On Fri Jun 28 12:52:40 IST 2019 purposes. Hence, the Legislature was justified in treating the State Government as a separate class and providing for a higher rate of interest on the dues of the Government of the State. 7. In view of the aforesaid pronouncement of this Court, the prayers challenging the constitutional validity of the provisions of sub-section (4A) of Section 47 of the Gujarat Sales-tax Act, 1969 are hereby rejected. 8. Coming to the second controversy involved in Special Civil Application No.243 of 1991 and also in Special Civil Application No.7578 of 1991, Mr Hasurkar and Mr Mankad, learned counsel for the Page 11 of 15

C/SCA/7801/2019 ORDER petitioners have submitted that since the Company and its Directors are separate legal entities, the liability of the Company to pay sales-tax on sale of goods effected by the Company cannot be fastened on the Directors personally or on the personal properties of the Directors. Referring to the provisions of Section 26, it is submitted that there are special provisions regarding liability to pay tax in certain cases like on the death of the dealer, partition of a Hindu undivided family, dissolution of a firm and transfer of business, termination of the guardianship or termination of the trust, but there is no provision fastening liability of a private Company on its Directors. Reliance is placed on the decisions in Desirajur Vennkatakrishna Sarma, In re, (1955) 25 Company Cases 32, Kundan Singh vs. Moga Transport Co.(P.) Ltd. & Ors., (1987) 62 Comp. Cases 600 and in Tikam Chand Jain vs. State Government of Haryana & Anr., (1987) 62 Comp. Cases 601. 9. On the other hand, Mr Gori, learned AGP for the respondents has vehemently submitted that since the arrears of sales-tax could not be recovered from the respective Companies, the respondent- authorities are justified in taking recourse to the properties of the Directors. Mr Gori has referred to the provisions of Section 78 of the Gujarat Sales-tax Act and has submitted that the analogy is required to be drawn from the said provisions which lay down that where an offence has been committed by a Company, every person who at the time the offence was committed was in charge of, and was responsible to the Company for the conduct of the business of the Company as well as Company shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly. In the alternative, Mr Gori has submitted that even if the Company and its Directors are separate legal entities, it is open to the authorities to lift the corporate veil and to proceed against the personal properties of the Company. 10. Before dealing with the rival submissions, we would like to point out that in neither of the two Page 12 of 15

C/SCA/7801/2019 ORDER petitions i.e. Special Civil Application No.243 of 1991 and 7578 of 1991, the authorities have passed any specific order fastening the liability on the Directors for payment of sales-tax dues of the respective Companies. For instance, in the letter dated 31.8.1989, the Assistant Sales-tax Commissioner (Appeals) Baroda has informed the concerned Sales- tax Officer at Godhra that the appeal filed by Choksi Plastics Pvt. Ltd. was being dismissed on account of non-compliance with the order for deposit of the sales-tax dues of the said Company, but it appeared that the financial position of the Directors of the said Company was good and it was possible to recover the dues from the said Directors. Hence, appropriate action may be taken for recovery of sales-tax dues of the said Company in accordance with law. It appears that it is on the basis of the aforesaid communication that the Sales-tax Officer, Godhra and the Recovery Officer proceeded against the personal properties of the Directors of Choksi Plastic Pvt. Ltd.. Similarly, in Special Civil Application No. 7578 of 1991 nothing is brought to our notice to indicate that the concerned authority had taken any conscious decision to fasten the Company's liability on the Directors of the Company personally or on their properties. 11. In view of the above factual position, it is not necessary to examine the controversy at length. Suffice it to state that the respondents are not in a position to point out any statutory provision empowering the sales-tax authorities to fasten the liability of Company on its Directors in the matter of payment of sales-tax dues. There appears to be substance in the submission made on behalf of the petitioners that Section 26 containing the said provision regarding liability to pay tax in certain cases covers several contingencies such as the liability in respect of the business carried on by an individual dealer after his death, the liability in respect of the dues where the dealer was an HUF and there is partition amongst various members or group of members; there is dissolution of a partnership firm and also in case of transfer of business in whole or in part. Unlike Section 179 of the Income-tax Act, 1961, there is no provision in the Sales-tax Act fastening the liability of the Company Page 13 of 15

C/SCA/7801/2019 ORDER to pay its sales-tax dues on its Directors. 12. Reliance placed by the learned AGP on the provisions of Section 78 is misconceived. The section specifically deals with offences by companies and the criminal liability is fastened on the Directors who were in charge of and were responsible for the conduct of the business of the Company, but does not at all provide for any personal liability of the Directors to pay the sales-tax dues of the Company nor does it empower the authorities to proceed against the personal properties of the Directors. The very fact that the same Legislature has in the same Act provided for criminal liability of the Directors without providing for any personal liability of the Directors or their personal properties for payment of sales-tax dues of the Company in question, the provisions of Section 78 lend support to the case of the petitioners rather than the case of the authorities. 13. As regards the faint plea of lifting the corporate veil, as per the settled legal position, the corporate veil is not to be lifted lightly. It is only when there is strong factual foundation for lifting the corporate veil that the question of examining the applicability of the principle of lifting such veil would be required to be examined. In neither of the two petitions raising the controversy, the authorities have passed any specific order fastening the liability on the Directors personally, much less any factual foundation has been laid to invoke the doctrine of lifting the corporate veil. Hence it is not necessary to dilate on the said principle any further. 14. In view of the above discussion, Special Civil Application No.3103 of 1991 is rejected since the constitutional validity of sub-section (4A) of Section 47 of the Gujarat Sales-tax Act, 1969 is already upheld in the case of Ashapura Mineral Company vs. State of Gujarat & Ors., (1993) 89 STC 289. Rule is discharged. Similar prayer made in Special Civil Application No.243 of 1991 is also rejected. 15. However, Special Civil Application No.243 of 1991 and 7578 of 1991 are allowed to the extent Page 14 of 15

C/SCA/7801/2019 ORDER that the respondents are restrained from proceeding against the petitioners or their personal properties for recovery of the sales-tax dues of the respective Companies in which they are Directors. Rule is made absolute to the aforesaid extent only in the said two petitions. There shall be no order as to costs.” 7. In view of the aforesaid, this petition succeeds and is hereby allowed. The respondent authorities are directed to forthwith comply with the order passed by the first Appellate authority, Annexure 'D' to this petition and delete the attached entry on revenue records located in Survey No.968 (old survey No. 1310/1) Manij, Ta. Mahemadabad, District Kheda. 8. Rule is made absolute. Direct service is permitted. (J. B. PARDIWALA, J) (A. C. RAO, J) MAYA Page 15 of 15