Resigned Director liable to pay service tax for his period. High Court declined to stay arrest or appearance before DG GST Intelligence in connection with the investigation/enquiry
ABCAUS Case Law Citation:
ABCAUS 2342 (2018) (05) HC
The instant Writ Petition was filed seeking direction to the office of Additional Director General at Director General of Goods and Service Tax Intelligence (DGGI) [the Department] Unit not to arrest the petitioner on his appearance before him in connection with the investigation/enquiry of the Case registered against a Private Limited Company over alleged evasion of Service Tax in violation of the provisions of Section 89 (1) (ii) of the Finance Act, 1994 read with Section 174 of the Central Goods & Services Act, 2017.
The contention of the petitioner was that he was an Ex-Director of the Company. The Company was established by the petitioner and two others. Due to a personal dispute between the petitioner and the other directors, the petitioner was made to resign from the company and, his resignation from the Directorship was duly reported to the Registrar of the Company (RoC) in accordance with law.
It was also submitted that the other two directors had divested the petitioner from being signing authority in the bank account of the said Company which was duly communicated by them through their letter issued to the banker of the said Company, therefore, since the petitioner had nothing to do with the business carried out by the said Company from which, he had to finally resign, the business of the said Company continued to be done by the remaining directors. Subsequently, the petitioner and one of the directors entered into a “Deed of Settlement” in order to settle the business dispute and it was decided that the petitioner will control and handle the businesses of five group Companies whereas the other director will control and handle the businesses of three Companies, which included the company in question. It was also agreed between them that they would continue to be responsible for all the liabilities of the respective Companies controlled by them including the statutory liabilities and customers advances etc.
However, the service tax allegedly due upon the said Company remained unpaid as a result of which an enquiry/investigation was launched against the said Company and its Directors for evasion of service tax which is an offence punishable under Section 89(1)(ii) of the Finance Act, 1994 with imprisonment for a term which may extend to seven years. The said penal Section had been made cognizable with effect from 14.5.2016 by way of amendment carried out under Finance Amendment Act, 2016. Under Section 90 and 91 of the Said Act (Finance Act), the procedure and power of arrest is also laid down on the default of payment of service tax.
It was mentioned that the impugned summon was served upon the petitioner requiring him to be present before the Investigation Officer (IO) in his office. It was issued by filling the blanks on a prescribed format which did not show that any case of service tax evasion was launched against the said Company. Prior to the service of the said summons, the petitioner did not have any knowledge with regard to enquiry/investigation going on as he had left the Company. He had come to know that when the remaining Directors of the said Company appeared before IO in response to the summons issued to them when both of them were arbitrarily arrested and were remanded to judicial custody.
It was submitted that if he appears voluntarily to give evidence pursuant to the summons, he could also be arrested. It is further mentioned that in respect of the Companies which had been under the control and management of the petitioner after “Deed of Settlement”, all the due taxes have been paid regularly to the concerned authorities by him from time to time and there had never been any complaint.
It was further argued that an amount of Rs. one crore was deposited by the petitioner but no such averment has been found to have been made in the affidavit or in rejoinder-affidavit filed on behalf of the petitioner. Also, the said contention of depositing of the said amount has been vehemently denied by the Department.
The Department submitted that the petitioner had not given any reason/documents as to why he was made to resign and divested from being signing authority in the bank account of the said Company. The letter sent to the bank did not indicate the date on which the same was received by the bank and also the petitioner was silent in respect of other bank accounts of the Company. When the petitioner has nothing to do with the business carried out by the company, why he continued to remain Director of the same for period of more than one and half years from the date of his resignation.
It was further mentioned that the liability to pay service tax or for that matter any tax is a statutory liability imposed by statute under the authority of law in terms of Article 265 of the Constitution. There is a vicarious responsibility cast upon the Directors to pay the service tax. The Section 9AA of the Central Excise Act, 1994 makes it absolutely clear that the Directors of the Company and other persons are liable for the offence. The Section 168 of the Companies Act, 2013 stipulates that the Director who has resigned shall also be liable even after his resignation for the offences which occurred during his tenure. Thus, the penal/statutory liability which has been imposed by a statute (in this case Section 9AA of Central Excise Act, 1944 and proviso to sub-Section (2) of Section 168 of the Companies Act, 2013) cannot be over-written by contractual “Deed of Settlement”.
It was submitted that the petitioner himself had accepted the fact that the service tax was due from the company which remained unpaid, as a result of which, an inquiry/investigation was started by the Department against the said Company and its Directors for evasion of service tax which is an offence punishable under Section 89(1) (ii) of the Finance Act, 1994.
Further, it is submitted that there is no requirement of any prior notice before issuing summons under Section 14 of the Said Act. In fact, the summons can be issued to any person whose attendance is considered necessary either to give evidence or to produce the document or any other thing in any inquiry which a Central Excise Officer is making for any of the purposes of the said Act. The other two Directors who appeared in compliance with summons gave clinching evidence including one hand-written diary mentioning cash receipts on which no service tax had been paid. Their arrest was made following due process of law and as per guidelines laid down by C.B.E.C. (Central Board of Excise and Customs) vide its circular dated 30.9.2016.
Further it was mentioned that the apprehension of the petitioner for being arrested is unfounded as he could show his honest intention by appearing in response to the summons issued to him and could have cooperated in the investigation. He was given complete 17 days time since service of summons upon him but during this entire period, he concealed himself and did not deposit any amount of service tax. The attention of the Court had also been invited to the fact that till date no commercial space/unit has been constructed in the project which clearly showed that the intention of the fraud not only with the Government but also with customers, was there from whom the advances along with service tax had been collected by the Company. Further it was submitted that due to personal dispute with Co-Directors, the petitioner was removed and divested of the right of being signing authority in the bank account of the said Company and, thereafter, he resigned but as per record, petitioner remained Director in the said Company for considerable time and during this period of his directorship, more than two crores of service tax was received by him from the customers but the same was not deposited into Government account.
It was further submitted that there are six essential ingredients laid down by CBEC vide circular dated 30.9.2016 relating to arrest which are required to be established to the satisfaction of the competent authority before ordering arrest. However, if the alleged offender was assisting in the investigation and had deposited at least half of the evaded tax, then the need to arrest may not arise. In the case at hand, all the ingredients were established to the satisfaction of the competent authority. The service tax collected but not deposited was beyond Rs. 4.80 crores and the alleged offender had neither shown any intention of assisting in the investigation nor he deposited at least half of the evaded tax and there was great probability of destruction of evidence, therefore, the arrest became inevitable. Further, it was mentioned that simply because the offence was compoundable, does not place any embargo on the power of arrest vested in Section 91 of the Finance Act.
It was submitted that all the Directors were passing their responsibility on one another and none of them had paid full dues towards the service tax along with interest and penalty nor have they provided requisite details to the department. Also the cash transactions figures of around 45 crore remain unexplained by the three accused Directors, thus, they had committed a crime against the country by collecting taxes from the customers and not depositing the same to the Government rather misappropriated the said money. This was an offence of grave and serious nature, hence, no indulgence should be granted to the petitioner.
The Hon’ble High Court observed that as per the scheme of the Finance Act an offence under Section 89 of Act is a cognizable offence by virtue of Section 90 and in Section 91 power of arrest is conferred upon an officer of the Central Excise Department not below the rank of Superintendent of Central Excise nominated by the Principal Commissioner of Central Excise or Commissioner of Central Excise who would adopt the same procedure as provided under Cr.P.C. for arrest.
It was also observed that being an economic offence, separate guidelines have been issued by the Department which need to be followed while making arrest and the most important among them being that in case the accused is ready to deposit at least half of the service tax due, the need to arrest may not arise.
The Hon’ble High Court also observed that as stated by the Department, the petitioner neither made himself available for being interrogated nor was ready to deposit half the amount of service tax due to be realised, there was a huge amount of service tax outstanding belonging to the period when the petitioner was one of the Directors, therefore he cannot take the plea of not being liable to pay in terms of the “Deed of Settlement”.
In view of the above, the Hon’ble High Court held that no case was made out in favour of the petitioner to pass any order prohibiting his arrest, if the same had to be carried out in accordance with the provisions as provided under the Finance Act. The prayer was accordingly dismissed.
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