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Introduction
In the Previous Article, of which this Article is a continuation, we saw as to how the Recovery Officer of Employees’ Provident Fund Organisation demanded from the Petitioner, who was a Director, to either pay the provident fund dues or face arrest. Further when a Writ Petition was filed by the Petitioner before a Single Judge of the High Court it was decided that there is a prima facie case made out against the Director, hence he at least should deposit Rs. 2,00,000/- during pendency of the Writ. But the Director being sure of his honesty did not budge and approached, against the said decision of the Single Judge, to the Division Bench of the High Court in Letters Patent Appeal.
This was the recapitulation of the discussion till now and let’s now, without wasting any further time, see how the Petitioner protected himself against the illegal demand of the Recovery Officer.
How to Approach High Court for Invoking Writ of Certiorari
Now after discussing the ways in which the EPFO can force a Director to pay according to its whims and fancies, let’s discuss how a Director/Promoter/Employer can deal with such illegal demand of EPFO or any other government organisation for that matter. I would suggest the best way is to approach High Court with a prayer for issuance of Writ of Certiorari, as the remedy is both expeditious and efficacious. Efficacious because it will cancel/quash the notice and any other order of demand made by the EPFO in pursuance of that notice. Expeditious because no evidence is required to be lead in the case of a Writ Petition as everything is either on Affidavit or Counter Affidavit, which saves considerable time of the petitioning party. (Other procedure relating to the Writ Petition is explained by me in this Article)
But on what ground a person can request the High Court for quashing the Show Cause Notice and subsequent order of demand? Though the grounds can be manyfold but in this case they can be these particular two:
One of the grounds is Section 8B itself, under which the Show Cause Notice is issued in the first place. As per the provisions of section 8B, rather than attaching the personal property of the Director, EPFO must first attach the property of the Company/Factory/Establishment like its machinery, assets, shares, building etc. So without proceeding against the property of the Company/Factory/Establishment, EPFO cannot attach Director’s personal property
One more provision is Section 8G which states that Second and Third Schedule of Income Tax Act, 1961 and Income Tax (Certificate Proceedings) Rules, 1962 are applicable to any proceedings of recovery initiated by the Recovery Officer. This is called “Legislation by Reference” which means that whenever the Recovery Officer initiates the recovery proceedings under EPFMP Act, he has to follow the same procedure as a Tax Recovery Officer does under Income Tax Act and Rules.
Here I have to ramble a bit from our discussion in order to understand how proceedings relating to recovery of income tax arrears are undertaken under Income Tax Act and Rules. If the Income Tax Officer, who is often called Assessing Officer, assesses a person, often called the Assesse, for income tax dues and deems he is defaulting in payments for such dues or arrears then the Assessing Officer will send the demand for arrears to the Tax Recovery Officer who will then draw a Certificate for the Tax Recovery. Then the proceedings are similar to recovery proceedings under EPFMP Act, whereby the Tax Recovery Officer will serve a Show Cause Notice upon the Defaulter (The person who was called Assesse earlier is now called the Defaulter, because as per the version of Assessing Officer he has defaulted in payment of the Income Tax arrears).
Now the Defaulter has to present himself before the Tax Recovery Officer and explain as to why he is not entitled to pay any income tax arrears and why he should not be called a Defaulter. If Tax Recovery Officer is not satisfied with the reply of the Defaulter and believes that the Defaulter has, in order to escape his liability to pay income tax arrears, transferred or concealed his property or the Defaulter takes the stand that he will not pay the income tax arrears then the Recovery Officer is entitled to arrest and send that person to prison.
These provisions are similar to Presidential Towns Insolvency Act, 1909 & Provincial Insolvency Act, 1920 whereby if a person, after being adjudicated insolvent, meaning he has more debt than income and savings combined, transfers his assets dishonestly, such transfers are non-Est in the eyes of law. (Though I must strike a note of caution here that after the enactment of Insolvency and Bankruptcy Code, 2016 existence of both Presidential Towns Insolvency Act, 1909 & Provincial Insolvency Act, 1920 is under a cloud as under Section 243 of the Insolvency and Bankruptcy Code, Central Government after notification in the Official Gazette can supersede both these Acts and if that happens personal insolvency will also be regulated by Insolvency and Bankruptcy Code, which till now only regulates Corporate Insolvency. Though the Central Government has not done so till date and hence Presidential Towns Insolvency Act, 1909 & Provincial Insolvency Act, 1920 are ruling the field of personal insolvency as of date. Same are the provisions in regard to the transfer of the assets of a Company after Corporate Insolvency Resolution Process (in short CIRP) has been initiated against it under IBC.
Now coming back from our ramblings to the case at hand we will see as to how Section 8G which seems so innocuous, can protect a Director against illegal recovery by the Recovery Officer? If a Recovery Officer, be it under EPFMP Act & Income Tax Act & Rules, wants to arrest a Director he cannot do so only by issuing a Show Cause Notice and asking the Director to pay the arrears. He is also enjoined by the EPFMP Act or Income Tax Act & Rules to give some findings under Second Schedule contained in Part V of the Income Tax Act 1961. He has to give his First Finding as to which property, like land, house, balance in bank account etc. has been transferred or concealed by the Director/Employer. Even after this he cannot arrest the Director as he have to give a Second Finding as to why he, namely the Recovery Officer, believes that such transfer or concealment has been done with an ulterior motive of avoiding the provident fund or income tax or arrears (as the case maybe), which is called Dishonest intention. Findings are to be supported by concrete evidence and reasoning and if this is not done by the Recovery Officer he cannot arrest the Director.
In the present case without giving these findings the Recovery Officer gave ultimatum to the Director to pay arrears or he will be arrested. As this was illegal without the above said two findings, the Kerala High Court rightly allowed the Writ Petition and quashed the Show Cause Notice and consequent order of demand by the Recovery Officer.
Conclusion
When someone runs a business he is already preoccupied with many day to day worries. So it may happen that he may not be able to fulfil his legal obligations in time, like paying provident fund dues. Moreover many a times it happens that a Director is a Sleeping Director in a company with no real control over the Company affairs. Same is the case with Sleeping Partners. In such a case to make a demand from him to pay dues by hanging the sword of arrest over his head is incorrect as well as immoral.
If a person is arrested it is a very harsh power given to any government authority not only because a person loses his freedom and liberty on arrest, but also because once arrested and even if found innocent later on, his image suffers a blemish in the eyes of the society. This is worse in the case of a Director as with his arrest, his business’ goodwill also suffers a dent. (Imagine what will happen to the valuation of shares of a publicly listed Company, if its Director is arrested under PMLA). Therefore a person who is under such threat must marshal his resources skillfully in order escape such illegal arrest. And I must say that engaging an able Advocate is one of the most crucial aspects of such marshalling.
Parveen Semwal
Advocate, High Court of Delhi and Supreme Court of India