2022 (11) TMI 1273 - HC - VAT and Sales Tax

Recovery of arrears of tax from the ex-directors - Attachment of property belonging to the petitioner - legality of the notice - violation of principles of natural justice - HELD THAT - A reading of Section 16B of Revenue Recovery Act, 1864 indicates that the liability of the Directors of a private company would arise only when the a private company is wound-up and any tax assessed on the company under the Act for any period before or in the course of or after its liquidation cannot be recovered. Thus, every person who was a Director of the private company at any time during the period for which the tax is due shall be jointly and severally liable for payment of said tax. Further the provisions of Section 16B of the Act does not provide for recovery from the Director automatically in the event of failure to recover from the private limited company. On the other hand the provision specifies that if the Director proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company, no recovery can be made from the said Director. Since the 2nd respondent-Company is not wound-up, no recourse can be made to recover the dues from the Director, who either continues to be on Board or ceases to be Director of the Company, inasmuch as the respondents-authorities can take steps to recover such arrears from the 2nd respondent-Company - Since the petitioner in the present case is an Ex-Director of the 2 nd respondent-Company, which admittedly is not wound-up, the impugned notice of attachment for recovery of arrears of tax cannot be sustained. The impugned notice of attachment for recovery of arrears of tax is set aside - Petition allowed.

Summary

Issues:
Challenge to notice of attachment under APGST Act, 1957 for recovery of tax arrears from a director of a private company after resignation.

Analysis:
The petitioner challenged a notice of attachment issued by the 1st respondent under the APGST Act, 1957, attaching her property for recovery of tax arrears from a private company where she was a director. The petitioner argued that the notice was illegal and contrary to the Act's provisions and principles of natural justice as it was issued after she had resigned from the company. The petitioner contended that the provision allowing recovery from directors can only be invoked when the company is wound-up, and recovery from directors is a last resort after failed attempts to recover from the company.

The petitioner's counsel argued that the notice did not mention efforts made to recover arrears from the company and that the conditions for invoking the provision were not met since the company was still operational. They cited previous court decisions supporting their argument that recovery from directors is only permissible in specific circumstances, such as company liquidation. The respondent, in their counter affidavit, acknowledged the change in company management but proceeded with recovery against the petitioner, emphasizing the responsibility of directors to ensure tax payment.

The court analyzed Section 16B of the Act, which imposes liability on directors of a private company only after the company is wound-up and recovery from the company fails. The court noted that recovery from directors is not automatic and requires proof of no gross neglect, misfeasance, or breach of duty on their part. The court found that since the company was not wound-up, recovery from the petitioner, an ex-director, was not justified. Consequently, the court allowed the writ petition, setting aside the notice of attachment against the petitioner and directing the respondent to pursue recovery proceedings against the company instead.