Director is not liable for payment of tax amount when it is not determinable that the Company is unable to pay the tax amount during liquidation proceedings

[CA Bimal Jain]

The Hon’ble Madras High Court in the case of SMT. K. MALATHI VERSUS STATE TAX OFFICER, A.R. RAMASUBRAMANIA RAJA - 2023 (11) TMI 513 - MADRAS HIGH COURT held that, Director is not liable for payment of tax amount when it is not determinable that the Company is unable to pay the tax amount during liquidation proceedings. However as per Section 88 (3) of the Central Goods and Services Tax Act, 2017 (“the CGST Act”), the Directors can be held liable jointly and severally, when it is conclusively determined that the Company is unable to settle the amount of tax, interest or penalty payable.

Facts:

K. Malathi (“the Petitioner”) was the Director of M/s Sri Karunambigai Spinning Mills Pvt. Ltd. (“the Company”) and has been ordered to be liquidated by the National Company Law Tribunal order. The Revenue Department conducted an inspection of the Company premises and recovered certain documents. Later, a show cause notice dated June 15, 2020 (“the SCN”) was issued under Section 74 of the CGST Act, wherein demand was raised for payment of tax on account Input Tax Credit (“ITC”) wrongly availed for Financial Year 2018-2019.

As per the legal opinion received by the Petitioner, the Petitioner contended that, the Petitioner has no locus standi to represent the Company after orders of liquidation are passed by the National Company Law Tribunal (“the NCLT”). Thereafter, the Respondent intimated the aforementioned facts to the Official Liquidator of the Company (“the Liquidator”) and provided an opportunity of hearing. However, the Liquidator neither filed any reply nor appeared for any hearing. The Respondent vide ex-parte orders dated September 28, 2020 (“the Impugned Orders”) imposed tax, interest and penalty on the Company.

The Petitioner, being Director apprehends that the amount stated in the Impugned Order would be recovered from her. Hence, writ petition is filed for quashing of Impugned Orders and DRC-07 issued thereto.

Issue:

Whether the Director is liable for payment of tax amount when it is not determinable that the Company is unable to pay the tax amount during liquidation proceedings?

Held:

The Hon’ble Madras High Court in the case of SMT. K. MALATHI VERSUS STATE TAX OFFICER, A.R. RAMASUBRAMANIA RAJA - 2023 (11) TMI 513 - MADRAS HIGH COURT held as under:

• Observed that, Section 88(3) of the CGST Act, incorporates the principle of vicarious liability of Directors of debtor company wherein it is provided that when any private company is liquidated and any tax, interest or penalty under the CGST Act is un-recovered, then the Directors of the Company shall be jointly and severally liable for payment of tax.
• Noted that, the Impugned Orders were passed based on the alleged irregularities which has taken place prior to the commencement of Corporate Insolvency Resolution Process against the Company and served on the Petitioner.
• Further Noted that, the Respondents shall approach the Liquidator for disbursement of the claims and if Liquidator finds that the company has insufficient funds to pay the dues of Sales Tax, a new cause of action would arise wherein the Respondent would be entitled to recover the amount of sales tax due from Ex-Directors of the company at the time of liquidation.
• Opined that, no cause of action arises against the ex-directors to recover the sales tax dues payable by the Company in liquidation. Hence, the action taken by the Respondent in passing the Impugned Orders of demand in the name of the Company being in liquidation is not sustainable.
• Held that, Impugned Orders are set aside and liberty is granted to Respondent to approach the Liquidator when it is concluded that the Company has no sufficient funds to settle the tax dues payable, the Respondent under Section 88(3) of the CGST Act, is empowered to proceed against Ex-Directors of the Company in accordance with law. 

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