Private Company’s dues cannot be collected from its directors

[CA Bimal Jain]

The Hon’ble Supreme Court in the case of SHANKAR RUDRA VERSUS THE STATE OF UTTARAKHAND & ORS. - 2024 (9) TMI 1317 - SC ORDER allowed the civil appeal and held that when the provisions of the Uttarakhand Value Added Tax (“the UVAT Act”) does not provide for the dues of a limited company could be ascertained by the Director. Hence, recovery certificate and demand notice shall have not been issued to the Assessee.

Facts:

The Orders of assessment were passed by the State Government (“the Respondent-1”) under the UVAT Act against M/s. SLR Impex Private Limited (“the Company”). The assessment made was pertaining to the years 2014-15, 2015-16 and 2016-17. The notice of demand and the tax assessment order were attempted to be served at the last known address of the Company. The amount was not paid by the Company. Therefore, the Respondent-1 took recourse to the recovery proceedings by treating the amount of tax and other dues payable by the Company as arrears of land revenue.

Accordingly, an Officer of the Government of NCT of Delhi (“the Respondent-3”), issued a recovery certificate and a recovery notice dated June 6, 2019 addressed to Mr. Shankar Rudra (“the Appellant”) who was one of the Directors of the Company.

The Appellant, therefore, filed a writ petition before the learned Single Judge and the Division Bench of the Hon’ble High Court challenging the recovery notice, which was dismissed by holding that the Appellant had an alternative remedy under Section 287-A of the Uttar Pradesh Zamindari Abolition and Land Reforms Act, 1950 to challenge the recovery certificate.

Hence, aggrieved by the Impugned Orders, the Appellant filed the present Special Leave to Appeal.

Issue:

Whether recovery dues of a private company be recovered from its directors?

Held:

The Supreme Court in SHANKAR RUDRA VERSUS THE STATE OF UTTARAKHAND & ORS. - 2024 (9) TMI 1317 - SC ORDER held as under:

• Observed that, as per Section 12(1) of the UVAT Act, the liability of the Directors of a private company will arise when a private company is wound up after the commencement of the UVAT Act. Therefore, Section 12(1) of the UVAT Act will have no application in the current case as an order of winding up has not been produced.
• Held that, when there is no provision under the UVAT Act under which dues of a limited company could have been recovered from its directors. Hence, the Respondent-3 was not justified in issuing the recovery certificate and demand notice against the Appellant. These crucial factors were ignored by the Hon’ble High Court. It ought to have been noted by the Hon’ble High Court that an attempt to recover tax payable by the Company from the Appellant from its inception was illegal. Therefore, the Appellant ought not to have been driven to the remedy of preferring an appeal. Hence, the appeal was succeeded and the Impugned Orders of single bench and Division bench were sets aside. The notice of recovery was passed on June 6, 2019.

Our Comments:

Section 12 of the UVAT Act governs “Liability in case of a Company”. Section 12(1) of the UVAT Act discusses the liability of the directors of a private company in liquidation. It states that under the Company’s Act, 1956, when any private company is wound up after the commencement of the UVAT Act, and any tax assessed on the company for any period, whether before or in the course of or after its liquidation, cannot be recovered, then, 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 such tax unless he proves that the non-recovery can not be attributed to any gross neglect, misfeasance or breach of duties on his part in relation to the affairs of the company.

Hence, Section 12(1) of the UVAT Act is only applicable in the case of winding up or liquidation of a company. In the case in hand, the Company did not wind up. Therefore, the Directors were not liable for payment of recover. Had the case been of liquidation, all the directors would have been jointly and severable liable for payment of such tax. 

Under GST Law, 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.

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