Recovery from Directors of Service Tax Dues Owed By A Public Limited Company Impermissible without Lifting Corporate Veil

[Rakesh Chitkara]

Introduction

In the first part of our article, we discussed about the relevant provisions and judicial pronouncements pertaining to the recovery from Directors of Service tax owed by the Company. Let’s now examine the Liability of Directors under other laws and the manner in which  such other laws establish a precedent for the concept of recovery of Company dues from the Directors under GST Law.

Precedent under Negotiable Instrument Act

In A.R. RADHA KRISHNA VERSUS DASARI DEEPTHI & ORS. [2019 (4) TMI 577 - SUPREME COURT], Hon'ble Supreme Court has held that a Director of  the Company is not liable in a cheque bounce case against the company. 

Following the same principle, one can contend that a Director may not be responsible for the payment of Company Dues.

Law of land as established under Income Tax Act

Section 179 of Income Tax Act, 1961 prescribes that :-

 “Notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), where any tax due from a private company in respect of any income of any previous year or from any other company in respect of any income of any previous year during which such other company was a private company cannot be recovered, then, every person who was a director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax unless he 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.”

Although the law holds the Directors of the Company jointly and severally liable for payment of Income Tax,  yet  the judiciary in such case has consistently  held that before initiating recovery from Directors, the Revenue has to prove that all steps necessary for recovery has been taken against erring the Company. See JAISON S. PANAKKAL VERSUS PRINCIPAL CHIEF COMMISSIONER OF INCOME TAX & ANOTHER [2018 (5) TMI 442 - BOMBAY HIGH COURT], MEHUL JADAVJI SHAH VERSUS THE DEPUTY COMMISSIONER OF INCOME-TAX-11 (2) (1) AND 2 ORS. [2018 (4) TMI 646 - BOMBAY HIGH COURT], AMIT SURESH BHATNAGAR VERSUS INCOME-TAX OFFICER [2008 (10) TMI 67 - GUJARAT HIGH COURT]

It should also be noted that it is a well settled law in India and many courts have reiterated time and again that the concept of vicarious liability is absent in Indian Laws including the criminal law, unless when expressly provided in the statute. Thus,  the Directors of a company can be made liable for dues of the company only by lifting the Corporate Veil in the circumstances as referred in the statue. In other words, the vicarious liability gets attracted only when the condition precedent to attract the vicarious liability, as prescribed in the statue gets satisfied.

Provision of lifting of Corporate Veil under GST

Further, Section 89 of CGST Act, 2017 is pari materia to Section 89 of CGST Act, 2017. Section 89 of the CGST Act, 2017 is as reproduced below :-

"(1) Notwithstanding anything contained in the Companies Act, 2013, where any tax, interest or penalty due from a private company in respect of any supply of goods or services or both for any period cannot be recovered, then, every person who was a director Section 89 of CGST Act, 2017 Liability of directors of private companyof the private company during such period shall, jointly and severally, be liable for the payment of such tax, interest or penalty unless he 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.

(2) Where a private company is converted into a public company and the tax, interest or penalty in respect of any supply of goods or services or both for any period during which such company was a private company cannot be recovered before such conversion, then, nothing contained in sub-section (1) shall apply to any person who was a director of such private company in relation to any tax, interest or penalty in respect of such supply of goods or services or both of such private company:

Provided that nothing contained in this sub-section shall apply to any personal penalty imposed on such director. "

Section 89 as akin to the provisions of Income Tax, provides that the tax can be recovered from Director of a Private Limited Company, who was a Director of the Company during the relevant period.  However, there is no provision in the CGST Act or in the Income Tax Act or for that matter, in any other law, fastening the Liability of Directors of Public Limited Company.

The above provision also clarifies that a Director cannot be made liable to  pay tax dues of the Company unless the liability is fastened on the Company itself. The words "due from a private company" appearing in the provision makes it absolutely clear that the Directors  of the Company could vicariously be made liable for the recovery of the dues when the Company can be held liable, subject to the averments  and proof thereof. Hence, we arrive at the irresistible conclusion that for maintaining the liability of the Directors, dues of a company needs to be first establish.

Moreover, if it is substantiated that Non-Executive Directors are not responsible for the non payment of dues then, Section 89 will not apply to them.

Further, in order to recover the dues of the Company from Directors,  burden lies on the Department to prove that the Directors were responsible for the conduct of the business of the Company during the relevant period in relation to which liability exist.

Conclusion

From the above analysis, we can arrive at a conclusion that the dragnet on the touchstone of vicarious liability has to be clearly established in the Statue unless the Directors have been made separately liable for the recovery of the tax. 

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Rakesh Chitkara, Adv. With CA Pooja Jajwani