2020 (11) TMI 241 - HC - Service Tax

Recovery of service tax dues of the company from the director - Attachment of his personal bank account by respondent - recovery of dues from the assessee-company under the Finance Act, 1994 - HELD THAT - Any show cause notices issued to the assessee-company during the adjudication proceedings does not amount to notice to the petitioner in his personal capacity. Admittedly no notice was ever issued to the petitioner personally prior to the passing of the impugned demand notices dated 21st May, 2019 and 09th November, 2019 and/or the attachment order dated 08th June, 2020. In fact, during the course of final hearing, this Court had put a pointed question to the Principal Commissioner, CGST, as to whether the respondents would like to give a fresh notice to the petitioner clearly mentioning as to how the petitioner was liable for tax dues of the assessee-company. However, the Principal Commissioner informed this Court that the department has no material against the petitioner other than the fact that he was a Director of the assessee-company. The impugned order is in violation of principles of natural justice - writ petition is allowed without costs.

Summary

Issues Involved:
1. Attachment of the petitioner’s personal bank account by the Service Tax Authorities for recovery of dues from the assessee-company.
2. Jurisdiction and applicability of Section 87(b)(i) of the Finance Act.
3. Personal liability of Directors for the tax liabilities of a company.
4. Violation of principles of natural justice.

Detailed Analysis:

1. Attachment of Petitioner’s Personal Bank Account:
The petitioner, a former Director of the assessee-company, challenged the attachment of his personal bank account by the Service Tax Authorities for recovery of dues from the assessee-company under the Finance Act, 1994. The petitioner argued that he was appointed as an Additional Director on 22nd August 2014 and resigned on 8th July 2015, and thus should not be held responsible for the company’s dues.

2. Jurisdiction and Applicability of Section 87(b)(i) of the Finance Act:
The petitioner contended that the attachment order dated 8th June 2020, issued under Section 87(b)(i) of the Finance Act read with Section 174(1) of the CGST Act, was beyond jurisdiction. Section 87(b)(i) provides for a garnishee order, i.e., attachment of funds of an assessee lying with third parties. The petitioner argued that there was no material to indicate that funds in his personal bank account were due to, or held on behalf of, the assessee-company.

The court agreed with the petitioner, stating that Section 87(b)(i) does not entitle the revenue to attach personal bank accounts of a director for recovery of dues of the assessee-company. The court emphasized that a company is a separate legal entity distinct from its directors, and this distinction cannot be jettisoned unless there is a specific statutory provision to the contrary.

3. Personal Liability of Directors for the Tax Liabilities of a Company:
The respondent argued that directors of a company are vicariously liable to pay service tax dues. However, the court found no provision in the Finance Act making directors personally liable for the company’s service tax liabilities. The court contrasted the Finance Act with Section 179 of the Income Tax Act and Section 18 of the Central Sales Tax Act, which specifically render directors liable for tax dues under certain conditions, noting the absence of such provisions in the Finance Act.

The court also clarified that Section 89 of the CGST Act is confined to liabilities assessed under the CGST Act and cannot be used to impose personal liability on directors for company dues determined under the Finance Act. The court rejected the reliance on Section 9AA of the Central Excise Act and Section 168(2) of the Companies Act, stating these provisions deal with offences, not civil liability to pay tax.

4. Violation of Principles of Natural Justice:
The petitioner argued that no proceeding was initiated against him personally, and he was not granted an opportunity to be heard before the issuance of the demand notices and attachment order. The court agreed, noting that any show cause notices issued to the assessee-company did not amount to notice to the petitioner in his personal capacity.

The court highlighted that the department had no material against the petitioner other than his directorship. Consequently, the court found the impugned order in violation of principles of natural justice and stated that recovery cannot be selectively initiated against one director only.

Relief:
The court allowed the writ petition without costs, quashing the demand notices dated 21st May 2019 and 8th November 2019, and the attachment order dated 8th June 2020. Any action taken by the respondents in pursuance of the impugned notices/order and OIO dated 8th August 2018 against the petitioner was also set aside.