2024 (11) TMI 1337 - HC - VAT / Sales Tax

Challenge to action of the respondents in freezing his saving bank accounts with the purpose to recover the VAT dues of M/s East Bourne World Cuisine Private Limited, where the petitioner was a former director - HELD THAT - The company has itself filed an appeal before the appellate authority, which is still pending. It is also noticed that the company is functional and the petitioner is no more a director of the said company. In the circumstances, there was no occasion for the respondent to attach the bank accounts of the petitioner for recovery of its dues as against the concerned company. A perusal of Section 83 (3) of Companies Act also reflect that the recovery from the director of a company can only be made when such a company has been wound up. Even under the Companies Act, 1956, the provision for recovery from the director is not available at the stage prior to winding up of the company - There is also no case of allegation of mismanagement of the company and in such circumstances also, the order would have to be obtained from the concerned NCLT. The order of attachment of the saving accounts of the petitioner and the notice dated 12.02.2021 are quashed and set aside. The petitioner is held to be entitled to receive a sum of Rs. 1 lac as penal cost for wrongful attachment of his bank accounts putting him in unnecessary financial distress. The amount of Rs. 1 lac shall be paid by the respondent authorities and deposited in his bank account within two months, failing which interest @ 18% shall also be paid, which may be recovered from the concerned delinquent officer, who has arbitrarily issued attachment order without authority. The writ petition is allowed.

Summary

Issues:
1. Petition to quash attachment notice for freezing bank accounts to recover VAT dues of a private limited company.
2. Interpretation of liability of directors for recovery of dues under the Punjab Value Added Tax Act, 2005.
3. Comparison of provisions under different tax acts regarding recovery from directors of companies.
4. Prematurity of petition and necessity of proceedings against the company.
5. Analysis of Section 83(3) of the Act regarding director's liability.
6. Consideration of mismanagement allegations and requirement of NCLT order.
7. Arbitrary exercise of power by the respondent in attaching bank accounts.
8. Direction to decide the appeal of the company and quashing of the attachment order.
9. Award of penal cost for wrongful attachment and payment by respondent authorities.

Analysis:
The petitioner filed a writ petition challenging the freezing of his bank accounts by the respondents to recover VAT dues of a private limited company where he was a former director. The petitioner argued that the liability of a director for recovery only arises under specific provisions, and there is no provision under the Punjab Value Added Tax Act, 2005 to hold a director liable while the company is functional. Reference was made to a Supreme Court judgment highlighting the necessity of winding up a company for recovery from directors. The petitioner also cited Section 83(3) of the Act, emphasizing that recovery from a director is contingent on the company being wound up.

The respondent contended that the petition was premature and proceedings should be initiated against the company. However, the court observed that the company had filed an appeal, was operational, and the petitioner was no longer a director. The court noted that recovery from a director is permissible only after the company is wound up, and there were no allegations of mismanagement warranting an NCLT order. The court criticized the arbitrary attachment of the petitioner's bank accounts as unauthorized and ordered the quashing of the attachment notice.

In a previous direction, the court had instructed the respondent to decide the company's appeal, which remained pending. Despite this, the court ruled in favor of the petitioner, declaring the attachment unlawful and awarded a sum of Rs. 1 lac as penal cost for financial distress caused by the wrongful attachment. The court directed the respondent authorities to pay the amount within two months, with interest at 18% if delayed, recoverable from the responsible officer. The writ petition was allowed with costs, and all pending applications were disposed of accordingly.