"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"
FACTS & SUBJECT MATTER:
(1) 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 was issued u/s 74 of the CGST Act, wherein demand was raised for payment of tax on account ITC wrongly availed for Financial Year 2018-2019.
(2) 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. 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.
(3) 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.
CASE LAW: W.P.No.19728 of 2020 & 484 of 2021 dated October 30, 2023 in the case of K. Malathi v. State Tax Officer & Anr.
ISSUE : Whether the Director is liable for payment of tax when it is not determinable that the Company is unable to pay the tax during liquidation proceedings?
HELD:
(1) Sections 88(3) of the CGST Act, incorporated the principle of vicarious liability of the Directors of the debtor company. It provides that when any private company is liquidated and any tax, interest or penalty determined under this Act remains un-recovered, then the Directors of such debtor company shall be jointly and severally liable for the payment of such tax, interest or penalty.
(2) In the present case, the impugned orders of demand were passed based on the alleged irregularities that had taken place prior to the period of commencement of Corporate Insolvency Resolution process against M/s.SKMPL and served on the petitioner.
(3) The right course available for the respondents is to file appropriate claim before the Official Liquidator. In case there are no funds available with the company in liquidation, in which case, it is not possible to recover the sales tax dues from the Company in liquidation, in such circumstances, a new cause of action would arise to recover the sales tax dues from the Ex.Directors of the Company in liquidation. In the present case, the issue of non-availability of the funds with the Official Liquidator for disbursement of the claims, is yet to be decided. Therefore, at present there is no cause of action arose to initiate against the Ex.Directors to recover the sales tax dues payable by the Company in liquidation.
(4) Therefore, the present action taken by the respondents in passing the impugned orders of demand in the name of M/s.SKMPL, which is in liquidation and serving on the petitioner, is not sustainable.
(5) Accordingly, the Writ Petitions are allowed. The impugned orders, dated 28.09.2020 are set aside. The respondents are at liberty to approach the Official Liquidator and in case, the Official Liquidator comes to the conclusion that the company in liquidation has no sufficient funds to settle the sales tax dues payable by the company in liquidation, a new cause of action would arise to invoke Section 88(3) of the CGST Act and in which event, the respondents are at liberty to proceed against the Ex.Directors of the Company in liquidation in accordance with law. No costs. Consequently, connected WMPs are closed.
Click to download Order in W.P.No. 19728 of 2020 & 484 of 2021 dated October 30, 2023 in the case of K. Malathi v. State Tax Officer & Anr.
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