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Recovery proceedings not to be initiated against the former director of the Company who was not the director during the concerned period

Bimal jain
Recovery Actions Invalid Against Former Director Not Serving During Relevant Period, Says Court; Attachment Order Set Aside The Bombay High Court ruled that recovery proceedings cannot be initiated against a former director of a company who was not serving as a director during the relevant period. The case involved a former director whose Director Identification Number was disqualified, and who subsequently resigned. Despite this, recovery actions were pursued against him, including an attachment order on his assets. The court found that the Central Goods and Services Tax Act requires that liability be assessed only if the individual was a director during the concerned period, and noted procedural lapses such as the absence of a show cause notice or personal hearing. Consequently, the attachment order was set aside. (AI Summary)

The Hon’ble Bombay High Court in the case of PRASANNA KARUNAKAR SHETTY VERSUS STATE OF MAHARASHTRA, COMMISSIONER OF STATE TAX, MUMBAI, STATE TAX OFFICER - 2024 (4) TMI 779 - BOMBAY HIGH COURT allowed the writ petition and set aside the attachment order in case where recovery proceedings were initiated against the former director of the Company who was not the director of the Company during the concerned period.

Facts:

Prasanna Kumar Shetty (“the Petitioner”) joined as Director of Universeus Impex Pvt. Ltd. (“the Company”). Later the DIN of the Petitioner got disqualified under Section 164(2)(a) of the Companies Act, 2013(“the Companies Act”). The Petitioner of the Company did not participate in the affairs of the Company after the disqualification. Also, the Petitioner formally resigned as Director of the Company.

Thereafter, Show Cause Notice dated August 7, 2020 (“the SCN”) was issued by the Revenue Department (“the Respondent”) against the Company demanding tax along with interest and penalty for which later recovery proceedings were initiated against the Petitioner, and the Company. Also, FIR was lodged against the Petitioner for which the Petitioner was granted Anticipatory Bail. Further, the Petitioner’s Firm bank account and flat were attached by the Respondent vide order dated January 11, 2024 (“the Impugned Attachment Order”)

Issue:

Whether recovery proceedings be initiated against the former director of the Company who is not the director during the concerned period?

Held:

The Hon’ble Bombay High Court in the case of PRASANNA KARUNAKAR SHETTY VERSUS STATE OF MAHARASHTRA, COMMISSIONER OF STATE TAX, MUMBAI, STATE TAX OFFICER - 2024 (4) TMI 779 - BOMBAY HIGH COURT held as under:

  • Observed that, as per Section 79 of the Central Goods and Services Tax Act, 2017(“the CGST Act”), the principal liability is not on the Petitioner who is not a registered person as per sub-section (1) of Section 79 of the CGST Act.
  • Further observed that, Section 89 of the CGST Act provides that before taking any action of recovery against the Directors of the Company, the Concerned Officer should be satisfied that the person concerned against whom recovery is to be made is the Director of the Company for the concerned period. Further, it is after the aforesaid satisfaction of the Officer that such person was the director of the Company, the liability could be fastened against the Director.
  • Noted that, the factual issues needed to be verified before the passing of the Impugned Attachment Order by the concerned officer, by issuing the SCN to the Petitioner calling upon him to show cause that the amount due and payable by the Company is liable to be recovered from the Petitioner under Section 79, read with Section 89 of the CGST Act.
  • Opined that, neither any SCN was issued nor any opportunity for personal hearing was granted to the Petitioner before the passing of the Impugned Attachment Order.
  • Held that, the writ petition is allowed and the Impugned Attachment Order is set aside.

(Author can be reached at [email protected])

Goods and Services Tax - GST
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