Andhra: The Andhra Pradesh High Court has ruled that tax authorities cannot recover unpaid tax dues of a private company from its directors under the Andhra Pradesh Value Added Tax Act, 2005, unless it is first established that the non-recovery of tax was attributable to gross negligence, misfeasance, or breach of duty on the part of the directors.
The Division Bench was dealing with a batch of writ petitions filed by former directors of M/s Kusalava Batteries Private Limited, who had challenged notices issued by the commercial tax authorities attaching their personal bank accounts for recovery of the company’s outstanding VAT dues after the company had gone into liquidation.
The petitioners contended that the company had been liquidated under the Insolvency and Bankruptcy Code, 2016, pursuant to orders passed by the National Company Law Tribunal, and that the tax authorities had failed to file their claims in accordance with the prescribed procedure during the liquidation process. They argued that, having failed to recover the dues from the company, the authorities could not directly proceed against the directors without satisfying the statutory requirements under Section 24(5) of the Act.
The tax department, on the other hand, argued that since the tax dues could not be recovered from the company, the directors were jointly and severally liable for payment of the outstanding amount. It was contended that Section 24(5) empowered the authorities to recover unpaid taxes from directors of a private company in liquidation and that no further adjudication was required before initiating recovery proceedings.
The Court noted that Section 24(5) of the Act permits recovery from directors only subject to two conditions: first, that the tax dues cannot be recovered from the company despite exhaustion of available remedies; and second, that such non-recovery is attributable to gross negligence, misfeasance, or breach of duty on the part of the directors in relation to the affairs of the company.
On the second condition, the Court held that there is an initial obligation on the tax authorities to clearly indicate the nature of the alleged negligence, misfeasance, or breach of duty before proceeding against the directors. Only after such allegations are specifically set out does the burden shift to the directors to demonstrate that the non-recovery cannot be attributed to their conduct.
The Court observed that in the present case, while the authorities had proceeded to attach the personal bank accounts of the petitioners, no notice had been issued setting out the specific acts or omissions constituting gross negligence or breach of duty. It held that coercive recovery measures initiated in the absence of such foundational allegations were contrary to the statutory scheme and violative of the principles of natural justice.
The Bench further observed that mere non-recovery of tax from a company, even where the company has been liquidated, does not automatically fasten personal liability on its directors. The lifting of the corporate veil under Section 24(5), the Court held, is conditional and cannot be invoked mechanically.
Setting aside the impugned attachment of the petitioners’ bank accounts, the High Court clarified that the tax authorities are not precluded from initiating fresh proceedings in accordance with law, provided the requirements of Section 24(5) of the Act are strictly complied with and due opportunity is afforded to the directors.
Case Title: Chukkapalli Ramakrishna Prasad v. The Deputy Commercial Tax Officer & Ors.
