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Tax Insights
from India Tax & Regulatory Services
Delhi High Court holds that a Director is not vicariously or jointly liable for company dues in absence of a specific
provision under the Finance Act, 1994
30 November 2020
In brief
Recently, the Delhi High Court1, held that the ex-Director of a company cannot be made vicariously or jointly liable f or its dues in the absence of a specific provision in the Finance Act, 1994 (Finance Act), even if the Director has knowledge of the affairs of the company. The Court also held that section 87(b)(i) of the Finance Act provides only for a garnishee order, i.e. it provides for the attachment of funds of a taxpayer lying with third parties, and the same cannot be used for attaching the personal bank account of the ex -Director.
In detail
Background
• The petitioner was a former Director of the taxpayer company. Prior to the petitioner’s appointment, the taxpayer company was under investigation by the Anti-Evasion Branch of Service Tax, Delhi.
• Subsequent to the petitioner’s resignation as a Director, a Show Cause Notice (SCN) was issued to the company. The demand and recovery of service tax, interest and penalty against the taxpayer company were also confirmed.
• The personal bank account of the petitioner was attached by the Service Tax Authorities towards recovery of dues from the taxpayer company by invoking section 87(b)(i) of the Finance Act read with section 174 of the Central Goods and Services Tax Act, 2017 (CGST Act).
• Aggrieved by the attachment of his personal bank account, the Petitioner filed a writ petition seeking to quash the attachment order.
High Court’s decision
The High Court set aside the order of attachment against the petitioner after observing the following:
Company and its Directors are separate and distinct juristic entities
• The notice to the company, which was a separate legal entity, was issued subsequent to the petitioner’s resignation as a Director. The Order-in-Original was also issued against the company alone.
• As held by the Supreme Court2, it is a well-settled rule that a company is a distinct juristic entity, separate f rom its Directors.
• It is apparent that the distinction between a company and its Director cannot be jettisoned unless there is a specific statutory provision to the contrary or till a case for lifting of the corporate veil is made out.
1 2020 (11) TMI 241 (DELHI HIGH COURT)
2 Bacha F. Guzdar, Bombay v. Commissioner of Income Tax, Bombay [AIR 1955 SC 74]
2 PwC Tax Insights
Section 87(b)(i) of the Finance Act provides for a garnishee order only
• The impugned attachment order is beyond the purview of section 87(b)(i) of the Finance Act, as the said provision provides for a garnishee order only, i.e. provides for the attachment of funds of a taxpayer lying with third parties. Accordingly, section 87(b)(i) of the Finance Act does not entitle the revenue to attach personal bank accounts of a Director like the petitioner, for recovering the dues of the taxpayer company.
No recovery from Directors, without specific provisions to recover
• In the absence of a specific provision in the Finance Act, similar to the provisions under section 179 of the Income-tax Act, 1961 and section 18 of the Central Sales Tax Act, 1956, to render the Director jointly and severally liable for tax dues assessed against the companies, it was held that the impugned action against the petitioner was without jurisdiction. The Court relied upon the ruling by the Bombay High Court3 in this regard.
• Though section 174(2) of the CGST Act saves any duty or tax that is due or may become due under the Finance Act, there is no provision in the Finance Act that makes the Directors personally liable for the service tax liabilities of a company.
• Section 89 of the CGST Act is confined only to liabilities assessed under the CGST Act and cannot be used to f asten personal liability on Directors for company dues determined under the Finance Act. No new liability can be fastened under the CGST Act for a period prior to its enactment as it does not have retrospective operation.
Violation of principles of natural justice
• No notice was ever issued to the petitioner in his personal capacity prior to the issuance of the demand notices. The Court held that any SCNs issued to the taxpayer company during the adjudication proceedings did not amount to notice to the petitioner in his personal capacity.
• The Department had no material against the petitioner other than the fact that he was a Director of the taxpayer company.
The Court thus held that, in the absence of a specific provision and given a company’s separate legal personality, the petitioner is not vicariously or jointly liable for the dues of the company, even if having
knowledge of its affairs. The onus of proof shall remain on the Department to show that a Director is personally liable f or the dues of the company at the stage of issuing SCN under section 73 of the Finance Act. The Court also observed that the recovery cannot be selectively initiated against one of the Directors only.
The takeaways
This is an important decision where the High Court has clearly held that the Director cannot be made personally liable f or the dues of the company in the absence of a specific provision. This principle would apply in the context of recovery under the tax laws where there are no specific provisions to recover from Directors.
It is interesting to note that the Court has considered the specific provisions of the Goods and Services Tax (GST) law seeking to hold the Directors jointly and severally liable for the company’s GST dues and held that these provisions cannot be invoked retrospectively to recover the service tax dues.
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact your local PwC advisor.
3 2005 (4) Mah. LJ 837
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In this document, PwC refers to PricewaterhouseCoopers Private Limited (a limited liability company in India having Corporate Identity Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers International L imited (PwCIL), each member firm of which is a separate legal entity.
This document does not constitute professional advice. The information in this document has been obtained or derived from sou rces believed by PricewaterhouseCoopers Private Limited (PwCP L) to be reliable but PwCPL does not represent that this information is accurate or complete. Any opinions or estimates contained in this document represent the judgment of PwCPL at this time and are subjec t to change without notice. Readers of this publication are advised to seek their own professional advice before taking any course of action or decision, for which they are entirely responsible, based on the contents of this publication. PwCPL neither accepts or assumes any resp onsibility or liability to any reader of this publication in respect of the information contained within it or for any decisions readers may take or dec ide not to or fail to take.
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