Court rules that directors cannot be held liable for tax dues without meeting specific conditions under AP VAT Act
In a significant ruling, the Andhra Pradesh High Court has set aside the attachment of bank accounts of directors of the now-liquidated M/s. Kusalava Batteries Private Limited, citing non-compliance with statutory requirements under the Andhra Pradesh Value Added Tax Act, 2005 (AP VAT Act). The Court, presided over by Justices R. Raghunandan Rao and T.C.D. Sekhar, emphasized that directors could only be held liable for the company's tax dues if two critical conditions under Section 24(5) of the AP VAT Act are met.
The case arose from the liquidation of Kusalava Batteries Private Limited, where the Deputy Commercial Tax Officer sought to recover Rs. 24,14,944/- from the company's directors after the liquidator rejected the tax claim due to procedural lapses. The tax authorities later issued notices to the directors under Section 24(5) of the AP VAT Act, demanding payment of the outstanding tax.
However, the Court underscored that for directors to be held liable, the authorities must first demonstrate an inability to recover the dues from the company and establish that non-payment was due to the directors' gross negligence, misfeasance, or breach of duty. The Court noted that the authorities had failed to provide specific reasons or evidence of such negligence or breach in their notices to the directors.
Citing a precedent from the Gujarat High Court, the Andhra Pradesh High Court reiterated the necessity for the tax authorities to present a prima facie case before invoking Section 24(5) against directors. The Court concluded that the attachment of the directors' bank accounts was not in accordance with the law and quashed the orders, while allowing the tax authorities to pursue recovery in compliance with legal provisions.
This ruling highlights the judiciary's stance on upholding procedural fairness and statutory compliance in tax recovery processes, particularly concerning directors of companies undergoing liquidation.
Bottom Line:
Directors of a private limited company in liquidation cannot be held liable for tax dues unless conditions under Section 24(5) of AP VAT Act are fulfilled, requiring inability to recover taxes from the company and evidence of gross negligence, misfeasance, or breach of duty by the directors.
Statutory provision(s): Andhra Pradesh Value Added Tax Act, 2005, Section 24(5)
