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

The Bombay High Court has ruled that recovery proceedings cannot be initiated against a former director of a company if they were not a director during the period in question. In this case, the court set aside an attachment order against a former director who had resigned and whose directorship was disqualified before the tax demand arose. The court emphasised that officials must verify if the individual was a director during the concerned period and provide an opportunity to be heard before attaching assets.

The Hon'ble Bombay High Court in the case of Prasanna Kumar Shetty v. State of Maharashtra and Others [Writ Petition No. 3098 of 2024 dated April 16, 2024] 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 Writ Petition No. 3098 of 2024 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.

Official copy of the judgment has been attached below