Goods & Services Tax (GST) in IndiaDirector of A Company Cannot Be Personally held Liable For The Affairs Of The Company under the Provisions Of GVAT Act

The Gujarat High Court, in the case of Nipun A Bhagat, Proprietor Of Steel Kraft Industries vs. State Of Gujarat & Anr., Case Number C/SCA/14931/2020 decided on 04.01.2021, held that  the action of State of Gujarat (hereinafter referred to as the “Respondent No1.”) and State Tax Officer (hereinafter referred to as “Respondent No.2”) of blocking the  Input Tax Credit (hereinafter referred to as “ITC”) of  Nipun A Bhagat, Proprietor Of Steel Kraft Industries (hereinafter referred to as the “Petitioner”), was improper and ordered immediate unblocking, allowing alternative recovery methods.

FACTS

 The Petitioner is engaged in manufacturing of brand kitchenware and home appliances and was the director of the company Dolphin Metals(India) Ltd. till 2009 and meanwhile the Petitioner was also the director of one company named Bhagat Marketing Private Limited till 2018..

In September 2020, Respondent No.2sent a notice under section 44 of the Gujarat value added Tax Act,2003 (hereinafter referred to as the “GVAT Act”)  to the bank seeking to attach the bank account maintained by Bhagat Marketing Private Ltd, for the recovery of outstanding tax and interest for years of Dolphin Metals(India) Ltd., in which the Petitioner was the ex-director .  The Respondent No.2, on the very same day, i.e,. 5th September, 2020, blocked the input tax credit of the amount of Rs.17,94,723/- available to the writ applicant in his electronic credit ledger under the provisions of the CGST Act. This action was with an intention to recover the amount of tax and interest due and payable by the Dolphin Metals under the GVAT Act for the period during which the Petitioner was not even the Director.

Aggrieved by the same, the Petitioner approached the Hon’ble High Court by way of  Writ Petition  under Article 226 of the Constitution of India, seeking multiple reliefs, including the release of the blocked amount and quashing the action of the respondent.

ISSUES BEFORE THE HIGH COURT

1. Whether the action of blocking of the ITC of the Petitioner is in contravention  to the provisions of GVAT Act  and section  86A of CGST Act?

2. Whether the director of a company can be made liable for the affairs of the company under GVAT Act?

CONTENTIONS OF THE PARTIES

The Petitioner submitted that such an action was unlawful, violating fundamental rights enshrined in Articles 14 and 19(1)(g) of the Constitution of India.

The Petitioner further argued that the directors of a Company cannot be held personally liable for the dues of the Company and the same cannot be recovered from the Directors under any of the provisions of the GVAT Act. The Petitioner further highlighted the absence of specific enabling provisions similar to those under other tax statutes, such as Section 179 of the Income Tax Act,1961, and Section 89 of the CGST Act, which allows recovery of the dues of the company from its directors.

Furthermore, the Petitioner referred to Rule 86A of the CGST Act, emphasizing its limitations and contended that blocking the ITC  under this rule wasn’t permissible for recovering dues of Dolphin Metals (India) Ltd., a public limited company where the Petitioner held a directorial position only for a short period of time.

In response,  the Respondents defended the blocking of the ITC  under Rule 86A of the CGST Act, and also mentioned that Section 18 of the  Central Sales Tax Act, 1956 which holds the directors of the company liable during liquidation. The Respondents argued that the action was within the purview of the law and aimed at recovering outstanding dues linked to Dolphin Metals (India) Ltd., considering the Petitioner’s association with the company during a specific period.

The Respondents also submitted that Section 49(3) of the CGST Act according to which the amount available in the electronic cash ledger of the Petitioner may be used for making any payment towards tax, interest, penalty, fees or any other amount payable under the provisions of this Act or the rules made.

DECISION AND FINDINGS

The Court observed that Rule 86A can be invoked only if the conditions stipulated therein are fulfilled. In other words, it is only if the Commissioner or an Officer authorized by him has reasons to believe that the credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible for the reasons stated in Rule 86A(1)(a) to that the authority would get the jurisdiction to exercise the power under Rule 86A of the Rules.

The court placed reliance on precedents such as like Mr. Choksi vs. State of Gujarat (SCA No.243 of 1991), Different Solution Marketing Private Ltd. vs. State of Gujarat (SCA No.19949 of 2015), and Paras Shantilal Savla vs. State of Gujarat (SCA No.7801 of 2019), the Court noted that previous cases established Rule 86A’s inability to facilitate such recovery. The Court aligned with the petitioner’s stance, considering these precedents as integral.

Consequently, The Hon’ble High Court noted that previous cases established Rule 86A’s inability to facilitate such recovery. The Court aligned with the petitioner’s stance, considering these precedents as integral and concluded that the Respondent No.2 erred in blocking the Petitioner’s ITC  under Rule 86A. As a result, the Hon’ble Court directed the immediate unblocking of ITC of the Petitioner, deeming the action unauthorized and unjustified by law.

Moreover, while ordering the unblocking, the Hon’ble High Court clarified that its decision didn’t restrict the tax department from pursuing other lawful means to recover dues linked to Dolphin Metals (India) Ltd.

 The Hon’ble Court declared that the blocking of the ITC  was unwarranted and mandated the immediate unblocking of the credit while allowing the tax department to explore alternative legal avenues for recovering the dues associated with Dolphin Metals (India) Ltd.

AMLEGALS REMARKS

The Hon’ble High Court in the present case held that the unfair blocking of the Petitioner was violative of the fundamental rights of the Petitioner under Article 14 and 19(1)(g) of the Constitution as it violated the individual rights of the Petitioner.

Directors of a Company are not to be held personally liable for the dues of the Company and the same cannot be recovered from the Directors under any of the provisions of the Section  86A GVAT Act.

The decision ensures fairness and protection towards the individual rights of the directors of the company and releases them from the liabilities of the company’s affairs for which they are not responsible.

– Team AMLEGALS assisted by Ms. Nandani Mukherjee