Case: Mr. Pranay Dhabhai v. State of U.P. And 2 Others. Writ Tax No. – 638 of 2017

The recent judgment by the Allahabad High Court (the court) underscores the principle that tax dues cannot be collected from the director of a company under liquidation unless expressly provided for by statute. This principle highlights the importance of statutory provisions in determining the liability of directors in such scenarios, serving as a safeguard against undue financial burden on directors and emphasizing the need for legal clarity in imposing liability for tax obligations in the context of liquidated companies.
In the present case, the Official Liquidator of the respondent Company-under-Liquidation was appointed by the Delhi High Court as Provisional Liquidator on 09.09.2013, subsequently assuming control of the company’s assets in October of the same year. Despite this, ex-parte assessment orders were issued for the assessment years 2010-11, 2011-12, and 2012-13, with outstanding tax demands remaining against the respondent company. Subsequently, the assessing authority initiated proceedings against the director to recover the tax dues from the personal assets of the company. Seeking relief, the petitioner, a director of the company, approached the High Court, where interim protection was granted.
The petitioner’s counsel argued that the petitioner couldn’t be held vicariously liable for the tax dues of the respondent company. They contended that the liability under the U.P. VAT Act, 2008, and/or the Central Sales Tax Act, 1956 didn’t generally apply, especially considering the respondent company wasn’t solely owned by the petitioner. Moreover, they emphasized that the petitioner hadn’t engaged in conduct suggesting he was the true operator of the respondent company.
In response, the respondent argued that the negligent management by the directors resulted in their failure to participate in the assessment proceedings. However, the Court noted that this argument was the only indication of the petitioner’s alleged misconduct leading to liability for the tax dues.
The Court emphasizing that directors of a company cannot automatically be held personally liable for tax dues unless specific circumstances justify piercing the corporate veil. The Court stressed that corporate personality should only be disregarded in cases involving unlawful or fraudulent activities, and mere failure to pay government dues is insufficient grounds. Noting a similar case where tax recovery attempts against the petitioner by Maharashtra VAT authorities were withdrawn, the Court directed revenue authorities to refrain from recovering outstanding tax dues from the petitioner’s personal assets. However, they were permitted to pursue recovery from the company’s assets under liquidation. Consequently, the writ petition was granted.

Author of this article:
Adv. Ravish Bhatt,
Partner, R&D Law Chambers,
Dual Qualified Lawyer Solicitor | International Tax Affiliate

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