The quote "With great power comes great responsibility." The said quote holds persuasive value in the current scenario, wherein on one end, senior officials of a company, such as the director, hold the power to take important decisions for the company; on the other hand, they hold the onus for their decisions taken in the company. The civil laws, including tax laws, work on the same lines and hold them responsible even after these officials surrender their positions. While a company has its own legal status, it cannot be taken as a shelter by the senior officials of the company for their actions.
In this article, we have tried to cover the liability of directors under different laws, i.e., company law, income tax and GST.
LIABILITY OF DIRECTORS UNDER THE COMPANIES ACT, 2013
The Companies Act 2013 attributes the liability on the 'officer-in-default' to penalize officers, in addition to penalties levied on the company itself for various categories of defaults, contraventions, or non-compliances. The term 'officer-in default' as defined under Section 2(60) of the Companies Act, inter alia, includes a whole-time director or key managerial persons (such as CEO, CFO, whole-time CS, MD) owing to their involvement in the day-to-day activities of the company. Any other director could be held liable only with respect to specific contraventions that have occurred with the director's consent or connivance.
Further, Section 168 of the said Act extends the liability of the retiring director for offenses that occurred during his tenure, even after his resignation. However, the said provisions apply uniformly to all directors and hold no distinction between directors of private companies and those of public companies.
LIABILITY OF DIRECTORS UNDER THE INCOME TAX ACT, 1961
Section 179 of the Income Tax Act, 1961, has an overriding impact on the provisions of the Companies Act, 2013. It provides that if the tax dues (incl. penalty, interest, and fees) from a private company w.r.t any income of any previous year could not be recovered, then every person who was a director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax dues. However, if he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance, or breach of duty on his part in relation to the affairs of the company, then no liability shall accrue to him. The said provision shall also apply to a private company that later becomes a public company.
From the afore-mentioned provision, it could be understood that the directors of public companies or deemed-to-be public companies are not covered by the rigors of Section 179 of the Income Tax Act. Thus, under the Income Tax Act, the liability of a director of a private limited company is beyond their tenure with the company. Whereas in the case of a director of a public limited company, there are no such stringent provisions.
LIABILITY OF DIRECTORS UNDER GST
The provisions that impute a personal liability on directors of a private company have been enshrined under Section 89 of the Central Goods and Service Tax Act 2017 (hereinafter referred to as the 'CGST Act'). The said provisions are similar to the provisions (Section 179 referred to above) contained in the Income Tax Act.
In terms of Section 89 of the CGST Act, every director of a private limited company shall be jointly and severally liable for the payment of tax, interest, and penalty wherein the same cannot be recovered from such company in respect of any supply of goods or services or both for the period during which he was a director, unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance, or breach of his duty on his part in relation to the affairs of the company. It is pertinent to note that the said provisions provide for recovery of not only the tax amount but also the interest and penalty.
Further, the said provisions override Section 18 of the Companies Act, 2013, i.e., a private limited company being converted into a public limited company. Hence, a director of a public limited company that was previously a private limited company can be held responsible under Section 89 of the CGST Act for the period during which he was the director of said private limited company.
It is interesting to note that there were no such provisions prevalent under the erstwhile regime, i.e., central excise, service tax, or VAT. Even under customs law, there is no such provision that specifically holds the director of a private limited company liable for any tax recovery. It appears that these provisions under GST have been borrowed from income tax. Hence, similar to the Income Tax Act, these provisions under GST only cover the director of a private limited company.
We shall now discuss the recent judgment related to the liability of the director in the case of a private company.
PRASANNA KARUNAKAR SHETTY VS. STATE OF MAHARASHTRA [2024-VIL-358-BOM]
The focal point of the captioned case is the recovery proceedings against the former director of a private company.
Facts of the case
- The petitioner joined as director in March 2017; however, in November 2017, his DIN, as filed with the Registrar of Companies (RoC), was disqualified under the provisions of Section 164(2)(a) of the Companies Act. Since he was a director of the said company only for a short time, he did not participate in the company's affairs.
- Pursuant to the petitioner's DIN being disqualified and his recommendation, another director was appointed in his place in June '18. In the process of appointing a new director, the petitioner's resignation could not be recorded immediately, and therefore the effective date of his resignation was May 19th.
- A show cause notice was issued against the company for the period April 2018 to March 2019, and subsequently, an order was passed in December 20 confirming the total demand against the company.
- Since the recovery against the company and its prevailing directors could not be taken forward, the bank account and personal property of the petitioner had been attached on the ground that he was the director for a short period during the impugned period. Upon such a backdrop,, the captioned writ petition was filed.
Petitioner's arguments in the said case
- No show cause was issued to the petitioner, and directly, the bank account and personal property were attached.
- The impugned order is in the teeth of Section 79 read with Section 89 of the Maharashtra Goods & Services Tax Act, 2017 ("MGST Act");
- Also, the petitioner had ceased to be director during the relevant period, so the question of attaching the petitioner's immovable property and current account does not arise.
- Additionally, merely because recovery is not possible against the company, the same would not empower the respondents to proceed against a former director, who was never involved in the day-to-day business operations and affairs of the company, nor had participated in the management of the company at the relevant time.
Respondent arguments in the said case
The respondents contended that since the petitioner was the director for a short time, the impugned attachment orders were justified.
Underlying Provisions of the CGST Act, 2017
- Section 79 of the CGST Act provides for modes by which the proper officer may recover the tax payable to the government.
- Section 89 of the CGST Act deals with provisions pertaining to the liability of directors of a private company (as discussed above).
Judgement
HC, in view of the cumulative effect of Section 79 of the CGST Act, observed that, since the principal liability does not fall upon the petitioner, who is not a registered person, the provisions of the said Section shall not fall upon the petitioner. Further, the governing provisions of Section 89 clearly state that, before taking any action of recovery against the directors of the company, a subjective satisfaction is required to be achieved by the concerned officer in regard to whether a person concerned against whom recovery is sought to be made was a director of a private limited company for the concerned period. It is only after such satisfaction to the effect that such person was the director of the company that liability could be fastened against such director.
Accordingly, HC held the impugned order as illegal and unsustainable since the same were in breach of the rights guaranteed to the petitioner under Article 14, read with Article 300A, of the Constitution.
Disclaimer: This article provides general information existing at the time of preparation, and we take no responsibility to update it with the subsequent changes in the law. The article is intended as a news update, and Affluence Advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute for the need to refer to the original pronouncement.
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