The Hon'ble Bombay High Court in Prasanna Karunakar Shetty vs. State of Maharashtra [ Writ Petition No. 3098 of 2024 ] held that initiating recovery proceedings against a former director of a company for the company's GST dues by attaching their personal property is illegal and violates the constitutional rights of the former director.
Facts of the Case:
1. The Petitioner, Mr. Prasanna Karunakar Shetty, joined Universeus Impex Pvt. Ltd. as a Director on March 2, 2017. Mr. Mayur Guliyana was another Director in the company.
2. In November 2017, the Petitioner's Director Identification Number (DIN), as filed with the Registrar of Companies (RoC), was disqualified under the provisions of Section 164(2)(a) of the Companies Act, 2013.
3. The Petitioner claimed that after his DIN was disqualified in November 2017, he did not participate in the company's affairs. In March 2018, due to the vacancy in the Board of Directors caused by the Petitioner's DIN disqualification, the Petitioner informed the Board to look for an alternate director.
4. On June 1, 2018, Mr. Vishal Tanna was appointed as a new director to replace the Petitioner. Although these changes occurred, the Petitioner's formal resignation as a director remained pending.
5. On May 15, 2019, the Petitioner formally resigned as a director of the company. According to the Petitioner, he ceased to be a Director of the company on May 25, 2019.
6. On August 7, 2020, a show cause notice (SCN) was issued to the company demanding Goods and Service Tax (GST) of Rs. 2,17,28,084/-, along with interest of Rs. 1,19,31,274/- and a penalty of Rs. 2,17,28,084/-.
7. On November 27, 2020, an impugned order was passed, confirming a total demand of Rs. 5,53,87,442/- against the company.
8. The Petitioner contended that recovery against the Company and its Directors could not be taken forward successfully.
9. In November 2022, the Petitioner received a summons from the Andheri Police Station stating that a First Information Report (FIR) had been lodged against him by the Maharashtra State GST Department.
10. On December 14, 2022, the Petitioner applied for and was granted Anticipatory Bail by the Sessions Court, Greater Mumbai, in connection with the said FIR.
11. On July 7, 2023, the Petitioner received a communication from the Assistant Commissioner of State Tax regarding the recovery proceedings initiated against the Company, pursuant to the order dated November 27, 2020.
12. On December 18, 2023, the Petitioner received an email from his bank stating that the Current Account of M/s. India Hair, of which the Petitioner was a proprietor, had been attached as per the instructions of the Respondent No. 3.
13. On January 11, 2024, the Respondent No. 3 issued an impugned order of attachment, attaching the Petitioner's flat, being Flat No. 18, 6th Floor, Trimurti Residency, Plot No. 16, J.B. Nagar, Andheri (E), Mumbai 400 059, owned by and in possession of the Petitioner.
14. The Petitioner immediately submitted a representation dated February 19, 2024, against the attachment order.
15. Aggrieved by the attachment of his personal properties for the company's GST dues, the Petitioner filed this writ petition.
Issue:
Whether the attachment of the Director's personal properties for recovering the company's GST dues is legal and valid.
Held by the Court:
The Hon'ble Bombay High Court, in the Writ Petition No. 3098 of 2024, held that:
The impugned attachment order violated the Petitioner's constitutional rights under Articles 14 and 300A of the Constitution of India.
The Court observed that a bare reading of Section 79 of the Maharashtra Goods and Services Tax Act, 2017 (MGST Act) would bring about a cumulative effect that the principal liability is not on the Petitioner, who is not a registered person within the meaning of Section 79(1) of the MGST Act.
The Court held that Section 89 of the MGST Act, which provides for the liability of directors of a private limited company, clearly stipulates that before taking any action of recovery against the directors, a subjective satisfaction is required to be achieved by the concerned officer regarding whether the person against whom recovery is sought was a director of the company during the concerned period.
The Court opined that all factual issues regarding the Petitioner's directorship during the relevant period were required to be verified by the concerned officer before passing the impugned attachment orders. The officer was required to issue a show cause notice to the Petitioner, calling upon him to show cause, on tangible materials, that the amount due and payable by the company was liable to be recovered from the Petitioner under Sections 79 and 89 of the MGST Act.
The Court observed that no show cause notice was issued to the Petitioner, and he was not given an opportunity to be heard before the impugned attachment orders were passed against him.
The Court held that there is no reasoning provided in the impugned order as to what basis the Respondents proceeded to make the attachment of the Petitioner's properties.
The Court expressed that there is no manner of doubt that the impugned order passed against the Petitioner is illegal and cannot be sustained, as it is in breach of the rights guaranteed to the Petitioner under Article 14, read with Article 300A, of the Constitution of India.
The Court allowed the Petition in terms of prayer clauses (a) and (b), quashing the impugned attachment order and directing the Respondents to withdraw/cancel the order, lift the attachment on the Petitioner's flat, and revoke the notice given to the bank for attaching the Petitioner's Current Account.
Relevant Sections:
Section 79 of the Maharashtra Goods and Services Tax Act, 2017: "Where any amount payable by a person to the Government under any of the provisions of this Act or the rules made thereunder is not paid, the proper officer shall proceed to recover the amount by one or more of the following modes..."
Section 89 of the Maharashtra Goods and Services Tax Act, 2017: "Notwithstanding anything contained in the Companies Act, 2013, where any tax, interest or penalty due from a private company in respect of any supply of goods or services or both for any period cannot be recovered, then, every person who was a director of the private company during such period shall, jointly and severally, be liable for the payment of such tax, interest or penalty unless 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.
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