Private Company Directors' Liability: Companies Act, Income Tax, and GST.

This quote "With great power comes great responsibility," the aforementioned quote holds persuasive value in the current scenario, in which, on the one hand, senior officials of a company, such as Directors, have the authority to make important decisions for the company, while on the other hand, they bear the responsibility for their decisions. Civil laws, including tax laws, operate on the same principles and hold officials accountable even after they leave their positions. While the firm has its own legal status, it cannot be used to justify the activities of its highest officers.

I. LIABILITY OF DIRECTORS UNDER THE COMPANIES ACT, 2013

The Companies Act of 2013 places the responsibility for penalizing officers on the 'officer-in-default,' in addition to fines imposed on the company itself for various types of defaults, contraventions, or non-compliances. The phrase 'officer-in default', as defined under Section 2(60) of the Companies Act, includes a full-time director or key managerial personnel (such as CEO, CFO, full-time CS, MD) who are involved in the company's day-to-day operations. Any other director could be held accountable solely for particular violations committed with his or her knowledge or permission.

Furthermore, Section 168 of the Act makes the retiring director liable for violations committed during his employment even after he resigns. However, the regulations apply consistently to all directors and make no distinction between directors of private firms and those of public corporations.

II. LIABILITY OF DIRECTORS UNDER THE INCOME TAX ACT, 1961

Section 179 of the Income Tax Act of 1961 overrides the provisions of the Companies Act of 2013. It states that if a private company's tax dues (including penalties, interest, and fees) for any previous year's income cannot be recovered, every person who was a director of the private company at any time during the relevant previous year is jointly and severally liable for payment of such tax dues. However, if he can demonstrate that the non-recovery was not caused by gross carelessness, misfeasance, or breach of duty on his part in relation to the company's activities, he will not be held liable. The aforementioned regulation will likewise apply to a private firm that was later converted into a public company.

According to the aforementioned rule, directors of public companies or presumed to be public corporations are not subject to the restrictions of Section 179 of the Income Tax Act. Thus, under the Income Tax Act, a Director's obligation for a private limited company extends beyond his or her term with the company. There are no such rigorous regulations in place for directors of public limited companies.

III. DIRECTORS' LIABILITY UNDER GST

Section 89 of the Central Goods and Service Tax Act of 2017 (hereafter referred to as the 'CGST Act') contains provisions that impose personal liability on private company directors. The rules in question are identical to Section 179 of the Income Tax Act.

According to Section 89 of the CGST Act, every director of a private limited company is jointly and severally liable for the payment of tax, interest, and penalty that 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 It is important to note that the aforementioned laws allow for the recovery of not only the tax amount but also the interest and penalties.

Furthermore, the aforementioned rules supersede Section 18 of the Companies Act of 2013, which governs the conversion of a private limited company into a public limited company. As a result, a director of a public limited company that was previously a private limited company may be held liable under Section 89 of the CGST Act for the period during which he served as Director of the private limited company.

It is worth noting that such measures did not exist under the previous regime, which included Central Excise, Service Tax, and VAT. Even under Customs legislation, no provision exists that directly holds a director of a private limited business accountable for any tax recovery. These GST provisions appear to have been borrowed from income tax. As a result, similar to the Income Tax Act, the provisions under GST only apply to directors of private limited companies. We will now analyze a recent judgment about the liability of a director in the context of a private firm.

PRASANNA KARUNAKAR SHETTY VS. STATE OF MAHARASHTRA (2024-VIL-358-BOM)

The captioned case focuses on recovery actions against a former director of a private corporation.

Facts about the case:

1. The petitioner became a director in March 2017; however, in November 2017, his DIN, as registered with the Registrar of Companies (RoC), was disqualified under the requirements of Section 164(2)(a) of the Companies Act. Because he was just a director of the company for a short period, he was not involved in its operations.

2. Following the disqualification of petitioner's DIN and his suggestion, another director was appointed in his place in June 2018. The petitioner's resignation could not be recorded immediately due to the procedure of appointing a new director, therefore his resignation became effective on May 19, 2019.

3. A show cause notice was filed against the company from April 2018 to March 2019, and an order was issued in December 2020 affirming the whole demand against the company.

4. Because the recovery against the company and its prevailing directors could not be pursued, the petitioner's bank account and personal property were attached on the basis that he was the director for a brief period during the impugned period. The captioned writ case was filed against the backdrop of the petitioner.

Petitioner's Arguments in the aforementioned Case:

• The petitioner was not given a show cause notice, and the bank account and personal items were immediately attached.
• The challenged ruling violates Sections 79 and 89 of the Maharashtra Goods and Services Tax Act, 2017 ("MGST Act").
• Furthermore, the petitioner had ceased to be a director throughout the relevant period, so the issue of attaching the petitioner's immovable property and current account is not raised.
• Furthermore, just because recovery is not possible against the company does not give the respondents the authority to proceed against a former director who was never involved in the day-to-day business operations and affairs of the company, nor had he participated in the company's management at the relevant time.

Respondent's Arguments in the Said Case:

The respondents maintained that while the petitioner served as director for a brief period of time, the impugned attachment orders were warranted.

Underlying Provisions of the CGST Act, 2017:

Section 79 of the CGST Act specifies the methods by which the proper officer can reclaim the tax owed to the government.

Section 89 of the CGST Act addresses laws concerning the responsibility of directors of private companies (as detailed above).

Judgment:

The High Court ruled that Section 79 of the CGST Act does not apply to non-registered individuals because they do not bear the primary liability. Furthermore, the governing provisions of Section 89 clearly state that, before taking any action of recovery against the directors of the company, the concerned officer must obtain subjective satisfaction as to whether the person against whom recovery is sought was a director of a Private Limited Company for the relevant period. Only after such satisfaction that such an individual was a director of the corporation may liability be imposed on such director. As a result, the HC ruled that the impugned order was unconstitutional and unsustainable because it violated the petitioner's rights granted under Article 14, read with Article 300A of the constitution.