Gujarat HC: Cannot attach Director’s personal property for tax default by company
Facts of the case
The case involved a company called Patel Rolling Mills Pvt. Ltd. (the “Company”) that owed sales tax to the Gujarat government. The government issued a notice to the Company demanding payment of the dues. When the Company failed to pay the dues, the government attached the personal property of the Company’s directors, including Mr. Manharlal Hirajibhai Virdiya (the “petitioner”).
The petitioner challenged the attachment of his property, arguing that it was illegal. He argued that he was not personally liable for the Company’s sales tax dues.
The government argued that the directors of a private limited company are personally liable for the company’s debts, including sales tax dues. The government relied on Section 27 of the Companies Act, 1956, which states that “every director of a company shall be liable to the company and its creditors for the negligence in the discharge of his duties as director.”
The petitioner argued that Section 27 of the Companies Act does not apply to sales tax dues. He argued that sales tax is a statutory liability, and that the directors of a company are not personally liable for statutory liabilities.
The Gujarat HC agreed with the petitioner. The court held that Section 27 of the Companies Act does not apply to sales tax dues. The court also held that the attachment of the directors’ personal property would be a disproportionate punishment for the company’s tax default.
Judgment of the Gujarat HC
The Gujarat HC agreed with the petitioner and quashed the attachment order. The court held that the directors of a private limited company are not personally liable for the company’s debts. The court also held that the attachment of the directors’ personal property would be a disproportionate punishment for the company’s tax default.
The court’s judgment is based on the following grounds:
- The directors of a private limited company are not personally liable for the company’s debts. This is because a private limited company is a separate legal entity from its directors. The directors are only liable for the company’s debts if they have personally guaranteed the debts.
- The attachment of the directors’ personal property would be a disproportionate punishment for the company’s tax default. The directors are not responsible for the company’s tax default. They may have taken all reasonable steps to ensure that the company paid its taxes.
- The attachment of the directors’ personal property would be a violation of their fundamental right to property. The right to property is guaranteed by Article 300A of the Constitution of India.
Case details
The case is titled Manharlal Hirajibhai Virdiya v. State of Gujarat and Others (TS-403-HC-2023(GUJ)-VAT). The judgment was delivered on August 15, 2023.