Madras HC: Recovery Actions Cannot Be Initiated Against Company Directors if Assessee’s Status is Non-Existent

It was carried by the Madras High Court that recovery actions against the directors of a company cannot be created if the status of the taxpayer does not exist.

The Division Bench of Justices Anita Sumanth and G. Arul Murugan noted that “while in the case of amalgamation, it is only the apparent and outer shell of the company which is destroyed…. However, in the case of dissolution, the entity wholly ceases to exist.”

In the identical case, the taxpayer company was ordered to be closed and an official Liquidator was appointed to handle the liquidation of the company. A plea was furnished against the closing order. The closing order was set aside however the Official Liquidator stayed appointed and was asked to take charge of all company assets.

The status report of the official liquidator shows that just the movable assets were taken over and then sold to pay the remaining dues to the Provident Fund and Employees‘ State Insurance authorities. By order dated 20.12.2017, the company was formally dissolved.

The bench in the matter of principal Commissioner of Income-Tax V. Mahagun Realtors (P) Ltd. (443 ITR 194), where the Supreme Court in the Income Tax Act, 1961 has repeated the settled difference between amalgamation and winding up of a company.

Where in the matter of amalgamation it is just the apparent and the outer shell of the company that is destroyed, the core or the corporate venture carries in the transferee’s hands via whom it requires to be taken over. In the matter of dissolution, the entity ceases to exist, the bench noted.

As per the bench in “conclusion and succumbing to the status of the assessee which, as of date, is non-existent, they seek liberty to proceed with recovery action against the Directors of the company, if any, under the provisions of the Tamil Nadu General Sales Tax Act, 1959, Central Sales Tax Act, 1956 and Revenue Recovery Act. ………Such specific liberty as sought for is not liable to be granted…….”

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The bench for the aforesaid view has dismissed the petition.