Madras High Court Upholds ₹2.66 Cr GST Recovery Against Former Director Of CBIGS Advertising

The Madras High Court on 7 July held that tax dues of a private company in liquidation can be recovered from its former director under Section 88(3) of the Central Goods and Services Tax (CGST) Act, 2017, unless the director proves that the non-recovery was not due to gross neglect, misfeasance or breach of duty.

Justice C. Saravanan dismissed three connected writ petitions filed by CBIGS Apparels and Jewels, its partner Mrs. N. Seetha, and Yantur Manufacturing Private Limited challenging GST recovery proceedings initiated for the tax dues of CBIGS Advertising Private Limited, a company that had gone into voluntary liquidation. He held:

“Since the petitioner in W.P.No.16529 of 2024 was a director of the said company from 2014-2015 to 2019-2020 (specifically, between 26.07.2014 to 20.09.2019), she is liable. Thus, the amount of tax, penalty and interest that are due from the said company namely CBIGS Advertising Private Limited can be recovered from the petitioner in W.P.No.16529 of 2024, namely Mrs.N.Seetha.”

The GST Department had issued recovery notices under Section 79(1)(c) of the CGST Act (which enables recovery of unpaid tax dues) read with Rule 145 of the CGST Rules (which provides for attachment and sale of property for recovery), seeking to recover tax arrears exceeding Rs. 2.66 crore from CBIGS Advertising Private Limited, which had subsequently gone into voluntary liquidation pursuant to an order passed by the National Company Law Tribunal (NCLT).

CBIGS Apparels and Jewels argued that it was a separate legal entity and had no dues payable to CBIGS Advertising Private Limited. It contended that the Department had proceeded against the partnership firm only because Mrs. Seetha was earlier a director of the company and was also a partner in the firm. The petitioners also challenged the attachment of the firm's overdraft accounts, arguing that such facilities were credit arrangements and not assets belonging to the firm.

The Department submitted that Section 88(3) of the CGST Act makes every person who was a director of a private company during the period for which tax was due jointly and severally liable where the dues cannot be recovered, unless the person proves that the failure was not due to any gross neglect, misfeasance or breach of duty.

The Court accepted the Department's stand and held that Mrs. Seetha had to establish the absence of negligence before the Commissioner under the statutory mechanism. It held that such a defence could not be examined in a writ petition. It also upheld the attachment of CBIGS Apparels and Jewels' bank accounts, noting that Mrs. Seetha continued as a partner in the firm during the relevant period. It held that her subsequent retirement and induction of new partners did not prevent recovery proceedings.

While considering Yantur Manufacturing Private Limited's petition, the Bench noted that the company was incorporated by members of the same family after the tax defaults of CBIGS Advertising Private Limited. It noted that the materials on record prima facie indicated that directors and partners had been interchanged among family members across different entities and that there was a possibility of examining whether the subsequent company was incorporated to avoid payment of tax arrears by lifting the corporate veil. It observed:

“Prima facie indications are that the incorporation of the petitioner in W.P.No.6074 of 2026 was also for the purpose of avoiding payment of tax arrears and may warrant lifting of the corporate veil, though the said company is an independent entity and is liable to tax.”

Accordingly, the High Court dismissed all three writ petitions while clarifying that Mrs. Seetha could approach the competent authority under Section 88(3) to establish that the tax default was not attributable to her conduct.

For Petitioner: P.V.Balasubramaniam, Senior Counsel and K.S.Karthik Raja, Advocate

For Respondent: TNC.Kaushik, Additional Government Pleader For Respondent No. 1 to Respondent No. 3, O.S.Karthikeyan, Advocate For Respondent No. 4 and C.Mohan & A.Rexy Josephine Mary, Advocate for Respondent No. 5 and G.Shanthi Meenakshi, For Respondent No. 6