The Madras High Court has held that the GST Department cannot invoke recovery provisions under Section 79 of the Central Goods and Services Tax (CGST) Act to attach the bank accounts of independent legal entities merely because they share common directors, partners, or family relationships with a defaulting taxpayer.
The bench of Justice C. Saravanan emphasized that recovery can only be made from a person who actually owes money to the defaulting taxpayer or holds money on its behalf, and not from unrelated entities solely because of common management or familial connections.
A batch of writ petitions filed by a partnership firm, an individual former director, and a private limited company challenging GST recovery notices and attachment of their bank accounts issued for recovering tax arrears of Assessee, which was undergoing liquidation.
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The dispute originated from tax dues amounting to approximately ₹3.66 crore allegedly payable by the assessee for the financial year 2017-18. According to the GST Department, the company had failed to file GSTR-3B returns despite filing GSTR-1, resulting in unpaid GST liability. After assessment proceedings, recovery notices were issued and the Department initiated recovery under Section 79(1)(c) of the GST Act.
Instead of limiting recovery against the defaulting company, the Department proceeded to attach the bank accounts of a partnership firm, an individual who had earlier served as a director of the defaulting company, and another private company,
on the ground that they were connected through common family members and business associations.
The partnership firm’s current accounts as well as overdraft accounts maintained with Axis Bank, ICICI Bank and HDFC Bank were frozen, severely affecting its business operations.
The petitioners argued that each of them was a separate legal entity under law and none of them owed any money to the defaulting company. They contended that Section 79(1)(c) permits recovery only where money is due or may become due to the defaulting taxpayer, or where a third person holds money on behalf of such taxpayer.
According to the petitioners, the GST Department had proceeded solely because one individual had earlier served both as a director of the defaulting company and as a partner or director in the petitioning entities. They asserted that this common link did not authorize attachment of entirely independent businesses having no financial liability towards the defaulting company.
The petitioners further pointed out that the partnership firm had filed all applicable GST returns and had no outstanding dues. They also produced financial records and a Chartered Accountant’s certificate stating that no amount was payable by them to the defaulting company.
The Department defended the recovery by contending that the former director had been associated with the defaulting company during the relevant tax period and was also connected with the other entities. According to the Department, the business entities were effectively controlled by members of the same family and recovery proceedings were justified because the tax demand had arisen during the tenure of the former director.
The Department also relied upon Section 89 of the CGST Act, which imposes joint and several liability upon directors of private companies where tax dues cannot be recovered from the company itself. It argued that attachment of the bank accounts was necessary to safeguard government revenue.
The Court carefully distinguished between the liability of a director under Section 89 and the recovery mechanism under Section 79.
The court observed that Section 79(1)(c) authorizes recovery only from a person who owes money to the defaulting taxpayer or holds money on behalf of that taxpayer. The provision does not authorize the Department to attach bank accounts of independent legal entities merely because they are associated with a common individual.
The Court noted that the Department had failed to establish that the partnership firm or the other company owed any money to the defaulting company or held any funds on its behalf. Instead, the recovery proceedings were founded primarily on family relationships and overlapping management, which could not substitute the statutory requirements under Section 79.
The Court further observed that if the Department intended to recover dues from the former director personally under Section 89, it was required to follow the statutory procedure applicable to directors’ liability. However, the Department could not bypass those requirements by attaching bank accounts belonging to distinct legal entities.
The Court found that merely because one individual had earlier been associated with multiple entities did not permit the Department to ignore their independent legal status. Recovery proceedings under the GST law must strictly conform to the statutory provisions and cannot be expanded on assumptions arising from common ownership or family relationships.
The Madras High Court held that the attachment of the bank accounts of the partnership firm and the other company for recovery of the tax dues of CBIGS Advertising Private Limited could not be sustained in law.
The Court clarified that while the GST Department remains free to pursue recovery against the defaulting company or any person legally liable under the CGST Act, it cannot recover such dues by attaching the bank accounts of unrelated entities without establishing the statutory conditions prescribed under Section 79.
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