AP VAT Act | Tax Dept Must Specify Negligence Before Recovering Company Dues From Directors: Andhra Pradesh High Court

The Andhra Pradesh High Court at Amaravati has held that tax authorities cannot recover unpaid taxes under the Andhra Pradesh Value Added Tax Act, 2005, from directors of the company unless they first clearly spell out the negligence or breach of duty alleged against them.

A Division Bench of Justice R Raghunandan Rao and Justice T. C. D. Sekhar clarified the scope of Section 24(5) of the Andhra Pradesh Value Added Tax Act, 2005.

The court said that while the provision does allow directors of a private company in liquidation to be made personally liable, the burden on directors does not arise automatically.

The bench observed, “…this condition would have to be understood to mean that there is an initial responsibility on the tax authorities to indicate the nature of such gross negligence, misfeasance, or breach of duty. It is only upon such an indication being given that the duty of demonstrating that there was no such gross negligence, misfeasance, or breach of duty on the part of the directors, would fall upon the directors of such a private limited company in liquidation.”

The case involved former directors of Kusalava Batteries Private Limited, which was liquidated under the Insolvency and Bankruptcy Code by orders of the National Company Law Tribunal, Amaravati Bench. During the liquidation process, the commercial tax authorities approached the liquidator in October 2019 seeking recovery of Rs.24.14 lakh from the liquidation proceeds.

The liquidator rejected the claim, noting that it was neither filed in the prescribed format nor within the limitation period. The NCLT later allowed the company to be dissolved, bringing the liquidation process to a close. Despite this, the tax department issued notices to the former directors in January 2021 under Section 24(5). In September 2025, their bank accounts were attached through notices issued under Section 29 of the AP VAT Act.

Before the High Court, the directors said the tax authorities had missed the opportunity to pursue their claim during liquidation and could not later turn to the directors for recovery.

They said the State could not take advantage of its own lapse and that Section 24(5) could not be invoked unless a prima facie case of gross negligence, misfeasance, or breach of duty was first made out. The State countered that the language of Section 24(5) permits recovery from any director of a private company in liquidation and that the burden of disproving negligence lies on the directors.

The court examined the two conditions built into Section 24(5). In the first condition, it explained when tax dues can be said to be unrecoverable from the company. The bench said, “The first condition, is that the taxes due from the company cannot

be recovered by the authorities, and all avenues of such recovery are closed.”

It added that recovery could be barred due to lack of assets or statutory restrictions, including under insolvency law, and clarified, “To the mind of this Court, the negligence or otherwise of the authorities in recovering the taxes cannot fall outside the term 'cannot be recovered.'”

In the circumstances, this said condition would be complied with when the authorities have made their efforts, negligently or otherwise, to recover taxes and such taxes cannot be recovered at all. On the second condition, the court found a clear defect in the notices issued to the directors. The Bench noted that the authorities had failed to explain what conduct of the directors led to non-payment of tax.

It recorded that “no indication has been given, in this notice, as to the nature of gross negligence, misfeasance, or breach of duty of the directors that had resulted in non-recovery of the taxes.”

In this backdrop, the court held that the attachment of the directors' bank accounts was not in accordance with law. The attachments were set aside, while leaving it open to the authorities to initiate fresh proceedings after complying with the provision.