Section 24(5) APVAT: Tax Department Must First Particularise Director’s Gross Neglect/Misfeasance Before Personal Recovery

1. Introduction

This common order of the Andhra Pradesh High Court (Division Bench: R. Raghunandan Rao, J. and T.C.D. Sekhar, J.) decided three writ petitions (W.P. Nos. 26352, 26371 & 26377 of 2025) filed by former directors of M/s. Kusalava Batteries Private Limited, a private company that had been liquidated and dissolved under the Insolvency & Bankruptcy Code, 2016 pursuant to orders of the NCLT, Amaravati Bench in C.P(IB) No.546/9/HDB/2018.

The Commercial Tax Department attempted to recover alleged VAT dues (about Rs. 23.37 lakhs/ Rs. 24.14 lakhs as reflected in the record) from the directors personally by attaching their bank accounts through a notice dated 18.09.2025 under Section 29 of the Andhra Pradesh Value Added Tax Act, 2005 (“AP VAT Act”).

The core legal issue was the correct preconditions for invoking Section 24(5) AP VAT Act (personal liability of directors of a wound-up private company) and whether bank attachment could be sustained without satisfying those preconditions and without a procedurally adequate notice.

2. Summary of the Judgment

  • The Court set aside the attachment of the petitioners’ bank accounts as not being in accordance with the requirements of Section 24(5) AP VAT Act.
  • The Court held that while directors may be made jointly and severally liable under Section 24(5), such recovery is conditional: (i) the tax must be one that cannot be recovered from the company, and (ii) non-recovery must be attributable to the director’s gross neglect, misfeasance, or breach of duty.
  • Critically, the Court held that the Department must first indicate the nature of the alleged gross neglect/misfeasance/ breach of duty; only then does the statutory burden shift to the director to prove that non-recovery is not attributable to him.
  • Liberty was reserved to the Department to proceed afresh in accordance with Section 24(5) by issuing a proper notice and providing an opportunity to object.

3. Analysis

3.1 Precedents Cited

(a) R/Special Civil Application Nos.5354 & 5355 of 2018 (Gujarat High Court, dated 27.08.2018)

The Andhra Pradesh High Court treated the Gujarat High Court’s reasoning (in the context of section 179 of the Income-tax Act, an analogous director-liability provision) as persuasive on two connected propositions:

  • Although the director bears the burden (the statute is framed “in the negative”), the authority must still disclose primary facts and the basis on which it proposes to invoke the provision.
  • Personal recovery from directors is in substance a lifting of the corporate veil; it cannot be done mechanically, and requires demonstrable satisfaction of statutory conditions.

The AP High Court extracted and adopted the principle that an invocation notice must do more than demand payment—it must lay a foundation, including an allegation (and supporting basis) that non-recovery is linked to the director’s gross neglect/misfeasance/breach of duty.

(b) Pravinbhai M. Kheni v. Assistant Commissioner of Income Tax and ors

Quoted within the Gujarat decision, this authority was relied upon for the proposition that a show-cause notice/order is vulnerable where the Assessing Officer:

  • does not allege, or broadly set out, that non-recovery was on account of gross neglect/misfeasance/breach of duty; and
  • bases final conclusions on material never shared with the affected director.

While the Andhra Pradesh High Court did not independently analyse the full facts of Pravinbhai M. Kheni, it used the embedded ratio to reinforce a procedural fairness requirement: the director must know the case he has to meet before the statutory burden can be said to arise.

3.2 Legal Reasoning

(i) Two statutory conditions under Section 24(5)

The Court read Section 24(5) as containing two cumulative conditions:

  1. Inability to recover from the company: the tax “cannot be recovered” from the private company in liquidation.
  2. Director-linked culpability: such non-recovery must be attributable to “gross neglect, misfeasance or breach of duty” of the director (subject to the director’s statutory opportunity to prove otherwise).

(ii) Meaning of “cannot be recovered” includes statutory bars (including IBC) and is not confined to “best efforts”

On the first condition, the Court held that “cannot be recovered” is unqualified. It encompasses:

  • non-availability of assets/funds; and
  • a statutory bar, including the IBC framework that can prohibit admission of belated claims after the limitation/claim process closes.

Importantly, the Court added that even the Department’s negligence in pursuing recovery does not take the case outside “cannot be recovered”: once recovery is in fact shut out (negligently or otherwise), the first condition stands satisfied. This clarifies that the “cannot be recovered” threshold is an objective end-state, not a merit badge for departmental diligence.

(iii) Procedural minimum for the second condition: the Department must first indicate the alleged neglect/misfeasance

The decisive holding lies in the Court’s treatment of the second condition. While Section 24(5) places the burden on the director to prove that non-recovery is not attributable to his gross neglect/misfeasance/breach of duty, the Court held that this burden-shift presupposes a procedurally adequate initiation:

  • The Department must initially indicate the nature of the gross neglect/misfeasance/breach of duty believed to have caused non-recovery.
  • Only after such indication does the director’s obligation meaningfully arise to disprove attribution.

Applying this, the Court noted that an earlier notice dated 27.01.2021 under Section 24(5) was issued, but it did not specify any conduct amounting to gross neglect/misfeasance/breach of duty. The later bank attachment (18.09.2025) under Section 29, without a compliant Section 24(5) foundation and opportunity, was therefore unsustainable.

(iv) Relationship between Section 24(5) and Section 29 (bank attachment)

Section 29 was used to attach bank accounts, but the Court treated such coercive recovery as necessarily dependent on the validity of the underlying Section 24(5) invocation against directors. Without satisfying Section 24(5)’s preconditions (including a proper notice meeting the second-condition foundation), attachment could not stand.

3.3 Impact

  • Higher procedural threshold for personal recovery from directors: Tax authorities in Andhra Pradesh must now structure Section 24(5) action as a reasoned, particularised process, not a bare demand followed by attachment.
  • Enhanced natural justice in “burden on director” statutes: Even where a provision formally casts the burden on the director, the State must disclose the factual basis for alleging gross neglect/misfeasance/breach of duty.
  • IBC-era recoveries: Where a department’s claim is rejected in liquidation (including for limitation or non-compliance), the company’s dues may become practically irrecoverable; the decision clarifies that this state of irrecoverability can satisfy the first limb of Section 24(5), but personal recovery still depends on pleading and substantiating director-linked culpability at the notice stage.
  • Drafting discipline: Notices under Section 24(5) must articulate (at least prima facie) the conduct complained of; otherwise, downstream recovery measures (including bank attachments) risk being struck down.

4. Complex Concepts Simplified

“Wound up / liquidation”
A process where a company’s affairs are closed, its assets are realised, creditors’ claims are dealt with, and the company may ultimately be dissolved.
“Cannot be recovered”
The Court treats this as a factual/legal conclusion that recovery from the company is no longer possible—because there are no assets, or because law (including the IBC claim regime/limitation) prevents recovery.
“Gross neglect, misfeasance, breach of duty”
Serious lapses or wrongful conduct by directors in managing the company’s affairs, beyond mere business failure. Under Section 24(5), personal liability is linked to this culpability, not imposed automatically.
“Lifting the corporate veil”
Normally, a company is a separate legal person and its debts are not the personal debts of directors. “Lifting the veil” is a legal mechanism allowing creditors (here, the State) to proceed against directors personally, but only when statutory conditions are met.
“Opportunity to file objections / natural justice”
The affected person must be told the basis of the proposed action and given a fair chance to respond before coercive recovery is undertaken.

5. Conclusion

The judgment establishes a clear procedural and substantive checkpoint for invoking director liability under Section 24(5) AP VAT Act: even though the provision casts a burden on directors, tax authorities must first disclose the prima facie basis—specifically, the alleged gross neglect, misfeasance, or breach of duty—before proceeding to coercive steps like bank attachment. It also clarifies that “cannot be recovered” is broad enough to include statutory bars arising under the IBC process. The immediate outcome was the quashing of bank attachments, with liberty to recommence recovery only through a Section 24(5)-compliant process.