• Dated 30^th January, 2026

RECOVERY FROM SEPARATE COMPANY ILLEGAL MERELY DUE TO COMMON DIRECTOR: KARNATAKA HC

Brief Facts of the Case:

The petitioner-company and M/s Xylem Resource Management Pvt. Ltd. (XRMPL) were separate and independent juristic entities, though they had a common Director. A show cause notice under Section 73 of the KGST Act, 2017 was issued only to XRMPL and an adjudication order was passed confirming GST demand against it. However, instead of recovering the dues from XRMPL, the department issued a garnishee notice in Form GST DRC-13 and recovered an amount of ₹24.73 lakhs from the bank account of the petitioner-company. Aggrieved by the said recovery action, the petitioner approached the Karnataka High Court.

Assessee 's Contention:

The petitioner contended that it was an independent legal entity and no show cause notice or adjudication proceedings were ever initiated against it. It was argued that recovery proceedings under Section 79 of the CGST/KGST Act cannot be initiated against a third party merely because of common directorship. The petitioner further submitted that lifting of the corporate veil on such ground was impermissible in law.

Respondent's Contention:

The respondent authorities justified the recovery action by contending that the Director was common in both the companies and, therefore, the corporate veil could be lifted to recover the tax dues confirmed against XRMPL from the petitioner-company.

Court's Decision:

The Karnataka High Court held that the show cause notice and adjudication order were issued only against XRMPL, which was an independent and distinct juristic entity. The petitioner-company could not be made liable for the tax dues of XRMPL when it was neither a garnishee nor liable to pay any amount to XRMPL. The Court categorically held that mere common directorship cannot be a basis for lifting the corporate veil to effect recovery. Accordingly, the impugned Form GST DRC-13 was quashed and the department was directed to refund the amount recovered along with applicable interest.

BTA's Comments:

This ruling firmly reiterates the settled legal position that every company is a distinct and independent juristic entity, and GST recovery proceedings must strictly adhere to the procedure prescribed under law. The judgment provides significant protection to group companies by unequivocally holding that mere common directorship, in the absence of any statutory liability, cannot justify lifting the corporate veil for recovery of tax dues. The decision also sends a clear message to tax authorities that coercive recovery actions, particularly against third parties, are impermissible without due process and lawful authorization.

Author: Sneha Nandi