2013 (12) TMI 726 - HC - Income Tax

Whether tax dues of company be recovered from its directors - Held that - Tax dues of a private company can be recovered from its Directors in the circumstances specified in Section 179 of the Act - Section 179 of the Act cannot be invoked if such a Director proves that non recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on the part of the petitioner in relation to the affairs of the company - The petitioner has thus proved that non recovery of the tax due against the company cannot be attributed to any gross neglect, misfeasance or breach of duty on her part in relation to the affairs of the company - Neither the ACIT nor the CIT have referred to any material nor they have referred to any evidence to indicate any gross neglect, misfeasance or breach of duty on the part of the petitioner in relation to the affairs of the company - Decided in favour of petitioner.

Issues Involved:

1. Whether the word "tax due" used in Section 179 of the Act would include penalty and interest.
2. Whether the petitioner has established that the recovery cannot be attributed to any gross neglect, misfeasance, or breach of duty on the part of the petitioner in relation to the affairs of the company.
3. Whether the CIT has correctly held that the tax dues of the company are liable to be recovered from the petitioner as Director for the AY 1984-85.
4. Whether the orders passed under Section 179 of the Act against the petitioner are liable to be set aside on the ground of violation of principles of natural justice.

Detailed Analysis:

Issue 1: Whether the word "tax due" used in Section 179 of the Act would include penalty and interest

The court examined Section 179 of the Income Tax Act, 1961, and noted that the term "tax due" was not explicitly defined within the Act. It referenced Section 2(43) of the Act, which defines "tax" but does not include penalty and interest. The court also considered the explanation added to Section 179 by the Finance Act 2013, which clarified that "tax due" includes penalty and interest from 1.6.2013 onwards. It concluded that prior to this amendment, "tax due" under Section 179 did not encompass penalty and interest. This interpretation was supported by the Supreme Court's decision in Harshad Shantilal Mehta, which differentiated between tax, penalty, and interest.

Issue 2: Whether the petitioner has established that the recovery cannot be attributed to any gross neglect, misfeasance, or breach of duty on the part of the petitioner in relation to the affairs of the company

The petitioner argued that she was an inactive Director and had resigned in 1983, which was acknowledged by the CIT. The ACIT's efforts to recover the tax dues from the company were unsuccessful, and the ACIT did not disprove the petitioner's claim of non-involvement in the company's day-to-day affairs. The court found that the department did not make sufficient efforts to recover the dues from the company's assets before proceeding against the petitioner. The court held that the petitioner had proven that the non-recovery of tax was not due to her gross neglect, misfeasance, or breach of duty.

Issue 3: Whether the CIT has correctly held that the tax dues of the company are liable to be recovered from the petitioner as Director for the AY 1984-85

The court noted that the CIT had admitted the petitioner was an inactive Director and that she had resigned before the end of the assessment year 1984-85. The CIT's decision to hold the petitioner liable under Section 179 was based on the incorrect assumption that the Director's activity level was irrelevant. The court emphasized that liability under Section 179 requires proof of gross neglect, misfeasance, or breach of duty, which was not established in this case. Consequently, the court held that the CIT's decision was incorrect.

Issue 4: Whether the orders passed under Section 179 of the Act against the petitioner are liable to be set aside on the ground of violation of principles of natural justice

Given the conclusions on the other issues, the court found it unnecessary to address the question of natural justice violations. The court's findings on the other issues were sufficient to set aside the orders against the petitioner.

Conclusion:

The court set aside the order dated 29.3.2007 and the order of attachment dated 22.9.2006, restraining the respondent from recovering the tax dues of the company from the petitioner. The writ petition was allowed with costs.

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