2014 (3) TMI 390 - HC - Income Tax

Personal liability of directors due to negligence on their part - Deemed public limited company - Application of section 179 - company had ceased to be a private company by virtue of provisions of section 43A of the Companies Act Held that - It was not a case of the Assessing Officer that the facts asserted by the petitioner were not correct or that for any other reason, the company had not become a deemed public company under section 46A of the Companies Act, 1956. the decision in M. Rajamoni Amma and another v. Deputy Commissioner of Income tax (Assessment) and others 1992 (2) TMI 3 - SUPREME Court followed. The Company being a public limited company, proceedings against the directors for recovery of the tax due from the company cannot be taken, and certainly not proceeded with, under Section 179 of the Income Tax Act, 1961. - Decided in favour of Assessee.

Summary

Issues:
Challenge to order under section 179 of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Challenge to Order under Section 179
The petitioner challenged an order passed by the Income Tax officer under section 179 of the Income Tax Act, 1961. The order pertained to tax demands raised against a company for various assessment years, with the petitioner being a director of the company during the relevant period.

Issue 2: Director's Liability
The petitioner contended that he should not be held personally liable for the tax recovery under section 179 as he claimed to have resigned from the company and was not involved in its day-to-day operations. However, the Income Tax officer observed that the petitioner continued to act as a director even after his claimed resignation, as evidenced by his actions such as signing the company's returns and filing appeals.

Issue 3: Company's Status
The petitioner argued that the company had become a deemed public company under section 43A of the Companies Act, thus exempting him from personal liability under section 179. The Assessing Officer rejected this argument, stating that section 179 specifically applies to private limited companies and overrides the Companies Act provisions. The court noted that the Assessing Officer failed to inquire into the company's status as raised by the petitioner, which was a mixed question of fact and law.

Issue 4: Recovery Notice
The court found that the recovery demand for certain assessment years failed due to procedural lapses. The notice for recovery was issued shortly after the assessment orders, without allowing time for the company to address the tax dues. The court cited a previous case to emphasize that recovery from directors can only be initiated if the company is unable to pay its dues.

Conclusion
The court quashed the impugned order dated 3.1.2005, ruling in favor of the petitioner based on procedural deficiencies and the failure to consider the company's status as a deemed public company. The court highlighted the importance of proper inquiry and adherence to legal provisions in cases of director's liability under section 179 of the Income Tax Act.