2021 (3) TMI 1232 - HC - Income Tax

Violation of Section 179 - Liability of directors of private company in Liquidation - HELD THAT - The impugned orders have been passed under Section 179 of the Income Tax Act 1961 which specifically applies to liability of directors of private companies. The definitions of private limited company and public limited company Section 3(i)(iii) and (iv) of the Companies Act 1956 is clear. The definition of company has defined in Companies Act 1956 has been incorporated in the Income Tax Act 1961. The Companies Act 1956 recognizes private limited company and public limited company. There are no evidence on records to conclude that the said assessee in default companies namely M/s.Gangotri Textiles Ltd and NEPC Agro Foods Ltd was a private limited company. There are no records to substantiate the said companies was a private limited company. Therefore challenge to invocation of Section 179 of the Income Tax Act also appears to correct. Considering the fact that the records are not in produced either by the petitioner nor the respondent it is of the view that the impugned orders is liable to be quashed. These cases are remitted back to the respondent to pass appropriate orders after considering the definition of the Company in Section 262(68) and (71) of the Companies Act 2013 and ..deals of the Companies Act 1956. The respondent may how issue a proper notice after examining the certificate of incorporation of the respective assessee in default and after examined the articles and Memorandum and Article of association of M/s.Gangotri Textiles Ltd and NEPC Agro Foods Ltd. If there are materials to suggest that the .company were a private limited company the respondent may pass appropriate order under Section 179 of the Income Tax Act. This exercise shall be carried out by the respondent within a period of three months from the date of receipt of a copy of this order. In case the records from the Registrar of Companies indicates that the assessee in default was a public limited company no further proceedings is to be taken. In the event there is a prima facie material to conclude that the assessee in default were a private limited company appropriate notice may be issued to the petitioners.

Summary

Issues:
Challenge to orders passed under Section 179 of the Income Tax Act, 1961 regarding liability of directors of companies. Dispute over whether the defaulting companies were private limited or public limited companies.

Analysis:
The petitioner challenged the orders passed by the Assistant Commissioners of Income Tax, Corporate Circle 1 and 2, Coimbatore under Section 179 of the Income Tax Act, 1961. The petitioner argued that the invocation of Section 179 was without jurisdiction because the defaulting companies were not private limited companies where the petitioner held director/shareholder positions. The petitioner relied on a Supreme Court decision that stated proceedings against directors for recovery of tax from a public limited company cannot be pursued under Section 179. The court allowed the appeals, quashed the orders, and stated that further proceedings for recovery of tax from the directors should not be pursued under Section 179. The court emphasized that the department could use other legal processes for recovery. The petitioner distinguished a Gujarat High Court decision as not applicable to their case.

The respondent contended that the writ petitions should be dismissed, suggesting the petitioners seek remedy under Section 264 of the Income Tax Act for revision. The respondent argued that there were disputed facts regarding the nature of the defaulting companies and that liability could be imposed on directors through Section 179. The respondent cited a Gujarat High Court decision to support their position. The Standing Counsel for the Respondent invoked the Doctrine of Piercing the Corporate Veil recognized by the Supreme Court to argue for the application of Section 179 to recover tax liability from directors of public limited companies if statutory conditions are met.

The court considered the arguments presented by both parties. It noted that the impugned orders were issued under Section 179, which applies to the liability of directors of private companies. The court highlighted the definitions of private limited and public limited companies under the Companies Act, stating that there was no evidence to conclude that the defaulting companies were private limited. As there were no records to substantiate the companies' status, the court found the challenge to the invocation of Section 179 to be valid. The court directed the respondent to reexamine the companies' status based on the Companies Act definitions and issue appropriate orders within three months. If the companies were found to be public limited, no further proceedings were to be taken. If they were deemed private limited, proper notice should be issued to the petitioners.

In conclusion, the court disposed of the writ petitions with the above observations, without costs, and closed connected Miscellaneous Petitions.