2022 (4) TMI 1407 - HC - Income Tax

Liability of directors in tax due from the company - Liability of directors of private company u/s 179 - Recovery proceedings - arrears of income tax were due from the Company recovery proceedings were initiated against the Directors of the Company - whether no tax is due from the Company, warranting any proceedings under Section 179 ? - HELD THAT - By virtue of the order passed in appeal by the Appellate Tribunal, produced as Ext.P29, a total change of scenario has occurred. As rightly, contended by the learned Senior Counsel Sri.Joseph Markose, the proceedings under Section 179 of the Act can be initiated only when there is a tax due from the Company, in respect of any income of any previous year. As per Section 179 of the Act if tax is due from a private Company and the same cannot be recovered, then every person, who was a Director of the Company, at any during the relevant previous year, will be liable for payment of such tax. The very basis for issue of Ext.P10 was the existence of a tax liability against the Company. The said tax liability has been effaced completely by virtue of Ext.P29, and the same has been remanded for reconsideration. When the issue that was pending consideration before the Tribunal has been directed to be reconsidered, in the eyes of law after setting aside the order of assessment to the extent challenged before the Tribunal, there is no tax due from the Company. Consequently there cannot be any recovery of tax from any Director of the Company for any assessment year, relevant to the previous year. Therefore, in the view that, Ext.P10 has no legs to stand, in view of Ext.P29. 8. Accordingly, Ext.P10 shall stand set aside.

Summary

Issues:
1. Challenge to order under Section 179 of the Income Tax Act 1961.
2. Declaration of liability for income tax dues of a company.

Analysis:
1. The petitioner challenged an order issued under Section 179 of the Income Tax Act 1961, alleging liability for income tax dues of a company. The petitioner claimed to have resigned as Director of the company and had no connection with it after a short period. Recovery proceedings were initiated against the petitioner based on arrears of income tax due from the company. However, subsequent events revealed that the company obtained partial relief in the first appeal and the entire assessment order was set aside in the second appeal before the Appellate Tribunal through Ext.P29. This led to a change in the scenario as the tax liability of the company was no longer established, leaving the matter open for reconsideration by the Assessing Officer.

2. The Senior Counsel argued that no tax was due from the company after Ext.P29, rendering the proceedings under Section 179 invalid. On the other hand, the Standing Counsel contended that if fresh orders creating tax liability for the company were passed after the remand order, the issue might still arise under Section 179. However, the court held that Ext.P10, which was based on the existence of tax liability against the company, had no basis following Ext.P29. The court emphasized that under Section 179, the liability of directors arises only when tax is due from the company, and since there was no tax liability due to the remand order, Ext.P10 was unsustainable.

3. The court concluded that since the order of assessment against the company was set aside and directed to be reconsidered, there was no tax due from the company. Consequently, there could be no recovery of tax from any director of the company for the relevant assessment year. Therefore, the court set aside Ext.P10, clarifying that it did not delve into the merits of the findings in Ext.P10, leaving the contentions of both parties open for future consideration if necessary. Ultimately, the writ petition was allowed, and Ext.P10 was overturned.