2008 (10) TMI 67 - HC - Income Tax

Petitioners is a Director of a Company order issued u/s 179 by the respondent-authority for recovery of tax due by company tax from director held that Revenue was required to establish that such recovery could not be effected from the Company and only then could the Directors be called upon to discharge the liability of the Company but revenue failed to do so therefore, order issued u/s 179 is quashed and set aside

Summary

Issues:
Challenge to order under Section 179 of the Income Tax Act, 1961 regarding recovery from Directors of a private Company.

Analysis:
The judgment delivered by the High Court involved three petitions challenging orders made by the respondent-authority under Section 179 of the Income Tax Act, 1961. Each petitioner, a Director of a Company named Diamond Project P. Ltd., contested the demand raised against the Company for the assessment year 2001-02. The Company's appeal before the Commissioner (Appeals) was dismissed, and a Second Appeal was pending before the Tribunal. The respondent-authority requested payment during the appeal's pendency, leading to correspondence with the Company. The impugned order dated 19-8-2008 showed an outstanding demand of Rs. 3,48,95,985, including interest.

The petitioners argued that before recovery from Directors of a private Company could be initiated under Section 179, the Revenue must establish the inability to recover from the Company, citing the judgment in Indubhai T. Vasa (HUF) v. Income-Tax Officer. The respondent-authority contended that the Company's expressed inability justified action under Section 179, without the need to prove recovery impossibility. However, they acknowledged the applicability of the Indubhai T. Vasa judgment.

The Court observed that the controversy was settled by the Indubhai T. Vasa judgment, requiring the Revenue to prove recovery impossibility from the Company before proceeding against Directors. As the respondent-authority had not taken effective steps to recover from the Company, the impugned orders were quashed. The Court emphasized that before initiating action under Section 179, the Revenue must demonstrate the Directors' responsibility for the Company's affairs, and efforts to recover dues from the Company.

The Court set aside the impugned orders, allowing the Revenue to take necessary steps for recovery from the Company. The petitions were granted in favor of the petitioners, with no costs imposed.