2018 (9) TMI 77 - HC - Income Tax

Recover the unpaid tax dues of the company from the petitioner in terms of section 179 - Held that - In show-cause notice the AO has not laid down sufficient foundation for invoking section 179 of the Act leave alone broadly pointing out he has not even alleged that non-recovery was on account of gross negligent, misfeasance or breach of duty on part of the petitioner in relation to the affairs of the company. His final conclusions in the impugned order are therefore based on the material at his command which was never shared with the petitioner. In the result, impugned order is set aside only on this ground making it clear that nothing stated in the order would prevent the Assessing Officer from initiating fresh exercise for the same purpose, if so advised and, if the material at his command is sufficient to permit him to do so.

Summary

Issues:
Challenge to order seeking recovery of unpaid tax dues from ex-director under section 179 of Income Tax Act, 1961.

Analysis:
The judgment dealt with petitions arising from a common background where the petitioner, an ex-director of a private limited company, challenged an order passed by the Income Tax Officer seeking to recover unpaid tax dues of the company from the petitioner under section 179 of the Income Tax Act, 1961. The Assessing Officer issued a notice to the petitioner based on the unpaid tax demand of the company, as the company did not pay the dues. The notice invoked section 179 of the Act, holding the petitioner liable for the outstanding dues as a former director. The petitioner responded by stating her resignation from the company and denying any association with the company's affairs post-resignation, attributing the non-payment to the actions of other directors. However, the Assessing Officer disregarded the petitioner's contentions and passed the order asking her to pay the company's dues.

The judgment delved into the interpretation of section 179 of the Act, which allows the Revenue to recover unpaid tax dues of a private company from its directors unless they prove non-recovery is not due to their gross negligent, misfeasance, or breach of duty. The burden of proof lies on the director to establish relevant facts. The court emphasized that the statutory provision enables the lifting of the corporate veil to recover dues from directors. Referring to previous cases, the court highlighted the necessity for the Revenue to establish the impossibility of recovering dues from the company before holding directors liable under section 179.

The court noted that the Assessing Officer failed to provide sufficient grounds for invoking section 179 in the show-cause notice, as there was no mention of gross negligence, misfeasance, or breach of duty on the part of the petitioner. Consequently, the impugned order was set aside on this basis, allowing the Assessing Officer to initiate a fresh exercise if supported by sufficient material. The judgment clarified that nothing in the order would prevent a reevaluation of the case based on adequate evidence.

In conclusion, the court's decision focused on the procedural and substantive requirements for invoking section 179 of the Income Tax Act, emphasizing the need for the Revenue to establish the impossibility of recovering dues from the company before holding directors personally liable. The judgment provided clarity on the burden of proof and the responsibilities of directors in such cases, ensuring a fair and just application of the law.