2019 (7) TMI 31 - HC - Income Tax

Liability of directors of private company u/s 179 - recovery of unpaid tax dues of a private company from its directors - attaching the petitioner's bank accounts for recoveries - HELD THAT - Action of respondent No. 1 cannot be sustained. Section 179 of the Act undoubtedly authorizes the Department to recover unpaid tax dues of a private company from its directors, however, this is subject to certain legal requirements contained in the said provision. First requirement for application of sub-section (1) of Section 179, therefore, is that the tax dues in question could not be recovered from private company. Even if this requirement is satisfied, it is open for the concerned director to prove that such non-recovery cannot be attributed to any gross negligence, misfeasance or breach of duty on his part in relation to the affairs of the company. On all these counts, therefore, the petitioner had a right to oppose and resist the proposal of the Assessing Officer. It is not even averred that the dues of the company should not be recovered form the said Company and that therefore, the onus would be on the director to prove that the same could not be attributed to his gross neglect, misfeasance or breach of duty. The action of the AO to order recovery of the unpaid tax dues of the company from the petitioner, thus, was without the foundation of the necessary facts in show-cause notice. In the context of establishing that such recovery cannot be attributed to his gross neglect, misfeasance or breach of duty, the petitioner had made a detailed representation. The Assessing Officer passed the order without considering such representation. When this was pointed out to him, he passed a further order describing it as one of the 'Corrigendum'. This was also impermissible. Without recalling the earlier order, his action to dispose of the petitioner's objections would amount to nothing more than post-decisional consideration. Under these circumstances, both the orders dated 18.9.2018 and Corrigendum dated 8.3.2019 are set aside. The order of attaching the petitioner's bank accounts for such recoveries is also set aside.

Summary

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

Analysis:
The petitioner, a director of a private limited company, challenged an order passed by the Deputy Commissioner of Income Tax under Section 179 of the Income Tax Act, 1961. The order imposed liability on the petitioner to pay the outstanding tax dues of the company. The petitioner contended that the tax dues could be recovered from the company and were not due to any gross neglect, misfeasance, or breach of duty on his part. The Assessing Officer passed the order holding the petitioner liable without considering the detailed representation submitted by the petitioner. The court analyzed Section 179 of the Act, which allows recovery of tax dues from directors of a private company under certain legal requirements. It highlighted that recovery from a director is subject to proving that non-recovery cannot be attributed to gross negligence, misfeasance, or breach of duty on the part of the director.

The court emphasized that the first requirement for recovery from a director is the inability to recover tax dues from the private company. Even if this condition is met, the director has the right to prove that non-recovery is not due to their negligence, misfeasance, or breach of duty. The court noted that the show-cause notice did not establish that the dues should not be recovered from the company, shifting the burden to the director to prove non-attribution of neglect, misfeasance, or breach of duty. The Assessing Officer's order lacked necessary facts in the show-cause notice, rendering the recovery order baseless.

The court criticized the Assessing Officer for passing the order without considering the petitioner's detailed representation and subsequently issuing a 'Corrigendum' without recalling the initial order. Such post-decisional consideration was deemed impermissible. Consequently, the court set aside the orders dated 18.9.2018 and 8.3.2019, along with the attachment of the petitioner's bank accounts for recoveries. The court clarified that its decision did not prevent the Department from issuing a fresh show-cause notice and passing a new order in accordance with the law. The writ petition was disposed of accordingly.