2020 (1) TMI 1071 - HC - Income Tax

Liability of directors of private company in liquidation u/s 179 - satisfaction of the condition precedent for taking action under Section 179 - condition precedent for the purpose of invoking Section 179 that it is only in the event the Department fails to recover the dues from the company that it can proceed against the Director jointly or severally - HELD THAT - As decided in MAGANBHAI HANSRAJBHAI PATEL 2012 (11) TMI 189 - GUJARAT HIGH COURT before recovery in respect of the dues from a private company can be initiated against the directors to make them jointly and severally liable for such dues it is necessary for the Revenue to establish that such recovery cannot be made against the company and then alone it can reach to the directors who were responsible for the conduct of the business during the previous year in relation to which liability exists. There is no escape from the fact that the perusal of the Notice under Section 179 of the Act 1961 reveals that the same is totally silent as regards the satisfaction of the condition precedent for taking action under Section 179 of the Act 1961 viz. that the tax dues cannot be recovered from the Company. In the show -cause notice there is no whisper of any steps having been taken against the Company for recovery of the outstanding amount. Additional affidavit- in- reply as regards the steps taken against the company for the recovery of the dues we would like to give one chance to the department to undertake a fresh exercise so far as Section 179 is concerned. If the show -cause notice is silent including the impugned order the void left behind in the two documents cannot be filled by way of an affidavit- in- reply. Ultimately it is the subjective satisfaction of the authority concerned that is important and it should be reflected from the order itself based on some cogent materials. However with a view to protect the interest of both the writ applicant as well as Revenue we are inclined to quash the impugned order and give one opportunity to the Revenue to initiate the proceedings afresh by issuance of fresh show-cause notice with all necessary details so that the writ- applicant can meet with the case of the Revenue. We are inclined to adopt such measure keeping in mind the statement made by the learned counsel Mr.Soparkar that till the fresh proceedings are not completed his client will not operate the bank account. Writ -application is partly allowed. The impugned notice as well as the order is hereby quashed and set aside. It shall be open for the respondent to issue fresh show -cause notice for the purpose of proceeding against the writ- applicant under Section 179 - We would like to give a time bound program so that the proceedings may not go on for an indefinite period. We are also issuing such direction because of the statement being made that the writ- applicant will not operate the bank account till the fresh proceedings are initiated and completed. In such circumstances we grant two months time from the date of receipt of the writ of this order to the Department to initiate fresh proceedings and pass appropriate orders in accordance with law. Till the final order is passed the writ- applicant shall not operate the bank account concerned. Two notices under Section 226(3) of the Act 1961 i.e. one to the Kalupur Commercial Cooperative Bank Limited and another to the HDFC Bank Limited are also quashed and set aside.

Summary

Issues Involved:
1. Validity of the impugned order under Section 179 of the Income Tax Act, 1961.
2. Adequacy of the show-cause notice under Section 179 of the Income Tax Act, 1961.
3. Responsibility and liability of directors for the outstanding tax dues.
4. Propriety of the Department's actions in recovering tax dues from the company before proceeding against the directors.
5. Freezing of the writ-applicant's bank account under Section 226(3) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Validity of the impugned order under Section 179 of the Income Tax Act, 1961:
The writ-applicant challenged the order passed under Section 179 of the Income Tax Act, 1961, which held the directors jointly and severally liable for the outstanding tax dues of ?9074.34 lakhs. The court noted that the impugned order was the outcome of a show-cause notice dated 02.11.2017. The court observed that the order did not disclose any material showing steps taken by the Department to recover the dues from the company before proceeding against the directors.

2. Adequacy of the show-cause notice under Section 179 of the Income Tax Act, 1961:
The writ-applicant argued that the show-cause notice was bereft of material particulars regarding the steps taken by the Department to recover the tax from the company. The court agreed, stating that the notice was silent on the satisfaction of the condition precedent for taking action under Section 179, i.e., that the tax dues could not be recovered from the company. The court emphasized that the subjective satisfaction of the authority should be reflected in the order based on cogent materials.

3. Responsibility and liability of directors for the outstanding tax dues:
The court reiterated that under Section 179, directors could only be held liable if the non-recovery of tax could not be attributed to any gross neglect, misfeasance, or breach of duty on their part. The burden of proof lies on the directors to demonstrate that the non-recovery was not due to their fault. The court found that the impugned order did not provide sufficient evidence to establish that the directors were responsible for the non-recovery.

4. Propriety of the Department's actions in recovering tax dues from the company before proceeding against the directors:
The court highlighted that the Department must first establish that recovery from the company was not possible before proceeding against the directors. The additional affidavit-in-reply submitted by the Department indicated steps taken against the company, but the court noted that such details should have been included in the show-cause notice and the impugned order. The court decided to give the Department another opportunity to undertake a fresh exercise under Section 179, ensuring that all necessary details are provided in the show-cause notice.

5. Freezing of the writ-applicant's bank account under Section 226(3) of the Income Tax Act, 1961:
The writ-applicant's bank account was frozen following the impugned order. The court acknowledged the writ-applicant's commitment not to operate the bank account until the fresh proceedings are completed. Consequently, the court quashed the notices under Section 226(3) issued to the banks, directing the Department to initiate fresh proceedings within two months.

Conclusion:
The court partly allowed the writ-application, quashing the impugned order and the notices issued under Section 226(3). The Department was granted two months to initiate fresh proceedings under Section 179 with all necessary details, ensuring compliance with legal requirements. The writ-applicant was directed not to operate the bank account until the completion of the fresh proceedings.