2022 (7) TMI 1309 - HC - Income Tax

Recovery from the directors u/s 179 - Attachment of property - Arrears of taxes other liabilities of private company - whether the petitioner liable to pay a demand alongwith interest under section 220(2) of the Act which was otherwise due and payable by the company, CPML - HELD THAT - A reading the show cause notice would therefore clearly suggest that there was no satisfaction recorded that the tax cannot be recovered. It needs to be understood that recovery procedure u/s 179 against the directors is not to be resorted to casually and only because it is convenient to do so for affecting recovery of the tax dues. With a view to show that the respondent No.1 had mechanically resorted to the provisions of section 179 of the Act, the petitioner has relied upon an order of attachment, dated 6th March 2019, whereby the Tax Recovery Offcer-2, Thane has ordered the attachment of land at Village Kalivali, Taluka Panvel, Dist. Raigad to show that if respondent had made an effort, the tax dues could be recovered from the company. An additional affidavit has also been filed by the petitioner. In response to this additional affidavit, an affidavit in reply has also been filed by the Deputy Commissioner of Income Tax- 1(2)(1), Mumbai in which a stand is taken that steps for sale of the property attached would be initiated after getting the fair market value determined. This statement itself has the effect of nullifying the action initiated under section 179 of the Act against the petitioner rendering the order impugned unsustainable in law. Writ Petition is allowed. The impugned order dated 13th February 2018 as also the order dated 12th February 2019 passed under section 264 of the Act are quashed. However, in case, the tax dues are not fully satisfied upon sale of the property that has been attached, then the Assistant Commissioner can proceed in the matter afresh in accordance with law, after giving an opportunity of being heard to the petitioner, in the light of the observations made by us in the preceding paragraphs.

Summary

Issues:
1. Liability of a director under section 179 of the Income Tax Act, 1961 for tax dues of a company.
2. Application of the principle of lifting the corporate veil to determine the nature of the company.
3. Compliance with principles of natural justice in tax recovery proceedings.

Analysis:

Issue 1: Liability of a director under section 179
The petitioner, as the Chairman and Managing Director of a company, contested a tax demand under section 179 of the Income Tax Act, 1961. The petitioner argued that proceedings against a director should follow attempts to recover dues from the company. The court held that the director could be held liable if the company failed to pay tax dues, especially if the company operated more like a private enterprise than a public limited company. The court emphasized that the director's involvement in decision-making leading to the tax demand was crucial for determining liability.

Issue 2: Application of the principle of lifting the corporate veil
The court examined whether the company, though listed as a public company, operated as a privately held enterprise. It cited previous judgments on lifting the corporate veil to ascertain the true nature of the company for tax liability purposes. The court noted that the tax recovery proceedings should not invoke this principle without proper evidence and consideration of various factors, including shareholding, control, and agreements among shareholders.

Issue 3: Compliance with principles of natural justice
The court criticized the tax authority for not providing the petitioner with a fair opportunity to contest the application of the corporate veil principle. It stressed that natural justice principles must be upheld in tax recovery proceedings. Additionally, the court highlighted the necessity for the tax authority to exhaust all avenues of recovery from the company before holding directors personally liable under section 179.

In conclusion, the court allowed the writ petition, quashing the orders against the petitioner. It directed a fresh assessment if the tax dues were not fully satisfied through the sale of attached property, emphasizing the need for procedural fairness and thorough consideration of recovery options before imposing personal liability on directors.