2022 (10) TMI 612 - HC - Income Tax

Liability of directors of private company - recovery action against the appellant by invoking the power under Section 179 - garnishee notices issued - what manner the power under Section 179 of the Act could be invoked? - HELD THAT - We need not labour much to decide this issue as there are several decisions of the various High Courts on this aspect. In the case of K.B. REDDY 1998 (4) TMI 129 - ANDHRA PRADESH HIGH COURT . The Court after taking note of Section 179 as it stood after the amendment in the year 1975 pointed out in terms of the said provision where any tax due from a private company in respect of any income of any previous year cannot be recovered, then every person who was a director of the company during the relevant previous year shall be jointly and severally liable for the payment, noting that the language of the Section is clear that it is only in cases where tax cannot be recovered from the company, the liability of the director arises. Since in the said case there was no finding that the department could not recover the arrears of tax from the company, the proceedings initiated under Section 179 of the Act was held to be without jurisdiction. In Mehul Jadavji Shah 2018 (4) TMI 646 - BOMBAY HIGH COURT relying on MADHAVI KERKAR 2018 (1) TMI 749 - BOMBAY HIGH COURT held that before the Assessing Officer assumes jurisdiction under section 179 requires to recover the tax due from the delinquent private limited company should have failed and if no steps were taken then the notice issued under section 179 is required to be quashed. Admittedly, in the year 1990 the appellant had retired from his directorship and the company had changed hands and fresh set of directors had taken over the company, necessary formalities under the Income tax Act, 1956 was complied with and fresh certificate of incorporation incorporating the new name of the company was issued. The new set of directors carried on business till the year 1997 when the company went under liquidation. From the records placed before the Court, it is clear that the department has not taken any steps to recover the dues from the defaulting private limited company. It is nearly after 25 years the present attempt had been made by issuing garnishee notice on the appellant who is no more the director of the company eversince 1990. After the company had gone into liquidation, the department could have lodged a claim before the Official Liquidator. There is nothing on record to show that such a claim was made by the department before the Official Liquidator. This aspect is very crucial aspect which the learned Writ Court ought to have considered and the same cannot be brushed aside and a direction could not have been issued without reference to the said fact. Thus we hold that the garnishee notices which were impugned in the writ petition are held to be wholly without jurisdiction and accordingly, they are quashed. Appeal filed is allowed.

Summary

Issues:
Delay in filing the appeal - Condonation of delay.
Validity of garnishee notice under Section 179 of the Income Tax Act.
Interpretation of Section 179 regarding recovery of tax dues from private limited company directors.
Recovery action against directors when tax dues cannot be recovered from the company.
Requirement for the department to initiate proceedings against the defaulting company before invoking Section 179.
Consideration of the company's liquidation and claim before the Official Liquidator.
Comparison with relevant legal precedents.
Refund of amount recovered from the appellant's bank account.

Delay in filing the appeal - Condonation of delay:
The High Court of Calcutta considered a delay of 85 days in filing the appeal and found sufficient cause for the delay. The Court allowed the application for condonation of delay, thereby permitting the appeal to proceed.

Validity of garnishee notice under Section 179 of the Income Tax Act:
The appeal challenged a garnishee notice issued under Section 179 of the Income Tax Act by the respondent department. The notice demanded payment for outstanding tax from the appellant, a former director of a private company. The appellant contended that the notice was invalid as no order had been passed under Section 179, and no notice of demand had been served as required by law.

Interpretation of Section 179 regarding recovery of tax dues from private limited company directors:
The legal issue in the appeal centered on the invocation of power under Section 179 of the Act. The Court analyzed various precedents, including K.B. Reddy v. Asst. Commissioner of Income Tax and C. Rajendran v. Income-tax Officer, to interpret the conditions for liability of directors of a private company when tax dues cannot be recovered from the company.

Recovery action against directors when tax dues cannot be recovered from the company:
The Court emphasized that before invoking Section 179, the department must first attempt to recover tax dues from the defaulting company. If recovery fails, only then can the liability be transferred to the directors. In this case, the department had not made any efforts to recover dues from the company before targeting the appellant.

Consideration of the company's liquidation and claim before the Official Liquidator:
The Court noted that the appellant had retired from directorship in 1990, and the company went into liquidation in 1997. The department had not taken steps to recover dues from the company or lodge a claim before the Official Liquidator. This crucial aspect was overlooked by the lower court, leading to the quashing of the garnishee notices.

Comparison with relevant legal precedents:
The Court referenced legal precedents such as Mehul Jadavji Shah v. Deputy Commissioner of Income-tax and Ashita Nilesh Patel v. Asst. Commissioner of Income-tax to support its decision to quash the garnishee notices issued to the appellant.

Refund of amount recovered from the appellant's bank account:
The appellant sought a refund of Rs.26,680 recovered from their bank account. The Court decided that due to the long period since the recovery in 2012 and the nature of the case, the refund request was not granted.

In conclusion, the High Court allowed the appeal, set aside the order in the writ petition, quashed the garnishee notices as without jurisdiction, and held the proceedings under Section 179 to be invalid. However, the Court denied the refund of the amount recovered from the appellant's bank account.