2023 (2) TMI 1073 - HC - Income Tax

Liability of directors u/s 179 - recovery of the outstanding dues of the private limited company - petitioners liability to pay the outstanding tax in capacity of the Directors of the assessee company - Proof of gross negligent, misfeasance or breach of duty on part of the petitioner in relation to the affairs of the company - HELD THAT - AO is required to make efforts for recovery of the outstanding dues from the assessee private limited company which has committed default in payment of the outstanding demand. The petitioners have prima facie shown that non recovery cannot be attributed to any gross negligence, misfeasance or breach of duty as Directors of the assessee company. In the impugned order, AO has failed to consider the fact that the petitioners have tendered their explanation and the petitioners have not remained negligent nor there is any misfeasance or breach of trust on part of the petitioners and only because the petitioners have been unable to deposit 20% of the demand raised in the assessment order, the petitioners cannot be said to be negligent and respondent no.1 cannot therefore, invoke jurisdiction under section 179 of the Act. This Court in case of Sadhna Ramchandra Jeswani 2018 (9) TMI 77 - GUJARAT HIGH COURT notice that in showcause notice the Assessing Officer has not laid down sufficient foundation for invoking section 179 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. Petition succeeds and is accordingly allowed.

Summary

Issues:
Challenge to order under section 179 of the Income Tax Act, 1961 fastening liability on petitioners as Directors of a company for outstanding dues for Assessment Year 2013-2014.

Analysis:
The petitioners challenged the order passed under section 179 of the Income Tax Act, 1961, holding them liable for outstanding dues of a company. The petitioners were appointed as Directors of the company, and the assessment order resulted in additional demand. The company appealed the assessment order, following which a show cause notice was issued to the petitioners under section 179 of the Act. The petitioners responded to the notice, leading to the impugned order dated 24.01.2017. The petitioners contended that the conditions for invoking section 179 were not satisfied, emphasizing the lack of evidence attributing non-recovery to their negligence. They cited various legal precedents to support their argument.

The respondents argued that all provisions of section 179 were complied with before passing the impugned order. They highlighted the company's failure to pay the outstanding demand despite notices and the attachment of the petitioners' bank account. The respondents asserted that the petitioners, as Directors, were liable for the outstanding tax under section 179 due to their neglect in payment. They relied on a Delhi High Court judgment to support their position.

The court noted that the Assessing Officer must make efforts to recover outstanding dues from the defaulting company before holding Directors liable under section 179. The petitioners demonstrated that non-recovery was not due to their negligence or breach of duty. The court found that the impugned order failed to consider the petitioners' explanations and wrongly assumed negligence based on their inability to deposit a portion of the demand. Citing legal precedents, the court emphasized the need for sufficient grounds to invoke section 179 and set aside the impugned order.

In conclusion, the court allowed the petition, quashed the impugned order dated 24.01.2017, and made the rule absolute without costs. The judgment highlighted the importance of proving negligence or breach of duty before holding Directors liable for a company's outstanding tax dues under section 179 of the Income Tax Act, 1961.