2023 (6) TMI 1138 - HC - Income Tax

Revision u/s 264 - Rejection of application - Recovery of tax dues of the company from the Director u/s 179(1) - Director is now no more (deceased) - Petitioners are two out of the four legal heirs of one late assessee who was a Director of the company - HELD THAT - We will have to proceed on the basis that no letter or notice was sent to the deceased before the order dated 7th May 2018 came to be passed. There is also nothing to indicate what steps were taken to trace the assets of the company. Moreover, the order dated 7th May 2018 passed u/s 179 of the Act does not satisfy any of the ingredients required to be met. Before passing an order under Section 179 of the Act, the Assessing Officer should have made out a case as required under Section 179(1) of the Act that the tax dues from the company cannot be recovered. Only after the first requirement is satisfied would the onus shift on any Director to prove that non recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company. The order impugned passed by respondent no. 1 u/s 264 of the Act is a very brief order in the sense that the only ground on which the application u/s 264 came to be rejected is contained in paragraph 4.2 of the impugned order. Respondent no. 1, without considering any of the submissions made by petitioners, has simply rejected the application under Section 264 of the Act noting that notice of the death of the deceased was not brought to the Assessing Officer by anybody and before the order under Section 179 of the Act was signed by the Assessing Officer and, therefore, as on the date of the passing of the order, there was nothing invalid. In our view, not only this order but also the order passed u/s 179 require to be quashed and set aside. Considering the order there is no ground made out in the order for even commencing proceedings under Section 179.

Summary

Issues:
The judgment involves the rejection of an application under Section 264 of the Income Tax Act, 1961, and the order passed under Section 179(1) of the Act. The key issues include the validity of the rejection of the application, the proceedings under Section 179, the lack of notice to the deceased, and the requirements for holding a Director responsible for tax dues.

Application under Section 264:
The petitioners contested an order dated 9th March 2020, rejecting their application under Section 264 of the Income Tax Act. The petitioners, as legal heirs of a deceased Director of a company, challenged an order passed under Section 143(3) of the Act, which included significant additions and a substantial demand. Despite attempts for stay and appeals, the deceased passed away before another order was issued under Section 179 of the Act. The rejection of the application under Section 264 was based on the failure to notify the Assessing Officer of the deceased's death before the order under Section 179 was signed. The court found the rejection invalid due to lack of consideration of the submissions made by the petitioners.

Order under Section 179:
The judgment also addressed the order passed under Section 179 of the Act on 7th May 2018. The court noted deficiencies in the order, including the absence of grounds for initiating proceedings under Section 179. It was highlighted that no notice was issued to the deceased, and there was a lack of evidence regarding attempts to trace the company's assets. The court emphasized that the order did not meet the necessary requirements under Section 179(1) of the Act, especially considering the company's insolvency status. Additionally, the court referenced a previous judgment emphasizing that a Director can be held responsible only if non-recovery is due to gross neglect, misfeasance, or breach of duty, which requires proper assessment and opportunity for the Director to defend against such allegations.

Conclusion:
The High Court quashed both the order dated 9th March 2020 passed under Section 264 and the order dated 7th May 2018 passed under Section 179 of the Income Tax Act. The court emphasized the importance of providing notice, opportunities for defense, and meeting the legal requirements before holding a Director accountable for tax dues. The judgment highlighted the need for proper assessment and consideration of circumstances before passing such orders.