2005 (3) TMI 41 - HC - Income Tax

Order u/s 179 - Petition challenges the order made by the respondent under section 179 - Recovery of Tax - In the present case it is not necessary to decide as to whether the phrase jointly and severally is applicable qua the company and its directors or is applicable qua the directors inter se and hence the said issue is left open. Suffice it to state that section 179 of the Act on a plain reading prima facie indicates the latter interpretation i.e. qua the directors inter se. In the circumstances the impugned order made under section 179 by the respondent is quashed and set aside. The respondent is prohibited from proceeding any further in consequence of the impugned order - The petition is allowed accordingly

Summary

Issues:
Challenge to order under section 179 of the Income-tax Act, 1961.

Detailed Analysis:

1. Petitioner's Liability under Section 179 of the Income-tax Act, 1961:
The petitioner, a Hindu undivided family, challenged an order made by the respondent under section 179 of the Income-tax Act, 1961. The respondent sought to hold the petitioner jointly and severally liable for outstanding dues of a company for the assessment year 1996-97. The petitioner argued that since the karta had resigned as a director of the company in February 1996, they should not be held liable for the demand. The respondent acknowledged the resignation but still held the petitioner liable for the outstanding tax amount along with interest. The petitioner contended that they could not be held liable for income accruing after their resignation as a director.

2. Recovery Efforts and Prerequisites under Section 179:
The respondent argued that section 179 of the Act allowed authorities to proceed against any director of a private company jointly and severally. They cited a Madras High Court decision to support this interpretation. The respondent claimed to have made efforts to recover dues from the company, including attaching its properties. However, the petitioner argued that the respondent failed to establish that recovery from the company was not possible, a prerequisite for proceeding against directors. The court emphasized that the revenue must prove the inability to recover from the company before pursuing directors.

3. Judicial Precedents and Interpretation of Section 179:
The court referred to a previous decision where it was held that recovery from directors could only be initiated if recovery from the company was not feasible. The court noted that the phrase "jointly and severally liable" in section 179 required the revenue to exhaust remedies against the company before proceeding against directors. The court disagreed with the interpretation of the Madras High Court decision, emphasizing the need to establish the inability to recover from the company before holding directors liable.

4. Decision and Conclusion:
The court quashed and set aside the impugned order under section 179 of the Act, prohibiting the respondent from further proceedings based on that order. The court ruled in favor of the petitioner, emphasizing the importance of proving the inability to recover from the company before holding directors jointly and severally liable. The court left open the interpretation of the phrase "jointly and severally" in the context of directors' liability. The petition was allowed, and no costs were imposed.

By analyzing the issues raised in the case and the arguments presented by both parties, the court concluded that the respondent failed to establish the prerequisite conditions for holding the petitioner liable under section 179 of the Income-tax Act, 1961. The judgment highlighted the importance of proving the inability to recover from the company before proceeding against directors, ultimately ruling in favor of the petitioner and setting aside the impugned order.