RECOVERY OF INCOME TAX DUE BY COMPANY FROM DIRECTOR

[Mr. M. GOVINDARAJAN]

     Sec. 179 of the Income Tax deals with the liability of directors of private company in liquidation.  It provides that notwithstanding anything contained in the Companies Act, 1956 where any tax due from a private company in respect of any income of any previous year or from any other company in respect of any income of any previous year during which such other company was a private company cannot be recovered, then every person who was a director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax unless he proves that the 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 section further provides that where a private company is converted into a public company and the tax assessed in respect of any income of any previous year during which such company was a private company cannot be recovered then, nothing contained in the above para shall apply to any person who was a director of such private company in relation to any tax due in respect of any income of such private company assessable for any assessment year commencing before the 1^st day of April, 1962.

     What are the conditions precedent for recovery of tax due by company from director?    The Gujarat High Court has given answer to this question in 'Amit Suresh Bhatnagar V. Income Tax Officer' -  2009 -TMI - 32170 - GUJARAT HIGH COURT Each of the petitioners in this case is a director of a company.   For the assessment year 2001 - 02 pursuant to the assessment order dated 31.12.2006 a demand of Rs.3,62,01,913/- was raised in the hands of the company.    The company filed an appeal before the Commissioner (Appeals) which was dismissed.  The company has preferred second appeal before the Tribunal.  It appears that the respondent authority called upon the company to make the payment during pendency of the first appeal for liquidating a part of the demand.   The company has deposited a sum of Rs.15,09,946/- and the company was making payment of Rs.1 lakh every month.  The company, therefore, requested for further stay against recovery of demand till the disposal of the appeal pending before the tribunal.   The request for stay was rejected.  On 19.08.2008 the respondent authority made the impugned order under Sec. 179 of the Income Tax Act in which the demand that has been shown to be outstanding vis-à-vis the company is at a figure of Rs.3,48,95,985/- considering the interest on the outstanding dues.

     The petitioners submitted the following contentions:

·        In the light of the provisions of Sec. 179 of the Income Tax Act, before recovery in respect of dues from a private company can be initiated against the directors, the Revenue was required to establish that such recovery could not be effected from the company and only then could the directors be called upon to discharge the liability of the company;

·        It is apparent that the controversy raised in the petitions concluded by the judgment of this court.   The record reveals that except for accepting the amount paid by the company from time to time, the respondent authority has not taken any steps to effect recovery from the company.

The petitioners relied on the judgment of Gujarat High Court in the case of 'Indubhai T. Vasa (HUF) V. ITO 2009 -TMI - 32279 - Gujarat High Court.

     The respondent authority has submitted that in fact from the correspondence it was apparent that the company having expressed its inability to discharge the liability, the respondent authority was justified in acting under Sec. 179 of the Act.   The respondent authority need not thereafter take any steps to show that recovery was sought to be effected against the company and such recovery was not possible. 

     The tribunal held that before action under Sec. 179 of the Income Tax Act can be initiated against the director or directors of a private company, the Revenue has to first of all show that such a director of directors were responsible for the conduct of the business during the previous in relation to which the liability exists.   The Revenue has also to establish that it has taken effective steps to recover the outstanding dues from the company and has not been able to recover the entire outstanding liability.   Applying the aforesaid ratio to the facts of the case, it is apparent that except for calling upon the company and/or the petitioners-directors to discharge the liability, the Revenue has taken no effective steps to effect recovery of outstanding dues from the company.  In the circumstances, the impugned order made in the case of each of the three petitioners, cannot be permitted to operate and the tribunal quashed the order and set aside.