2014 (5) TMI 706 - HC - Income Tax

Invocation of section 179 of the Act - Liability of the directors of private company in liquidation Held that - The dues were paid to the creditors at the time when assessment order was yet to be passed - The assessee made a bona fide claim of set off - It may be that according to the AO such claim was not maintainable - The issue has not yet achieved finality and is pending before the appellate authority - There is nothing on record to suggest that the company raised such a claim wholly mala fide - the ground that while paying all other creditors, the company made no provision for income tax liability, was not a valid ground - on the date when the creditors were paid off, there was no outstanding liability towards the income tax department. During the devastating earthquake of 26.01.2001, the hotel building was severely damaged - The ground that the directors should have taken appropriate measures to protect the property of the company is neither maintainable in law nor in fact - The company had insured its property - It was not a case where the directors failed to take measures for protecting the property or interest of the company as suggested by the Tax Recovery Officer - by itself it didn t mean that the directors were negligent in performing their duties or they committed breach of duty in affairs of the company. The ground being deliberately false claim raised by the company is not borne out from any material on record - if the company raises a completely bogus and mala fide claim of tax deduction, with the sole purpose of defrauding the Revenue, it may still be open for the Revenue to argue that provisions of section 179 of the Act would be applicable thus, the order of the Tribunal is set aside Decided in favour of Assessee.

Issues Involved:
1. Invocation of Section 179 of the Income Tax Act, 1961.
2. Validity of the tax recovery order against the director.
3. Responsibility of the director in relation to the company's tax dues.
4. The impact of pending appeal on tax recovery.

Detailed Analysis:

1. Invocation of Section 179 of the Income Tax Act, 1961:
The primary issue revolves around the invocation of Section 179 of the Income Tax Act, 1961, which pertains to the liability of directors of a private company for tax dues that cannot be recovered from the company itself. The Tax Recovery Officer issued a show cause notice to the petitioner, a director of the company, for recovery of tax dues amounting to Rs. 1.95 crores for the assessment year 2010-2011, citing gross neglect, misfeasance, or breach of duty on the part of the director.

2. Validity of the Tax Recovery Order Against the Director:
The petitioner contested the tax recovery order, arguing that the non-recovery of tax dues could not be attributed to any gross neglect, misfeasance, or breach of duty on his part. The petitioner highlighted that the company's financial troubles were due to the destruction of the hotel building in the 2001 earthquake, which was beyond their control. Despite efforts, the insurance claim for the building was not secured, and the company had to dispose of its property to settle debts. The Tax Recovery Officer, however, held the petitioner jointly and severally liable for the tax dues, stating that the director showed gross negligence in following applicable laws and failed to make provisions for tax liabilities while selling the property.

3. Responsibility of the Director in Relation to the Company's Tax Dues:
The court examined whether the non-recovery of tax could be attributed to gross neglect, misfeasance, or breach of duty by the director. The Tax Recovery Officer's reasons included the lack of provisions for tax liabilities during the sale of the property, the failure to insure the property against natural calamities, and the alleged deliberate false claim of tax deductions by the company. The court found these grounds unsustainable, noting that the tax assessment was made after the creditors were paid, the insurance claim was still pending, and there was no evidence of a mala fide claim by the company.

4. The Impact of Pending Appeal on Tax Recovery:
The petitioner argued that the tax demand had not become final as the company's appeal against the assessment order was still pending. The court noted that under Section 179, the tax department is not required to await the outcome of the appeal if the stay is refused, making the tax recoverable from the company. However, the court emphasized that the Tax Recovery Officer must consider whether the non-recovery can be attributed to the director's gross neglect, misfeasance, or breach of duty.

Conclusion:
The court quashed the impugned order dated 5.12.2013, holding that the Tax Recovery Officer erred in applying Section 179 against the directors. The court found that the non-recovery of tax dues could not be attributed to gross neglect, misfeasance, or breach of duty by the directors. The court also provided that if the company receives any amount from the insurance company for the destruction of the hotel building, the petitioners must inform the income tax department before utilizing the amount.

Final Order:
The petitions were allowed, and the impugned order was quashed. The court directed that any insurance recovery must be reported to the income tax department before utilization.

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