2014 (9) TMI 825 - HC - Income Tax

Joint and several liability to make payment u/s 179(1) Liability of directors Basis of issuing notice valid or not - Held that - Following the decision in Maganbhai Hansrajbhai Patel v. Assistant Commissioner of Income-Tax 2012 (11) TMI 189 - GUJARAT HIGH COURT sub-section (1) of section 179 provides for joint and several liability of the directors of a private company wherein the tax due from such company in respect of any income of any previous year cannot be recovered - The first requirement to attract liability of the director of a private limited company is that the tax cannot be recovered from the company itself. Such requirement is held to be a prerequisite and a necessary condition to be fulfilled before action u/s 179 of the Act can be taken - once it is shown that there is a private company whose tax dues have remained outstanding and the same cannot be recovered, any person who was a director of such a company at the relevant time would be liable to pay such dues - the responsibility to establish such facts is on the director. However, once the director places before the authority his reasons why it should be held that non-recovery cannot be attributed to any of the above three factors, the authority would have to examine such grounds and come to a conclusion in this respect - the lack of gross-negligence, misfeasance or breach of duty on the part of the directors is to be viewed in the context of non-recovery of the tax dues of the company - as long as the director establishes that the non-recovery of the tax cannot be attributed to his gross neglect, etc. his liability u/s 179(1) of the Act would not arise - in the absence of any consideration, the Assistant Commissioner could not have been ordered recovery of dues of the company from the director. The notice is totally silent as regards the satisfaction of the condition precedent for taking action u/s 179 of the Act, namely, that the tax dues cannot be recovered from the Company - the necessary prerequisite for resorting to the provisions of section 179 of the Act itself against the directors is not satisfied - nothing has been stated therein regarding any gross-negligence, misfeasance or breach of duty on the part of the petitioners due to which the tax dues of the Company could not be recovered - the very basis on which the respondent has proceeded, suffers from non-application of mind to the requirements for exercise of powers under section 179(1) of the Act - In the absence of any finding that non recovery of the tax due from the company can be attributed to any gross-negligence, misfeasance or breach of duty on the part of the petitioners, no order could have been made u/s 179(1) of the Act for recovering the same from the directors thus, the order u/s 179(1) is to be set aside Decided in favour of assessee.

Issues Involved:
1. Application of Section 179(1) of the Income Tax Act, 1961.
2. Liability of Directors for Company's Tax Dues.
3. Conditions Precedent for Invoking Section 179.
4. Examination of Gross Negligence, Misfeasance, or Breach of Duty by Directors.
5. Procedural Requirements and Evidence for Recovery Actions.

Issue-wise Detailed Analysis:

1. Application of Section 179(1) of the Income Tax Act, 1961:
This petition under Article 226 of the Constitution of India challenges the order dated 6.2.2014 passed by the Income Tax Officer under section 179(1) of the Income Tax Act, 1961, which held the petitioners, as directors of a private limited company, jointly and severally liable for payment of Rs. 10,46,088/-. The petitioners contended that the necessary condition for invoking section 179, which requires that tax cannot be recovered from the company, was not satisfied.

2. Liability of Directors for Company's Tax Dues:
The petitioners were directors of 'Miraa Processors Pvt. Ltd.' The company had filed a nil return for the assessment year 2003-04, but the total income was later assessed at Rs. 32,74,428/- after certain additions. The company's appeal led to some deletions, but a penalty of Rs. 4,29,811/- was imposed. The Income Tax Officer issued a notice under section 179, calling upon the directors to show cause why they should not be held liable for the tax dues.

3. Conditions Precedent for Invoking Section 179:
The petitioners argued that the notice under section 179 did not allege that tax could not be recovered from the company, a prerequisite for invoking section 179. The court emphasized that the first requirement to attract liability under section 179 is that the tax cannot be recovered from the company itself. This prerequisite was not satisfied as the notice and the impugned order did not demonstrate that steps were taken to recover the dues from the company.

4. Examination of Gross Negligence, Misfeasance, or Breach of Duty by Directors:
The petitioners contended that the non-recovery of tax could not be attributed to any gross neglect, misfeasance, or breach of duty on their part. The court referred to the case of Maganbhai Hansrajbhai Patel v. Assistant Commissioner of Income-Tax, which held that the authority must examine whether non-recovery of tax can be attributed to the directors' gross neglect, misfeasance, or breach of duty. The respondent's order focused on the directors' neglect in the company's functioning rather than on any gross neglect related to the non-recovery of tax.

5. Procedural Requirements and Evidence for Recovery Actions:
The court noted that the notice under section 179 and the impugned order lacked details on efforts made to recover the tax from the company. The respondent's affidavit was also silent on this aspect. The court found that the impugned order did not address the petitioners' explanation regarding the non-recovery of tax and failed to establish gross negligence, misfeasance, or breach of duty by the directors. Thus, the order was inconsistent with the requirements of section 179(1) and could not be sustained.

Conclusion:
The court quashed and set aside the impugned order dated 6th February 2014, passed by the Income Tax Officer under section 179 of the Act, as it did not meet the necessary conditions and lacked evidence of gross negligence, misfeasance, or breach of duty by the directors. The petition was allowed, and the rule was made absolute with no order as to costs.

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