2017 (7) TMI 818 - HC - Income Tax

Recovery of dues u/s 179(1) - seeking recovery of unpaid tax of the said company and penalty under section 271(1)(c) of the Act of the same company from the director - Held that - In the present case we do not find a single notice on record issued to any of the directors why order under sub section (1) of section 179 should not be passed for whatever reasons that may be available at the command of the income tax authority. The notices which we have referred to are all issued to the company. These notices are in the form of recoveries or reminders of unpaid tax or penalty. None of these notices contain even a reference to any recoveries being made personally from the directors for the failure of the company to discharge its tax dues. If one reads the order it seems to be suggesting that the sole requirement of applicability of section 179(1) is that the tax dues of a private company have remained unpaid. To the later requirement of the same not attributable to any gross negligent misfeasance or breach of duty on part of director in relation to the affairs of the company is totally lost sight of. The language used in sub section (1) of section 179 may be in the negative covenant casting primary duty on the director to establish such facts nevertheless it is one of the essential requirements. The statute at best may be seen as giving rise to rebutable presumption which is required to be rebutted by the concerned director. It does not in any manner provide for a deemingfiction a natural and inevitable consequence or an irrebutable presumption. A director of a company would discharge his responsibility of establishing necessary facts only when he is put to notice that the authority proposes to pass order under section 179(1) of the Act.In the result impugned orders under section 179(1) of the Act are set aside.

Summary

Issues:
Challenge to order under section 179(1) of the Income Tax Act for recovery of unpaid tax and penalty from director of a private company without issuing a show cause notice.

Analysis:
1. The petitioner, a director of a private company, challenged an order seeking recovery of unpaid tax and penalty for the assessment year 2004-05 under section 179(1) of the Income Tax Act. The main contention was the absence of a show cause notice before passing the order.

2. The company had a history of tax assessment and penalty proceedings, leading to the imposition of unpaid tax and penalty. The department sought recovery from the directors due to non-payment by the company, without providing an opportunity to the directors to present their case.

3. The petitioner argued that the action of the department was illegal as no show cause notice or opportunity was granted before passing the order. The absence of reasons in the order under section 179(1) was highlighted as a ground for challenge.

4. The department contended that despite repeated notices to the company, the dues remained unpaid, justifying the recovery from the directors. The authority believed that the consequences under section 179(1) automatically applied if the company's dues were not paid.

5. The court analyzed section 179(1) of the Act, emphasizing the importance of providing an opportunity to the director to prove non-recovery was not due to their negligence or breach of duty. Natural justice principles required issuing a show cause notice and granting a reasonable opportunity to be heard before passing such an adverse order.

6. The court noted the absence of any notice issued to the directors explaining why the order under section 179(1) should not be passed. The order itself lacked details on satisfying statutory requirements.

7. The court found the order disregarded the statutory requirements of section 179(1) by solely focusing on unpaid dues without considering the director's role or negligence. The order was set aside, and consequential attachment orders were nullified.

8. Citing a previous case, the court clarified that striking down an action based on natural justice principles did not permanently terminate proceedings but returned them to rectify the defect.

9. Ultimately, the petitions were allowed, subject to the observations made, emphasizing the need for adherence to statutory requirements and principles of natural justice in such recovery proceedings.