2020 (2) TMI 267 - HC - Income Tax

Liability of directors of private company in liquidation u/s 179 - satisfaction of the condition precedent for taking action under Section 179 of the Act, 1961, viz. that the tax dues cannot be recovered from the Company - HELD THAT - In the context of Section 179 of the Act, 1961, this Court held that before recovery in respect of the dues from a private company can be initiated against the directors, to make them jointly and severally liable for such dues, it is necessary for the Revenue to establish that such recovery cannot be made against the company and then alone it can reach to the directors who were responsible for the conduct of the business during the previous year in relation to which liability exists. There is no escape from the fact that the perusal of the Notice under Section 179 of the Act, 1961, reveals that the same is totally silent as regards the satisfaction of the condition precedent for taking action under Section 179 of the Act, 1961, viz. that the tax dues cannot be recovered from the Company. In the show-cause notice, there is no whisper of any steps having been taken against the Company for recovery of the outstanding amount. Even in the impugned order, no such details or information has been staled. Question is, whether such an order could be said to be sustainable in law. The answer has to be in the negative. At the same time, in the peculiar facts and circumstances of the case and more particularly, when it has been indicated before us by way of an additional affidavit-in-reply as regards the steps taken against the company for the recovery of the dues, we would like to give one chance to the department to undertake a fresh exercise so far as Section 179 of the Act, 1961, is concerned. If the Show-cause notice is silent including the impugned order, the void left behind in the two documents cannot be filled by way of an affidavit-in-reply. Ultimately, it is the subjective satisfaction of the authority concerned that is important and it should be reflected from the order itself based on some cogent materials. However, with a view to protect the interest of both, the writ applicant as well as Revenue, we are inclined to quash the impugned order and give one opportunity to the Revenue to initiate the proceedings afresh by issuance of fresh show-cause notice with all necessary details so that the writ-applicant can meet with the case of the Revenue. We are inclined to adopt such measure keeping in mind the statement made by the learned counsel Mr.Soparkar that till the fresh proceedings are not completed, his client will not operate the bank account. Writ-application is partly allowed. The impugned notice as well as the order is hereby quashed and set aside. It shall be open for the respondent to issue fresh show-cause notice for the purpose of proceeding against the writ-applicant under Section 179 of the Act, 1961. We would like to give a time bound program so that the proceedings may not go on for an indefinite period. We are also issuing such direction because of the statement being made that the writ-applicant will not operate the bank account till the fresh proceedings are initiated and completed.

Issues Involved:
1. Legality of the impugned order under Section 179 of the Income Tax Act, 1961.
2. Adequacy of steps taken by the Department to recover tax dues from the company before proceeding against the Directors.
3. Validity of the show-cause notice and subsequent actions under Section 179.
4. Freezing of the writ-applicant's bank account under Section 226(3) of the Act.

Detailed Analysis:

1. Legality of the Impugned Order under Section 179 of the Income Tax Act, 1961:
The writ-applicant challenged the order passed under Section 179 of the Income Tax Act, 1961, holding the directors of a private company liable for outstanding tax dues. The impugned order stated that the directors were jointly and severally liable for the payment of ?9074.34 lakhs, as the company had no recoverable assets and failed to pay the tax despite multiple opportunities. The court noted that Section 179 allows holding directors liable if the tax cannot be recovered from the company, unless the directors prove that the non-recovery was not due to their gross neglect, misfeasance, or breach of duty.

2. Adequacy of Steps Taken by the Department to Recover Tax Dues from the Company:
The writ-applicant argued that the Department did not demonstrate the steps taken to recover dues from the company. The show-cause notice and the impugned order lacked material particulars regarding the recovery efforts. The court emphasized that the Department must establish that it exhausted all recovery avenues against the company before proceeding against the directors. The additional affidavit submitted during the hearing detailed the steps taken but was deemed insufficient to fill the void left in the original notice and order.

3. Validity of the Show-Cause Notice and Subsequent Actions under Section 179:
The court found that the show-cause notice and the impugned order were silent on the steps taken to recover the dues from the company. This omission rendered the order unsustainable. The court highlighted that the subjective satisfaction of the authority must be reflected in the order based on cogent materials. Consequently, the court quashed the impugned order and directed the Department to issue a fresh show-cause notice with all necessary details, allowing the writ-applicant to respond adequately.

4. Freezing of the Writ-Applicant's Bank Account under Section 226(3) of the Act:
The writ-applicant's bank account was frozen following the impugned order. The court noted that the freezing of the bank account was a direct consequence of the flawed order under Section 179. Given the decision to quash the impugned order, the court also set aside the notices issued under Section 226(3) to the banks, thereby lifting the freeze on the writ-applicant's account.

Conclusion:
The court partly allowed the writ-application, quashing the impugned order and the related bank account freeze notices. It provided the Department with two months to initiate fresh proceedings under Section 179, ensuring the writ-applicant's right to a fair hearing. The writ-applicant agreed not to operate the bank account until the completion of the fresh proceedings.

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