2022 (9) TMI 1325 - HC - Income Tax

Recovery of the amounts from the company and its directors - Liability of directors of private company u/s 179 - Whether company is presently stated to be undergoing Corporate Insolvency Resolution Process before the National Company Law Tribunal (NCLT) and the Income Tax Department ought to have raised/made its claim before the NCLT without pursuing the demand as against the Directors? - HELD THAT - Only condition set out under Section 179 is to the effect that attempts should be made by the Income Tax Department to recover the tax dues from the company and such attempts should have been unsuccessful. The measures taken by the Department to recover the dues that have admittedly been unsuccessful. Moreover, the company is itself before the National Company Law Tribunal, which establishes that it does not presently, have the funds to settle the tax dues. The condition precedent under Section 179 stands complied in this case. Section 179(1), in itself, grants the Directors the liberty to prove that the non-recovery cannot be attributed to gross neglect, misfeasance or breach of duty on their part in relation to the affairs of the company. In the present case, the replies filed by the petitioners to the show cause notices prior to passing of the impugned orders merely contain a bald assumption to this effect. They have not, in my view, established, that the petitioners had taken all reasonable efforts to ensure compliance of the company to statutory dues and were not guilty of neglect, misfeasance or breach of duty in that regard. The impugned orders do not suffer from any infirmity and for the reasons set out above, the same are confirmed. No costs. Connected Miscellaneous Petitions are closed.

Summary

Issues:
Challenge to orders under Section 179 of the Income Tax Act by Directors of a Private Limited Company.

Analysis:
1. Background: The case involves three Directors of a Private Limited Company challenging orders passed under Section 179 of the Income Tax Act, 1961. The company, part of a group trading in steel and holding shares as investments, faced assessments and additions in relation to share application and investment in shares of another company.

2. Provisions of Section 179: Section 179 outlines the liability of Directors of a Private Limited Company for tax payment if the Department cannot recover dues from the company, unless the Director proves non-recovery is not due to neglect, misfeasance, or breach of duty. The petitioners argued the impugned order lacked specifics on Section 179 requirements.

3. Recovery Attempts: The Income Tax Department detailed multiple unsuccessful attempts to recover dues from the company, including unpaid demands, notices, appeals, and bank attachments. The Department issued notices to the Directors only after exhausting recovery efforts against the company.

4. Legal Precedents: The petitioners cited a Gujarat High Court case where Directors were favored due to unsatisfied conditions under Section 179. However, the current case distinguished itself as reasonable recovery attempts were made before implicating the Directors.

5. Compliance with Section 179: The judgment noted that Section 179 mandates unsuccessful recovery attempts from the company before holding Directors liable. In this case, the Department's efforts and the company's insolvency proceedings indicated compliance with Section 179 requirements.

6. Director's Defense: The Directors failed to prove they were not negligent or in breach of duty regarding the company's tax obligations. Their responses lacked substantial evidence of efforts to ensure the company's compliance with tax dues.

7. Judicial Decision: The Court found the impugned orders valid, as recovery attempts were diligently made before holding the Directors responsible. The Directors' failure to demonstrate their lack of neglect or breach of duty led to the confirmation of the orders under Section 179. No costs were awarded, and the case was closed.