2023 (2) TMI 869 - HC - Income Tax

Liability of directors of private company u/s 179 - petitioner did not have any independent operational control over the company - CIT rejected the application for revision u/s 264 - HELD THAT - The petitioner having brought on record material to suggest lack of financial control, lack of decision making powers in the light of her stand that she had a very limited role to play in the company as a director and that the entire decision making process was with the directors appointed by the investors, i.e., KFI which was the single largest shareholder of the JVC had, in our opinion, sufficiently discharged the burden cast upon her in terms of section 179 to absolve herself of the liability of the company. AO appears to have applied himself more on the issue of the petitioner participating in the affairs of the company for purposes of pinning liability in terms of section 179 rather than discovering the element of gross neglect , misfeasance or breach of duty on the part of the petitioner in relation to the affairs of the company and establishing its corelation with non-recovery of tax dues. The petitioner having discharged the initial burden, the AO had to show as to how the petitioner could be attributed such a gross neglect, misfeasance or breach of duty on her part. As in the present case, the AO has not specifically held the petitioner to be guilty of gross neglect, misfeasance or breach of duty on part in relation to the affairs of the company. Not a single incident, decision or action has been highlighted by the AO, which would be treated as an act of gross neglect, breach of duty or malfeasance which would have the remotest potential of resulting in non-recovery of tax due in future.

Summary

Issues Involved:
1. Challenge to the order under section 179 of the Income Tax Act, 1961.
2. Liability of the petitioner for taxes due from the company.
3. Non-recovery of tax dues and the role of the petitioner.
4. Application of legal precedents and interpretation of section 179.

Detailed Analysis:

1. Challenge to the Order under Section 179 of the Income Tax Act, 1961:
The petitioner contested the order dated 22nd December 2017, issued by the Income Tax Officer under section 179 of the Income Tax Act, 1961, which held the petitioner liable for the taxes due from M/s. Kaizen Automation Pvt. Ltd. (KAPL) for the assessment years 2008-09 and 2009-10. Additionally, the petitioner challenged the order dated 18th March 2019 by the Principal Commissioner of Income-tax, Mumbai, which dismissed the revision petition under section 264 of the Act.

2. Liability of the Petitioner for Taxes Due from the Company:
The petitioner received a show cause notice on 12th January 2017, requiring her to explain why recovery proceedings should not be initiated against her as a director of KAPL. The notice stated that the company was untraceable and the tax dues could not be recovered despite attaching the bank accounts. The petitioner argued that she had no control over the company's affairs, lacked authorization to act independently, and had no functional responsibility assigned to her. She also highlighted that she and her husband were removed as directors in September 2009.

3. Non-Recovery of Tax Dues and the Role of the Petitioner:
The AO rejected the petitioner's contention, stating that she failed to establish that she was not actively involved in the management of the company and that there was no gross neglect, malfeasance, or breach of duty on her part. The AO emphasized that the petitioner was actively involved in the company's day-to-day affairs until her removal in September 2009. The petitioner argued that she had no independent authority or operational control and that the decision-making process was with the directors appointed by the investors, KFI.

4. Application of Legal Precedents and Interpretation of Section 179:
The court examined the requirements of section 179, which stipulates that directors can be held liable for the company's tax dues unless they prove that non-recovery cannot be attributed to their gross neglect, misfeasance, or breach of duty. The court noted that the AO did not provide material evidence to establish the petitioner's gross neglect, malfeasance, or breach of duty. The court referred to the judgments in Maganbhai Hansrajbhai Patel Vs. Assistant Commissioner of Income-tax & Anr. and Ram Prakash Singeshwar Rungta & Ors. Vs. Income-tax Officer, which emphasized the need for specific findings of gross neglect, misfeasance, or breach of duty for holding directors liable under section 179.

Conclusion:
The court concluded that the AO did not establish any specific incident, decision, or action by the petitioner that could be considered gross neglect, malfeasance, or breach of duty leading to non-recovery of tax dues. Consequently, the orders dated 22nd December 2017 and 18th March 2019 were set aside, and the petition was allowed. The interim application was also disposed of.