2023 (5) TMI 226 - HC - Income Tax

Liability of directors of private company - order u/s 179 made against the petitioner for pending tax dues of Pvt. Ltd.company - as argued no efforts undertaken to recover money from the Company itself and further non-recovery of said dues are not attributable to any gross neglect, misfeasance or breach of duty by the petitioner in the affairs of the Company and as such, impugned notice is vague, reflecting no such condition precedent - HELD THAT - There is no discussion on the elements which are basic in nature for invoking jurisdiction under Section 179 of the Income Tax Act, there is no subjective satisfaction on such and additionally the notice itself is found to be vague and as such, apparently, it appears that the action is not sustainable in view of the settled proposition of law. The order which has been passed by the authority is without dealing with the basic elements of Section 179 of the Income Tax Act and the same being suffering from the vice of non-application of mind, we may deem it proper to quash the same, of course with liberty to the respondent authority to pass a fresh order after issuing proper notice to the petitioner which must indicate briefly the steps to be taken by the department to recover the tax dues from the private limited company in default and its failure to recover is possible to be attributed to the petitioner. We may also deem it proper to quote the proposition of law laid down by the Hon ble Apex Court on the issue of proper notice being noticed while initiating the step. We hereby allowed the petition by quashing and setting aside the notice as well as order passed by the respondent authority and while allowing the petition we reserve liberty for respondent by observing that it shall be open for the respondent to issue fresh notice for the purpose of proceedings against the petitioner under Section 179 of the Income Tax Act and shall pass a fresh order in accordance with law on the subject in question, if it deems fit.

Issues Involved:
1. Validity of the impugned notice issued under Section 179 of the Income Tax Act, 1961.
2. Compliance with principles of natural justice.
3. Examination of the prerequisites for invoking jurisdiction under Section 179.
4. Availability of an alternative remedy under Section 264 of the Income Tax Act.

Summary:

1. Validity of the Impugned Notice:
The petitioner challenged the notice dated 28.02.2018 issued under Section 179 of the Income Tax Act, 1961, arguing that it was vague and did not reflect any condition precedent as required by the section. The petitioner contended that the notice failed to state any efforts undertaken to recover money from the company itself and did not attribute non-recovery to any gross neglect, misfeasance, or breach of duty by the petitioner. The court found that the notice merely stated that the petitioner was a director during the relevant period without providing details on why the petitioner should be held responsible, thus reflecting vagueness.

2. Compliance with Principles of Natural Justice:
The petitioner argued that the vague notice deprived him of making an effective representation, violating the principles of natural justice. The court agreed, noting that the notice did not provide sufficient details for the petitioner to address the allegations effectively. The court emphasized that adherence to principles of natural justice is crucial, and the notice must be precise and unambiguous to allow the party to make an informed representation.

3. Examination of Prerequisites for Invoking Jurisdiction Under Section 179:
The court highlighted that Section 179 requires the authority to establish that tax dues cannot be recovered from the company before holding directors liable. The court found no discussion or subjective satisfaction on this issue in the impugned order. The court referred to several precedents, including the decisions in Ram Prakash Singeshwar Rungta v. Income Tax Officer and Mehul Jadavji Shah v. Deputy Commissioner of Income Tax, which emphasized the need for the authority to demonstrate efforts made to recover dues from the company and the failure of such efforts.

4. Availability of Alternative Remedy Under Section 264:
The respondent argued that the petitioner had an alternative remedy available under Section 264 of the Income Tax Act. However, the petitioner contended that the revision application was not an efficacious remedy, and the writ jurisdiction was invoked appropriately. The court did not delve deeply into this argument, focusing instead on the inadequacies of the notice and the impugned order.

Conclusion:
The court quashed the notice dated 28.02.2018 and the order dated 29.03.2019, citing non-application of mind and failure to meet the prerequisites of Section 179. The court granted liberty to the respondent authority to issue a fresh notice with proper details and to pass a fresh order in accordance with the law. The court emphasized the need for the authority to examine the basic elements required for invoking jurisdiction under Section 179 and to ensure compliance with principles of natural justice.

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