2023 (6) TMI 885 - HC - Income Tax

Liability of directors u/s 179 - Recovery of dues of company - Onus to prove the gross neglect or misfeasance or breach of duty on his part - HELD THAT - Where a Director proves that non recovery of tax dues cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the Company, he shall not be liable for payment of tax dues. Of course, the responsibility of establishing such fact is upon the Director. Once the Director places before the authority his material and reasons why it should be held that non-recovery cannot be attributed to any of the three factors on his part, the Authority is bound to examine such grounds and come to a reasoned conclusion in this respect. We are alive to the fact that the legislature in its wisdom has used the words gross neglect and not mere neglect on the part of the Director. This view finds support in the judgment of Maganbhai Hansrajbhai Patel 2012 (11) TMI 189 - GUJARAT HIGH COURT where the said High Court has dealt with the same present provision of Section 179 - In the said judgment it is further held that gross negligence etc is to be viewed in the context of non recovery of tax dues of the Company and not with respect to general functioning of the company. Perusal of the documents produced on record shows that after Petitioner s removal from the directorship which has taken place in the year 2009 itself, Petitioner had no connection with the said company or any access to its affairs. Perusal of the impugned Orders further show that both the ITO as well as revisional Authority have mainly proceeded on the basis that the Petitioner was director during the assessment years and do not really consider whether there was any gross neglect or misfeasance for breach of duty on his part in relation to affairs of the company in the context of non recovery of tax dues . In such situation it is difficult to sustain the impugned Orders, which without any basis, simply says that Petitioner (Director) has failed to prove that nonrecovery cannot be attributed to any gross neglect or misfeasance or breach of duty on his part. No material is highlighted by the ITO contrary to material placed on record by Petitioner, based on which he can be held to be guilty of gross neglect or misfeasance or breach of duty in the context of nonrecovery of tax dues. Having brought on record material to show lack of financial control, lack of decision making power and having very limited role in the assessee company even as director and entire decision making process being with the directors appointed by KFI (Being single largest share holder of the assessee company), in our opinion, Petitioner has sufficiently discharged the burden cast upon him in terms of section 179(1) of the Act to absolve him from the liability thereunder. Order passed in Petitioner s revision, by Chief Commissioner of Income Tax(OSD) holding charge of Pr. Commissioner of Income Tax-10, Mumbai is quashed and set aside. Decided in favour of assessee.

Issues Involved:
1. Validity of the Order under Section 179 of the Income Tax Act, 1961
2. Interpretation of Section 179(1) of the Income Tax Act, 1961
3. Assessment of Gross Neglect, Misfeasance, or Breach of Duty
4. Delay in Initiating Action

Summary:

1. Validity of the Order under Section 179 of the Income Tax Act, 1961:
The Petitioner sought a writ of Certiorari to quash the order dated 22nd December 2017 by the Income Tax Officer holding him liable for taxes due from Kaizen Automation Pvt. Ltd. (KAPL) for Assessment Years 2008-09 & 2009-10, and the subsequent order dated 18th March 2019 by the Chief Commissioner of Income Tax rejecting the Petitioner's revision application against the initial order.

2. Interpretation of Section 179(1) of the Income Tax Act, 1961:
The Court emphasized that Section 179(1) provides an escape route for directors if they can prove that non-recovery of tax cannot be attributed to any gross neglect, misfeasance, or breach of duty on their part. The Court noted that the burden of proof lies on the director to establish that non-recovery was not due to their fault.

3. Assessment of Gross Neglect, Misfeasance, or Breach of Duty:
The Court found that the authorities failed to consider whether the non-recovery of tax was due to gross neglect or misfeasance by the Petitioner. The Petitioner had provided sufficient evidence showing that he had no control over KAPL's financial affairs and that the real control was with the directors appointed by KFI. The Court concluded that the Petitioner had discharged his burden under Section 179(1), and the authorities did not provide any contrary material to substantiate their claims.

4. Delay in Initiating Action:
The Court held that the action initiated after a long period of 8 years was unreasonable and violated the principles of natural justice. The delay in adjudication defeated the purpose of the legal process, making the impugned orders procedurally unfair.

Conclusion:
The Court quashed and set aside the impugned orders dated 18th March 2019 and 22nd December 2017, ruling that the Petitioner was not liable for the outstanding dues of KAPL. The judgment emphasized the importance of procedural fairness and the necessity for authorities to act within a reasonable period. The rule was made absolute, with no order as to costs.

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