Petitioners challenged an order invoking Section 179 of the Income Tax Act to recover company dues from them as directors. The Court held the order was without jurisdiction as Respondent failed to establish gross neglect or breach of duty, quashing the action.
Impugned order dated 24.01.2017 under Section 179 is quashed and set aside.
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C/SCA/12929/2019 CAV JUDGMENT DATED: 16/12/2022
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/SPECIAL CIVIL APPLICATION NO. 12929 of 2019
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR. JUSTICE N.V.ANJARIA
and HONOURABLE MR. JUSTICE BHARGAV D. KARIA
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DEVENDRA BABULAL JAIN
Versus
INCOME TAX OFFICER, WARD 1(1)(4)
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Appearance:
MR. JAIMIN R DAVE(7022) for the Petitioner(s) No. 1,2
MR NIKUNT RAVAL FOR MS KALPANA K RAVAL for the Respondent(s) No. 1
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CORAM: HONOURABLE MR. JUSTICE N.V.ANJARIA and
HONOURABLE MR. JUSTICE BHARGAV D. KARIA
Date : 16/12/2022
CAV JUDGMENT
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(PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA)
1.Heard learned advocate Mr.Jaimin Dave for the
petitioners and learned advocate Mr. Nikunt Raval for the respondents.
2.The petitioners have challenged the order dated
24.01.2017 passed by respondent no.1 under section 179 of the Income Tax Act, 1961 (For short “the Act”) fastening the liability upon the petitioners to pay the outstanding dues of
M/s. G P Shah Investment (here-in-after referred to as “the said company”) as the petitioners are the Directors of the said
company for the Assessment Year 2013-2014.
3.Brief facts of the case are that the petitioners were appointed as the Directors of M/s. G P Shah Investment Private Limited.
3.1) Respondent no.1 carried out assessment under section 143(3) of the Act against the said company for the Assessment Year 2013-2014 and passed the assessment order dated 21.03.2016
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resulting into additional demand of Rs.
5,51,56,520/-. Consequently demand notice dated 21.03.2016 under section 156 of the Act was
issued upon the said company raising demand of Rs. 5,51,56,520/-.
3.2) Being aggrieved by the said assessment order and demand notice, the said company preferred an appeal before the Commissioner of Income Tax Appeal-1, Surat on 30.05.2016.
3.3) Respondent thereafter issued show cause notice dated 10.11.2016 under section 179 of the Act to the petitioners.
3.4) The petitioners vide individual letters dated 23.11.2016 submitted reply to the said show cause notice.
3.5) Respondent no.1 thereafter passed the
impugned order dated 24.01.2017 under section 179 of the Act.
3.6) Being aggrieved by the impugned action of the respondents, the petitioners have
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preferred the present petition.
4.This Court by order dated 29.07.2019 issued the
notice and stayed the operation and implementation of the impugned order dated 24.01.2017 passed under section 179 of the Act.
5.Learned advocate Mr. Jaimin Dave for the petitioners submitted that the impugned order passed under section 179 of the Act is without jurisdiction as the basic condition for invoking section 179 of the Act are not satisfied in the
facts of the case.
5.1) It was submitted that for invoking jurisdiction under section 179 of the Act, twin conditions with regard to the amount of tax dues from a private limited company which is not recovered from such company is attributable to the gross negligence, misfeasance or breach of
duty of the Director, is not satisfied in the present case. It was submitted that in the facts of the case there is nothing on record to
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suggest that the respondent authorities have
been satisfied before invoking powers under section 179 of the Act vis-a-vis the recovery of the outstanding dues of the private limited company and there is no finding that such non recovery of taxes is attributable to the gross negligence, misfeasance or breach of duty of the petitioners. It was submitted that except issuance of recovery notice, respondent no.1 has neither issued any notice of demand nor taken
any assertive steps for the purpose of recovering the outstanding tax dues from the private limited company. In support of his submissions, reliance was placed on the following decisions:
Commissioner of Income-tax reported in (1999) 238 ITR 127 (Gujarat).
Officer, Ward 4(3) reported in (2006) 282 ITR 120( Gujarat).
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tax officer reported in (2009) 308 ITR 113 (Gujarat).
Commissioner of Income Tax reported in (2018) 403 ITR 201 (Bombay).
Income Tax Officer (judgment dated 27.08.2019 in Special Civil Application No.5354/2018 and allied matter).
Commissioner of Income-tax reported in (2017) 399 ITR 74 (Gujarat).
Tax Officer reported in (2014) 367 ITR 558 (Gujarat).
6.On the other hand, learned advocate Mr. Nikunt Raval for the respondents submitted that the compliance of the provisions of section 179 of
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the Act are made prior to passing of the impugned order. It was submitted that the private limited company of which the petitioners are the Directors is liable to pay the demand of more than Rs. 5 crores since 2016 and the said company did not make any payment of the outstanding demand within the due time inspite of giving recovery notice dated 20.06.2016 by the Recovery Officer.
6.1) It was pointed out that the bank
account of the petitioners was also attached under section 226(3) of the Act on 2.08.2016. It was submitted that as per the provisions of section 179 of the Act, the petitioners are liable to pay the outstanding tax in capacity of the Directors of the assessee company who have neglected to make the payment of outstanding demand.
6.2) In support of his contention that
despite all possible efforts, entire outstanding
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tax dues could not be recovered from the company leaving department with no option but to recover the same from the Directors, reliance was placed on the judgment of Delhi High Court in case of Rajeev Behl v. Principal Commissioner of Incometax reported in (2021) 132 taxmann.com 283 (Delhi).
6.3) It was further submitted that reliance placed by the petitioners on the various decisions of this Court are not applicable in the facts of the said case as it is for the petitioners to point out that the petitioners have not remained negligent for non recovery of the outstanding dues of the private limited company.
7.Having heard the learned advocates for the respective parties, it appears that the respondent authorities have failed to take any action for recovery of the outstanding dues except issuing notice for recovery and attaching the bank account of private limited company.
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Section 179(1) of the Act reads as under :
“Liability of directors of private company44 [ * ].**
179. (1) Notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), where any tax due from a private company in respect of any income of any previous year or from any other company in respect of any income of any previous year during which such other company was a private company cannot be recovered, then, every person who was a director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax unless he proves that the nonrecovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.”
8.On perusal of the above provisions, it is clear
that the Assessing Officer is required to make efforts for recovery of the outstanding dues from the assessee private limited company which has committed default in payment of the outstanding demand. The petitioners have prima facie shown that non recovery cannot be attributed to any gross negligence, misfeasance or breach of duty as Directors of the assessee company. In the impugned order, the Assessing
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Officer has failed to consider the fact that
the petitioners have tendered their explanation and the petitioners have not remained negligent nor there is any misfeasance or beach of trust on part of the petitioners and only because the petitioners have been unable to deposit 20% of the demand raised in the assessment order, the petitioners cannot be said to be negligent and respondent no.1 cannot therefore, invoke jurisdiction under section 179 of the Act.
9.This Court in case of Sadhna Ramchandra Jeswani
v. Income Tax Officer (supra) in similar
situation has held as under :
“8. Reverting back to the facts of the case, we notice that in showcause notice the Assessing Officer has not laid down sufficient foundation for invoking section 179 of the Act leave alone broadly pointing out he has not even alleged that non-recovery was on account of gross negligent, misfeasance or breach of duty on part of the petitioner in relation to the affairs of the company. His final conclusions in the impugned order are therefore based on the material at his command which was never shared with the petitioner.
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prevent the Assessing Officer from initiating fresh exercise for the same purpose, if so advised and, if the material at his command is sufficient to permit him to do so.”
Commissioner of Income-tax reported in 238 ITR 127 (Guj).
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The impugned order dated 24.01.2017 is hereby quashed and set aside.
(N.V.ANJARIA, J)
(BHARGAV D. KARIA, J)
RAGHUNATH R NAIR
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2 issues framed by the court
Whether Section 179 of the Income Tax Act, 1961 can be invoked against directors for company dues without finding gross neglect, misfeasance, or breach of duty.
Whether the Assessing Officer satisfied the statutory conditions before fastening liability on directors for outstanding tax dues of a private company.
Colour shows how this judgement treated each authority
Bhagwandas J. Patel v. Deputy Commissioner of Income-taxRelied on¶61
(1999) 238 ITR 127
Indubhai T. Vasa v. Income Tax Officer, Ward 4(3)Relied on¶63
(2006) 282 ITR 120
Amit Suresh Bhatnagar v. Income-tax officerRelied on¶67
(2009) 308 ITR 113
Mehul Jadavji Shah v. Deputy Commissioner of Income TaxRelied on¶69
(2018) 403 ITR 201
Sadhna Ramchandra Jeswani v. Income Tax OfficerRelied on¶71
Special Civil Application No.5354/2018
Susan Chacko Perumal v. Assistant Commissioner of Income-taxRelied on¶73
(2017) 399 ITR 74
Gul Gopaldas Daryani v. Income Tax OfficerRelied on¶75
(2014) 367 ITR 558
Rajeev Behl v. Principal Commissioner of IncometaxDistinguished¶87
(2021) 132 taxmann.com 283
2 provisions across 1 enactments
Devendra Babulal Jain
Income Tax Officer, Ward 1(1)(4)
N.V. Anjaria
Bhargav D. Karia
As recorded by the court registry
Judgements on the same questions, provisions and authorities, from every court
