Procedure Of recovery under section 179 of the Income Tax Act against directors is not to be resorted to casually and only because it is convenient to do so: Bombay High Court
The Bombay high court recently passed a judgement on Tuesday, the 26th of July, in the year 2022 in which it moved a judgement in favour of the Petitioner by quashing the order that made the petitioner liable for his company’s tax dues. This order was seen in the case of Rajendra R. Singh vs. Assistant Commissioner of Income Tax -9(2)(2), Mumbai (Writ Petition No. 3590 Of 2019) and this judgement was presided over by The Honourable Mr. Justice Dhiraj Singh Thakur and by The Honourable Mr. Justice Abhay Ahuja.
FACTS OF THE CASE:
In this petition, the petitioner who is the Chairman and Managing Director of the company Crest Paper Mills Limited (CPML), seeks the issuance of a writ of certiorari for quashing the order dated 13th February 2018 passed under section 179 of the Income Tax Act, 1961 which held the petitioner liable to pay a demand of Rs.3,98,19,430 along with interest, under section 220(2) of the Act, which normally otherwise would be due and payable by the company.
On 24th January 2018, A Show Cause Notice was served to the petitioner by the Assistant Commissioner of Income Tax, of Mumbai informing the petitioner that tax dues for an amount of Rs.3,88,19,430 were outstanding against Crest Paper Mills Ltd. for the assessment year 2010-11 and that the same had not been paid by the assessee company so far. The petitioner thereafter was asked to show cause as to why proceedings under section 179 of the Income Tax Act should not be initiated against him in his capacity as the Director of the Company.
The petitioner then submitted his response to the Show cause notice taking a defence that jurisdiction under section 179 of the Income tax Act could be assumed against a director of a private company and not against a public company. The court later on established that no evidence had been furnished by the petitioner to prove that CPML was a public company.
Another defence that was taken was proceedings against a director could not have been initiated directly without first initiating recovery proceeding against the company, there must be a proper finding that recovery of tax arrears was not possible from the company. In the show cause notice, there was no such averment that the tax due cannot be recovered from the company.
JUDGEMENT:
In the present case, the court discussed that the notice under section 179 of the Act issued by the respondent did not inform the petitioner of its intention to treat the company as a public company and by invoking the principle of ‘lifting the corporate veil’ much less did it refer to any material or conclusion based upon which it could assume jurisdiction under section 179 of the Act against the directors of a Private Company.
The respondent had only invoked the principle of lifting the corporate veil to hold that CPML was in fact a privately held enterprise under the garb of a public company only after the petitioner had taken an objection to the respondent assuming jurisdiction against a public company. The procedure adopted by respondent was clearly violative of the principles of natural justice and without affording to the petitioner, an opportunity of being heard on the question.
The court also said the orders impugned are also unsustainable on another ground that is Power under section 179 of the Act can be exercised against the Directors upon satisfaction that tax dues cannot be recovered from the private company. To justify that the tax dues cannot be recovered, the Assessing Officer had to enumerate the steps taken towards recovery of tax dues from the company. Reading the show cause notice would clearly suggest that there was no recorded statement that the tax cannot be recovered. The court states that the recovery procedure under section 179 of the Act against the directors is not to be resorted to casually and only because it is convenient to do so for affecting recovery of the tax dues.
An affidavit in reply had also been filed by the Deputy Commissioner of Income Tax in which a stand is taken that sale of the property attached would be initiated after getting the fair market value determined. This statement itself has the effect of nullifying the action initiated under section 179 of the Act against the petitioner rendering the order impugned unsustainable in law.
The court passes the judgement saying the writ Petition is allowed and the impugned order dated 13th February 2018 as well as the order dated 12th February 2019 passed under section 264 of the Act are quashed. However, in case, the tax dues are not fully satisfied upon sale of the property that has been attached, then the Assistant Commissioner can proceed in the matter afresh in accordance with law, after giving an opportunity of being heard to the petitioner.
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JUDGEMENT REVIEWED BY TANAV ZACHARIAH.