Gujarat High Court: Department can proceed against Directors only on Failure to Recover Tax from Company

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The writ application has been file by the applicant against an order passed by the Respondent under Section 179 of the Income Tax Act, 1961.

Facts of the Case

The facts of Sonal Nimish Patel v. Assistant Commissioner Of Income Tax, Circle 4(1)(2) are as follows:

An amount of Rs. 9074.34 lakhs was to be paid by M/s Tirupati Proteins Pvt. Ltd and the date of payment were due. Despite repeated requests and opportunities, the said amount was not paid.

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The Directors of the Company at that particular point of time were Smt, Sonal Nimish and Smt, Ashita Nilesh Patel. The Company records show that there were no recoverable assets in the name of the assessee Company. Under the above-mentioned circumstances, a notice was issued to the Directors of the said Company under Section 179 of the Income Tax Act. The Directors were requested to show cause vide notice u/s 179 of the Act as to why they should not be treated as jointly and severally liable for the payment of such tax and why the order passed against them would not prevail.

Respondent’s Arguments

The Respondent Company, being a Private Company was liable u/s 179 of the I.T Act. The Respondent Company, Tirupati Proteins Pvt Ltd. had failed to comply with the said provision of the Act, hence Section 179(1) of the Act is attracted. The case relied on for this argument is Union of India vs. Praveen D. Desai (1988) 173 ITR 303.

Section 179(1) of the Act states that,

“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 concerning the affairs of the Company.”

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The order issued can be justified because an instruction issues after the Act was enacted enables proceedings to be initiated u/s 179 simultaneously against Company and Directors and action against the Company doesn’t need to be exhausted.

Since the Directors of the said Company failed to furnish a reply when proceedings were initiated against their Company for the non-payment of the due taxes. Hence, it is presumed that they do not have any objection to such orders being passed.

Since the demand is not recoverable from the assessee Company, the responsibility is fixed upon the Directors u/s 179 (1) of the IT Act and they are treated as assessee with respect of tax. Hence, Smt. Sonal Nimish Patel and Smt. Ashita Nilesh Patel is jointly and severally liable to make payment of outstanding demand of Rs. 9074.34 lakhs.

Petitioner’s Arguments

Section 179 is concerning the liability of the Directors of the Private Company. If any tax is due from the Company, and the tax is not recovered, then every person is a Director of the Private Company at any time during the relevant previous year can also be held under the Section, unless the Director proves that the non-recovery of the tax could not be attributed to negligence or other factors affecting a Company.

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The writ applicant, Smt. Sonal Nimish Patel also claims that she had resigned as the Director of the Company long back and hence could not be made liable.

The counsel for the applicant argued that it is obligatory on the part of the Department to demonstrate, by some material on record, that it had taken necessary steps to recover the dues from the Company, but such steps failed. Only after this could order be issued against the Directors of the Company.

A notice was issued under Section 226(3) of the Act to the Principal Officer of HDFC Bank Limited which whom the writ-applicant has a bank account and the account was freezing based on the order issued. The counsel prays for the account be deferred and the order to be set aside.

Counter Arguments For Revenue

The responsibility to prove that the payment was not recovered is not on the Department but on the Directors of the Company.

There is a charge of one institution or the other to the assets of the Company. Further, the account of the Director with HDFC Bank was freezed by the Department because of its urgency to recover the outstanding amount, which was due.

Has The Respondent Committed Any Error In Passing The Impugned Order

Section 179(2) reads that,

“Where a private company is converted into a public company and the tax assessed in respect of any income of any previous year during which such company was a private company cannot be recovered, then, nothing contained in sub-section (1) shall apply to any person who was a director of such private company concerning any tax due in respect of any income of such private company assessable for any assessment year commencing before the 1st day of April 1962.”

In the case of Maganbhai Hanrajbhai Patel v. Assistant CIT [(2013) 353 ITR 57], this Court needed to examine the Section in detail.

In the judgement of the present case, it was held that,

“There is no escape from the fact that the perusal of the Notice under Section 179 of the Act, 1961, reveals that the same is  silent as  regards the satisfaction of the condition precedent  for taking action under Section 179 of the Act, 1961, viz. that the tax dues cannot be recovered  from the Company.”

Court’s Decision

Ultimately, it is the subjective satisfaction of the authority concerned that is important and it should be reflected from the order itself based on some cogent materials.

The court was inclined to quash the order and allow Revenue to start afresh proceedings, with all the necessary details, so that the applicant meets up the needs of the Revenue.

In view of the above, two notices under Section 226(3) of the Act, 1961, i.e. one, to the Kalupur Commercial Cooperative Bank Limited, and another, to HDFC Bank Limited, are also set aside. The writ application is partly allowed and disposed of.


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