Sec 179 Of Income Tax Act Can Be Invoked Against Director Only In Case Of Non-Recovery Of Tax Dues From Company: Bombay HC

The Bombay High Court has ruled that according to Section 179(1) of the Income Tax Act, a person can be held responsible as a Director for tax recovery only if he was a Director both at the relevant assessment year and at the time when the demand was raised.

Further, the Division Bench of Justice K.R. Shriram and Justice Firdosh P. Pooniwalla observed that “before passing an order under Section 179 of the Act, the Assessing Officer should have made out a case as required under Section 179(1) of the Act that the tax dues from the company cannot be recovered. Only after the first requirement is satisfied would the onus shift on any Director to prove that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part concerning the affairs of the company”.

Advocate Ranit Basu appeared for the Petitioner, whereas Advocate Suresh Kumar appeared for the Respondent.

Brief facts of the case were that the petitioners, two of the legal heirs of the deceased challenged an order passed by the Department under Section 264 of the Income Tax Act. The company had filed its income tax return which underwent scrutiny assessment resulting in various additions and disallowances. A demand for payment was made, and the deceased applied for a stay, which was rejected. The company voluntarily paid certain amounts, and properties were temporarily attached but later released. The petitioners' revision application under Section 264 was also rejected. Subsequently, they received an order under Section 179, against which they filed another revision application, which was rejected. The petitioner argued that the deceased, who was seriously ill and ailing for six months, passed away a day before the order was passed under Section 179 of the Act. The order under Section 264 was passed rejecting the application solely on the ground that the notice of the deceased's death was not brought to the attention of the Assessing Officer before the order under Section 179 was signed.

After considering the submission, the Bench noted that there was no evidence to prove that any notice was issued to the deceased since the affidavit filed by the respondents only mentioned that letters were sent through speed post and were not returned undelivered.

The Bench also pointed out that there was no supporting evidence or documentation to verify the preparation and delivery of such letters, and therefore, it can be assumed that no letter or notice was sent to the deceased before the order dated May 7, 2018, was passed.

Additionally, the High Court found that there was no information regarding the steps taken to trace the assets of the company, and thus, the order passed under Section 179 on May 7, 2018, failed to meet the requirements.

Noting that the company was currently undergoing Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC), the High Court observed that the Assessing Officer should have established a case that the tax dues from the company cannot be recovered before issuing an order under Section 179.

The Bench added that because of the non-issuance of notice, the deceased had not been even allowed to establish that non-recovery cannot be attributable to any of the three factors on his part, i.e., gross neglect or misfeasance or breach of duty.

The Bench, therefore, quashed both the order passed under Section 264 as well as the order passed under Section 179 of the Act.

Cause Title: Manjula D. Rita and Anr. v. Principal Commissioner of Income Tax, Mumbai and Ors. [Neutral Citation No. 2023:BHC-OS:5421-DB]

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