By TIOL News Service

AHMEDABAD, MARCH 02, 2014: THE issues before the Bench are - Whether when the assessee is a public limited company, recovery of tax dues cannot be initiated against Directors and no proceedings u/s 179 can be initiated and Whether it is necessary for the Revenue to establish that such recovery cannot be made against the company and then alone it can reach the directors who were responsible for conduct of the business during the previous year in relation to which liability existed. And the answers go against the Revenue.

Facts of the case

The assessee, was a director of one M/s. Sirs Engineering Private Limited. For the AY 2000-2001, AO passed order of assessment on 28.3.2003, raising tax demand of Rs.40,99,967/. With penalty, it came to Rs.41,09,967/. Five more separate orders of assessment dated 27.2.2004 were passed in case of the same company for the AY 1996-1997 to 1999-2000 and 2001-2002 raising different tax demands. On 22.3.2004, ITO issued a notice to the petitioner indicating that a tax demand of the said company of Rs.41,11,967/for the AY 2000-2001 was still outstanding. Assessee was the director of the company during the relevant period and was asked to show cause why he should not be held personally liable for such recovery u/s 179. Assessee filed several replies to said notice. In his first reply dated 30.3.2004, assessee had conveyed that records of the company were lost; that he himself was suffering from heart problem. During the AYs 2002-2003, he was totally immobile and was not able to attend any of the meetings or day to day business of the company. He was therefore, not responsible for negligence, misfeasance or breach of duty in connection with the affairs of the company. Yet another reply came to be filed on 28.9.2004 in which it was contended that assessee was the only supplying technical support to the company. He was rendering such service for various other companies. He was never engaged in the day to day business of the company. In yet another reply it was contended that he had already resigned from the company on 25.2.1996. It was also contended that by virtue of section 43A of the Companies Act, 1956, since the company’s turn over had crossed the threshold limit, the company would be a deemed public company. It was further contended that as this company falls in category of deemed Public Limited in view of its turnover being more than Rs.1 crores as estimated by the Department u/s 144, therefore section relating to personal liability of Director does not arise in this case if the assessment of income was correct by the department. AO observed that he had signed and verified the return of the income of the company for the AY 2001-2002 on 23.3.2003. He had also filed appeals before the CIT(A) for the AY 1996-1997 to 2001-2002 which prove that assessee continued to be the director of the company even after submission of his resignation. With respect to his involvement in the company, ITO held that assessee failed to prove that nonrecovery of tax cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to affairs of the company. His contention that he was only a technical director was negated observing that section 179 includes every person who is a director of a private company and the onus was on such director to prove nonnegligence, nonmisfeasance or nonbreach of duty on his part.

Held that,

++ the recovery demand therefore, for the assessment years 1996-1997 to 1999-2000 and 2001-2002 must fail on two counts. Firstly, there was no notice for recovery of such amounts. More importantly, the only notice of show cause which was issued was dated 22.3.2004. The assessment orders of the said assessment years were passed on 27.2.2004. Thus within less than a month of passing of the assessment orders, the notice came to be issued. The first requirement of application of section 179 is that any tax due from a private company cannot be recovered from such company. When obviously thus Assessing Officer had and could not have made any efforts for recovery of such tax dues, question of inquiring with the petitioner as a director of the company to pay up the same amount or else be held liable under section 179 of the Act, would not arise. In case of Bhagwandas J. Patel v. DCIT reported in (1999) 238 ITR 127, the Court had held that before recovery in respect of dues from the private company can be initiated against the directors, it is necessary for the Revenue to establish that such recovery cannot be made against the company and then and then alone it can reach the directors who were responsible for conduct of the business during the previous year in relation to which liability existed. Our inquiry therefore, regarding the impugned order of Assessing Officer would be confined to the demands for the assessment years 2000-2001. In this context we are unable to hold that the petitioner having already resigned from the position of a director in the year 1996, could no longer be held responsible under section 179 of the Act. The undisputed facts which have come on record are that in the year 2003, the petitioner signed the returned of the company as its director. In the year 2004, the petitioner filed appeals against the orders of assessment passed by the Assessing Officer for the assessment years 1995-1996 and onwards. Thus, even if we believe that the petitioner had tendered his resignation as a director, he continued to act as one. Neither the company nor the petitioner acted on such resignation;

++ the question raised by the assessee was a mixed question of fact and law. If the facts as asserted by the assessee were established, the legal implications flowing thereof must follow. The Assessing Officer however, brushed aside this contention and held that whatever be the status of the company for the purpose of the Companies Act, section 179 of the Income Tax Act would continue to apply. It was not a case of the Assessing Officer that the facts asserted by the petitioner were not correct or that for any other reason, the company had not become a deemed public company under section 46A of the Companies Act, 1956. This being the position, the decision of the SC in case of M. Rajamoni Amma and another v. DCIT (Assessment) and others reported in (1992) 195 ITR 873, would apply. In the said decision, it was held and observed that since the genuineness of letter was doubted, we issued notice to the Registrar of Companies, Kerala. An affidavit has now been filed on behalf of the Registrar. It clearly shows that the company had become a public limited company by virtue of Section 43A of the Companies Act w.e.f. 1st October, 1975. As already: mentioned, the arrears sought to be recovered from the appellants relate to the assessment years 1977-78 to 1982-83. Obviously, the Company being a public limited company, proceedings against the directors for recovery of the tax due from the company cannot be taken, and certainly not proceeded with, under Sec 179 of the Income Tax Act, 1961. We need hardly say Article 265 of the Constitution clearly prohibits any attempt to recover taxes except under the authority of law. It is, therefore, clear that further proceedings against the appellants for recovery of the tax due from the company have to be stayed. In absence of any such foundation, we would not answer such a question in this petition. Under the circumstances on this count, the petition is required to be allowed. We may briefly state that we are not influenced by the petitioner’s contention that merely being a technical director, section 179 of the Act would not apply to him. We are also broadly in agreement with the view of the Assessing Officer that duty is cast on the directors to establish that nonrecovery was not due to any gross neglect, misfeasance or breach of duty on his part and in the present case, he produced no material to establish such facts. Nevertheless, when section 179 itself does not apply, question of seeking any recovery personally from the director would not arise. In the result, impugned order dated 3.1.2005 is quashed. Rule made absolute. Petition is disposed of.

(See 2014-TIOL-280-HC-AHM-IT)