By TIOL News Service

MUMBAI, APRIL 12, 2018: THE ISSUE BEFORE THE COURT IS - Whether providing details of failure to recover the tax dues for the delinquent Private Limited Company in a SCN issued u/s 179(1) is a sine-qua non to put forth the proceedings. YES IS THE ANSWER.

Facts of the case:

The Assessee, an individual, had filed his return for the relevant AY. In the course of the assessment proceeding, the Revenue noted that the Assessee was a former Director of M/s. Shravan Developers Pvt. Ltd. The said company failed to honour its tax obligation for AY 2011-12 hence, the said company became a delinquent Private Limited Company. Accordingly, a SCN u/s 179(1) was issued to the Assessee asking him to recover the tax dues on the part of the delinquent Private Limited company. In reply, the Assessee stated that he had resigned in the year 2013. Further, the Assessee also sought details of the notice issued to the delinquent Private Limited Company. However, without responding to the Assessee's reply, the AO passed an order u/s 179(1) making a demand of Rs.4.69 crores upon the Assessee.

the High Court held that,

++ the Act itself makes no distinction/classification between professional/paid Directors and Directors holding a large shareholding stake in the delinquent Private Limited Company. Sec. 179(1) only gives jurisdiction to the AO to proceed against a Director of a delinquent company when the AO is unable to recover the dues of the delinquent company from it. It is not, therefore, open for the AO to read conditions into Sec. 179(1) and jettison the strict rule of interpretation of fiscal statute which interalia prevents implying and/or reading anything in the statute not expressed therein;

++ the efforts which were made to recover the tax dues from the delinquent company though not stated in the SCN are found in the disputed order or in any event in the affidavit-in-reply dated 14th February, 2018. Thus, is sufficient compliance with Sec. 179. It is the Assessee's case in the petition that, an amount of Rs.49.81 crores are loans advanced to companies/associates of its Director, Mr. Praful Setna. The attempts at recovery if made known in the SCN, would have given an opportunity to the Assessee to bring the facts to the notice of the AO who could have recovered from them before proceeding with the notice. Therefore, the giving of particulars of efforts made and failure to recover the tax dues for the delinquent Private Limited Company in a notice issued u/s 179(1) is a sine-qua non for proceeding further. This is so as not only the AO can assume/acquire jurisdiction only on failure to recover its dues from a Private Limited Company after proper efforts. But is also gives an opportunity to the Assessee to point out why the efforts made are inadequate and/or improper;

++ further, in the case of Madhavi Kerkar, this Court has held that "... the SCN issued u/s 179(1) to the directors of the delinquent Private Limited Company must indicate albeit, briefly, the steps taken to recover the tax dues and its failure. In cases where the notice does not indicate the same and the Assessee raises the objection of jurisdiction on the such account, then the Assessee must be informed of the basis of the AO exercising jurisdiction and the notice/directors response, if any, should be considered in the order passed u/s 179(1) ..." Thus, giving of particulars in the disputed order or in the Affidavit-in-reply does not meet with the requirement of proper notice to the noticee;

++ it is clear that before the AO assumes jurisdiction efforts to recover the tax dues from the delinquent Private Limited Company should have failed. This effort and failure of recovery of the tax dues must find mention in the SCN howsoever briefly. This would give an opportunity to the noticee to object to the same on facts and if the Revenue finds merit in the objection, it can take action to recover it from the delinquent Private Limited Company. This before any order under Section 179(1) is passed adverse to the noticee. In this case, admittedly the SCN itself does not indicate any particulars of the failed efforts to recover the tax dues from the delinquent Private Limited Company. Thus, the issue stands covered in favour of the Assessee by the order of this Court in the case of Madhavi Kerkar. Hence, the disputed order dated 26th December, 2017 is quashed and set aside;

++ it is made clear that the AO is at liberty to pass a fresh order after issuing appropriate notice to the Assessee which must indicate briefly the steps taken by the Department to recover the tax dues from the delinquent private limited company and its failure to recover the same. Needless to state, the AO would hear the Assessee on its objection and pass a fresh order in accordance with law. As the demand relates to AY 2011-12, the Counsel for the Assessee, states that the Assessee would cooperate with the AO in early disposal of notice issued to him u/s 179;

++ the bank accounts of the delinquent private Limited company is attached. The attachment of the bank account including that of the Assessee if it stands already attached before 9th February, 2018 (when ad-interim relief was granted) would continue till the passing of the order by the AO u/s 179(1) after giving a fresh notice. However, in case the Assessee's bank accounts have not been attached till the date of hearing of this Writ, it would not, in these proceedings be attached until an order u/s 179(1), adverse to him is passed.

(See 2018-TIOL-681-HC-MUM-IT)