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AHEMDABAD, : THE ISSUE BEFORE THE DIVISION BENCH IS –
“Whether notices in form of recovery or reminders of unpaid tax or penalty, issued specifically to pvt ltd company, can be enforced personally against its directors without specific notice of hearing”.
NO IS THE VERDICT.
Facts of the case:
The Assessee company had filed its return for the A.Y 2004-05 declaring total income of Rs. 21,06,990/- and the assessment u/s 143(3) was completed. Such assessment was, however, set aside by CIT(A) as time barred. Notice of reopening was issued and order of re-assessment was passed determining the total income of the company at Rs. 64,73,810/-. Finally, giving effect to the appellate order, the ITO held that the company had to pay unpaid tax of Rs. 23,45,790/-. Penalty proceedings was also initiated resulting into imposition of penalty u/s 271(1)(c) at Rs. 12,49,050/-. On the premise that the company had not discharged such tax and penalty liabilities, the department wishes to make recovery from the director of the company, for which, the said order had been passed. The main ground of challenge, though not the only ground, was that, before passing the said order, no show cause notice was issued and no other form of opportunity was granted to the assessee why such recovery should not be made nor the order contained any ground why such recovery was necessitated from the director of the company. However, despite series of notices to the company, the tax and the penalty remained unpaid. The department, therefore, had no choice but to effect recovery from the directors.
High Court held that,
* it is to be noted that Section 179(1) permits lifting of the corporate veil subject to the conditions contained therein being satisfied. Ordinarily, there being a clear distinction in law between a company be it a private or a public company and its directors, the dues of the company cannot be recovered from the directors. Section 179(1), however, envisages that where any tax due from a private company in respect of any income of any previous year cannot be recovered then, every person, who was a director of the private company during the relevant previous year, shall be jointly and severally liable for payment of such tax, unless he proves that the non-recovery cannot be attributed to any gross negligent, misfeasance or breach of duty on his part in relation to the affairs of the company. The recovery of any paid dues of the company, therefore, can be resorted to, provided the company happens to be a private company and the person, who is director during any period of the relevant previous year, fails to establish that nonrecovery cannot be attributed to any gross negligent, misfeasance or breach of duty on his part in relation to the affairs of the company. It is therefore, not correct to suggest that the moment the tax dues of a private company remain unpaid, the consequence u/s 179(1) must follow against each of the directors. Before such an order can be passed, the statute envisages an important stage whereby the concerned director would have an opportunity to prove that the non-recovery cannot be attributed to any gross negligent, misfeasance or breach of duty on his part in relation to the affairs of the company.. This opportunity would have to be made available to the director before an effective order u/s 179(1) can be passed;
* By no stretch of imagination can the Income Tax authorities proceed to pass order in terms of section 179(1) by merely holding that despite repeated efforts, the tax dues of the company remained unpaid. This is only one element of the requirement of sub section (1) of section 179. The other requirement can be fulfilled only after hearing the director concerned. Any other view would amount to eliminating the requirement of hearing and following the principles of natural justice before an adverse civil order that may be passed. It cannot be denied that the recovery of the tax dues of the company from the director is adverse civil consequence. If the department therefore wishes to pass any such order, the bare minimum requirement would be to issue a show cause notice and grant reasonable opportunity to the concerned director of being heard. In the present case, we do not find a single notice on record issued to any of the directors why order u/s 179(1) should not be passed for whatever reasons that may be available at the command of the income tax authority. The notices, which we have referred to, are all issued to the company. These notices are in the form of recoveries or reminders of unpaid tax or penalty. None of these notices contain even a reference to any recoveries being made personally from the directors for the failure of the company to discharge its tax dues. This apart even the order u/s 179(1) is completely silent on the requirements of the statute being satisfied;
* A perusal of the order would demonstrate total disregard of the authority towards the requirement of section 179(1). He merely proceeds on the basis that tax and penalty have not been paid so far and therefore, “whole directors of the company shall be jointly and severally liable to pay the outstanding demands.” He accordingly, orders such directors to pay the said sum within ten days of the receipt of the order. This order betrays certain misconception about the requirement of section 179(1). If one reads the order, it seems to be suggesting that the sole requirement of applicability of section 179(1) is that the tax dues of a private company have remained unpaid. To the later requirement of the same not attributable to any gross negligent, misfeasance or breach of duty on part of director in relation to the affairs of the company is totally lost sight of. The language used in sub section (1) of section 179 may be in the negative covenant casting primary duty on the director to establish such facts, nevertheless, it is one of the essential requirements. The statute, at best, may be seen as giving rise to rebutable presumption which is required to be rebutted by the concerned director. It does not, in any manner, provide for a deeming fiction, a natural and inevitable consequence or an irrebutable presumption. A director of a company would discharge his responsibility of establishing necessary facts only when he is put to notice that the authority proposes to pass order u/s 179(1). In the result, impugned orders u/s 179(1) are set aside. Consequential orders of attachment issued by the department would not survive.