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.
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
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