Action against Director u/s 179 only to be taken after failure of steps to Recover Income Tax Due by Company: Bombay HC [Read Order]

A Division Bench of the Bombay High Court has recently quashed impugned show cause notices and the order issued under Section 179 of the Income Tax Act, 1961, to the petitioner, as the said order did not have any reference as to how the steps to recover the income tax dues from the company assets failed.

Section 179 of the Income Tax Act, 1961 pertains to the liability of a company's directors in certain cases.

According to this section, where any tax due from a private company in respect of any income for any year cannot be recovered, then every person who was a director of the company at any time during that year shall be jointly and severally liable for the payment of such tax, unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part.

The counsels for the petitioner, Rahul Gaikwad, along with Aman Jhawar, Garima Joshi, Vivek Akshali, Reshma Nair and Nikita Abhyankar submitted that, “it is the petitioner’s case that he was not a Director of the Company much prior to the issuance of the impugned show cause notices and the impugned order, by virtue of the fact that he had not attended a single Board meeting of the company.

It was further submitted that in terms of the provisions of Section 283 of the Companies Act, 1956 (old Act) and in terms of the provisions of Section 167 of the Companies Act, 2013 (new Act), the petitioner is deemed to have vacated the Office of the Director since he was absent for all the meetings of the Board of Directors during any period prior to the issuance of the show cause notices.

The counsel thus argued that the petitioner not being a Director of the Company, was not liable

for any notice from the respondents under Section 179 of the Income Tax Act.

Suresh Kumar, counsel for the respondent-revenue opposed the petition and submitted that though the impugned show cause notices did not state the details and facts which constitute the steps taken by the revenue for recovery of the tax dues from the company, the revenue had filed a detailed affidavit before this Court setting out all steps taken by it, from the year 2016 till year 2020 for making efforts to recover the dues from the company.

He contended that a reading of the aforementioned affidavit would leave no manner of doubt that the Officer who has issued the show cause notices was satisfied that there was enough material to conclude that the revenue was unable to recover taxes from the company and was left with no choice but to proceed against the Directors of the company.

However, the petitioner counsel had submitted that, “the revenue could not proceed against him in terms of Section 179 of the Act, without specifically averring in the show cause notice the various steps taken by it to proceed against the company to recover its dues.”

The Bench collectively observed that, “ Assessing Officer is vested with jurisdiction to recover the tax from a Director of a Private Company only when the officer is unable to recover such dues from that Company. It is also clear from this provision that the Assessing Officer assumes jurisdiction under Section 179 of the Act only when there is failure to recover dues from the Private Company after efforts have been made by the Revenue to recover such dues.”

Observing that the disclosure of steps and the failure of the same in the attempt to collect the tax dues is a sine qua non (essential condition), the Division Bench of Justice Valmiki S A Menezes and Justice Dhiraj Singh Thakur quashed and set aside the show cause notices and order issued against the petitioner.

To Read the full text of the Order CLICK HERE

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