Bombay High Court Quashes Income Tax Recovery against Directors  upon Proving Lack of Control on Financial Affairs of Company [Read Order]

The Division Bench of Justice K.R.Shriram and Justice  M.M.Sathaye of Bombay High court has quashed the income tax recovery against directors upon proving lack of control on financial affairs of company.

The writ petition is filed by the petitioner Prakash B. Kamat is a mechanical Engineer who developed a smart card based ticketing solution in the year 2000.  Petitioner incorporated his company  KAPL on 30th March 2006 through a joint venture agreement with Khaleej Finance and Investment.

Since disagreement arose between the J V Partners, Petitioner was forcibly removed from the post of Managing Director in January2009 and his wife as Director. The directorship of Petitioner and his wife in KAPL was terminated in September 2009.

During the time when he was Director of the Company, there was no outstanding demand for tax / duty from the Income Tax Department.

After a long period of 8 years, the Petitioner was served with a show cause notice directing him to reply as to why proceedings under Section 179 of the Income Tax Act,1961 should not be initiated against him for outstanding demand against KAPL the assessee Company.

Petitioner Contended that the non recovery of tax from KAPL could not be attributed to any gross neglect misfeasance or breach of duty of Petitioner or his wife.

Therefore, the department under Section 179 of the Income Tax Act holding that the Petitioner, as a Director of KAPL-assessee Company, was jointly and severally liable for outstanding tax-dues of KAPL

J.D. Mistri, Counsel for the petitioner contented that impugned orders were passed solely on the ground that Petitioner was a Director during relevant Assessment Years of KAPL- the assessee Company Director proved that “non recovery” cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company, then such Director couldnot be held liable.

Suresh Kumar, the Counsel for the respondent submitted that during the Assessment Years under consideration, the assessee Company, being a private Company, had received large sums of money as share application money or share premium, which would not have been possible without involvement of its Directors.

Thus, the Petitioner being Director of the private company at the relevant assessment years, was jointly & severally liable for the payment of tax by the assessee company.

Relied upon the decision of the case Satish D. Sanghavi v. Union of India and Narinder Singh v. Union of India  the bench observed that “in absence of any specific provisions in the statute, duty or penalty liability of the company cannot be recovered from its Director, who is not personally liable towards liability of the Company.”

It was further observed by the bench that  on perusal of the documents produced on record shows that after Petitioner’s removal from the directorship which took place in the year 2009 itself, Petitioner had no connection with the said company or any access to its affairs.

Both the ITO as well as revisional Authority have mainly proceeded on the basis that the Petitioner was director during the assessment years and do not really consider whether there was any gross neglect or misfeasance for breach of duty on his part in relation to affairs of the company “in the context of non recovery of tax dues”.

The petitioner is squarely covered by the exception carved out by the later part of Section 179(1) of the Income Tax Act and as such he cannot be held liable.

Therefore, the division bench  quashed the order holding Petitioner liable for outstanding dues of M/s. Kaizen Automation Pvt. Ltd

To Read the full text of the Order CLICK HERE

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