The Calcutta High Court, has recently, in an appeal filed before it, held that the Department’s power u/s 179, to proceed against the directors is applicable only in cases where tax cannot be recovered from the assessee company.
The aforesaid observation was made by the High Court when an intra-court appeal by the writ petitioner was filed before it, against the order dated April 21, 2022, in WPO 213 of 2013.
The facts of the case are that the appellant, an erstwhile director of M/s. Basant Udyog Pvt. Ltd., having filed a writ petition challenging the garnishee notice issued by the respondent department under Section 179 of the Income Tax Act 1961, stating that there is an outstanding tax demand payable by the company for the assessment years 1983-84, 1985-86 and 1986-87, was granted five days’ time to pay the amount of Rs.191.39 lakhs failing which it was informed to him by the department that action will be taken for recovery of the outstanding.
The appellant contending that no order having been passed under Section 179 of the Act, the said demand of tax on account of the private company of which the appellant was a former shareholder-director cannot be enforced, he sought for the issuance of the Writ of Mandamus to forbear the respondent/department from initiating any recovery action against the appellant, by invoking the power under Section 179 of the Act.
Further, it was contended by the appellant that the implied terms of the provisions of Section 179 statutorily required the respondent to take steps to recover the tax due from the continuing company instead of proceeding against the appellant for the reason of him being its past director while letting off the company, the real assessee in default, he further submitted that no notice of demand has been served upon him as is required under Section 156 of the Act, in the absence of which, no coercive action could have been initiated against the appellant.
However, with the Single Bench by its impugned order dismissing the said writ petition, the appellant was left with no other option but to prefer the instant appeal before the High Court.
Hearing the opposing contentions of both sides and perusing the materials available on record, the Bench comprising of Justice T.S. Sivagnanam and Justice Supratim Bhattacharya commented:
“In the year 1990 the appellant had retired from his directorship and the company had changed hands and a fresh set of directors had taken over the company, necessary formalities under the Income Tax Act, 1956 was complied with and a fresh certificate of incorporation incorporating the new name of the company was issued. The new set of directors carried on business till the year 1997 when the company went under liquidation.”
“From the records placed before the Court, it is clear that the department has not taken any steps to recover the dues from the defaulting private limited company. It is nearly after 25 years the present attempt had been made by issuing garnishee notice on the appellant who is no more the director of the company ever since 1990.”, they added.
“After the company had gone into liquidation, the department could have lodged a claim before the Official Liquidator. However, there is nothing on record to show that such a claim was made by the department before the Official Liquidator. This aspect is very crucial aspect which the learned Writ Court ought to have considered and the same cannot be brushed aside and a direction could not have been issued without reference to the said fact.”, adding to its observation, the High Court said.
Thus, allowing the assessee’s appeal, the Court ruled:
“The impugned garnishee notices issued on the appellant stand quashed as being without jurisdiction. Consequently, the proceedings initiated under section 179 of the Income Tax Act, 1961 are held to be wholly without jurisdiction. The order passed in the writ petition is set aside and the appeal is allowed”.
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