The Rajasthan High Court, by granting relief to the directors of a public company, ruled that the outstanding income tax dues cannot be recovered from the directors under Section 179 of the Income Tax Act, 1961.
The petition was filed on the issue that “whether recovery of the outstanding dues under the Income Tax Act, 1961 (for short ‘the Act’) of Public Limited Company can be recovered from the Director by invoking Section 179 of the Act.”
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The petitioner was a Non-Executive Director of M/s. Pinky Auto Finance Limited later known as M/s. Golden Future Capital Limited (hereafter ‘the Company’). For Assessment Year 2007-08, the demand of tax and penalty against the Company was created by the Assessing Officer.
On failure to recover the demand from the company, notice dated 22.08.2017 under Section 179 of the Act was issued to the petitioner being the Director of the Company. The reply dated 30.08.2017 was filed. The order dated 22.09.2017 under Section 179 of the Act was passed holding the petitioner liable to pay the outstanding demand alongwith interest.
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The counsel for the petitioner submits that Section 179 of the Act can only be invoked in case of Private Limited Company.
However, the department’s counsel defended the impugned order and submitted that the petitioner was the Director and is liable to clear the outstanding dues.
The bench referred to Section 179 of the Income Tax Act, which addresses the liability of directors in private companies. This provision enables the Income Tax Authorities to recover outstanding dues of a private company from individuals who served as directors during the relevant financial year. The latter part of Section 179(1) places a burden on the director to demonstrate that the inability to recover dues was not due to their gross neglect, misfeasance, or breach of duty concerning the company’s affairs.
The bench observed that, in response to the show cause notice, it was explicitly stated that the company had been incorporated as a Public Limited Company since 1997 and is registered with the Registrar of Companies, Rajasthan.
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While issuing the order under Section 179 of the Act, it was not disputed that the company is a Public Limited Company. A similar stance was maintained in the reply to the writ petition, where no contention was raised challenging the company’s status as a Public Limited Company.
The court observed that the Revenue Authorities failed to establish a factual basis in the notice or the order issued under Section 179 of the Act to contest the company’s status as a Public Limited Company. It further noted that the petitioner’s contention—that proceedings under Section 179 of the Act cannot be initiated against a director of a Public Limited Company—merits acceptance, as the provisions of this section do not apply to Public Limited Companies.
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Justices Ashutosh Kumar and Avneesh Jhingan referred to the Supreme Court’s decision in M. Rajamoni Amma vs. Deputy Commissioner of Income Tax (Assessment), which held that Section 179 of the Income Tax Act does not apply to Public Limited Companies. The Supreme Court observed that since the company in question had become a Public Limited Company under Section 43-A of the Companies Act, recovery proceedings against its directors for tax dues could not be initiated under Section 179. It emphasized that Article 265 of the Constitution prohibits tax recovery without legal authority, and therefore, further proceedings against the directors for the company’s tax dues must be stayed.
The bench also referred to the Gujarat High Court’s decision in Radhey Mohan Sharma vs. Deputy Commissioner of Income Tax (OSD), which held that Section 179 of the Income Tax Act imposes vicarious liability on directors of private companies for tax arrears, provided the company fails to discharge its tax liability despite efforts by the tax authorities. However, the court emphasized that this section explicitly does not apply to public companies, as clarified in subsection (2). The judgment noted that unless there are exceptional circumstances, such as the need to pierce the corporate veil, invoking Section 179 against directors of public companies is invalid. Consequently, the petition challenging the proceedings under Section 179 in such cases must succeed.
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The bench also relied on the Madras High Court’s decision in R. Rajagopalan vs. Deputy Commissioner of Income Tax, which clarified that Section 179 of the Income Tax Act applies exclusively to private companies and does not extend to public limited companies. The court emphasized that no equivalent provision exists under the Act to recover tax arrears of public companies from their directors. Consequently, any proceedings initiated under Section 179 against directors of public companies are barred and must be set aside.
Relying on the above mentioned cases, the Rajasthan High Court allowed the writ petition and clarified that the Section 179 of Income tax act cannot be invoked against directors of a public company. The petitions were allowed and impugned notices and orders were quashed.
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However, the bench made it clear that the revenue authorities can move legal proceedings against the company for recovery of the dues.
Mr.Siddharth Ranka, Adv. with Ms.Apeksha Bapna, Adv., Ms.Satwika Jha, Adv., Mr.Muzaffar Iqbal, Adv. & Mr.Rohan Chatter, Adv appeared for the petitioners and Mr.Sandeep Pathak, Adv. with Ms.Jaya P. Pathak, Adv appeared for the department.
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