The Bombay High Court has held that procedure of recovery u/s 179 against directors not to be resorted to casually and for convenience.
The petitioner, Rajendra R. Singh, is the Chairman and Managing Director of the company Crest Paper Mills Limited (CPML), who has appeared before the Court for the issuance of a writ of certiorari for quashing the order passed under section 179 of the Income Tax Act, 1961 wherein it was held that the petitioner is liable to pay a demand of Rs.3,98,19,430 along with interest, under section 220(2) of the Act, which normally otherwise would be due and payable by the company.
A Show Cause Notice was served to the petitioner by the Assistant Commissioner of Income Tax, of Mumbai informing the petitioner that tax dues for an amount of Rs.3,88,19,430 were outstanding against Crest Paper Mills Ltd. for the assessment year 2010-11 and that the same had not been paid by the assessee company so far. The petitioner thereafter was asked to show cause as to why proceedings under section 179 of the Income Tax Act should not be initiated against him in his capacity as the Director of the Company.
The petitioner then submitted his reply to the Show cause notice stating that the jurisdiction under section 179 of the Income tax Act could be assumed against a director of a private company and not against a public company. The Court later stated that no evidence had been furnished by the petitioner to prove that CPML was a public company.
Another defence that was taken was proceedings against a director could not have been initiated directly without first initiating recovery proceeding against the company, there must be a proper finding that recovery of tax arrears was not possible from the company. In the show cause notice, there was no such averment that the tax due cannot be recovered from the company.
The Division Bench consisting of Justice Dhiraj Singh Thakur and Abhay Ahuja observed that “the procedure adopted was clearly violative of the principles of natural justice and without affording to the petitioner, an opportunity of being heard on the question, as to why the principle of ‘lifting the corporate veil’ be not applied in the case of CMPL to justify the recovery of the tax dues from the directors.
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