Recovery of Company Dues from
director
Provisions of section179 of the Act which envisages
that if the tax dues from a private company, in respect of any income of any
previous year cannot be recovered, then, every person who was a director of the
private company at any time during the relevant previous year shall be jointly
and severally liable for the payment of such tax unless he proves 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.
In
other words, Directors of a Private Company are
personally liable for tax due if the person was director at any time during the
period for which the tax is due and cannot be recovered. Under the provisions
of this section the directors are jointly and severally liable for the tax due.
The provisions apply for a private company which is later converted into a
public company.
Text of Section 179
179.
Liability of directors of private company [1][***]
[2][(1)
Notwithstanding anything contained in the [3][[Companies
Act, 1956 (1 of 1956)],
[4][where any tax due from a private company in respect of any
income of any previous year or from any other company in respect of any income
of any previous year during which such other company was a private company]
cannot be recovered, then, every person who was a director of the private
company at any time during the relevant previous 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 in relation to the affairs of the company.
[5][(2) Where a private company is converted into a public company and the tax assessed in respect of any income of any previous year during which such company was a private company cannot be recovered, then, nothing contained in sub-section (1) shall apply to any person who was a director of such private company in relation to any tax due in respect of any income of such private company assessable for any assessment year commencing before the 1st day of April, 1962.]
[6][Explanation. - For the purposes of this section, the expression “tax due” includes penalty, interest [7][, fees] or any other sum payable under the Act.]
KEY NOTE
1. The words “in liquidation” omitted by the
Finance Act, 2022, with effect from 01.04.2022.
2. Section 179 renumbered as sub-section (1)
thereof by the Taxation Laws (Amendment) Act, 1975,
with effect from 01.10.1975.
3. Now Companies
Act, 2013 (18 of 2013).
4. Substituted for “when any private company is
wound up after the commencement of this Act, and any tax assessed on the
company, whether before or in the course of or after its liquidation, in
respect of any income of any previous year” by the Taxation Laws (Amendment)
Act, 1975, with effect from 01.10.1975.
5. Inserted by the Taxation Laws (Amendment)
Act, 1975, with effect from 01.10.1975.
6. Inserted by the Finance Act, 2013, with
effect from 01.06.2013.
7. Inserted by the Finance
Act, 2022, with effect from 01.04.2022.
Thus, Section 179 of the Act applies to a case of private
company. In the event of any tax due from a private company in respect of the
income of any previous year or of other company in respect of any previous year
during which such company was a private company, all those persons who were the
Director of the company at the relevant point of time, are responsible for
payment of such arrears of the tax unless the person concerned proves that the
non-recovery cannot be attributed to any gross negligence, misfeasance or
breach of duty in his part in relation to the affairs of the company.
Sub-section (2) of Section 179 of the Act makes it
amply clear that where a private company converts into public company and the
tax assessed of any previous year or during which such company was a private
company, cannot be recovered, the provisions of sub-section (1) of Section 179
of the Act would not apply to a person, who was a Director of such company in
relation to such arrears of the tax before the 1st day of April, 1962.
Before the jurisdiction is assumed
and exercised under section 179
Before the jurisdiction is assumed and exercised under
section179 against the Director the Assessing Officer must feel satisfied that
:
(a) tax was due from the Private Limited Company,
and that
(b) the tax dues cannot be recovered from such a
company
Section 2(68) of the Companies Act, 2013 defines private companies. According to that, private
companies are those companies whose articles of association restrict the
transferability of shares and prevent the public at large from subscribing to
them. This is the basic criterion that differentiates private companies from
public companies.
Text of Section 2(68) of the
Companies Act, 2013
“Private company” means a company having a minimum paid-up share capital of
one lakh rupees or such higher paid-up share capital as may be prescribed, and
which by its articles,—
(i) restricts the right to transfer its shares;
(ii) except in case of One Person
Company, limits the number of its members to two hundred:
PROVIDED that where two or more
persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be
treated as a single member:
PROVIDED FURTHER that -
(A) persons who are in the
employment of the company; and
(B) persons who, having been
formerly in the employment of the company, were members of the company while in
that employment and have continued to be members after the employment ceased,
shall not be included in the number of members; and
(iii)
prohibits any invitation to the public to subscribe for any securities of the
company
Characteristics of a Private
Company:
§
No
minimum capital required: There was a minimum paid-up share capital requirement
of Rs. 1 lakh previously, but that is omitted now.
§
Name
of the Company: The name of a private company must be unique and must be
approved by the Ministry of Corporate Affairs (MCA). The name should end with
the words “Private Limited”. For instance, ‘XYZ Private Limited’.
§
Minimum
2 and maximum 200 members: A private company can have a minimum of just two
members (but just one is enough if it a One Person Company), and a maximum of
up to 200 members.
§
Transferability
of shares restricted: Private companies cannot freely transfer their shares to
the public like public companies. This is why stock exchanges never list
private companies.
§
Privileges
and exemptions: Since private companies do not freely transfer their shares and
involve limited interest by members, the law has granted them several
exemptions that public companies do not enjoy.
Specimen of
Show-cause notice
“To,
…………….
…………….
Subject:
Show Cause notice under section 179 of the Income-tax Act, 1961 – Recovery of
outstanding demand of Rs. …… for Assessment year ……in the case of …………………… -
Regarding
A total demand
of Rs. ……… is outstanding against M/s. ………………... for Assessment year ……... The
company has not made the said payment despite various notices given to it in
this regard. You are, therefore, requested to show cause as to why an order
under section 179 of the Act should not be made against you as you are/were the
director of the company during the period to which the demand relates and show
cause as to why you should not be held jointly and severally liable for payment
of above demand of tax. You are requested to attend the office on ……. at …… AM
with your explanation, failing which, order under section 179 of the Act shall
be passed against you.
You are also
requested to furnish the copy of latest balance sheet/statement of affairs
including the name and address of banks where you are holding accounts with
bank A/c. Nos. Name & address of the debtor and also location of fixed
assets owned by you.
Sd/-
Assistant
Commissioner of Income Tax,
…………………
Specimen of
Order under Section 179 of the Income Tax Act, 1961
Order under
Section 179 OF the Income-tax Act, 1961
In the case of
……………. (PAN………) demand of Rs. ……………. Is outstanding as on date and the breakup
of the demand as mentioned is given as under:–
|
S.
No. |
Assessment
year |
Demand
|
Nature
of Demand (Tax/Interest/Penalty) |
|
1.
|
2020-21 |
10,00,000
|
Penalty
|
|
2
|
2021-22 |
8,00,000
|
Tax
|
|
3
|
2022-23 |
3,50,000
|
Interest
|
|
4
|
2023-24 |
1,75,000
|
Tax
|
|
|
Total |
23,25,000
|
|
2. The said
demand has not been paid till date. Despite being given a number of
opportunities, the company did not make the payment of outstanding demand of
Rs. 23,25,000/-.
3. At the
relevant point of time the directors of the assessee-company were Smt. ……. and
Smt. ……... Further, it is noticed from the records of the company that there
are no recoverable assets in the name of assesseecompany. In such
circumstances, proceedings under section 179 of the Income Tax Act were
initiated on ……. by way of issuing of notice to the then Directors and all the
directors were requested to show cause vide notice under section 179 of the Act
as to why they should not be treated as jointly and severally liable for the
payment of such tax and why an order under section 179 of the Income-tax Act,
1961 should not be passed against them. In terms of the said notice the
directors were to attend the office of the undersigned on 10.11.2017 with
explanation. But no compliance was made in response to the said notice. It is
noticed that neither the Directors or any of their authorized representatives
attended nor any written submission was furnished.
4. The
Company, ……………... is a private company and hence, the provisions of section 179
of the Income Tax Act are clearly applicable in the case of directors of the
said company. As directors of the company it was duty bound on the part of the
directors of the company to pay tax due. The directors of the assessee-company
failed to discharge that duty, hence provisions of section 179(1) are clearly
attracted.
5. The
provisions of section 179 of the Act are very clear in this matter and is reproduced
below:
“Notwithstanding
anything …………………………………to the affairs of the company.”
6. It is
further emphasized that the Board had desired that the provisions of section
179 of the Income Tax Act should not be used more vigorously and frequently in
such instances. Instruction No.1519 vide F.No.404/110/82- ITCC dated 20.07.1983
of the CBDT states that the Assessing Officer can proceed under section 179
simultaneously against company & directors and it is not necessary that
action against the company should be exhausted.
7. Thus, from
all the angles, the assessee-company falls within the ambit of section 179 of
the Income Tax Act. Smt. …….. and Smt. …….., were the directors of the company
for the period under consideration during which demand was raised and the
default of non-payment of tax occurred. In response to the proceedings
initiated under section 179(1) of the Income Tax Act, the directors failed to
furnish any reply to the notice under section 179(1) of the Income Tax Act. It
is, therefore, presumed that the directors have no objection for passing order
under section 179 of the Income Tax Act. In light of the discussion made in the
foregoing paragraphs, since the demand is not recoverable from the
assessee-company, responsibility is fixed upon the then directors under section
179(1) of the Income Tax Act and they will be treated as assessee in default in
respect of tax, interest and penalty recoverable from the assessee-company.
8. Considering
the above facts, Smt….. and Smt. ……. are held jointly and severally liable to
make payment of outstanding demand of Rs. …….. as well as any future demand
which may arise in the case of Assesseecompany, as provided under section 179
of the Income Tax Act.
Sd/-
Asst.
Commissioner of Income Tax,
…………..
Assessee-director had prima facie shown that non-recovery of dues of company could not be attributed to any gross negligence, misfeasance or breach of duty of directors of company, since basic ingredients of section179 were not fulfilled, impugned order passed against directors raising demand under section179 and attaching accounts was without jurisdiction and thus liable to be set aside - Inability to deposit 20% demand, not negligence on Directors’ part; Quashes Section 179 order
Gujarat High Court sets
aside order under Section 179 holding Assessee's
Directors liable for unpaid taxes and also the order under Rule
48 of the Second Schedule attaching their residential property; Holds
that the impugned orders are without jurisdiction as the basic condition for
invoking Section 179 was not complied with by the Revenue,
particularly when the Assessee's Directors have demonstrated that
they were not negligent for non-recovery of the outstanding
dues; For Assessment year 2014-15, Revenue made addition in
case of the Assessee i.e. private company of Rs. 7,00,00,000/-
for bogus unsecured loans and consequently raised demand of Rs. 3,06,63,860/-; Pending adjudication of Assessee's appeal,
Revenue issued recovery notice for outstanding dues to the
Assessee and subsequently passed order under Section 179 as well as demand
notice calling upon the Directors to pay the outstanding demand
within 15 days; High Court analyses Section 179 (1) whereby the Revenue is
required to make efforts for recovery of the outstanding dues from
the defaulting Assessee, observes that the Revenue failed
to take any action for recovery of the outstanding dues except issuing notice
for recovery and attaching the bank account; Notes that
the Directors have prima facie shown that non-recovery cannot be
attributed to any gross negligence, misfeasance or breach of duty as directors
of the company; Remarks that the Directors cannot be said to be
negligent merely because they were unable to deposit 20% of the demand raised
in the assessment order for seeking stay from the appellate
authority;
Relies on coordinate bench ruling in Bhagwandas J. Patel v. Deputy Commissioner of Income-tax reported in (1999) 238 ITR 127 (Guj.). and Sadhna Ramchandra Jeswani v. ITO (judgment dated 27.08.2019 in Special Civil Application No.5354/2018 and allied matter)., wherein the order under Section 179 was set-aside due to lack of sufficient foundation for invoking Section 179 as no allegation was made that the non-recovery on account of gross negligent, misfeasance or breach of duty on part of the petitioner in relation to the affairs of the company.; Rejects Revenue’s reliance on Delhi High Court ruling in Rajeev Behl v. PCIT reported in (2021) 132 taxmann.com 283 (Del.)., states that Revenue in the present case has not complied with the basic requirement under Section 179 and thus, “impugned actions are without jurisdiction more particularly, when the petitioners have demonstrated that they have not remained negligent for non-recovery of the outstanding dues.”; - [Devendra Babulal Jain v. ITO (2023) 291 Taxman 333 : (2022) 145 taxmann.com 553 : [TS-975-HC-2022(GUJ)] (Guj.)]
Absent specific finding on director’s negligence or misfeasance, tax recovery not sustainable
Bombay High Court
quashes order passed under Section 179 holding Assessee-Director liable
for tax dues of a private company; Holds that the
Revenue did not specifically hold the Assessee as guilty of
gross neglect, misfeasance or breach of duty in relation to the affairs of the
company; Opines that the Assessee, on the contrary, had sufficiently
proved the lack of financial control, lack of decision making powers to
substantiate her claim that the non-recovery of the tax dues cannot be
attributed to any gross neglect, misfeasance, breach of duty on her
part; Assessee was one of the directors of a private
company, started by her husband as a Joint Venture with a
Baharain based investor; Revenue, found that the said private company was
not traceable on the available addresses and the tax dues from the same could
not be recovered despite attachment of the bank accounts due to
insufficiency of funds; Thus, Revenue initiated recovery proceedings
against the Assessee in capacity of company's director and passed
order under Section 179 holding the Assessee liable for tax dues for Assessment
year 2008-09 and 2009-10; Revenue also rejected the revision petition filed by
the Assessee pursuant to which the Assessee
preferred a writ petition; High Court observes that Section 179
provides that if dues from a private company cannot be recovered then
every person who was a director of the said private company, at any time
during the relevant previous year, shall be jointly and severally liable for
the payment of such tax unless it is proved that the non-recovery cannot be
attributed to any gross neglect, misfeasance or breach of duty on the part of
the director; Observes that although the Revenue made reference
to various Board meetings which were attended by the Assessee, not a single
incident, decision or action was highlighted to suggest that the Assessee could
be held guilty of gross neglect, malfeasance or breach of duty in regard to the
affairs of the said company; On the contrary, remarks that the
Assessee brought on record enough material to suggest the lack of financial
control, lack of decision making powers to substantiate her claim that she had
a very limited role to play in the company as a director and that the entire
decision making process was with the directors appointed by the
investors; Also observes that the Revenue focussed more to prove
Assessee’s participation in the affairs of the said company, rather than
discovering the element of gross neglect, misfeasance or breach of duty on the
part of the Assessee in relation to the affairs of the company and establishing
its co-relation with non-recovery of tax dues; Relies on Gujarat High Court
ruling in Maganbhai
Hansrajbhai Patel v. ACIT & Anr. (2013)
353 ITR 567 (Guj.)
and Ram Prakash Singeshwar Rungta
& Ors. v. ITO (2015) 370 ITR 641 (Guj.), wherein it was held that in the absence of finding
that non-recovery of the tax due from the company can be attributed to any
gross-negligence, misfeasance or breach of duty on the part of
the directors, no order could have been made under Section 179(1) for
recovering the same from the directors; Points out that once the Assessee
discharged the initial burden under Section 179, it was Revenue’s
responsibility to show as to how a gross neglect, misfeasance or breach of duty
would be attributed to the Assessee, which the Revenue failed to establish in
the present case; Thus holds the order under Section 179 and dismissal of
revision application under Section 264 to be unsustainable and
sets them aside. [In favour of assessee] (Related Assessment years :
2008-09 and 2009-10) – [Geeta P. Kamat v. PCIT [TS-75-HC-2023(BOM)] – Date of Judgement :
20.02.2023 (Bom.)]
Assessee was director of a
company. Assessing Officer served on assessee a notice under section 179
informing that in case of company certain amount of demand was outstanding for
assessment year 2010-11 since long. He further rejected objections and
contentions raised by assessee and passed an order under section 179 holding
assessee liable to pay such demand with interest. It was noted that power under
section 179 could be exercised against directors upon satisfaction of certain
conditions only if tax dues could not be recovered from private company. It was
further noted that show cause notice clearly suggested that there was no satisfaction
recorded that tax could not be recovered. Impugned order deserved to be quashed.
[In favour of assessee]
(Related Assessment year : 2010-11) – [Rajendra R. Singh v. ACIT (2022) 289 Taxman 682 : 143
taxmann.com 34 (Bom.)]
High Court justified recovery of tax from director as only small part of tax dues were recovered from Company
Primary condition before invoking section 179 is
that tax dues could not be recovered from company before proceeding against
director. Assessee was one of directors of a private company when he resigned.
Assessing Officer finalised assessment of company and raised tax demand.
However, company as well as other directors failed to pay tax. Therefore,
Assessing Officer passed an order under section 179 against assessee to recover
tax dues of company from him being director for such period for which tax was
payable treating assessee as jointly and severally liable for payment of
outstanding tax demands of company. Assessee contended that no action to
recover demand from company was taken by Assessing Officer. It was noted that
demand notices were served upon company but tax was not paid - Bank account of
company was also attached, however, only a small part of demand was recovered.
Thus, despite all possible efforts entire outstanding tax dues could not be
recovered from company leaving department with no other option but to recover
same from assessee director. On facts, impugned order under section 179 passed
against assessee was justified. [In favour of revenue] (Related Assessment
years : 2006-07 to 2009-10) – [Rajeev Behl v. PCIT
(2021) 132 taxmann.com 283 (Del.)]
Attachment and sale of property – Properties settled on trust for grand children – Recovery proceedings Against son – Properties settled on Trust cannot be attached
The properties were settled for the benefit of grand
children. The petitioner was one of the trustees, in the year 1986 joined the
assessee-company as a managing director and resigned from the company in the
year 1993. In 1990 the Department carried out a survey action in the case of
the company. Orders of assessment were passed for the assessment years 1988-89,
1989-90 and 1990-91. The liability of the managing director was quantified. For
realisation of the liability, by separate attachment orders, the Tax Recovery
Officer attached three properties belonging to the trust on the premise that
the three properties belonged to the petitioner in his individual capacity. On
a writ the Court held that the properties belonged to the trust which was
settled by will by S before initiation of recovery proceedings by the Revenue
against the petitioner. The properties did not belong to the petitioner in his
individual capacity or his legal heirs or representatives. The trust had been
formed in the year 1978 and the will of the mother was made in 1985 much before
initiation of recovery proceedings. There was no question of the properties
being diverted to the trust to evade payment of due tax. That being the
position, the attachment orders were liable to be quashed. (Related Assessment
years : 1988-89, 1989-90, 1990- 91) – [Rajesh T. Shah v. Tax Recovery
Officer (2020) 425 ITR 443 (Bom.)]
No Tax recovery from director if
same can be recovered from company - Inability to recover dues from company –
Revenue should establish inability to recover due from the Company
In the given case the subject matter of challenge in
this writ-application at the instance of the writ-applicant is an order passed
by the respondent under section 179 of the Income-tax Act, 1961. In the case of
M/s. Tirupati Proteins (P) Ltd demand of Rs. 9074.34 lakhs is outstanding. The
said demand has not been paid till date. Despite being given a number of
opportunities, the company did not make the payment of outstanding demand.
At the relevant point of time the directors of the
assessee-company were Smt. Sonal Nimish Patel and Smt. Ashita Nilesh Patel.
Further, it is noticed from the records of the company that there are no
recoverable assets in the name of assessee-company. In such circumstances,
proceedings under section 179 of the Income Tax Act were initiated by way of
issuing of notice to the then Directors and all the directors were requested to
show cause vide notice under section 179 of the Act as to why they should not
be treated as jointly and severally liable for the payment of such tax and why
an order under section 179 of the Income-tax Act, 1961 should not be passed
against them. In terms of the said notice the directors were to attend the
office of the undersigned on 10.11.2017 with explanation. But no compliance was
made in response to the said notice. It is noticed that neither the Directors
or any of their authorized representatives attended nor any written submission
was furnished.
There is no escape from the fact that the perusal of
the Notice under section 179 of the Act, 1961, reveals that the same is totally
silent as regards the satisfaction of the condition precedent for taking action
under section 179 of the Act, 1961, viz. that the tax dues cannot be recovered
from the Company. In the show-cause notice, there is no whisper of any steps
having been taken against the Company for recovery of the outstanding amount.
Even in the impugned order, no such details or information has been staled.
In such circumstances, the question is, whether such
an order could be said to be sustainable in law. The answer has to be in the
negative. At the same time, in the peculiar facts and circumstances of the case
and more particularly, when it has been indicated before us by way of an
additional affidavit-in-reply as regards the steps taken against the company
for the recovery of the dues, High Court would like to give one chance to the
department to undertake a fresh exercise so far as section 179 of the Act, 1961,
is concerned. If the show-cause notice is silent including the impugned order,
the void left behind in the two documents cannot be filled by way of an
affidavit-in-reply. Ultimately, it is the subjective satisfaction of the
authority concerned that is important and it should be reflected from the order
itself based on some cogent materials. However, with a view to protect the
interest of both, the writ applicant as well as Revenue, High Court are
inclined to quash the impugned order and give one opportunity to the Revenue to
initiate the proceedings afresh by issuance of fresh show-cause notice with all
necessary details so that the writ-applicant can meet with the case of the
Revenue. High Court is inclined to adopt such measure keeping in mind the
statement made by the learned counsel that till the fresh proceedings are not
completed, his client will not operate the bank account.
In view of the above, this writ-application is partly
allowed. The impugned notice as well as the order is hereby quashed and set
aside. It shall be open for the respondent to issue fresh show-cause notice for
the purpose of proceeding against the writ-applicant under section 179 of the
Act, 1961. High Court would like to give a time bound program so that the
proceedings may not go on for an indefinite period. High Courts are also
issuing such direction because of the statement being made that the
writ-applicant will not operate the bank account till the fresh proceedings are
initiated and completed. In such circumstances, High Court grants two months’
time from the date of receipt of the writ of this order to the Department to
initiate fresh proceedings and pass appropriate orders in accordance with law.
Till the final order is passed, the writ-applicant shall not operate the bank
account concerned. With the above, this writ-application stands disposed of. – [Sonal
Nimish Patel v. ACIT (2020) 422 ITR 275 : 270 Taxman 141 : 107 CCH 0449 (Guj.)]
Private company-Liability of directors - Where Assessing Officer issued a notice under section 179 against assessee director of a company seeking to recover tax dues of said company from assessee, since such notice was totally silent regarding fact that tax dues could not be recovered from company and, further, there was no whisper of any steps being taken against company for recovery of outstanding amount, impugned notice under section 179 against assessee was to be set aside
Assessee was a director
in company Tirupati Proteins (P) Ltd. Tirupati Proteins (P) Ltd failed to make
payment of outstanding tax demand of certain amount. Assessing Officer issued
notice under section 179 to assessee treating her as jointly and severally
liable for payment of such tax. On writ the Court held that persual of notice
under section 179 revealed that same was totally silent regarding fact that tax
dues could not be recovered from company. Further, in show-cause notice, there
was no whisper of any steps having been taken against company for recovery of
outstanding amount. Therefore, notice under section 179 issued by
Assessing Officer against assessee was set aside. [Partly in favour of assessee] (Related Assessment years : 2011-12 to 2014-15) - [Ashita Nilesh Patel v. ACIT
(2020) 270 Taxman 132 (Guj.)]
There was nothing on record to
suggest that tax dues could not be recovered from company and same could be
attributed to any gross neglect, misfeasance or breach of duty on part of
assessee in relation to affairs of company, impugned recovery proceedings
deserved to be quashed
Assessee was a director of the company. For relevant
year, Assessing Officer completed assessment in case of said company giving
rise to certain tax demand, during pendency of appellate proceedings; Assessing
Officer issued a notice to assessee under Section 179 seeking to recover tax
dues of company. The Assessee raised a plea that there was nothing on record to
suggest that tax dues could not be recovered from the company and same could be
attributed to any gross neglect, misfeasance or breach of duty on part of
assessee in relation to affairs of company. Assessing Officer rejected the
application of the assessee. On writ the Court held that in order to apply
provisions of sub-section (1) of section 179, first requirement is that tax
dues cannot be recovered from private company and even in such a case, it is
open for concerned director to prove that such non-recovery cannot be
attributed to any gross negligence, misfeasance or breach of duty on his part
in relation to affairs of company, since aforesaid requirements were not
satisfied in assessee’s case, impugned order passed by Assessing Officer was
set aside. (related Assessment year : 2015-16) – [Vanraj V. Shah. v. DCIT
(2019) 266 Taxman 137 : 181 DTR 5 (Bom.)]
Assessing Officer can exercise
jurisdiction under section 179(1) against assessee only when it fails to
recover its dues from private limited company
Assessee was a director of private limited company.
She filed instant writ petition contending that order passed against her under
section 179(1) was without jurisdiction because no effort was made by revenue
to recover tax dues from defaulting private limited company. Assessing Officer
can exercise jurisdiction under section 179(1) against assessee only when it
fails to recover its dues from Private Limited Company, in which assessee is a
director. Such jurisdictional requirement cannot be said to be satisfied by a
mere statement in impugned order that recovery proceedings had been conducted
against defaulting private limited company. Since, in instant case, show cause
notice under section 179(1) did not indicate or give any particulars in respect
of steps taken by department to recover tax dues from defaulting private
limited company, impugned order was to be set aside. [In favour of assessee] (Related
Assessment years : 2006-07 : to 2011-12) – [Madhavi Kerkar v. ACIT (2018) 302
ITR 340 : 253 Taxman 288 : 90 taxmann.com 55 (Bom.)]
Disclosure of recovery effort in show-cause notice to delinquent Private Company’s director mandatory
Bombay High Court quashes order under section 179
holding petitioner director liable for unpaid taxes of Assessment year 2011-12
for a delinquent private limited company (of which it was director till 2013)
absent show-cause notice under section 179 mentioning particulars of recovery
efforts made and failure to recover taxes from such company; Rejects Revenue's
contention that since relevant details were mentioned in the order under
section 179 as well as affidavit filed by Assessing Officer, there was
sufficient compliance with Section 179 provisions; Further rejects Revenue’s
attempt to distinguish Bombay High Court ruling in Madhavi Kerkar on the ground
that petitioner in the present case is not a professional/paid director but
holds 76% shareholding in the company, observes that Income-tax Act does not
make any distinction between professional/paid Directors and Directors holding
a large shareholding stake in the delinquent Private Limited Company; Noting
petitioner's claim that the company had
advanced Rs. 49.81 Cr to other companies/associates of another director, High Court
observes, ‘The attempts at recovery if made known in the show-cause notice,
would have given an opportunity to the petitioner to bring the above facts to
the notice of the Assessing Officer who could have recovered from them before
proceeding with the notice’; However, allows Assessing Officer
to pass fresh order after issuing appropriate notice to petitioner director. [In favour of assessee] (Related Assessment year : 2011-12) – [Mehul Jadavji Shah
v. DCIT [TS-173-HC-2018(BOM)] – Date of Judgement z; 05.04.2018 (Bom.)]
Director of a public limited
company could not be treated as director of a private limited company, by
lifting corporate veil under section 179 without issuing show cause
notice to him in that regard by formulation of tentative ground
The assessee was a director of a limited company,
against which certain dues of tax were pending. The Assessing Officer issued a
notice under section 179 to the assessee, seeking to recover outstanding dues
of the company from him. The assessee raised objection that he was a director
of public limited company and, thus, proceedings under section179 could not be
invoked. The Assessing Officer rejected the said explanation and initiated
recovery proceedings. The Assessing Officer held that if conditions were
satisfied for lifting of corporate veil, he could take public limited . company
as private limited company. The assessee filed instant appeal contending that
no notice was given to him regarding lifting of corporate veil and, thus,
recovery proceedings were invalid.
Held : The revenue could not point out to the Court as
to whether at any point of time, the assessee was put to notice on the aspects
of lifting of the corporate veil and thereby to treat the director of the
public limited company at par with the directors of the private limited company
as provided under section 179. There is considerable force in the contention of
the assessee that the impugned order is silent on the aspect of lifting of the
corporate veil, but it cannot be said that lifting of the corporate veil is
impermissible if the facts are so demonstrated and the competent officer is
satisfied for such purpose. But, in any case, the person concerned is required
to be put to notice by formulation of the tentative ground as to why the
concept of lifting of the corporate veil should not be invoked. The director of
the company may show justifiable ground to satisfy the authority that no case
is made out for lifting of the corporate veil and thereafter, the competent
officer may form an opinion whether to lift the corporate veil or not. But, in
any case, as neither has happened in the instant case, it can be said that the
order passed based on the lifting of the corporate veil even if it is, would be
in breach of the principles of natural justice and, hence, cannot be sustained.
In view of the aforesaid observations, the impugned
order is quashed and set aside, but with the observations that it would be open
to the competent officer to formulate the ground and thereafter, to give a
notice for treating the company as private limited company by lifting of the
corporate veil and thereafter, to take steps, if any, available in accordance with
law under section 179. [In favour of assessee] – [Ajay S. Patel v. ITO (2015)
375 ITR 72 : 231 Taxman 64 : 56 taxmann.com 197 (Guj.)]
Recovery proceeding was initiated against petitioner
in respect of tax due of company in which petitioner was a past director. Revenue
treated company as a private company on basis of Code Number 13 mentioned in
return of income as such code applied to private company. However, it was found
that it was incorporated as a public limited company with Registrar of
companies and, further, it came out with its public issue of equity shares. Company
was a public company and merely on basis of mentioning of wrong code number in
return, company could not be treated as private company and, consequently,
order under section 179 was invalid. [In favour of assessee] (Related Assessment
year : 1996-97) – [Dhaval N. Patel v. CIT (2015) 231 Taxman 500 : (2014) 44
taxmann.com 211 (Guj.)]
Assessee
was a director of a company against which tax demand for assessment year
1996-97 remained unpaid, provisions of section 179 could not be made applicable
since said company was converted into public company from 05.12.1994
Assessee was
director of a company against which tax demand along with interest and penalty
for relevant year remained unpaid. A show-cause notice was issued to assessee
as to why recovery would not be made from her. She submitted that she was an
employee of said company and that she resigned from said company on 19.08.1997.
However, Commissioner held her responsible for default in payment of arrears
under section 179. Thereafter, a revision application was filed under section
264 on ground that company was a public limited company and thus, provisions of
section 179 would not be applicable. Since said company became a public limited
company from 05.12.1994, issuance of show-cause notice and consequent proceedings
under section 179 for relevant year must fail. [In favour of assessee] (Related
Assessment year : 1996-97) – [Gaurav V. Shah v. ACIT (2014) 369 ITR 265 : 227
Taxman 188 : 44 taxmann.com 65 (Guj.)]
Even a director of public limited
company can be held liable for recovery of tax due of the company
Huge income was unearthed during search operation. Company
had defaulted in tax payment of more than Rs. 155 crores. Attachment of assets
of company could lead to recovery of not more than Rs. 5 crores. ACIT found
that shares of company were held by family members and not by any members of
public and directors had amassed huge wealth in form of immovable property. He,
therefore, opined that company was only a conduit for creation of unaccounted money
and appropriating same in favour of directors. Department established that it
was not possible to recover tax dues from company Petitioner-directors of
company neither pleaded nor succeeded in establishing that such nonrecovery was
not attributable to any gross neglect, misfeasance or failure in discharging
duty on his part in connection with affairs of company. Being a public company,
ordinarily, provisions of section 179(1) could not be applied; however, if
factors noted by Assistant Commissioner were duly established, it would
certainly be a fit case where invocation of principle of lifting of corporate
veil would be justified. [Matter remanded] – [Pravinbhai M. Kheni v. ACIT
(2013) 353 ITR 585 : 213 Taxman 81 : (2014) 266 CTR 410 : (2012) 28 taxmann.com
111 (Guj)]
Tax does not include ‘penalty’
§ Under
section 179 what is made recoverable from the director of a private company is ‘tax
due’.
§ Section
179(1) thus statutorily provides for lifting of corporate veil under given set
of circumstances. The liability of tax dues which is basically fastened on the
company, is permitted to be recovered from its Director in case of private
company, provided the conditions set out in said section noted above are
fulfilled. In section179 of the Act, term used is ‘tax du’'.
§ Term
‘penalty’ has not been defined. Term ‘interest’ is defined in section 2(28A) of
the Act but is in context of interest payable in any manner in respect of any
moneys borrowed or debt incurred and has no relation to interest chargeable
under various provisions of the Act on tax arrears.
§ The
Act uses the term ‘tax’, interest and penalties at various places having
different connotations.
§ It
would therefore, not be possible to stretch the language of section 179(1) of
the Act to include interest and penalty also in the expression ‘tax due’.
Though
Department had taken 23 different step between 2001 and 2011 for recovery of
dues from company, no recovery could be made from company. Basic requirement of
section179 that tax due cannot be recovered from company could be said to have
been satisfied. Only tax due, and not penalty and interest, can be recovered
from director under section 179. Director can avoid liability of company under
section 179 if he proves that non-recovery cannot be attributed to gross
negligence, misfeasance or breach of duty on his part in relation to affairs of
company. Nothing came to be stated by Asstt. Commissioner regarding gross
negligence on part of petitioner due to which tax dues from company could not
be recovered and in absence of any such consideration, Assistant Commissioner
could not have ordered recovery of dues of company from director. [In favour of
assessee] (Related Assessment year : 1997-98) – [Maganbhai Hansrajbhai Patel v. ACIT (2013)
353 ITR 567 : 256 CTR 269 : (2012) 211 Taxman 386 : 26 taxmann.com 226 (Guj.)]
The Finance Act, 2013 has made an
amendment to Section 179. As per the amendment, the expression “tax due” under
section 179 to also include penalty, interest or any other sum payable under
the Act with effect from 01.06.2013. This amendment has incorporated in the
Act, thus it has overruled this Gujarat
High Court ruling in Maganbhai Hansraj Patel [TS-786-HC-2012(GUJ)], Nayan, M. Shah v. ITO
[TS-99-HC-2013(GUJ)] and Delhi High Court ruling in Sanjay Ghai
[TS-779-HC-2012(DEL)] wherein similar view has been taken by Delhi High Court
in the case of Sanjay Ghai [TS-779-HC-2012(DEL)]. High Court held that the
liability of the assessee director under section 179 was limited only to ‘tax’
as defined under section 2(43) and did not extend to penalty or interest
thereon.
The assessee, Mr Nayan Shah is a Director
in Ronak Oil Mills (P) Ltd. On completion of assessement for Assessment year
1995-96 for the company, demand was raised amounting to Rs 29.93 lakhs on the
company. This amount included unpaid tax and interest under section 234A and
234B.
Due to non payment of such tax and
interest by the company, Revenue issued a notice to the assessee, demanding him
to prove that such non payment was not due to any gross neglect, misfeasance or
breach of duty on his part in relation to affairs of the company. On failure to
reply to the notice, Assessing Officer passed an order under section 179 and
held the assessee jointly and severally liable for the payment of the
outstanding dues. The Assessing Officer recovered the entire dues of tax and
interest from the assessee. Further, assessee’s bank account was attached for
penalty under section 271(1)(c) levied and due on the company.
Before the High Court, through a writ
petition, the assessee contested the recovery of interest and penalty with
respect to the company's assessment from him.
A division bench of Gujarat High Court relied on its own ruling in Maganbhai
Hansrajbhai Patel [TS-786-HC-2012(GUJ)] and ruled in favour of the
assessee. High Court held that “By virtue of section 179(1) of the Act, the
director cannot be held liable for interest and penalty and thereupon be
treated as an assessee under section 2(7) of the Act as a person by whom any
tax or any other sum of money is payable under the Act.”
Based on this, High Court held that ‘it
was not legally permissible for the respondent to recover from the petitioner,
interest and penalty arising out of the assessment order passed against the
company, in which the petitioner was a Director.’ [In favour of assessee] (Related
Assessment year : 1995-96) – [Nayan. M. Shah v. ITO [TS-99-HC-2013(GUJ)] –
Date of Judgement : 04.03.2013 (Guj.)]
A private company had unpaid outstanding
penalty dues, such penalty amount could not be recovered from director of said
company
Assessee was a director in a private company. The said company had
unpaid outstanding penalty dues of Rs. 2,47,900/- for the assessment year
1988-89 and Rs. 4,38,620/- for the assessment year 1989-90. Assessing Officer
on premise that assessee was a director of said private company and he was
liable to discharge such penalty liability under section 179 passed two
separate orders on him for recovery of unpaid penalty amount. “Tax due” usually
refers to an ascertained liability. However, the meaning of the words ‘taxes
due’ will ultimately depend upon the context in which these words are used. In
view of judgment of Gujarat High Court in case of Maganbhai Hansrajbhai
Patel v. ACIT (2011) 211 Taxman 386 : 26 taxmann.com 226 (Guj.) such
penalty amount could not be recovered from assessee. [In favour of assessee] (Related
Assessment years : 1988-89 and 1989-90) – [Mahendra Sakarlal Gandhi v. ITO (2013)
216 Taxman 40 : 34 taxmann.com 196 (Guj.)]
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