High Court Of Gujarat
Susan Chacko Perumal vs. ACIT
Assessment year 2004-05
Akil Kureshi And Biren Vaishnav, JJ.
Special Civil Application Nos. 9822 To 9824 Of 2017
July 18, 2017
Akil Kureshi, J. – These petitions arise out of common facts. We may refer to the facts arising from Special Civil Application No. 9822 of 2017. The petitioner is a director of one M/s. MGM Trade Link Pvt. Ltd., a private company. She has challenged an order dated 26.03.2017 passed under section 179(1) of the Income Tax Act [‘the Act’ for short] seeking recovery of a sum of Rs. 23,45,790/- by way of unpaid tax of the said company for the assessment year 2004-05 and further a sum of Rs. 12,49,050/- towards penalty under section 271(1)(c) of the Act of the same company for the assessment year 2004-05.
2. The company had filed the return of income for the assessment year 2004-05 declaring total income of Rs. 21,06,990/-. Assessment under section 143(3) of the Act was framed on 29.03.2007. Such assessment was, however, set aside by CIT (Appeals) as time barred. Notice of reopening was issued on 13.03.2008 and order of re-assessment was passed on 5.12.2008 determining the total income of the company at Rs. 64,73,810/- The appeal of the company was allowed by the CIT (Appeals) partially. By an order dated 30.11.2009 giving effect to the appellate order, the Income Tax authorities held that the company had to pay unpaid tax of Rs. 23,45,790/-. Penalty proceedings resulted into imposition of penalty under section 271(1)(c) of the Act at Rs. 12,49,050/-.
3. On the premise that the company had not discharged such tax and penalty liabilities, the department wishes to make recovery from the director of the company, for which, the said order has been passed. The main ground of challenge, though not the only ground, is that, before passing the said order, no show cause notice was issued. No other form of opportunity was granted to the petitioner why such recovery should not be made nor the order contains any ground why such recovery was necessitated from the director of the company.
4. In reply to the notice issued, the respondent has appeared and filed a reply dated 12.07.2017. In such reply, the main ground taken is that, despite series of notices to the company, the tax and the penalty remained unpaid. The department, therefore, had no choice but to effect recovery from the directors. Along with this reply, the deponent has produced three notices which are:
(i) Notice dated 14.09.2007 under section 222(1) of the Act seeking recovery of the unpaid tax dues;
(ii) Notice dated 04.03.2011 raising demand of Rs.19,87,000/- of the pending tax;
(iii) Notice dated 10.04.2014 raising demand of unpaid penalty of Rs. 12,49,050/- with interest of Rs. 3,62,224/-.
All these notices are issued to the company and none of these notices are to any of the directors.
5. On the basis of such materials on record, learned advocate Mr. Darshan Patel for the petitioner submitted that the action of the department is wholly illegal. Without a show-cause notice or hearing or citing reasons, the authority has passed order under section 179(1) of the Act which is not sustainable. None of the petitioners, were visited with any show cause notice why the recovery of the unpaid tax and penalty of the company should be made from the directors. He further pointed out that the impugned order under section 179(1) of the Act does not cite any reasons.
6. On the other hand, learned counsel Mr. Desai for the department vehemently contended that despite repeated notices, the company did not pay the dues. It is not the case of the petitioners that the dues of the company have been paid up. In that view of the matter, the consequence envisaged under sub- section (1) of section 179 would automatically follow. Directors of the company would be liable to pay the dues of the company. The authority had given ten days’ time under impugned order to pay such dues. If the directors had any cause, they could have showed upon service of such order. He therefore, submitted that the action of department is in no manner opposed to the natural justice.
7. For multiple reasons, the action of the department cannot be upheld. Section 179(1) of the Act permits lifting of the corporate veil subject to the conditions contained therein being satisfied. Ordinarily, there being a clear distinction in law between a company be it a private or a public company and its directors, the dues of the company cannot be recovered from the directors. Sub-section (1) of section 179, however, envisages that where any tax due 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 during the relevant previous year, shall be jointly and severally liable for payment of such tax, unless he proves that the non-recovery cannot be attributed to any gross negligent, misfeasance or breach of duty on his part in relation to the affairs of the company. The recovery of any paid dues of the company, therefore, can be resorted to, provided the company happens to be a private company and the person, who is director during any period of the relevant previous year, fails to establish that non- recovery cannot be attributed to any gross negligent, misfeasance or breach of duty on his part in relation to the affairs of the company.
8. It is therefore, not correct to suggest that the moment the tax dues of a private company remain unpaid, the consequence under section 179(1) must follow against each of the directors. Before such an order can be passed, the statute envisages an important stage whereby the concerned director would have an opportunity to prove that the non-recovery cannot be attributed to any gross negligent, misfeasance or breach of duty on his part in relation to the affairs of the company. This opportunity would have to be made available to the director before an effective order under section 179(1) of the Act can be passed. This would necessarily require following the principles of natural justice. By no stretch of imagination can the Income Tax authorities proceed to pass order in terms of sub section (1) of section 179 by merely holding that despite repeated efforts, the tax dues of the company remained unpaid. This is only one element of the requirement of sub section (1) of section 179. The other requirement can be fulfilled only after hearing the director concerned. Any other view would amount to eliminating the requirement of hearing and following the principles of natural justice before an adverse civil order that may be passed. It cannot be denied that the recovery of the tax dues of the company from the director is adverse civil consequence. If the department therefore wishes to pass any such order, the bare minimum requirement would be to issue a show cause notice and grant reasonable opportunity to the concerned director of being heard. The Income Tax authority cannot presume that such factors exist and proceed on such basis without allowing the concerned director to establish necessary facts.
9. In the present case, we do not find a single notice on record issued to any of the directors why order under sub section (1) of section 179 should not be passed for whatever reasons that may be available at the command of the income tax authority. The notices, which we have referred to, are all issued to the company. These notices are in the form of recoveries or reminders of unpaid tax or penalty. None of these notices contain even a reference to any recoveries being made personally from the directors for the failure of the company to discharge its tax dues.
10. This apart even the order under section 179(1) of the Act is completely silent on the requirements of the statute being satisfied. We may reproduce the order:
“In exercise of powers u/s. 179(1) of the Income Tax Act, a Directors of company and the legal representative of any such person who is deceased, shall be jointly and severally liable along with the company for the amount of tax, penalty or other sum payable by the company for the assessment year to which such previous year is relevant, and all the provisions of this Act for payment of tax payable by M/s. MGM Tradelink Pvt. Ltd. Gandhidham.
The total demand of assessee firm namely M/s. MGM Tradelink Pvt. Ltd, Gandhdham of Rs. 35,94,840/-, (i.e. u/s. 143(3) of the Act Rs. 23,45,790/- & U/s. 271(1)(c) of Rs. 12,49,050/- u/s. 271(1)(c) plus interest u/s. 220(2) of the Act, the details of demand outstanding which read as under:-
|Financial Year||Assessment Years||Amounts Rs.||Date of Service|
|2013-2014||2004-2005||23,45,790 (appeal effect)||09/10/2013|
|2014-2015||2004-2005||1249050 (Penalty u/s. 271(1)(c))||21/04/2014|
The above payment has not been made so far. Therefore, whole directors of company shall be jointly and severally liable to pay the outstanding demands. The name and address of the directors of the company which read as under :-
|Name & Address of Directors||PAN|
|Smt. Susan Chacko Perumal||AGDPP9416A|
|Plot No. 170, Ward No. 12/B, Gandhidham|
|Shri Raju Chako Perumal||AGDPP9415D|
|Plot No. 170, Sector No. 12/B, Gandhidham|
|Shri Solly Chako Perumal||AGCPP4982G|
|D-5, Soli, NU-10/B, Shakti Nagar, Gandhidham|
They can make payment of tax as per their share holdings individually and rest of the amount can be paid jointly.
All the payment is hereby ordered to be paid within 10 days from the receipt of this order.”
11. Perusal of the order would demonstrate total disregard of the authority towards the requirement of section 179(1) of the Act. He merely proceeds on the basis that the tax and penalty have not been paid so far and therefore, “whole directors of the company shall be jointly and severally liable to pay the outstanding demands.” He accordingly, orders such directors to pay the said sum within ten days of the receipt of the order. This order betrays certain misconception about the requirement of section 179(1) of the Act. If one reads the order, it seems to be suggesting that the sole requirement of applicability of section 179(1) of the Act is that the tax dues of a private company have remained unpaid. To the later requirement of the same not attributable to any gross negligent, misfeasance or breach of duty on part of director in relation to the affairs of the company is totally lost sight of. The language used in sub section (1) of section 179 may be in the negative covenant casting primary duty on the director to establish such facts, nevertheless, it is one of the essential requirements. The statute, at best, may be seen as giving rise to rebutable presumption which is required to be rebutted by the concerned director. It does not, in any manner, provide for a deemingfiction, a natural and inevitable consequence or an irrebutable presumption. A director of a company would discharge his responsibility of establishing necessary facts only when he is put to notice that the authority proposes to pass order under section 179(1) of the Act.
12. In the result, impugned orders under section 179(1) of the Act are set aside. Consequential orders of attachment issued by the department would not survive. As held by this court in case of Pravinbhai M. Kheni v. Asstt. CIT  353 ITR 585/213 Taxman 81/ 28 taxmann.com 111 when the Court strikes down the action of the authority on the ground of principle of natural justice, the proceedings do not terminate permanently but would be placed back at the stage where the defect is detected.
13. In the result, petitions are allowed subject to the observations made above.
[Citation :Â 399 ITR 74]