Director Proves Lack Of Control On Financial Affairs: Bombay High Court Quashes Income Tax Recovery

The Bombay High Court has quashed the income tax recovery against the Director of a company on the grounds that the Director has sufficiently discharged the burden cast upon him in terms of Section 179(1) of the Income Tax Act.

The bench of Justice K.R. Shriram and Justice M.M. Sathaye has observed that the Director has brought on record material to show a lack of financial control, a lack of decision-making power, and a very limited role in the assessee company even as a director.

The petitioner has challenged the order passed by the Income Tax Officer under Section 179 of the Income Tax Act, 1961, holding the petitioner liable for taxes allegedly due from Kaizen Automation Pvt. Ltd. (KAPL).

The petitioner contended that during the time when he was the Director of the company, there was no outstanding demand for tax or duty from the Income Tax Department. After a long period of 8 years, the petitioner was served with a show cause notice directing him to reply as to why proceedings under Section 179 should not be initiated against him for an outstanding demand against KAPL, the assessee Company.

The petitioner had filed a detailed reply and supplied all the documents, agreements, etc. contending that the non-recovery of tax from KAPL cannot be attributed to any gross neglect, misfeasance, or breach of duty by the petitioner.

The petitioner contended that orders have been passed in complete disregard for the later part of Section 179(1) of the Act, which provides for an exception that if the concerned Director 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, then such Director cannot be held liable.

The department contended that the Assessee Company, being a private Company, had received large sums of money as share application money or share premium, which would not have been possible without the involvement of its Directors. The petitioner, being a director of the private company, was jointly and severally liable for the payment of tax by the assessee company. Petitioner, despite being given ample opportunities, has failed to establish that non-recovery cannot be attributed to his gross negligence, misfeasance, or breach of duty in relation to the affairs of the assessee company.

The court found that the department proceeded mainly on the basis that the Assessee was Director during the assessment years; however, it failed to consider whether there was any gross neglect or misfeasance for breach of duty on his part in relation to the affairs of the company "in the context of non-recovery of tax dues".

The court quashed the order holding the petitioner liable for the outstanding dues of M/s. Kaizen Automation Pvt. Ltd.

Case Title: Prakash B. Kamat Versus Principal Commissioner of Income-tax

Case No.: Writ Petition No. 3129 Of 2019

Date: 12/06/2023

Counsel For Petitioner: J.D. Mistri

Counsel For Respondent: Suresh Kumar

Click Here To Read The Order