23 Nov 2023 8:30 AM GMT
In a recent ruling, the Gujarat High Court has set aside an Income Tax Liability Order, highlighting the crucial requirement of a valid show-cause notice for recovery under Section 179 of the Income Tax Act, 1961.The above ruling came in a petition challenging the order dated 27.03.2019 under Section 179 of the Income Tax Act, 1961 against the petitioner holding him in his capacity as a...
In a recent ruling, the Gujarat High Court has set aside an Income Tax Liability Order, highlighting the crucial requirement of a valid show-cause notice for recovery under Section 179 of the Income Tax Act, 1961.
The above ruling came in a petition challenging the order dated 27.03.2019 under Section 179 of the Income Tax Act, 1961 against the petitioner holding him in his capacity as a Director responsible for the outstanding demand against the company – Banyan & Berry Alloys Limited.
The petitioner served as the Director of Banyan & Berry Alloys Limited until January 15, 2009. On this date, he resigned from the directorship citing health reasons.
The petitioner asserted that he notified the company of his resignation, and upon the company's failure to inform the Registrar of Companies, he personally took up the matter with the Registrar of Companies.
The petitioner contended that more than nine years after his resignation, the respondent no. 2 issued an order on February 13, 2018, under Section 179 of the Act, attributing responsibility and liability to the petitioner for the outstanding income tax, interest, and penalties pertaining to the assessment years 2006-07, 2007-08, 2008-09, 2009-10, and 2011-12 concerning the aforementioned company.
According to the petitioner, a show-cause notice was issued, prompting him to present reasons why he should not be held jointly and severally liable for the tax payment. In response, filed on July 14, 2017, the petitioner raised objections. Despite the petitioner's objections, the impugned order deemed him liable for the outstanding tax obligations.
The revenue's position was that, despite the department's diligent recovery efforts, it remained unable to collect the outstanding dues from the company. Their argument centered around the applicability of Section 179, emphasizing that the company's status as a private entity played a crucial role.
Furthermore, they asserted that the main factor contributing to the non-recovery was the company's complete cessation of business operations. The petitioner, in their view, failed to substantiate that the failure to recover funds was not a result of gross negligence, misfeasance, or breach of duty.
Considering the submissions made by the advocates appearing for the respective parties, the Court opined that a case was made out for interference and quashing of the order and for remanding the matter for a fresh consideration.
The court observed that the show-cause notice issued in this matter lacked crucial information regarding the recovery efforts. It stressed the significance of Section 179 of the Act, which mandates the tax department to demonstrate the impossibility of recovering funds from the company.
Consequently, the court deemed the show-cause notice as legally unsustainable due to its deficiencies.
The Court said, “Perusal of the impugned order in the present petition would indicate that nothing had come on record and it is undisputed that the show-cause notice issued to the petitioner was bereft of material particulars as regards the steps said to have been taken by the department for the purpose of recovering the tax from the company.
“Only on the ground of the show-cause notice being defective as the same is totally silent as regards the satisfaction of the condition precedent for taking action under Section 179 of the Act, the order dated 27.03.2019 passed by the respondent no. 1 is quashed and set aside. It shall be open for the respondent to issue fresh show cause notice for the purpose of proceeding against the petitioner under Section 179 of the Act, if thought fit,” the Court said while allowing the petition.
The above ruling was delivered by a division bench of Justices Biren Vaishnav and Bhargava D Karia.
Appearance: Mr B S Soparkar(6851) For The Petitioner(S) No. 1 Mr.Varun K.Patel(3802) For The Respondent(S) No. 1,2
LL Citation: 2023 LiveLaw (Guj) 187
Case Title: Bhailal Babubhai Patel Versus The Principal Commissioner Of Income Tax 1
Case No.: R/Special Civil Application No. 11182 Of 2019
Click Here To Read The Order / Judgement