Directors Not Negligent; Wrong Invocation Of Section 179 IT Act: Gujarat High Court

While quashing the order passed under Section 179, the bench of Justices N.V. Anjaria and Bhargav D. Karia concluded that since the basic ingredients of Section 179 were not complied with by the revenue authorities, the Income Tax Officer could not have invoked jurisdiction under Section 179 to fasten liability upon the Directors.

Section 179 of the Income Tax Act provides that, where any tax due from a private company cannot be recovered, every person who was a director of the said private company 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.

The petitioners are the Directors of M/s. Nakoda Syn-tex Private Limited. The Income Tax Officer passed an assessment order making certain additions to M/s. Nakoda Syn-tex's income. The Income Tax Officer issued a demand notice under Section 156 of the Income Tax Act, 1961. Consequently, a recovery notice was issued, demanding payment of the outstanding dues from the said Company.

Contending that an appeal against the assessment order and demand notice was pending before the Commissioner of Income Tax Appeal (CIT(A)), the Company filed a stay application before the Income Tax Officer, seeking stay of demand.

Rejecting the stay application filed by the Company, the Income Tax Officer passed an order under Section 179 of the Income Tax Act, fastening liability upon the petitioners to pay the outstanding dues of the Company. Subsequently, a notice of demand was issued, calling upon the petitioners to pay the outstanding dues. After the petitioners failed to comply with the demand notice, the Income Tax Authority passed an order under Rule 48 of the Second Schedule to the Income Tax Act, attaching the residential property of the petitioners.

Against this, the petitioners filed a petition before the Gujarat High Court.

The petitioners, including Devendra Babulal Jain, submitted before the High Court that the order passed under Section 179 of the Income Tax Act is without jurisdiction as the basic conditions for invoking Section 179 were not satisfied.

The petitioner added that only in cases where the amount of tax due from a private limited company is not recovered due to the gross neglect, misfeasance or breach of duty of the Director, can the jurisdiction under Section 179 be invoked.

The revenue department averred that despite all possible efforts, entire outstanding tax dues could not be recovered from the assessee Company, leaving the revenue department with no option but to recover the same from the Directors. Thus, the department argued that as per the provisions of Section 179 of the Income Tax Act, the petitioners being the Directors of the assessee company were liable to pay the outstanding tax.

The department contended that as per the CBDT guidelines, in case where the outstanding demand is disputed before the CIT(A), the Assessing Officer shall grant stay of demand till disposal of the first appeal, on payment of 20% of the disputed demand.

The department argued that since an appeal against the assessment order was pending before the CIT(A), the Directors of the assessee company could have applied for a stay of the demand order issued against the Company, after paying 20% of the demand. It contended that by failing to pay 20% of the demand raised, the Directors had failed to prove that they were not negligent for non-recovery of the assessee company's outstanding tax dues.

The Court observed that the Income Tax Authorities had failed to take any action against the assessee Company, except for issuing a recovery notice and attaching the said Company's bank account. Referring to Section 179 of the Income Tax Act, the bench noted that the Assessing Officer is required to make efforts for recovery of the outstanding dues from the assessee private limited company which has committed default in payment of the outstanding demand.

The Court added that merely because the petitioners were unable to deposit 20% of the demand raised in the assessment order to get a stay from the Income Tax Authority, the petitioners cannot be said to be negligent.

While holding that the petitioners/Directors of the assessee company had prima facie shown that non recovery cannot be attributed to any gross negligence, misfeasance or breach of duty on their part, the Court ruled that the Income Tax Officer could not have invoked the jurisdiction under Section 179.

The bench concluded that since the basic ingredients of Section 179 were not complied with by the revenue authorities, the orders passed under Section 179 and Rule 48 of the Second Schedule to the Income Tax Act, were without jurisdiction.

The Court thus allowed the petition and set aside the orders.

Case Title: Devendra Babulal Jain versus Income Tax Officer

Dated: 16.12.2022 (Gujarat High Court)

Counsel for the Petitioners: Mr. Jaimin R Dave

Counsel for the Respondent: Mr. Nikunt Raval for Ms. Kalpana K Raval

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