Bombay High Court: Director of Company is Liable only if Non-Recovery of Taxes is Attributable to their Breach of Duty

Bombay High Court: Director of Company is Liable only if Non-Recovery of Taxes is Attributable to their Breach of Duty

The Bombay High Court by its division bench of Justices K.R. Shriram and Firdosh P. Pooniwalla has observed that according to Section 179(1) of the Income Tax Act, a person can be held responsible as a Director for tax recovery only if they were a Director both at the relevant assessment year and at the time when the demand was raised. Furthermore, the Director can be held liable only if the non-recovery of taxes can be attributed to their gross neglect, misfeasance, or breach of duty.

In the present case, the petitioner’s claimed to be two the legal heirs of the deceased Dinesh Shamji Rita, who had challenged an order passed by respondent no. 1 under Section 264 of the Income Tax Act.

The company had filed its income tax return for Assessment Year 2012-2013, which underwent scrutiny assessment resulting in various additions and disallowances. A demand for payment was made, and the deceased applied for stay, which was rejected. The company voluntarily paid certain amounts, and properties were temporarily attached but later released. The petitioner’s revision application under Section 264 was also rejected.

Thereafter, they received an order dated 7th May, 2018 under Section 179 of the Act, against which they filed another revision application, which was rejected by the impugned order dated 9th March, 2020.

The petitioner argued that the deceased, who was seriously ill and ailing for six months, passed away on 6th May 2018, a day before the order was passed under Section 179 of the Act. The impugned order under Section 264 was brief and rejected the application solely on the ground that the notice of the deceased's death was not brought to the attention of the Assessing Officer before the order under Section 179 was signed.

The bench noted that there was no evidence to prove that any notice was issued to the deceased. The affidavit filed by the respondents only stated that letters were sent through speed post and were not returned undelivered.

However, there was no supporting evidence or documentation to verify the preparation and delivery of such letters.

Thus, the Court held that it can be assumed that no letter or notice was sent to the deceased before the order dated May 7, 2018, was passed. Additionally, there was no information regarding the steps taken to trace the assets of the company. Hence, it was concluded that the order passed under Section 179 of the Act on May 7, 2018, failed to meet the necessary requirements.

It was further noted by the Court that the company was currently undergoing Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC). The Court opined that the Assessing Officer should have established a case that the tax dues from the company cannot be recovered before issuing an order under Section 179.

“Only after the first requirement is satisfied would the onus shift on any Director to prove 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,” the bench remarked.

The Court stated that in view of non-issuance of notice, the deceased had not been even given an opportunity to establish that the non-recovery cannot be attributable to any of the three factors on his part, i.e., gross neglect or misfeasance or breach of duty.

Accordingly, the Court quashed both the order dated 9th March 2020 passed under Section 264 of the Income Tax Act and the order dated 7th May 2018 passed under Section 179 of the Act.