Bombay High Court Quashes Income Tax Claims Against Director with Limited Financial Control and Decision-Making Power

Bombay High Court Quashes Income Tax Claims Against Director with Limited Financial Control and Decision-Making Power

In a recent development, the Bombay High Court invalidated an order issued by the Income Tax Officer, holding the Petitioner responsible for the outstanding dues of a company. The Court determined that the Petitioner and his wife served as Directors in name only and were devoid of any substantial decision-making authority, being entirely dependent on the company's discretion.

The Division Bench, comprising Justices K.R. Shriram and M.M. Sathaye, observed that the Income Tax Officer failed to present any evidence contrary to the material provided by the Petitioner. The Bench thoroughly examined the material and determined that the Petitioner cannot be deemed guilty of gross neglect, misfeasance, or breach of duty concerning the non-recovery of tax dues. Additionally, the Bench referenced the material to demonstrate the lack of financial control and concluded that the Petitioner has adequately fulfilled the burden placed upon them under section 179(1) of the Income Tax Act, thereby absolving them from liability.

Prakash B. Kamat, the Petitioner, filed a petition with the Bombay High Court under Articles 226 and 227 of the Constitution of India. The petition sought a writ of Certiorari to challenge and invalidate the orders issued under Section 179 of the Income Tax Act, 1961, which held the Petitioner accountable for taxes purportedly owed by Company Kaizen Automation.

Senior Advocate J.D. Mistri, representing the Petitioner, argued that the management and actual control of the assessee Company rested with six Directors appointed by KFI (out of eight), with the Petitioner and his wife Geeta P. Kamat serving as the other two Directors. He further asserted that decisions concerning the Company's accounts and audits were exclusively under the purview of the Board of Directors of KFI.

The Petitioner argued that he and his wife held the position of name-sake Directors in the company and were entirely dependent on the decisions made by KFI. They asserted that they lacked any substantial control over the decision-making process of KAPL. Moreover, the Petitioner stated that he was never provided access to the premises, data, or any other relevant aspects associated with KAPL, including accounts, audits, income tax filings, etc.

The Petitioner stated that during their tenure as Director of the Company, there were no pending taxes or duty demands from the Income Tax Department. They argued that after a considerable period of eight years, they received a show cause notice dated January 12, 2017, specifically naming the Petitioner and his spouse, without mentioning any other Directors of the Company, regarding outstanding demands against KAPL for the Assessment Year 2008-09 and 2009-10. The Petitioner presented this as part of their submission to the court.

Advocate Suresh Kumar, representing the Respondents, contended that as a Director of the private company during the relevant assessment years, the Petitioner held joint and several liabilities for the payment of taxes by the assessee company. He strongly emphasised that despite being provided with sufficient opportunities, the Petitioner failed to demonstrate that the non-recovery of taxes cannot be attributed to their gross negligence, misfeasance, or breach of duty concerning the affairs of the assessee company.

After considering the arguments presented, the High Court, in its order, affirmed that it is an established legal principle that in the absence of explicit provisions in the statute, the duty or penalty liability of a company cannot be enforced against its Director who is not personally liable for the company's obligations.

Furthermore, the High Court noted that the Respondents did not argue or claim that the tax dues, which are the subject matter of the challenged orders, were demanded during the period when the Petitioner served as a Director of the assessee company.

"Perusal of the impugned Orders further show that both the ITO as well as revisional Authority have mainly proceeded on the basis that the Petitioner was director during the assessment years and do not really consider whether there was any gross neglect or misfeasance for breach of duty on his part in relation to affairs of the company ‘in the context of non-recovery of tax dues’. In such situation it is difficult to sustain the impugned Orders, which without any basis, simply says that Petitioner (Director) has failed to prove that non-recovery cannot be attributed to any gross neglect or misfeasance or breach of duty on his part," the Court observed.

Taking into account the significant time lapse of eight years, the High Court made a noteworthy observation. It stated that the court has consistently held that actions taken by the state must be carried out within a reasonable timeframe. The delay in the adjudication process undermines the fundamental objective of the legal process, as the taxpayer must be aware of their standing. If there is prolonged inaction from the departmental authorities, such delayed actions would violate procedural fairness and contravene the principles of natural justice.

Consequently, the High Court invalidated the challenged orders and emphasised that in the given circumstances, the Petitioner falls directly within the exception outlined in the latter part of Section 179(1) of the Act. The Court concluded that the Petitioner cannot be held liable.