Bombay High Court: Recovery Order Cannot be Sustained against Director of a Company Having Lack of Financial Control in the Company
Bombay High Court: Recovery Order Cannot be Sustained against Director of a Company Having Lack of Financial Control in the Company
The Bombay High Court by its division judges’ bench of Justices K.R. Shriram and M.M. Sathaye, has quashed the income tax recovery against a director of a company on the ground that the director had sufficiently discharged the burden cast upon him in terms of Section 179(1) of the Income Tax Act and brought material on record to show lack of financial control, lack of decision-making power, and a very limited role in the assessee company even as a director.
In the present case, the petitioner- Prakash B. Kamat challenged the order passed by the Income Tax Officer under Section 179 of the Income Tax Act, 1961, holding that the petitioner was liable for taxes allegedly due from Kaizen Automation Pvt. Ltd. (KAPL).
The petitioner argued 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.
However, 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 submitted 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 had 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 Court at the outset referred to the judgments of Satish D. Sanghavi vs. Union of India and Narinder Singh vs. Union of India and observed that it is settled position of law that in absence of any specific provisions in the statute, duty or penalty liability of the company cannot be recovered from its director, who is not personally liable towards liability of the Company.
Further, the Court on perusal of Section 179(1) Income Tax Act, 1961 (the Act for short), stated that it provides for an escape route to the Director.
“Where a Director proves that non recovery of tax dues cannot be attributed to any gross neglect, misfeasance, or breach of duty on his part in relation to the affairs of the Company, he shall not be liable for payment of tax dues. Of course, the responsibility of establishing such fact is upon the Director. Once the Director places before the authority his material and reasons why it should be held that non-recovery cannot be attributed to any of the three factors on his part, the Authority is bound to examine such grounds and come to a reasoned conclusion in this respect,” the Court noted.
Averting to the present case, the Court noted that the that both the ITO as well as revisional Authority 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.
The Court remarked that in such situation it is difficult to sustain the impugned Orders, which without any basis, simply stated that the Petitioner (Director) had failed to prove that non-recovery cannot be attributed to any gross neglect or misfeasance or breach of duty on his part.
The Court opined that although the burden cast upon the director of a private company in the later part of Section 179(1) of the Act is a negative burden of proving that non-recovery ‘cannot be attributed’ to any gross neglect misfeasance or breach of duty on his part, in the present case, the Court noted that the Petitioner had discharged such burden by placing on record his specific case and supporting material.
It was therefore imperative for the Authorities to consider the same and come to a reasoned conclusion in terms of section 179(1) of the Act, stated the bench.
In such circumstances, the bench was of the view that petitioner was squarely covered by the exception carved out by the later part of Section 179(1) of the Act and could not be held liable.
Accordingly, the Court quashed the order holding the petitioner liable for the outstanding dues of M/s. Kaizen Automation Pvt. Ltd.
