Recovery Of Tax Dues Of A Company From Its Directors Under Section 179 Of Income Tax Act, Cannot Be Invoked Casually: Bombay High Court

The Bench, consisting of Justices Dhiraj Singh Thakur and Abhay Ahuja, held that the recovery procedure under Section 179 against the directors of the assessee company cannot be resorted to casually.

The Assistant Commissioner of Income Tax (ACIT) passed an order under Section 179 of the Income Tax Act, 1961 holding that the petitioner Rajendra R. Singh, the director of the assessee company- M/s. Crest Paper Mills Ltd., was liable to pay the tax dues which were otherwise payable by the said Company. The ACIT held that during the relevant period the petitioner was a part of the decision-making process in the said Company, which led to the crystallization of the demand for the relevant assessment year. The ACIT further held that no evidence had been furnished by the petitioner to prove that the assessee Company was a public company. The ACIT ruled that even if the assessee Company was assumed to be a public company, yet by lifting the corporate veil, the directors of such a Company could be brought within the purview of Section 179, especially since the assessee Company had been delisted from the stock exchange and its affairs were not conducted as a public limited company in its true sense.

The petitioner challenged the order passed by the ACIT in a revision petition filed under Section 264 of the Income Tax Act before the Deputy Commissioner of Income Tax (DCIT), which was dismissed. Thereafter, the petitioner filed a writ petition before the Bombay High Court for quashing the order passed by the ACIT.

Section 179 of the Income Tax Act provides that if the tax dues of a private company, in respect of any income of any previous year, cannot be recovered, then, every person who was a director of the private company at any time 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 in relation to the affairs of the company.

The Court noted that in the case of Delhi Development Authority versus Skipper Construction Company (P) Ltd. and Anr. (1996), the Supreme Court had ruled that in a case where it is found that the public company was incorporated only as a facade, for the purposes of tax evasion and fraud, the corporate veil could be pierced to look at the reality behind the corporate veil.

The Court also observed that the Punjab and Haryana High Court in Kishan Lal versus Union of India (2016) had quashed the order passed by the revenue authorities against the director of a public company by exercising jurisdiction under Section 179 of the Income Tax Act. The High Court had noted that the Income Tax Authority had failed to refer and consider certain aspects in the show cause notice and the order passed by it, including the extent of shareholding of the directors, the extent of control exercised by them regarding the affairs of the company and the extent of their representation on the board of directors. The High Court had further observed that the Income Tax Authority had not taken into consideration the issue as to whether the assessee company was converted into a public limited company for the purpose of avoiding any statutory liability and/or for conferring any benefits upon the directors of the said company.

Noting that the ACIT, in the notice issued under Section 179 of the Income Tax Act, did not inform the petitioner of its intention to treat the assessee company as a private company by invoking the principle of 'lifting the corporate veil', the Court held that the said notice did not refer to any material or conclusion based upon which the revenue department could assume jurisdiction against the directors of the assessee company under Section 179. The Bench added that the procedure adopted by the ACIT was violative of the principles of natural justice.

"We do not wish to go into the question as to whether, the facts and circumstances of the case justified invoking the principle of lifting the corporate veil as in our opinion, the procedure adopted by respondent No.1 was clearly violative of the principles of natural justice and without affording to the petitioner, an opportunity of being heard on the question, as to why the principle of 'lifting the corporate veil' be not applied in the case of CMPL to justify the recovery of the tax dues from the directors.", the Court said.

The Bench held that power under Section 179 can be exercised against the directors of the private company only if the tax dues cannot be recovered from the said private company. The Court added that to justify that the tax dues cannot be recovered from the company, the Assessing Officer has to enumerate the steps taken towards recovery of tax dues from the company, which may include attachment of the accounts and the movable and immovable assets of the company.

Observing that in the show cause notice issued by the ACIT, there was no satisfaction recorded that the tax cannot be recovered from the assessee company, the Court held that recovery procedure under Section 179 against the directors of the assessee company cannot be resorted to casually.

The Court found that the ACIT had mechanically resorted to the provisions of Section 179. Thus, the Court allowed the writ petition and quashed the order passed by the ACIT under Section 179 and the order passed by the DCIT in the revision petition filed by the petitioner.

Case Title: Rajendra R. Singh versus Assistant Commissioner of Income Tax and Ors.

Dated: 26.06.2022 (Bombay High Court)

Counsel for the Petitioner: Mr. Madhur Agrawal with Mr. Harsh M. Kapadia

Counsel for the Respondents: Mr. Suresh Kumar and Mr Akhileshwar Sharma

Click Here To Read/Download Order