In Writ Petition No.1672 OF 2021 -BOM HC- Bombay High Court rules Director of company can be held liable only if non-recovery of taxes can be attributed to their gross neglect, misfeasance, or breach of duty
Justice K.R. Shriram & Justice Firdosh P. Pooniwalla [19-06-2023]

Read Order: Manjula D. Rita and Ors v. Principal Commissioner of Income Tax 12 and Ors

Chahat Varma

New Delhi, June 26, 2023: The Bombay High Court has ruled 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.

Brief facts of the case were that the petitioners, two of the legal heirs of the deceased Dinesh Shamji Rita, 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 petitioners' revision application under Section 264 was also rejected. Subsequently, 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 division bench of Justice K.R. Shriram and Justice Firdosh P. Pooniwalla noted that there was no evidence to prove that any notice was issued to the deceased. The affidavit filed by the respondents only mentioned 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. Therefore, 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. Thus, it was concluded that the order passed under Section 179 of the Act on May 7, 2018, failed to meet the necessary requirements.

The court further noted that the company was currently undergoing Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC). Hence, 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,” said the court.

The court opined 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.

The court, thus, 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.