2004 (9) TMI 59 - HC - Income Tax

Court quashes tax liability on director, orders recovery from company.

The court quashed the notice dated March 26, 2002, and the order dated May 29, 2003, finding them illegal and unsustainable. The petitioner, a director of ... Tax recovery – company – director - petitioner challenging the proceedings and the order passed under section 179 – notices issued by the Tax Recovery Officer – Held that order passed under section 179 of the Act is contrary to the well settled principles and, therefore, cannot be sustained. It is hereby quashed. However, it will be open to the Income-tax Department to recover the outstanding amount of tax from the company or its directors who were there at the relevant time. Issues Involved:1. Validity of the notice dated March 26, 2002, issued by the Tax Recovery Officer.2. Validity of the order dated May 29, 2003, passed by the Assistant Commissioner of Income-tax under section 179 of the Income-tax Act, 1961.3. Liability of the petitioner as a director for the outstanding tax dues of M/s. Shashank Polyplast Limited.Issue-wise Detailed Analysis:1. Validity of the notice dated March 26, 2002, issued by the Tax Recovery Officer:The petitioner challenged the notice dated March 26, 2002, which called upon him to show cause why a warrant of arrest should not be issued for non-payment of outstanding dues of Rs. 70,14,000 against M/s. Shashank Polyplast Limited. The petitioner argued that he was a director only for namesake and had signed the relevant forms under duress from the actual managing director, Sri P.K. Gupta. He claimed that he had no real involvement in the company's affairs and had not received any remuneration. The court found that the notice to show cause as to why a warrant of arrest should not be issued was illegal and without jurisdiction, as it was issued before the order under section 179 of the Act was passed. The notice dated March 26, 2002, was quashed.2. Validity of the order dated May 29, 2003, passed by the Assistant Commissioner of Income-tax under section 179 of the Income-tax Act, 1961:The petitioner also challenged the order dated May 29, 2003, which held him liable for the dues of M/s. Shashank Polyplast Limited. The court noted that section 179 of the Act imposes a vicarious liability on directors of private limited companies for tax dues if the company cannot pay. However, the court emphasized that the Assessing Officer must record a finding that the tax due from the company cannot be recovered from the company itself before invoking section 179(1). The court found no such finding in the order dated May 29, 2003, making it unsustainable. The order was quashed.3. Liability of the petitioner as a director for the outstanding tax dues of M/s. Shashank Polyplast Limited:The court examined whether the petitioner could be held liable for the tax dues under section 179 of the Act. The petitioner became a director on April 3, 1993, while the outstanding dues related to assessment years 1983-84 to 1990-91 and 1992-93, periods before his directorship. Additionally, M/s. Shashank Polyplast Limited became a public company under section 43A of the Companies Act, 1956, on February 9, 1992. According to the Supreme Court's decision in M. Rajamoni Amma v. Deputy CIT, tax dues from a period when the company was a private company cannot be recovered from directors after it becomes a public company. Therefore, the petitioner could not be held liable for the dues under section 179(1) of the Act.Conclusion:The court quashed both the notice dated March 26, 2002, and the order dated May 29, 2003. It held that the petitioner could not be held liable for the outstanding tax dues of M/s. Shashank Polyplast Limited under section 179 of the Income-tax Act, 1961. The court allowed both writ petitions, stating that the Income-tax Department could recover the dues from the company or its directors who were in position during the relevant period. Each party was ordered to bear its own costs.