2002 (4) TMI 11 - HC - Income Tax

Court quashes tax notices against non-executive directors, emphasizes company's liability. Assessing Officer's findings crucial.

The court quashed the notices issued under section 179 of the Income-tax Act, 1961 to the petitioners, who were non-executive directors of a company. The ... Notice has been issued to the petitioners under section 179(1) – liability of directors for payment of tax - proceeding can be initiated as against the directors of the company provided there is a finding that the tax for the relevant period cannot be recovered from the company. - In the impugned notice I do not find any averment about due compliance of the show cause notice under section 179 of the Act to the extent that the tax cannot be recovered from the company. - Therefore, such notice cannot be sustained. Hence, the notice stands quashed. Issues:Challenge to notices under section 179 of the Income-tax Act, 1961.Analysis:The judgment involved a challenge to notices under section 179 of the Income-tax Act, 1961, issued to the petitioners. The petitioners, who were non-executive directors of a company, contended that they should not be held personally liable for the company's tax dues as they had resigned before the tax liabilities arose. The petitioners argued that the authority should have first attempted to recover the tax from the company before pursuing them personally. The court examined the provisions of section 179, which state that directors can be held jointly and severally liable for the company's tax if it cannot be recovered from the company itself. The court considered various judgments cited by both parties to determine the extent of directors' liability under this section.The court noted that for the writ jurisdiction to be invoked, there must be evidence of illegality or material irregularity in the notice served. It analyzed the provisions of section 179 and observed that the joint or several liability of directors arises only if the tax cannot be recovered from the company. The court referred to judgments from different High Courts to establish that a proceeding against directors can only be initiated if there is a finding that the tax cannot be recovered from the company. In this case, the court found that the notice did not contain any averment indicating that the tax could not be recovered from the company. Therefore, the court quashed the notice and allowed the writ petition, emphasizing that the notice was not sustainable due to lack of evidence regarding the company's inability to pay the tax.The court clarified that its order did not prevent the authorities from initiating fresh proceedings if they found that the tax for the relevant period could not be recovered from the company. The judgment highlighted the importance of proper findings by the Assessing Officer regarding the company's inability to pay taxes before holding directors personally liable. The court directed the parties to act on the signed copy of the judgment and provided for the supply of certified copies to all concerned parties within a specified timeframe. The judgment emphasized that the order had a binding effect on both writ petitions and did not admit any factual allegations due to the absence of affidavits from the respondent authorities.