Directors' liability under tax recovery provisions fails when assessment is disputed and no neglect or breach of duty is shown

Section 179 fastens a private company's directors with tax liability only when recovery from the company fails and the directors cannot show that non-recovery was not due to their gross neglect, misfeasance or breach of duty. Where the company had consistently disputed the assessment and the tax demand was substantially reduced, the non-recovery could not be attributed to any fault on the part of the directors. On those facts, the statutory basis for proceeding against them was absent, and the notices and revisional order under section 179 were quashed.

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Issues: Whether the directors of a company could be fastened with liability under section 179 of the Income-tax Act, 1961, when the company was disputing the assessment and the tax demand had been substantially reduced.

Analysis: Section 179 makes directors of a private company jointly and severally liable for tax dues only where recovery from the company fails and the directors do not establish that such non-recovery was not due to their gross neglect, misfeasance or breach of duty. The company had challenged the assessment throughout and the tax liability had been sharply reduced from the original demand to a much lower figure. On those facts, the non-recovery of tax could not be attributed to any neglect or breach of duty by the directors. The challenge to the assessment itself was treated as sufficient to negative the statutory basis for fastening liability on them.

Conclusion: The notices and revisional order under section 179 were unsustainable and were quashed; the petitioners succeeded.

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