2014 (2) TMI 1292 - HC - Income Tax

Court rules Section 179 of Income Tax Act not applicable to directors of public limited companies

Dhaval N. Patel Versus Commissioner of Income-Tax and another

Dhaval N. Patel Versus Commissioner of Income-Tax and another - TMI Issues Involved:1. Applicability of Section 179 of the Income Tax Act to a public limited company.2. Validity of the order under Section 179 dated 11.01.2005.3. Validity of the order under Section 264 dated 19.03.2008.4. Requirement of evidence to prove company status.Issue-wise Detailed Analysis:1. Applicability of Section 179 of the Income Tax Act to a Public Limited Company:The petitioner challenged the applicability of Section 179 of the Income Tax Act, which allows for the recovery of tax arrears from directors of a private company, asserting that the company in question was a public limited company. The court noted that Section 179 is specifically applicable to private companies and does not extend to public limited companies. The provision states that directors of a private company can be held jointly and severally liable for tax dues if the company fails to pay, unless they prove that the non-recovery was not due to their gross neglect, misfeasance, or breach of duty. The court emphasized that this statutory provision does not apply to public companies, thereby invalidating the application of Section 179 in this case.2. Validity of the Order under Section 179 dated 11.01.2005:The court examined the factual background, noting that the petitioner was a director of Lanzorate Finance (India) Limited, a company that was originally incorporated as Ravit Vinimay Limited and later changed its name. The company was engaged in various business activities and had issued public equity shares in 1996. The petitioner resigned in 2000. The tax demand for the assessment year 1996-1997 amounted to Rs. 53,18,694. The court found that the company was a public limited company at the relevant time, supported by certificates of incorporation and commencement of business. Thus, the application of Section 179 was deemed inappropriate, and the order dated 11.01.2005 was invalidated.3. Validity of the Order under Section 264 dated 19.03.2008:The petitioner had also challenged the order under Section 264, which dismissed his revision application. The Commissioner of Income Tax had rejected the revision application on the grounds that the earlier Special Civil Application was dismissed due to lack of evidence proving the company's public status. The court held that the mere absence of documents in the earlier petition should not preclude a thorough examination of the company's status in the revision application. The court found that the revision order was improperly dismissed and thus invalid.4. Requirement of Evidence to Prove Company Status:The court addressed the issue of evidence, noting that the earlier petition was dismissed because the petitioner failed to provide sufficient evidence to prove that the company was a public limited company. However, in the current proceedings, the petitioner presented substantial evidence, including certificates of incorporation and commencement of business, which clearly indicated the company's public status. The court emphasized that the mention of a status code in the income return, indicating a private company, was insufficient to override the substantive evidence provided. The court concluded that the earlier dismissal should not have prevented the revision application from being considered on its merits.Conclusion:The court allowed the petitions, quashing the impugned orders under Section 179 dated 11.01.2005 and under Section 264 dated 19.03.2008, along with all consequential proceedings. The court ruled that Section 179 was not applicable to the petitioner as the company was a public limited company, and the evidence provided substantiated this status. The rule was made absolute with no order as to costs.