2014 (4) TMI 210 - HC - Income Tax

Directors not liable for company tax debt recovery, court rules.

Jashvantlal Natverlal Kansara Versus Income-tax Officer

The court ruled in favor of the petitioners, the directors of a private company facing a recovery order under section 179(1) of the Income-tax Act, 1961. ... Validity of order u/s 179(1) of the Act – Liability of directors of private company in liquidation - Held that:- The assessees were the directors of a private company - The company had tax dues towards the Department - Despite the efforts by the Department, such dues could not be recovered – Relying upon Maganbhai Hansrajbhai Patel v. Asst. CIT [2012 (11) TMI 189 - GUJARAT HIGH COURT ] - the company had run into losses - The company had substantial dues towards the State Bank of India from which it had taken loans and also enjoyed overdraft facility. Certain properties of the company were also mortgaged to the bank - the AO ought to have held that the assessees had succeeded in establishing that non-recovery of the tax dues of the company could not be attributed to gross neglect, misfeasance or breach of duty on the part of the directors in relation to the affairs of the company - It does not appear that the assessees had consented that the bank dues may also be recovered from such fixed assets - It was the DRT which had given such liberty to the bank - the contention of the counsel for the Revenue that the petitioners should have offered the said properties for recovery to the Department, can still not bring the action of the petitioners within the expression of gross neglect, misfeasance or breach of duty on their part – thus, the order passed by the CIT set aside – Decided in favour of Assessee. Issues:Challenge to order under section 179(1) of the Income-tax Act, 1961.Detailed Analysis:1. Facts and Background:The petitioners, as directors of a private company, faced a recovery order from the Income-tax Officer under section 179(1) of the Income-tax Act, 1961, due to unpaid tax dues of the company. Despite efforts, the tax dues could not be recovered from the company, leading to the action against the directors.2. Legal Provisions and Interpretation:Section 179(1) empowers the Department to recover unpaid tax dues of a private company from its directors unless they prove that non-recovery is not due to gross neglect, misfeasance, or breach of duty on their part in relation to the company's affairs. The court cited the case of Maganbhai Hansrajbhai Patel v. Asst. CIT to emphasize the burden of proof on directors to show lack of gross negligence.3. Director's Defense and Tribunal Order:The directors argued that they had settled the company's dues with the bank, forgone personal loans to the company, and taken steps to strike off the company's name due to financial difficulties. The Debts Recovery Tribunal order indicated that the bank had rights over certain assets, but it was not shown that the directors consented to using those assets for tax recovery.4. Court's Decision and Rationale:The court found that the directors had taken necessary steps to settle the company's debts and had not acted with gross neglect, misfeasance, or breach of duty. The Income-tax Officer's order and the Commissioner's dismissal were quashed, ruling in favor of the petitioners. The court highlighted that the recovery could not be attributed to the directors' actions, leading to the disposal of the petition without costs.In conclusion, the judgment analyzed the application of section 179(1) in the context of recovering tax dues from directors of a private company, emphasizing the need for directors to prove lack of gross negligence to avoid liability. The court found in favor of the petitioners, highlighting their efforts to settle the company's debts and lack of evidence showing their neglect or breach of duty.