1984 (2) TMI 63 - HC - Income Tax

Director of private company not personally liable for tax arrears under Income Tax Act.

The court ruled in favor of the petitioner, a director of a private limited company, in a case concerning personal liability for the company's tax arrears ... Recovery Issues:1. Whether the petitioner can be held personally liable for the company's tax arrears under section 179 of the Income Tax Act, 1961.2. Whether the order under section 179 and the subsequent attachments made by the Tax Recovery Officer are valid.Analysis:Issue 1:The petitioner, a director of a private limited company involved in construction and sale of flats, was served with a notice under section 179 of the Income Tax Act, 1961, to show cause for the recovery of the company's tax arrears. The Income Tax Officer (ITO) held the petitioner personally liable for the tax amount, disregarding the company's contention that profits for a builder cannot be determined based on work-in-progress. The ITO's decision was based on the existence of a valid demand pending for years and the rejection of the company's appeals up to the Tribunal. However, the petitioner argued that the tax liability could not be imposed retroactively under section 179, as clarified in a previous judgment. The petitioner also contended that the ITO failed to consider whether the non-recovery was due to neglect, misfeasance, or breach of duty on the petitioner's part. The court held that the order under section 179 was invalid as it did not address these crucial aspects, thereby ruling in favor of the petitioner.Issue 2:The petitioner challenged the order under section 179 and the subsequent attachments made by the Tax Recovery Officer. The court upheld the petitioner's submission based on a previous judgment that clarified the limitations of section 179 regarding retroactive tax liability. Additionally, the court found that the ITO failed to consider whether the non-recovery of taxes could be attributed to the petitioner's negligence, misfeasance, or breach of duty, as claimed by the company. As a result, the court declared the order under section 179 and the attachments made pursuant to it as invalid. The petition was granted in favor of the petitioner with costs, emphasizing the importance of addressing all relevant factors before holding a director personally liable for a company's tax arrears.