Tax recovery from deceased director's heirs quashed due to improper Section 179 proceedings and inadequate notice

The Bombay HC allowed a revision petition challenging recovery of tax dues from a deceased director's legal heirs under Section 179(1). The court found that the Assessing Officer failed to establish that company tax dues were unrecoverable before proceeding against the director. No proper notice was given to the deceased, and no steps were taken to trace company assets. The Section 179 order lacked required ingredients and failed to make out grounds for recovery from the director. The Commissioner's rejection of the Section 264 application was also flawed, merely noting non-intimation of death without considering petitioners' submissions. Both orders were quashed and set aside.

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Issues:
The judgment involves the rejection of an application under Section 264 of the Income Tax Act, 1961, and the order passed under Section 179(1) of the Act. The key issues include the validity of the rejection of the application, the proceedings under Section 179, the lack of notice to the deceased, and the requirements for holding a Director responsible for tax dues.

Application under Section 264:
The petitioners contested an order dated 9th March 2020, rejecting their application under Section 264 of the Income Tax Act. The petitioners, as legal heirs of a deceased Director of a company, challenged an order passed under Section 143(3) of the Act, which included significant additions and a substantial demand. Despite attempts for stay and appeals, the deceased passed away before another order was issued under Section 179 of the Act. The rejection of the application under Section 264 was based on the failure to notify the Assessing Officer of the deceased's death before the order under Section 179 was signed. The court found the rejection invalid due to lack of consideration of the submissions made by the petitioners.

Order under Section 179:
The judgment also addressed the order passed under Section 179 of the Act on 7th May 2018. The court noted deficiencies in the order, including the absence of grounds for initiating proceedings under Section 179. It was highlighted that no notice was issued to the deceased, and there was a lack of evidence regarding attempts to trace the company's assets. The court emphasized that the order did not meet the necessary requirements under Section 179(1) of the Act, especially considering the company's insolvency status. Additionally, the court referenced a previous judgment emphasizing that a Director can be held responsible only if non-recovery is due to gross neglect, misfeasance, or breach of duty, which requires proper assessment and opportunity for the Director to defend against such allegations.

Conclusion:
The High Court quashed both the order dated 9th March 2020 passed under Section 264 and the order dated 7th May 2018 passed under Section 179 of the Income Tax Act. The court emphasized the importance of providing notice, opportunities for defense, and meeting the legal requirements before holding a Director accountable for tax dues. The judgment highlighted the need for proper assessment and consideration of circumstances before passing such orders.

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