Propriety of proceedings u/s 179 of IT Act, 1961 initiated against directors for non-payment of tax by their company
Before invoking section 179, it is sufficient if it is held that there is a gross neglect or misfeasance or breach of duty on the part of the Directors in relation to the affairs of the company.
HIGH COURT OF KARNATAKA
H. Ebrahim
v.
DCIT
W.P. No. 9314 of 2007 (T-IT)
June 15, 2009
RELEVNAT EXTRACTS:
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4. To appreciate the rival contentions of the petitioners as well as the respondents, it is necessary to look into the provisions of Section 179 of the Act. It: is useful to extract the provisions of Section 179 of the Act:
“179.(1) Notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), where any tax due from a private company in respect of any income of any previous year or from any other company m respect of any income of any previous year during which such other company was a private company cannot be recovered, then, every person who was a director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax unless he proves that the non-recovery cannot be attributed to any loss neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.
(2) Where a private company is converted into a public company and the tax assessed in respect of any income of any previous year during which such company was a private company cannot be recovered, then, nothing contained in sub-section (1) shall apply to any person who was a director of such private company in relation to any tax due in respect of any income of such private company assessable for any assessment year commencing before the 1st day of April, 1962. *
Section 179 of the Act would speak about the liability of Directors of the private company in liquidation. It would start with a non-obstante clause, inasmuch as, where any tax due from a private company in respect of any income of any previous year or from any other company in respect of any income of any previous year during which such other company was a private company cannot be recovered, then, every person who was a director of the private company at any time during the relevant "previous year shall be jointly and severally liable for the payment of such tax.
5. Indeed, we are not really concerned with Sub-Section (2) of Section 179 of the Act, inasmuch as, it would relate to a conversion of a private limited company into a public company. Indeed, before invoking Section 179 of the Act, the Directors of the Company are required to prove that they were not in a position to file the returns and the same cannot be attributed to any gross neglect, misfeasance or breach of duty on their part in relation to the affairs of the Company. Indeed, the burden is on the Directors of the Company to prove that the non-filing of returns cannot be attributed for any gross-neglect, misfeasance or breach of duty. Indeed, before invoking Section 179 of the Act it is not necessary that all the three ingredients are required to be satisfied. Indeed, it is sufficient if it is held that there is a gross neglect or misfeasance or breach of duty on the part of the Directors in relation to the affairs of the Company, The Directors of .the Company are liable to satisfy the claim in their capacity as Directors. Indeed, it is to be noticed that in the case on hand, there are as many as three claimants for the amount due to the statutory authority. Indeed, the Bank has advanced credit facility and the same is not discharged. Thus, in this background, one will have to see whether gross neglect, misfeasance or breach of duty can be attributed to the petitioners. In this regard, the reply filed by the petitioners has been considered by the respondents. It is not in dispute that the company was incorporated in the year 1990 and started production in the year 1991. It is trite that the company has not filed returns of income from the inception of the Company till the date of search under Section 132 of the Act conducted on 18.01.2001. This would be 10 years. Indeed, in the present circumstances and having regard to the large sums of money due to the statutory authorities, the petitioners cannot be heard to say that there is no gross negligence, misfeasance or breach of duty on their part In this regard, it is to be noticed that in the first instance, subsection, (1) of Section 179 of the Act casts, a burden upon the Director to prove that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part.
7. The burden being on the Directors, they ought to have established the requirements of the sub- section(l) to escape the liability and the petitioners have failed to do so. The question as to whether the petitioners have discharged the burden is a pure question of fact and cannot be examined in a writ petition under Article 226 of the Constitution of India. As observed earlier, the Company is not in a position to meet the obligation of payment of tax due to thv statutory authorities which would necessarily mean that the Company is not in a position to pay the tax/amount to the statutory authority. Hence at this point of time, the petitioners cannot be heard to say that the Company does have assets and by sale of the said assets, the tax due could be recovered from the assets of the Company. Indeed, this contention was also urged before the competent authority indicating that 90,000 sq.ft. of land and several buildings were available. In fact, that has been rightly rejected by the respondent, inasmuch as, the company had availed various types of loan from the Bank of India and also have not paid the tax due to the Commercial Tax Department It is not in dispute that the Bank of India as well as the Commercial Tax Department have initiated recovery proceedings. There is an inter se dispute between the Commercial. tax department of the State as well as the Bank of India which is not really germane for the disposal of the present proceedings, but however, suffice it to make an observation that the said amount is due. To my mind, the petitioners have failed to discharge the burden cast on them that the said non-payment of dues cannot be attributed to gross negligence, misfeasance and breach of duty. Indeed, every citizen of the country is required to file his tax returns whether taxable or not. It is no doubt true that a contention is sought to be urged by Mr. Sliankar, learned counsel for the petitioner that, if an assessee does not. have taxable income he is not required to file his income. However, the said contention cannot be accepted, inasmuch as, the Company has slept over for almost more than a decade and they cannot be heard to say that since the company did not make any profits they are not obliged to file returns. This itself is sufficient to hold that there is a gross neglect on the part of the Directors of the Company. Hence, I am of the view that all the ingredients of Section 179 of the Act are satisfied.
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Posted at www.taxmannindia.blogspot.com
Get Free Quality SMS updates from my blog on your MOBILE:http://labs.google.co.in/smschannels/subscribe/ca_taxmannindiaBefore invoking section 179, it is sufficient if it is held that there is a gross neglect or misfeasance or breach of duty on the part of the Directors in relation to the affairs of the company.
HIGH COURT OF KARNATAKA
H. Ebrahim
v.
DCIT
W.P. No. 9314 of 2007 (T-IT)
June 15, 2009
RELEVNAT EXTRACTS:
** ** ** ** ** ** ** ** ** ** ** **
4. To appreciate the rival contentions of the petitioners as well as the respondents, it is necessary to look into the provisions of Section 179 of the Act. It: is useful to extract the provisions of Section 179 of the Act:
“179.(1) Notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), where any tax due from a private company in respect of any income of any previous year or from any other company m respect of any income of any previous year during which such other company was a private company cannot be recovered, then, every person who was a director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax unless he proves that the non-recovery cannot be attributed to any loss neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.
(2) Where a private company is converted into a public company and the tax assessed in respect of any income of any previous year during which such company was a private company cannot be recovered, then, nothing contained in sub-section (1) shall apply to any person who was a director of such private company in relation to any tax due in respect of any income of such private company assessable for any assessment year commencing before the 1st day of April, 1962. *
Section 179 of the Act would speak about the liability of Directors of the private company in liquidation. It would start with a non-obstante clause, inasmuch as, where any tax due from a private company in respect of any income of any previous year or from any other company in respect of any income of any previous year during which such other company was a private company cannot be recovered, then, every person who was a director of the private company at any time during the relevant "previous year shall be jointly and severally liable for the payment of such tax.
5. Indeed, we are not really concerned with Sub-Section (2) of Section 179 of the Act, inasmuch as, it would relate to a conversion of a private limited company into a public company. Indeed, before invoking Section 179 of the Act, the Directors of the Company are required to prove that they were not in a position to file the returns and the same cannot be attributed to any gross neglect, misfeasance or breach of duty on their part in relation to the affairs of the Company. Indeed, the burden is on the Directors of the Company to prove that the non-filing of returns cannot be attributed for any gross-neglect, misfeasance or breach of duty. Indeed, before invoking Section 179 of the Act it is not necessary that all the three ingredients are required to be satisfied. Indeed, it is sufficient if it is held that there is a gross neglect or misfeasance or breach of duty on the part of the Directors in relation to the affairs of the Company, The Directors of .the Company are liable to satisfy the claim in their capacity as Directors. Indeed, it is to be noticed that in the case on hand, there are as many as three claimants for the amount due to the statutory authority. Indeed, the Bank has advanced credit facility and the same is not discharged. Thus, in this background, one will have to see whether gross neglect, misfeasance or breach of duty can be attributed to the petitioners. In this regard, the reply filed by the petitioners has been considered by the respondents. It is not in dispute that the company was incorporated in the year 1990 and started production in the year 1991. It is trite that the company has not filed returns of income from the inception of the Company till the date of search under Section 132 of the Act conducted on 18.01.2001. This would be 10 years. Indeed, in the present circumstances and having regard to the large sums of money due to the statutory authorities, the petitioners cannot be heard to say that there is no gross negligence, misfeasance or breach of duty on their part In this regard, it is to be noticed that in the first instance, subsection, (1) of Section 179 of the Act casts, a burden upon the Director to prove that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part.
7. The burden being on the Directors, they ought to have established the requirements of the sub- section(l) to escape the liability and the petitioners have failed to do so. The question as to whether the petitioners have discharged the burden is a pure question of fact and cannot be examined in a writ petition under Article 226 of the Constitution of India. As observed earlier, the Company is not in a position to meet the obligation of payment of tax due to thv statutory authorities which would necessarily mean that the Company is not in a position to pay the tax/amount to the statutory authority. Hence at this point of time, the petitioners cannot be heard to say that the Company does have assets and by sale of the said assets, the tax due could be recovered from the assets of the Company. Indeed, this contention was also urged before the competent authority indicating that 90,000 sq.ft. of land and several buildings were available. In fact, that has been rightly rejected by the respondent, inasmuch as, the company had availed various types of loan from the Bank of India and also have not paid the tax due to the Commercial Tax Department It is not in dispute that the Bank of India as well as the Commercial Tax Department have initiated recovery proceedings. There is an inter se dispute between the Commercial. tax department of the State as well as the Bank of India which is not really germane for the disposal of the present proceedings, but however, suffice it to make an observation that the said amount is due. To my mind, the petitioners have failed to discharge the burden cast on them that the said non-payment of dues cannot be attributed to gross negligence, misfeasance and breach of duty. Indeed, every citizen of the country is required to file his tax returns whether taxable or not. It is no doubt true that a contention is sought to be urged by Mr. Sliankar, learned counsel for the petitioner that, if an assessee does not. have taxable income he is not required to file his income. However, the said contention cannot be accepted, inasmuch as, the Company has slept over for almost more than a decade and they cannot be heard to say that since the company did not make any profits they are not obliged to file returns. This itself is sufficient to hold that there is a gross neglect on the part of the Directors of the Company. Hence, I am of the view that all the ingredients of Section 179 of the Act are satisfied.
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