Opinion Of Eminent Legal Luminaries On Controversial Issues

Private company – Liability of directors -Applicability of section 179 of the I.T. Act.

QUERY: AO passes an order u/s. 179(1) of the Act whereby directors of the concerned Pvt. Co. are jointly and severally held liable for payment of outstanding demand of such Pvt. Co. in which they are directors. Can such directors prefer a writ petition before the Hon’ble High Court challenging the said order? Whether, before initiating recovery proceedings u/s. 179 against directors in respect of dues of a company, it is essential for the revenue to establish that such recovery cannot be made against the company? Whether directors can be made liable for such tax dues of a company even if such non recovery cannot be attributable to any gross neglect, misfeasance or breach of duty on the part of directors?
ANSWER: Section 179(1) reads as under:
“Notwithstanding anything contained in the Companies Act, 1956 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 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 gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company”
This sub section was tested by the Bombay High Court in Dinesh T. Tailor v. TRO [326 ITR 85], wherein the Court has observed as under:
“By sub section (1) of section 179, every person who is director of a private company at any time during the relevant previous year is jointly and severally liable for the payment of tax due from the company, if such tax cannot be recovered. Though the liability of the directors is made joint and several the provision is attracted only when tax cannot be recovered from the company. It is only if the tax cannot be recovered from the company that every person who was director of the company at any time during the relevant previous year becomes jointly and severally liable”.
However, the Department has to comply the condition precedent to recovery as held by the Bombay High Court in Madhavi Kerkar v. ACIT [403 ITR 157] The Court, in the said judgment has held as under:
“That the Department acquired or get jurisdiction to proceed against the directors of the private limited company, only after it had failed to recover the dues from the company, it was a condition precedent for the Assessing Officer to exercise jurisdiction under section 179(1) against the director of the company. The jurisdictional requirement was not satisfied by a mere statement in the order that recovery proceedings had been conducted against the defaulting company but it had failed to recover its dues. Such a statement should be supported by mentioning briefly the types of efforts made and the results. The notice under section 179(1) did not indicate or give any particulars in respect of the steps taken by the Department to recover the tax dues of the defaulting company and failure thereof. In the letter sent in response to the notice, questioning the jurisdiction of the Department, the petitioner had sought details of the steps taken by the Department to recover the tax dues of the defaulting company and failure thereof. In the letter sent in response to the notice, questioning the jurisdiction of the Department, the petitioner had sought details of the steps taken by the Department and had pointed out that the defaulting company had assets of over Rs. 100 crores. Admittedly, no particulars of steps taken to recover the dues from the defaulting company were communicated to the petitioner nor indicated in the order. At no time had the petitioner been given a chance to meet the Department’s case that it had taken steps to recover the amount from the defaulting company so as to meet the jurisdictional condition precedent before passing of an order under section 179(1). The order was set aside since the condition precedent was not satisfied….”.
Thus, it is necessary that revenue should prove first that no recovery could be made from the company.

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