Gujarat HC in the case of Sonal Nimish Patel Versus Assistant Commissioner of Income Tax

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/SPECIAL CIVIL APPLICATION NO. 3947 of 2019
SONAL NIMISH PATEL 
Versus 
ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 4(1)(2) 
Appearance: MR B S SOPARKAR(6851) for the Petitioner(s) No. 1 MR.M.R.BHATT, SENIOR ADVOCATE WITH MRS MAUNA M BHATT(174) for the Respondent(s) No. 1 
CORAM: HONOURABLE MR.JUSTICE J.B.PARDIWALA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA
Date : 20/01/2020 
ORAL ORDER 
(PER : HONOURABLE MR.JUSTICE J.B.PARDIWALA)
1.  Rule  returnable  forthwith.   Mrs.Mauna   Bhatt,   the learned standing counsel waives service of notice of rule for and on behalf of the Revenue. 
2. By   this   writ   application   under   Article   226   of the   Constitution   of   India,   the   writ­applicant   has prayed for the following relief(s):­ 
“7(a)   quash   and   set   aside   the   impugned   order   at Annexure­A to this petition; 
  (b)   Pending   the   admission,   hearing   and   final disposal of this petition, to stay implementation and operation of the order at Annexure­'A' to this petition.
  (c) any other and further relief deemed just and proper be granted in the interest of justice;
  (d) to provide for the cost of this petition.”
3. The   subject   matter   of   challenge   in   this   writapplication at the instance of the writ­applicant is an order passed by the respondent under Section 179 of   the   Income   Tax   Act,   1961   (for   short   the “Act,1961”). The impugned order reads thus:­ 
“   ORDER U/S.179 OF the Income Tax Act, 1961 
In   the   case   of   M/s.   Tirupati   Proteins Pvt.Ltd   (PAN­AABCT8423E)   demand   of   Rs.9074.34 lakhs is outstanding as on date and the breakup of the demand as mentioned is given as under:­

No.

A.Y.

Demand  (Lakhs)

Nature of Demand (Tax/Interest /Penalty)

1

2011­-12

7983.85 

Tax + Interest

2

2012­-13

782.36

Tax

3

2013­-14

292.99

Tax 

4

2014-­15

15.14 

Tax 

Total

9074.34

2. The said demand has not been paid till date. Despite being given a number of opportunities, the company   did   not   make   the   payment   of   outstanding demand of Rs.9074.34 lacs. 

3. At the relevant point of time the directors of   the   assessee   company   were   Smt.   Sonal   Nimish Patel and Smt. Ashita Nilesh Patel. Further, it is noticed from the records of the company that there are no recoverable assets in the name of assessee company. In such circumstances, proceedings under Section   179   of   the   I.T.Act   were   initiated   on 02.11.2017 by way of issuing of notice to the then Directors and all the directors were requested to show cause vide notice  u/s 179 of the Act as to why   they   should   not   be   treated   as   jointly   and severally liable for the payment of such tax and why   an   order   u/s   179   of   the   Income   Act,   1961 should not be passed against them. In terms of the said   notice   the   directors   were   to   attend   the office   of   the   undersigned   on   10.11.2017   with explanation.   But   no   compliance   was   made   in response   to   the   said   notice.   It   is   noticed   that neither the Directors  or any of their  authorized representatives   attended   nor   any   written submission was furnished. 
4. The Company, M/s. Tirupati Proteins Pvt.Ltd. is a private company and hence, the provisions of Section 179 of the I.T.Act are clearly applicable in the case of directors of the said company. As directors of the company it was duty bound on the part   of  the   directors   of  the   company   to  pay   tax due. The directors of the assessee company failed to   discharge   that   duty,   hence   provisions   of section 179(1) are clearly attracted. Reliance is placed   on   the   decision   of   Union   of   India   vs. Praveen D.Desai (1988) 173 ITR 303. 
5. The provisions of Section 179 of the Act are very clear in this matter and is reproduced below:
“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 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   unless   he   proves   that   the non­recovery   cannot   be   attributed   to   any   gross neglect,   misfeasance   or   breach   of   duty   on   his part in relation to the affairs of the company.”
6. It is further emphasized that the Board had desired that the provisions of Section 179 of the IT   Act   should   not   be   used   more   vigorously   and frequently in such instances. Instruction No.1519 vide F.No.404/110/82­ITCC dated 20.07.1983 OF the CBDT   states   that   the   AO   can   proceed   u/s.   179 simultaneously against company & directors and it is not necessary that action against  the company should be exhausted. 
7. Thus,   from   all   the   angles,   the   assessee company falls within the ambit of Section 179 of the   I.T.Act.   Smt.Sonal   Nimish   Patel   and   Smt. Ashita   Nilesh   Patel,   were   the   directors   of   the company for the period under consideration during which   demand   was   raised   an   the   default   of   nonpayment   of   tax   occurred.   In   response   to   the proceedings   initiated   u/s.   179(1)   of   the   IT   Ac, the directors failed to furnish any reply to the notice   u/s.   179(1)   of   the   I.T.Act.   It   is therefore,   presumed   that   the   directors   have   no objection   for   passing   order   u/s.   179   of   the I.T.Act.   In   light   of   the   discussion   made   in   the foregoing   paragraphs,   since   the   demand   is   not recoverable   from   the   assessee   company, responsibility   is   fixed   upon   the   then   directors u/s. 179(1) of the IT Act and they will be treated as assessee in default in respect of tax, interest and penalty recoverable from the assessee company.
8. Considering   the   above   facts,   Smt.Sonal Nimish Patel and Smt. Ashita Nilesh Patel are held jointly   and   severally   liable   to   make   payment   of outstanding demand of RS.9074.34 lakhs as well as any future demand which may arise in the case of Assessee Company, as provided under Section 179 of the IT Act.
[AKTA JAIN B] 
Asst.Commissioner of Income Tax, 
Cirlce – 4(1)(2), Ahmedabad.”
4. The   aforesaid   order   under   Section   179   of   the Act,   1961   is   the   outcome   of   the   show­cause   notice dated   02.11.2017   (Annexure­A   to   this   writapplication). The show­cause notice dated 02.11.2017 reads thus:­
“To, 
Smt.Sonal Nimish Patel,
13/6 Dariyapur Patel Society, 
Usmanpura, 
Ahmedabad – 380 013
Sub: Show Cause notice u/s 179 of the Income Tax Act, 1961 – Recovery of outstanding demand of Rs.9074.34 lacs for A.Y.2011­ 12 to A.Y.2014­15 in the case of M/s.   Tirupati Proteins Pvt.Ltd.­ reg.
A   total   demand   of   Rs.9074.34   lacs   is outstanding   against   M/s.   Tirupati   Proteins Pvt.Ltd.   for   A.Y.   2011­12.   The   company   has   not made   the   said   payment   despite   various   notices given   to   it   in   this   regard.   You   are,   therefore, requested to show cause as to why an order u/s 179 of the Act should not be made against you as you are/were   the   director   of   the   company   during   the period to which the demand relates and show cause as   to   why   you   should   not   be   held   jointly   and severally   liable   for   payment   of   above   demand   of tax.   You   are   requested   to   attend   the   office   on 10.11.2017   at   11.00   AM  with   your   explanation, failing which, order u/s. 179 of the Act shall be passed against you. 
You  are also  requested  to furnish  the copy of   latest   balance   sheet/statement   of   affairs including the name and address of banks where you are   holding   accounts   with   bank   A/c.   Nos.   Name   & address   of   the   debtor   and   and   also   location   of fixed assets owned by you. 
(AKTA JAIN B) Assistant Commissioner of Income Tax, Circle­4(1)(2), Ahmedabad.
5. Mr. B.S.Soparkar, the learned counsel appearing for the writ­applicant, submitted that the impugned order   is   not   tenable   in   law.   According   to   the learned   counsel,   Section   179   of   the   Act,   1961,   iswith   respect   to   the   liability   of   the   Directors   of the   private   company   in   liquidation.   If   any   tax   is due from the private company and the Revenue is not able   to   recover   such   tax   from   the   company,   then every person being a Director of the private company at any time during the relevant previous year can be held jointly and severally liable for the payment of such tax, unless the Director  proves  that the nonrecovery of tax due against the company could not be attributed   to   any   gross   negligence,   misfeasance   or breach   of   duty   on   their   part   in   relation   to   the affairs of the company.  
6. According   to   Mr.Soparkar,   just   because   the Department failed in recovering the dues towards the tax from the company, it could not have proceeded to seek such recovery from the properties of the writapplicant. It is also the case of the writ­applicant that she had resigned as a Director of the Company long time back, and therefore,  could not have been fastened with any liability. 
7. Mr.Soparkar   has   invited   the   attention   of   this Court   to   the   show­cause   notice   dated   02.09.2017. According   to   Mr.Soparkar,   the   show­cause   notice   is bereft   of   the   material   particulars   as   regards   the steps said to have been taken by the Department for the purpose of recovering the tax from the company. It is submitted that it is obligatory on the part of the   Department   to   demonstrate,   by   some   material   onrecord,   that   it   had   taken   the   necessary   steps   to recover   the   dues   from   the   company,   but   such   steps failed.
8. Mr.Soparkar  would  further  submit   that  even  the order passed by the Assistant Commissioner of Income Tax dated 11.12.2017 under Section  179 of the Act, 1961 does not disclose any such material. According to   Mr.Soparkar,   in   such   circumstances,   referred   to above,   the   Department   could   not   have   proceeded against   the   writ­applicant   as   a   Director   of   the Company. The condition precedent for the purpose of invoking Section 179 of the Act, 1961 is that it is only   in   the   event   the   Department   fails   to   recover the   dues   from   the   company   that   it   can   proceed against the Director jointly or severally.
9. Mr.Soparkar  further  pointed  out  that   after  the impugned order came to be passed  under Section 179 of the Act,1961, a notice  was issued under Section 226(3)   of   the   Act   to   the   Principal   Officer   of   the HDFC Bank limited with whom the writ­applicant has a bank   account   and   the   bank   account   has   been accordingly freezed. In such circumstances, referred to above, Mr.Soparkar prays that the impugned order passed   by   the   Assistant   Commissioner   of   Income   Tax under Section 179 of the Act, 1961, be quashed and set   aside   and   the   bank   account   be   ordered   to   be defreezed.
10. On   the   other   hand,   this   writ­application   has been vehemently opposed by Mr.M.R.Bhatt, the learned counsel   appearing   for   the   Revenue.   According   to Mr.Bhatt, no error not to speak of any error of law could   be   said   to   have   been   committed   by   the respondent in passing the impugned order. 
11. According to Mr.Bhatt, the burden is not on the Department to prove that they could not recover the tax from the company on account of gross negligence, misfeasance   or   breach   of   duty   on   the   part   of   the Directors of the Company, but on the contrary, it is for the Directors against whom the Department wants to proceed to prove that the non­recovery cannot be attributed   to   any   gross   negligence,   misfeasance   or breach of duty on their part. 
12. According to Mr.Bhatt, in the case on hand, due steps were taken against the company for the purpose of   recovery   of   the   dues,   but   unfortunately   such steps   failed   and   the   Department   is   not   able   to recover anything.
13. Mr.Bhatt   pointed   out   that   they   could   not   find any   asset   of   the   company   upon   which   there   is   no encumberance.   In   other   words,   according   to   the Mr.Bhatt,   there   is   a   charge   of   one   institution   or the   other   on   the   assets   of   the   company.   However, Mr.Bhatt very fairly pointed out that the show­cause notice as well as the impugned final order is silentso far as the steps taken by the Department against the company is concerned.
14. Today, when the matter is taken up for further hearing,   an   additional   affidavit­in­reply,   duly affirmed   by   the   Deputy   Commissioner   of   Income   Tax, Circle   4(1)(2),   Ahmedabad,   is   being   tendered   to indicate the steps taken against the company for the recovery   of  the   dues.   A  copy   of  the  same   has   been furnished today to Mr.Soparkar, the learned counsel appearing   for   the   writ­applicant.   The   additional affidavit­in­reply is ordered to be taken on record.
15. Over and above the same, there is an affidavitin­reply on record dated 26.06.2019. 
16. Mr.Bhatt   would   submit   that   there   is   quite   a sizable   amount   in   the   bank   account   of   the   writapplicant maintained with the HDFC Bank Limited. As the Department has not been able to recover anything from the Company,  the only hope for the Department is now to recover some of the dues by attaching the bank accounts of the Directors. 
17. In   such   circumstances,   referred   to   above,   the learned   counsel   Mr.Bhatt   prays   that   there   being   no merit in the writ­application, the same be rejected.
18. Having  heard   the  learned   counsel   appearing  for the parties and having gone through the materials onrecord,   the   only   question   that   falls   for   our consideration   is,   whether   the   respondent   has committed any error in passing the impugned order. 
19. Section 179 of the Act, 1961 reads thus:­ 
“Liability   of   directors   of   private   company   in liquidation.
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   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 unless he proves that the non­recovery cannot be attributed to any gross 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   sub­section   (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. 
Explanation.—For the purposes of this section, the expression "tax due" includes penalty, interest or any other sum payable under the Act.” 
20. In   the   case   of  Maganbhai   Hanrajbhai   Patel   vs. Assistant   CIT   [(2013)   353   ITR   57],   this   Court   had the occasion to examine Section 179 of the Act, 1961 in detail. It has been held therein that sub­section (1) of Section 179 of the Act, 1961 provides for the joint   and   several   liability   of   the   directors   of   a private   company,   wherein   the   tax   dues   from   such company   in   respect   of   any   income   of   any   previous year   cannot   be   recovered.   The   first   requirement, therefore, to attract such liability of the director of a private limited company is that the tax cannot be   recovered   from   the   company   itself.   Such requirement   is   held   to   be   a   pre­requisite   and necessary   condition   to   be   fulfilled   before   action under  Section   179  of   the  Act   can  be  taken.   In  the context of Section 179 of the Act, 1961, this Court held   that   before   recovery   in   respect   of   the   dues from a private company can be initiated against the directors, to make them jointly and severally liable for   such   dues,   it   is   necessary   for   the   Revenue   to establish that such recovery cannot be made against the   company   and   then   alone   it   can   reach   to   the directors   who   were   responsible   for   the   conduct   of the business during the previous year in relation to which liability exists.
21. There   is   no   escape   from   the   fact   that   the perusal of the Notice under Section 179 of the Act, 1961,   reveals   that   the   same   is   totally   silent   as regards the satisfaction of the condition precedent for   taking   action   under   Section   179   of   the   Act, 1961,   viz.   that   the   tax   dues   cannot   be   recovered from the Company. In the show­cause notice, there is no   whisper   of   any   steps   having   been   taken   against the Company for recovery of the outstanding amount. Even   in   the   impugned   order,   no   such   details   or information has been staled.
22. In   such   circumstances,   referred   to   above,   the question is, whether such an order could be said to be sustainable in law. The answer has to be in the negative.   At   the   same   time,   in   the   peculiar   facts and circumstances of the case and more particularly, when   it  has   been   indicated   before   us  by  way   of  an additional   affidavit­in­reply   as   regards   the   steps taken   against   the   company   for   the   recovery   of   the dues,   we   would   like   to   give   one   chance   to   the department  to undertake a fresh exercise  so far as Section 179 of the Act, 1961, is concerned. If the show­cause   notice   is   silent   including   the   impugned order,   the   void   left   behind   in   the   two   documents cannot   be   filled   by   way   of   an   affidavit­in­reply. Ultimately, it is the subjective satisfaction of the authority concerned that is important and it should be   reflected   from   the   order   itself   based   on   some cogent   materials.   However,   with   a   view   to   protect the interest of both, the writ applicant as well as Revenue, we are inclined to quash the impugned order and give one opportunity to the Revenue to initiate the   proceedings   afresh   by   issuance   of   fresh   showcause notice with all necessary details so that the writ­applicant   can   meet   with   the   case   of   the Revenue.   We   are   inclined   to   adopt   such   measure keeping   in   mind   the   statement   made   by   the   learned counsel Mr.Soparkar that till the fresh proceedings are not completed,  his client  will not operate thebank account.
23. In view of the above, this writ­application is partly  allowed.  The impugned  notice as well as the order is hereby quashed and set aside. It shall be open   for   the   respondent   to   issue   fresh   show­cause notice   for   the   purpose   of   proceeding   against   the writ­applicant   under   Section   179   of   the   Act,   1961. We would like to give a time bound program so that the   proceedings   may   not   go   on   for   an   indefinite period.   We   are   also   issuing   such   direction   because of the statement being made that the writ ­applicant will   not   operate   the   bank   account   till   the   fresh proceedings   are   initiated   and   completed.   In   such circumstances,   we   grant   two   months'   time   from   the date   of   receipt   of   the   writ   of   this   order   to   the Department   to   initiate   fresh   proceedings   and   pass appropriate orders in accordance with law. Till the final order is passed, the writ­applicant shall not operate the bank account concerned. 
24. In view of the above, two notices under Section 226(3)   of   the   Act,   1961,   i.e.   one,   to   the   Kalupur Commercial Cooperative Bank Limited, and another, to the   HDFC   Bank   Limited,   are   also   quashed   and   set aside.  
25. With   the   above,   this   writ­application   stands disposed of. 

26. One   copy   of   this   order   shall   be   furnished   to Mrs.Bhatt,   the   learned   standing   counsel   for   the respondent for its onward communication. 

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