RAMCHANDRA BHAGWANDAS JESWANI V. INCOME TAX OFFICER

SCA/5355/2018

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The case involves Sadhna Ramchandra Jeswani, a former director of Brajvashi Caterers Private Limited, who challenged an order from the Income Tax Officer demanding payment of unpaid tax dues of the company under section 179 of the Income Tax Act, 1961. The Income Tax Officer had issued a notice to the petitioner, stating that the company was non-existent at the registered address and that the petitioner, being a director during the relevant assessment year, was liable for the dues. The petitioner contested the notice, asserting her resignation prior to the relevant period and lack of involvement in the company's affairs. The court examined whether the Income Tax Officer had met the legal requirements to hold the petitioner liable for the company's tax dues.

• Counselvise Citation: [2018] 140 COUNSELVISE.COM (IT) 770474 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 27-08-2018
• Assessment Year: misc
• Other Referred Cases: Pravinbhai M. Kheni vs. Assistant Commissioner of Income Tax, Bhagwandas J. Patel, Indubhai T. Vasa(HUF) v. Incometax Officer
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: MAUNA BHATT
• Assessee Lawyers: DARSHAN PATEL
• Keywords: Assessment Year 2010-11; Corporate Veil; Director liability; Income Tax; Unpaid Tax Dues
• Section: 179

Judgement Text

"C/SCA/5354/2018 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 5354 of 2018 With R/SPECIAL CIVIL APPLICATION NO. 5355 of 2018 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MR.JUSTICE B.N. KARIA ========================================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India or any order made thereunder ? ========================================================== SADHNA RAMCHANDRA JESWANI Versus INCOME TAX OFFICER ========================================================== Appearance: DARSHAN R PATEL(8486) for the PETITIONER(s) No. 1 MRS MAUNA M BHATT(174) for the RESPONDENT(s) No. 1 ========================================================== CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MR.JUSTICE B.N. KARIA Date : 27/08/2018 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) Page 1 of 7 C/SCA/5354/2018 JUDGMENT 1. These petitions arises in common background. We may record facts from Special Civil Application No. 5354 of 2018. 2. Petitioner-an ex-director of one Brajvashi Caterers Private Limited has challenged an order dated 28.02.2018 passed by the respondent-Income Tax Officer seeking to recover the unpaid tax dues of the company from the petitioner in terms of section 179 of the Income Tax Act, 1961. 3. Record suggests that for the assessment year 2010-11, the Assessing Officer passed an order of assessment in case of the said company on 15.12.2017. This order resulted into demand of unpaid tax of Rs. 17.06 lacs (rounded off). Since the company did not pay the same, the Assessing Officer desired to invoke section 179 of the Act for which purpose, he issued notice on 07.02.2018. In the said notice, he stated thus: “2. In this regard, it is to state that total demand of Rs. 17,06,460/- as per the I.T.Act is outstanding in the case of M/s. Brijvashi Caterers Pvt. Ltd. This office has sent several letter at G-10, Mangal Murti Complex, Nr. Shiv Cinema Ashram Road, Ahmedabad during the course of assessment proceedings but the same was returned back with the remarks “left”. Moreover, the Inspector, who was deputed for inquiry had reported that the said company does not exist at the above mentioned premises. Also in the submission dated 07/12/2017. It has been reported by the Authorized Representative (AR) that the company is closed and its name is struck off from the list of ROC. Page 2 of 7 C/SCA/5354/2018 JUDGMENT 3. In view of the above facts, the direct recovery is not possible from the company. However, as per records, you were the director of the company during the A.Y. 2010-11. Therefore in view of provisions of section 179(1) of the I.T.Act, 1961 you are liable to pay the outstanding due of your company which is a private limited company. 4. You are hereby requested to explain as to why the outstanding demand of rs. 17,06,460/- till date as per the provisions of the I.T.Act should not be recovered from you. You are required to furnish your reply to this notice within 7 days of receipt of this notice.” 5. The petitioner opposed the notice by filing reply dated 15.02.2018 in which, she contended that she had resigned as Director from the company w.e.f. 29.12.2009. Since her resignation, she had no association with the company. The affairs of the company are managed by one Narendrasinh Chauhan along with his brother Kalpeshkumar Chauhan and another. These directors have defrauded the company and the Revenue. On her part, there is no negligence, misfeasance or breach of duty as a director which led to revenue defalcation. 6. The Assessing Officer ignored such pleas and passed the impugned order on 28.02.2018 asking her to pay up dues of the company. Much of this order is devoted to the question whether powers under section 179 of the Act can be invoked even against the director of the public company. All that with respect to the present petitioner he had to state was, the petitioner was a director of the company during the relevant Page 3 of 7 C/SCA/5354/2018 JUDGMENT period and for such period, the tax dues of the company could not be recovered from the company. He therefore concluded as under: “It can thus be seen that the primary reason for failure to collect the demand is on account of total closure of business operations, non-existence of office premises, etc. No provision was made by the company or any of its Directors to ensure payment of government dues which were bound to arise on account of deliberate and known acts of gross neglect, misfeasance and breach of duty by all directors of the company. Recovery was not possible for the following reasons:- Total absence of any identifiable assets, immovable assets of the company which could be attached and recovery made there from, nil balance in bank accounts and debtors which was attached or any other sources from which the recovery could be made. In view of the above findings and detailed discussion, every possible requirement of passing an order u/s. 179 has been met with and consequently, the above named person is hereby held jointly and severally responsible and liable u/s. 179 for payments of demand of all Income-tax, interest, penalties etc. which have been raised so far or may be further raised in future.” 7. At the outset, we may notice that section 179 of the Act would enable the Revenue to recover the unpaid tax dues of a private company from its director, unless he proves that the non- recovery cannot be attributed to any gross negligent, misfeasance or breach of duty on his part in relation to the affairs of the company. Of course this requirement is cast in Page 4 of 7 C/SCA/5354/2018 JUDGMENT the negative and the burden is on the person who was a director of the company at the relevant time to establish the relevant facts. Nevertheless, it would be the onus of the Assessing Officer to draw the primary facts to the notice of the assessee on the basis of which, he proposes to invoke powers under section 179 of the Act. Essentially, this statutory provision provides for lifting of corporate veil and enable the Revenue to recover the unpaid tax dues of a private company from its directors, provided the requirements referred to in sub-section (1) of section 179 of the Act are satisfied. In case of Pravinbhai M. Kheni vs. Assistant Commissioner of Income Tax and ors reported in 353 ITR 585 in the context of the said provision, the Division Bench had observed as under: “7. Sub-section(1) of section 179 as can be noticed provides that notwithstanding anything contained in the Companies Act, 1956, where any tax due from a private company or other company during the period when such company was a private company cannot be recovered, then, every person who was a director of the said company at the relevant time shall be jointly and severally liable for the payment of such tax. Such recovery however can be avoided, if such a person proves that 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. 8. Fundamental requirement for applicability of section 179 of the Act, of-course is that tax dues cannot be recovered from the company. In case of Bhagwandas J. Patel (supra), Division Bench of this Court had taken a similar view. Division Bench observed as under : Page 5 of 7 C/SCA/5354/2018 JUDGMENT “A bare perusal of the provision shows that before recovery in respect of dues from the private company can be initiated against director, 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 and then alone it can reach the directors who were responsible for the conduct of business during the previous year in relation to which liability exists.” In case of Indubhai T. Vasa(HUF) v. Incometax Officer reported in (2006) 282 ITR 120(Guj.), this Court reiterated such proposition following the decision in case of Bhagwandas J. Patel(supra) observing : “In these circumstances, it is not possible to accept the stand of the respondent that despite best efforts the taxes due from the Company cannot be recovered. As laid down by this Court the phrase \"cannot be recovered\" requires the Revenue to establish that such recovery cannot be made against the Company and then and then alone would it be permissible for the Revenue to initiate action against the director or directors responsible for conducting the affairs of the Company during the relevant accounting period. Hence, the prerequisite condition stipulated by Section 179 of the Act remains unfulfilled in context of the facts available on record by virtue of the impugned order as well as the affidavit-in reply.” 8. Reverting back to the facts of the case, we notice that in show- cause notice the Assessing Officer has not laid down sufficient foundation for invoking section 179 of the Act leave alone broadly pointing out he has not even alleged that non-recovery was on account of gross negligent, misfeasance or breach of duty on part of the petitioner in relation to the affairs of the Page 6 of 7 C/SCA/5354/2018 JUDGMENT company. His final conclusions in the impugned order are therefore based on the material at his command which was never shared with the petitioner. 9. In the result, impugned order is set aside only on this ground making it clear that nothing stated in the order would prevent the Assessing Officer from initiating fresh exercise for the same purpose, if so advised and, if the material at his command is sufficient to permit him to do so. Petitions are disposed of. (AKIL KURESHI, J) (B.N. KARIA, J) JYOTI V. JANI Page 7 of 7 "