M/S.SREE VRIDHI LEASING & FINANCE (P) V. DEPUTY COMMISSIOONER OF INCOME-TAX

WP(C)/23545/2004

AI Insights

The case involves M/S. SREE VRIDHI LEASING & FINANCE(P)LTD and its directors challenging the orders passed under Section 179 of the Income Tax Act, which held them liable for the company's unpaid taxes. The petitioners argued that the authorities failed to establish that the tax dues could not be recovered from the company itself before proceeding against the directors, which is a mandatory requirement under Section 179. The respondents contended that such a specific finding was not necessary and that the directors had not provided evidence that the company had recoverable assets. The court, referencing decisions from other High Courts, agreed with the petitioners, emphasizing the need for a specific finding that the company's assets were insufficient to cover the tax dues before implicating the directors.

• Counselvise Citation: [2009] 140 COUNSELVISE.COM (IT) 735900 (HC-KERALA)
• Appeal Type: Others
• Pronouncement Date: 26-06-2009
• Assessment Year: misc
• Other Referred Cases: K.V. Reddy and another Vs. Assistant Commissioner of Income Tax and Another (232 ITR 306), Bhagwandas J. Patel Vs. Deputy Commissioner of Income Tax (238 ITR 127), Indubhai T. Vasa (HUF) Vs. Income Tax Officer (282 ITR 120), Khaders International Construction Ltd. And others Vs. Commissioner of Income Tax (No.1) and others (229 ITR 450)
• Laws Referred To: Income Tax Act
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: P K R MENON; JOSE JOSE
• Assessee Lawyers: C NAIR; S RAJ
• Keywords: Directors' Liability; Income Tax; Recovery of Tax; Section 179; Company's Liability
• Section: 179

Judgement Text

" IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE P.R.RAMACHANDRA MENON FRIDAY, THE 26TH JUNE 2009 / 5TH ASHADHA 1931 WP(C).No. 23545 of 2004(C) -------------------------- PETITIONERS: --------------- 1. M/S. SREE VRIDHI LEASING & FINANCE(P)LTD PUTHOOR BUILDINGS, ERINJERI ANGADI, THRISSUR, REPRESENTED BY ITS MANAGING DIRECTOR JOY THOMAS. 2. E.A.UNNIKRISHNAN, CHAIRMAN, SREE VRIDHI LEASING & FINANCE (P) LTD., \"USHUS\", AMALA NAGAR P.O., THRISSUR-2. 3. JOY THOMAS, MANAGING DIRECTOR, SREE VRIDHI LEASING & FINANCE (P) LTD., PUTHOOR HOUSE, PARAPPUR P.O., THRISSUR. 4. GEORGE J.UKKEN, DIRECTOR, SREE VRIDHI LEASING & FINANCE (P) LTD., NEW CHURCH ROAD, ERINJERI ANGADI, THRISSUR. 5. K.F.RUSSAL, DIRECTOR, SREE VRIDHI LEASING & FINANCE (P) LTD., KALLOOR HOUSE, VADANAPPALLY P.O., THRISSUR. 6. C.C.ANTO, DIRECTOR, SREE VRIDHI LEASING & FINANCE (P) LTD., CHALAKKAL HOUSE, PURANATTUKARA P.O., THRISSUR. BY ADV. MR. C.KOCHUNNY NAIR MR. S.ARUN RAJ RESPONDENTS: --------------- 1. DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE II, ERNAKULAM. 2. THE COMMISSIONER OF INCOME-TAX (CENTRAL) KOCHI. 3. COMMISSIONER OF INCOME TAX (APPEALS), ERNAKULAM. ADV. MR. P.K.R.MENON, SENIOR ADVOCATE MR. JOSE K. JOSE, STANDING COUNSEL THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 29/06/2009, THE COURT ON 26/06/2009 DELIVERED THE FOLLOWING: P.R. RAMACHANDRA MENON J. ~~~~~~~~~~~~~~~~~~~~~~~ W.P. (C) No. 23545 of 2004 ~~~~~~~~~~~~~~~~~~~~~~~ Dated, this the 26th day of June, 2009 JUDGMENT The petitioners are before this Court challenging Ext.P11 order passed by the second respondent, whereby the proceedings taken by the first respondent under Section 179 of the Income Tax Act against the Directors of the first petitioner Company was upheld. The petitioners, who are the Company as well as the Directors, contend that there is absolutely no rhyme or reason in proceeding against the Directors of the Company, without arriving at a finding by the departmental authorities that the amount cannot be recovered from the Company, invoking the provisions under Section 179, which is cited as a mandatory requirement. 2. The contentions of the petitioners are mainly of two fold: firstly, petitioners submit that while issuing Ext.P9 order, no finding was arrived at as to the mandatory requirement that the amount cannot be recovered from the Company. Secondly, even if in a case where such a finding is there, a proceeding under Section 179 will be justified only if the lapse is directly attributable to the gross negligence, misfeasance etc on the part of the Directors. 3. In support of the contentions raised as above, particularly with respect to the first point, the learned counsel for the petitioners places WP (C) No. 23545 of 2004 : 2 : reliance on the decisions rendered by Division Bench of different High Courts as reported in K.V. Reddy and another Vs. Assistant Commissioner of Income Tax and Another (232 ITR 306) (rendered by the Division Bench of the Andra Pradesh), Bhagwandas J. Patel Vs. Deputy Commissioner of Income Taxe (238 ITR 127) (rendered by the Division Bench of the Gujarath High Court), Indubhai T. Vasa (HUF) Vs. Income Tax Officer (282 ITR 120) (rendered by the Division Bench of the Gujarath High Court), where it has been categorically held that, though Section 179 of the Income Tax Act is an exemption to the liability as discernible from the provisions of the Companies Act, the authority has necessarily be arrive at a finding before invoking the said provision that the due amount cannot be recovered from the Company. 4. Coming to the case is hand, Ext.P9 order passed by the first respondent does not reveal that any such finding was arrived at before invoking the said provision. The position is more clear from Ext.P6 show cause notice issued, seeking for the explanation of the Directors as to why the proceedings shall not be taken against them in respect of the recovery of the tax due from the Company, but for simply mentioning that the Company has not paid the tax and that Directors are liable to satisfy the same by virtue of the provision under Section WP (C) No. 23545 of 2004 : 3 : 179 of the Act. 5. The learned standing counsel appearing for the respondents submits that, the requirement contemplated under Section 179 is only a subjective satisfaction of the departmental authorities and that no specific finding needs to be recorded that the amount cannot be recovered from the Company. It is also submitted that, in Ext.P7 reply submitted by the petitioners in response to Ext.P6 notice, there is no case for the Directors/petitioners that the amount can be recovered from the Company or that the Company is having assets in this regard. However, in view of the mandate prescribed under Section 179 of the Act giving an exemption to the statutory requirement under the Companies Act, by virtue of the non obstante clause, the requirements contemplated therein are to be considered, appreciated and dealt with in a more meticulous manner. More so, when the range, scope and applicability of the said provision have been specifically considered by the different High Courts as referred to above, whereby it has been held that a specific finding has to be arrived at before proceeding with the steps under Section 179, holding that the amount cannot be recovered from the Company. There is considerable force in the submissions made from the part of the learned counsel appearing for the petitioners in this regard and this Court does not find any reason to take a WP (C) No. 23545 of 2004 : 4 : deviation. Ext.P11 order passed by the second respondent, confirming Ext.P9 series orders, also tries to justify the stand of the respondents observing in paragraph 17, that the assessing officer has given a finding that the Company would not be in a position to liquidate the arrears. It is nothing but a contribution to more than what is reflected in Ext.P9 series orders and hence not correct or sustainable. As such, this Court finds that, the matter requires to be reconsidered by the first respondent, before proceeding any further. 6. With regard to the second point raised from the part of the petitioners, even if the departmental authorities arrive at a finding that the amount cannot be recovered from the Company, thus justifying the steps under Section 179, it has further to be satisfied that the lapses should be attributable directly to the misfeasance, gross negligence or breach of duty of the Directors. Considering the sequence of events with regard to the case is hand, the learned counsel for the petitioners submits that, no such circumstances can ever be attributable to the petitioners who were repeatedly alerting the departmental authorities providing all such vital information about the amounts left at the hands of the different subscribers to the Chits of the first petitioner Company and as to the course to be pursued for realization of the amounts invoking the provisions under Section 223. Submission made from the part of WP (C) No. 23545 of 2004 : 5 : the petitioners appears to be correct, particularly in view of the fact that the second respondent has also made a reference to the same in paragraph 8 of the Ext.P11 order, though it has been observed that, such steps could not yield any positive result. 7. Yet another aspect pointed out by the learned counsel for the petitioners is that, the liability originally shown in Ext.P6 notice issued under Section was Rs.109 lakhs, which however was enhanced to Rs.179.82 lakhs when the order was finalized as borne by Ext.P9 series. The learned counsel further submits that the petitioners were earnestly prosecuting the matter with regard to the extent of the liability by filing necessary appeals, whereby the alleged dues were brought down to just Rs.85,841/- as discernible from the order dated 9.12.2004, passed by the first respondent himself. This by itself shows the prompt and regular steps being pursued by the petitioners to bring out the true state affairs to light and as such, even by the farthest stretch of imagination, the second limb, for mulcting the liability upon the petitioners under Section 179 of the Act can be attracted in the instant case. This also is a vital aspect to be examined by the second respondent, while reconsidering the matter. The learned counsel also places reliance on the decision rendered by another learned Single Judge of this Court in Khaders International Construction Ltd. And WP (C) No. 23545 of 2004 : 6 : others Vs. Commissioner of Income Tax (No.1) and others (229 ITR 450) in this regard. 8. In the above facts and circumstances, the impugned orders Ext.P9 series and Ext. P11 are set aside. The first respondent is directed to reconsider the matter as specified above, after giving an opportunity of hearing to the petitioners, as expeditiously as possible, at any rate, within a period of two months from the date of receipt of a copy of this judgment. The Writ Petition is allowed to the above extent. No cost. P. R. RAMACHANDRA MENON, JUDGE kmd "