The judgment of the court was delivered by
Akil Kureshi J.-The petitioners have challenged the order dated July 1, 2003, passed by the Income-tax Officer under section 179(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), as confirmed by an order dated February 16, 2004, passed by the Commissioner of Incometax in revision petition filed by the petitioners.
The facts are as under :
2.1 The petitioners were the directors of one M/s. K. N. Minerals Pvt. Ltd. (hereinafter referred to as "the company"). For the assessment year 1998-99, the return filed by the petitioners was taken in scrutiny and certain additions were made by the Assessing Officer. The assessment order though was carried in appeal, the Commissioner of Income-tax (Appeals) confirmed the order. No further appeal was carried by the company. Arising out of such assessment proceedings, the Income-tax Department had to recover a sum of Rs. 7,53,649 with interest. Despite several efforts for recovery, such amount could not be recovered from the company. The Income-tax Officer, therefore, issued show-cause notice to the directors on June 24, 2002, calling upon the petitioners why in terms of section 179(1) of the Act recoveries should not be made from them.
2.2 In response to such notice, the petitioners replied under a communication dated July 11, 2002, and raised several objections. It was pointed out that the company had suffered losses. The company had obtained overdraft facility and also taken loans from the State Bank of India. The properties and the assets of the company were mortgaged to the bank. Since the company was unable to pay the outstanding dues to the bank, the bank had instituted recovery proceedings before the Debts Recovery Tribunal. The Debts Recovery Tribunal, in its order dated February 26, 1997, recorded that the petitioners were to pay Rs. 26 lakhs by way of full and final settlement towards the dues of the bank. The land and building of the company was valued at Rs. 18 lakhs. The remaining amount was brought by the directors of the company from their personal resources. The company had also filed an application before the Registrar of Companies to strike off the name of the company since the company had no assets and was not carrying on any business. In order to ensure the strike off of the name of the company, the company had to give a guarantee from the creditors, i.e., directors themselves, that they have no objection to forgo the amount due to them by the company. The directors, thus, had forgone an amount of Rs. 17,85,729 in the process. The petitioners also contended that the recovery can be made under section 179(1) of the Act only if the petitioners fail to prove that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on their part in relation to the affairs of the company. The petitioners contended that in view of the facts narrated above, there was no gross neglect, misfeasance or breach of duty on their part in relation to the affairs of the company. It was also pointed out that the company had suffered total loss of Rs. 20.85 lakhs and the company had obtained loans from three directors to the tune of more than Rs. 17.85 lakhs.
2.3 Second reply was filed by the petitioners on October 21, 2002, before the Income-tax Officer in which similar contentions were taken.
2.4 The Income-tax Officer, however, was not convinced by such explanation and he passed the order dated July 1, 2003, holding that the provisions of section 179(1) of the Act would be applicable in the present case. He held that being the directors of the company, it was their duty to pay tax dues from the company. They failed to discharge such duty, hence, the provisions of section 179(1) of the Act are attracted. He, therefore, directed recovery of the outstanding dues of the company from the petitioners along with interest and penalty.
2.5 The petitioners challenge such order before the Commissioner of Income-tax (Appeals) by filing a revision petition under section 264 of the Act. In such application, the petitioners reiterated their stand that there was no gross neglect, misfeasance or breach of duty on their part in the affairs of the company and, therefore, the order under section 179 of the Act was bad in law.
2.6 The Commissioner, however, dismissed such revision petition by his order dated February 16, 2004. Hence, this petition.
Having heard the learned counsel for the parties and having perused the documents on record, we find that the basic facts are not in dispute. To recapitulate such facts, the petitioners were the directors of a private company. The company had tax dues towards the Department. Despite the efforts by the Department, such dues could not be recovered. The Income tax Officer, therefore, proceeded against the petitioners under section 179(1) of the Act. Section 179(1) of the Act provides as under :
"179. Liability of directors of private company in liquidation.-(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 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."
Sub-section (1) of section 179, thus, empowers the Department to recover unpaid tax dues of a private company from its directors under certain circumstances when such dues cannot be recovered from the company. Such recovery, however, can be avoided if the director concerned 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. In the case of Maganbhai Hansrajbhai Patel v. Asst. CIT reported in [2013] 353 ITR 567 (Guj), the Division Bench of this court in the context of such provision observed as under (page 583) :
"To our mind, the authority completely failed to appreciate in proper perspective the requirement of section 179(1) of the Act. We may recall that the said provision provides for a vicarious liability of the director of a public company for payment of tax dues which cannot be recovered from the company. However, such liability could be avoided if the director proves that the non-recovery cannot be attributed to any gross negligence, misfeasance or breach of duty on his part in relation to the affairs of the company. It is of course true that the responsibility of establishing such facts is cast upon the director. Therefore, once it is shown that there is a private company whose tax dues have remained outstanding and the same cannot be recovered, any person who was a director of such a company at the relevant time would be liable to pay such dues. However, such liability can be avoided if he proves that the non-recovery cannot be attributed to the three factors mentioned above. Thus the responsibility to establish such facts are on the director. However, once the director places before the authority his reasons why it should be held that non-recovery cannot be attributed to any of the three factors, the authority would have to examine such grounds and come to a conclusion in this respect. Significantly, the question of lack of gross negligence, misfeasance or breach of duty on the part of the director is to be viewed in the context of non-recovery of the tax dues of the company. In other words, as long as the director establishes that the non-recovery of the tax cannot be attributed to his gross neglect, etc., his liability under section 179(1) of the Act would not arise. Here again the Legislature advisedly used the word gross neglect and not a mere neglect on his part. The entire focus and discussion of the Assistant Commissioner in the impugned order is with respect to the petitioner's neglect in the functioning of the company when the company was functional. Nothing came to be stated by him regarding the gross negligence on the part of the petitioner due to which the tax dues from the company could not be recovered. In the absence of any such consideration, the Assistant Commissioner could not have ordered recovery of dues of the company from the director. We would clarify that in the present case the petitioner had put forth a strong representation to the proposal of recovery of tax from him under section 179 of the Act. In such representation, he had detailed the steps taken by him and the circumstances due to which non-recovery of tax cannot be attributed to his gross neglect. It was this representation and the factors which the petitioner had put forth before the Assistant Commissioner which had to be taken into account before the order could be passed. It is not even the case of the Department that the petitioner paid the dues of other creditors of the company in preference to the tax dues of the Department. It is not the case of the Department that the petitioner negligently frittered away the assets of the company due to which the dues of the Department could not be recovered. To suggest that the petitioner did not oppose the GSFC's auction sale is begging the question. GSFC had sold the property after several attempts through auction. It is not the case of the Department that proper price was not fetched."
Reverting to the facts of the case, the company had run into losses. The company had substantial dues towards the State Bank of India from which it had taken loans and also enjoyed overdraft facility. Certain properties of the company were also mortgaged to the bank. To realise its dues, the bank filed a petition before the Debts Recovery Tribunal. Before the Debts Recovery Tribunal, the parties agreed to settle the total dues of the bank for Rs. 26 lakhs. The properties of the company were valued at Rs. 18 lakhs. The balance was supplied by the directors of the company from their personal resources. Additionally, in order to strike off the name of the company from the register of companies, the directors agreed to forgo their loans to the company which were in excess of Rs. 16 lakhs. When such facts were established, in our opinion, the Assessing Officer ought to have held that the petitioners had succeeded in establishing that non-recovery of the tax dues of the company could not be attributed to gross neglect, misfeasance or breach of duty on the part of the directors in relation to the affairs of the company. In the impugned order in this respect, it had observed as under :
"5.1 . . . As a director of the company it was duty bound on the part of the directors of the company to pay tax due from the company and the directors failed to discharge that duty, hence the provisions of section 179(1) are clearly attracted. Reliance is placed on the decision of Union of India v. Praveen D. Desai [1988] 173 ITR 303 (Bom).
5.2 On verification of the relevant details it is found that there is gross negligence on the part of the directors in the day-to-day affairs of the company. In the auditor's report special remark is put which read as under :
'. . . The company has sold all its assets in settlement of bank outstanding and earned capital gain of Rs. 16,52,293 . . .'
From the above remarks and also on the basis of the facts of the case, the directors of the assessee-company were in knowledge of incidence of income-tax. Furthermore, the affairs of the company are audited by a leading chartered accountant firm, M/s. C. Patel and Co. Hence, the directors of the company are fully aware of their liability to pay tax on behalf of assessee-company. Hence, the director's contention as non-negligence on their part is not sustainable and accordingly rejected."
It may be that the assets of the company may not have been mortgaged to the bank. Nevertheless, the Debts Recovery Tribunal in its order dated November 11, 1997, provided as under :
"27. . . . The plaintiff-bank is entitled to recover the suit dues by sale of the said hypothecated machinery and movables including the goods, etc. That defendant No. 1 had agreed to create equitable mortgage on the fixed assets including land of factory premises towards the security for repayment of suit financial facilities. Hence, the plaintiff-bank shall also be entitled to realise the suit dues by sale of the said immovable property."
We have perused the said order of the Debts Recovery Tribunal. It does not appear that the petitioners had consented that the bank dues may also be recovered from such fixed assets. It was the Debts Recovery Tribunal which had given such liberty to the bank. That being the position, the contention of the counsel for the Revenue that the petitioners should have offered the said properties for recovery to the Department, can still not bring the action of the petitioners within the said expression of gross neglect, misfeasance or breach of duty on their part.
In the result, the impugned orders dated July 1, 2003, and February 16, 2004, passed by the Income-tax Officer and the Commissioner of Income tax, respectively, are quashed. The petition stands disposed of. Rule is made absolute accordingly. There shall be, however, no order as to costs.