W.P.Nos.34899, 34901 and 34902 of 2019
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED: 12.09.2022
CORAM
THE HONOURABLE DR. JUSTICE ANITA SUMANTH
W.P.Nos.34899, 34901 and 34902 of 2019
and WMP Nos.35669, 35670, 35673, 35674, 35676 and 35677 of 2019
Ritesh Rai ... Petitioner in W.P.No.34899 of 2019
Rajiv Rai ... Petitioner in W.P.No.34901 of 2019
Joseph Philip ... Petitioner in W.P.No.34902 of 2019
Vs
Income Tax Officer
Corporate Ward 5(4),
Room No.403, 4th Floor,
Main Building,
No.121, Mahatma Gandhi Road,
Nungambakkam, Chennai – 600 034. ... Respondent in the above W.Ps
Common Prayer:Writ Petitions filed under Article 226 of the Constitution of India, to issue Writ of Certiorari calling for the records on the file of the respondent in issuing the impugned show cause notice in C.W.5(4)/AAACR1743C/2008-09, 2015-16 dated 23.07.2019 and consequential order in C.W. 5(4)/AAACR1743C/2008-09, 2015-16 dated 28.10.2019 passed by the respondents under Section 179 of the Income Tax Act, 1961 and quash the same as illegal, arbitrary and without jurisdiction.
In all W.Ps For Petitioner : Mr.Veerabadran Prashanth For Mr.R.Sivaraman For Respondent : Mr.Prabhu Mukund Arun Kumar Junior Standing Counsel 1 https://www.mhc.tn.gov.in/judis W.P.Nos.34899, 34901 and 34902 of 2019 C O M M ON O R D E R These Writ Petitions have been filed by three Directors in a Private Limited Company, by name Rai Ispat Pvt. Ltd. (hereinafter referred to and in short ‘company’) challenging orders passed in terms of Section 179 of the Income Tax Act, 1961 (in short ‘Act’).
2. A brief history of the matter is set out below, as relevant to decide this writ petition:
(i) The Company is stated to be part of a group of companies, trading in steel and engaging in the acquisition of shares of other companies for the purposes of holding as investment.
(ii) A search under Section 132 was carried out on 26.09.2012 in the premises of a group company, SBQ Steels Ltd. consequent upon which the assessments of the company were reopened under Section 147 of the Act.
(iii) Additions were made in the hands of the company, two substantive additions being a) a sum of Rs.3.60 Crores that were received as share application from one Chandan Credits Ltd. on the ground that the aforesaid company was a paper concern and treating the share application as unexplained credit and b)a sum of Rs.4.62 crores (approx.) being investment in shares of SBQ steels as unexplained investment under Section 69 of the Act. 2 https://www.mhc.tn.gov.in/judis W.P.Nos.34899, 34901 and 34902 of 2019
(iv) The assessments have come to be confirmed confirming the aforesaid additions, adverse to the petitioners. The Assessing Authority, despite attempts, appears to have been unable to recover the demands from the company, and it is at that stage that the impugned orders had come to be passed under Section 179.
3. The provisions of Section 179 provide for the liability of the Directors of a Private Limited Company and states that every person who was a Director of a Private Limited Company during the relevant previous year, shall be jointly and severally liable for the payment of tax where the Department is unable to recover the tax due from that company unless he (the Director) 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. It is the petitioner’s case that the impugned order is entirely non-speaking, with respect to the ingredients of Section 179 itself.
4. That apart, the company is presently stated to be undergoing Corporate Insolvency Resolution Process before the National Company Law Tribunal (NCLT) and the Income Tax Department ought to have raised/made its claim before the NCLT without pursuing the demand as against the Directors. The petitioners, in this regard, rely on the decision of the Gujarat High Court in the 3 https://www.mhc.tn.gov.in/judis W.P.Nos.34899, 34901 and 34902 of 2019 case of Ram Prakash Singeshwar Rungta V. Income-tax Officer (59 taxmann.com
174).
5. Learned Standing Counsel appearing for the Department would point out that sufficient measures were taken to recover the amounts from the company at the first instance, and it is only upon failure of those measures that the attention of the Department turned to the Directors to recover the amount in terms of Section
179. He denies the allegation that the conditions precedent under Section 179 have not been satisfied, by drawing attention to the narration in the counter relating to the attempts made by the Department for recovery of tax due from the company itself.
6. Having heard learned counsel, my decision is as follows: The admitted facts in this case are that there are tax dues from the company. The counter filed by the Department sets out the following attempts made by the Department to recover the tax dues in relation to the respective assessment years.
(i) Demands were unpaid within the statutory period of 30 days from service of notice under Section 156 of the Act.
(ii) Notices under Section 221(1) dated 30.04.2019 was issued and duly served.
4 https://www.mhc.tn.gov.in/judis W.P.Nos.34899, 34901 and 34902 of 2019
(iii) The demands remained unpaid even after dismissal of first appeals on 26.03.2019.
(iv) Communications were sent to the company calling for remittances of the dues that also saw no compliance.
(v) Bank attachments of the company’s accounts were effected under Section 226(3) on 05.12.2017, but did not serve any purpose, as there were no funds available in any of the accounts.
(vi) The company has filed an appeal challenging the order passed by the Commissioner of Income Tax (Appeals), along with an application for stay before the Income Tax Appellate Tribunal (tribunal/ITAT).
(vii) The ITAT rejected the stay application vide order dated 07.06.2019 in S.P.No.175/Chny/2019, finding that the company had not enclosed any material to indicate financial constraint.
(viii) It is only thereafter that notice under Section 179 of the Act had been issued to the three petitioners on 23.07.2019.
7. No doubt, the above sequence of events and the attempts made by the respondents do not figure in either the show cause notices nor the impugned orders. However, there is no denial of the same by the petitioners before me and neither has a rejoinder been filed to the counter, despite counter dated 18.02.2020 5 https://www.mhc.tn.gov.in/judis W.P.Nos.34899, 34901 and 34902 of 2019 having been served upon the petitioners as early as on 24.02.2020. Thus, the narration and the sequence of events set out in the counter are taken to be uncontroverted.
8. Thus, and in light of the fact that the records reveal clearly that reasonable attempts/measures have taken by the Department to recover the amount from the company, it cannot be said that the impugned action under Section 179 is pre-mature. The action in the present case has, admittedly, been taken only after measures have been effected as against the company that have been proved to be an utter failure.
9. The above sequence of events would distinguish the facts in the present case from those of the case in Ram Prakash Singeshwar Rungta (supra). In that case, the decision of the Division Bench of the Gujarat High Court was in favour of the Directors, the Court being of the view that the condition precedent in Section 179 had not been satisfied. There is a finding at paragraph 13 of the judgment, where the Division Bench states as follows:
13. Examining the facts of the present case in the light of the principles propounded in the above decision, a perusal of the notice under section 179 of the Act reveals that the same is totally silent as regards the satisfaction of the condition precedent for taking action under section 179 of the Act, namely, that the tax dues cannot be recovered from the company………..6
https://www.mhc.tn.gov.in/judis W.P.Nos.34899, 34901 and 34902 of 2019 Reliance is placed on an earlier decision in Maganbhai Hansrajbhai Patel V. Asstt. CIT (353 ITR 567) to similar effect.
10. Though the notice may not elaborate on the measures for recovery effected in the case of the company, I have at paragraphs 7 to 9 supra, noted that such mention is not fatal as they are undisputed and flow from a reading of the uncontroverted counter. In light of this, reliance of the petitioners upon the decision in the case of Ram Prakash Singeshwar Rungta (supra) takes them nowhere.
11. Section 179 of the Act reads as follows:
Liability of directors of private company
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 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.
…….
12. Thus the only condition set out under Section 179 is to the effect that attempts should be made by the Income Tax Department to recover the tax dues from the company and such attempts should have been unsuccessful. I have noted 7 https://www.mhc.tn.gov.in/judis W.P.Nos.34899, 34901 and 34902 of 2019 the measures taken by the Department to recover the dues that have admittedly been unsuccessful. Moreover, the company is itself before the National Company Law Tribunal, which establishes that it does not presently, have the funds to settle the tax dues. For the aforesaid reasons, I am of the view that the condition precedent under Section 179 stands complied in this case.
13. Section 179(1), in itself, grants the Directors the liberty to prove that the non-recovery cannot be attributed to gross neglect, misfeasance or breach of duty on their part in relation to the affairs of the company. In the present case, the replies filed by the petitioners to the show cause notices prior to passing of the impugned orders merely contain a bald assumption to this effect. They have not, in my view, established, that the petitioners had taken all reasonable efforts to ensure compliance of the company to statutory dues and were not guilty of neglect, misfeasance or breach of duty in that regard.
14. In light of the discussion as aforesaid, I am of the categoric view that the impugned orders do not suffer from any infirmity and for the reasons set out above, the same are confirmed. No costs. Connected Miscellaneous Petitions are closed.
12.09.2022 sl Index : Yes/No Speaking Order 8 https://www.mhc.tn.gov.in/judis W.P.Nos.34899, 34901 and 34902 of 2019 To Income Tax Officer Corporate Ward 5(4), Room No.403, 4th Floor, Main Building, No.121, Mahatma Gandhi Road, Nungambakkam, Chennai – 600 034.
9 https://www.mhc.tn.gov.in/judis W.P.Nos.34899, 34901 and 34902 of 2019 Dr.ANITA SUMANTH,J.
Sl W.P.Nos.34899, 34901 and 34902 of 2019 and WMP Nos.35669, 35670, 35673, 35674, 35676 and 35677 of 2019 12.09.2022 10 https://www.mhc.tn.gov.in/judis