The Bombay High Court allowed a writ petition filed under Articles 226 and 227 of the Constitution of India, seeking a writ of Certiorari for quashing and setting aside the order dated 22nd December 2017 passed by Income Tax Officer holding Petitioner liable for taxes for Assessment Year 2008-09 & 2009-10.
The Court observed that where a Director proves that non-recovery of tax dues cannot be attributed to any gross neglect, misfeasance, or breach of duty on his part in relation to the affairs of the Company, he shall not be liable for payment of tax dues.
Brief Facts:
The petitioner had developed a smart card-based ticketing solution for various public transport. Its implementation required huge funds. Khaleej Finance and Investment, (KFI) agreed to make an investment, and MOU was executed between Petitioner and KFI. The assessee company KAPL came to be incorporated on 30th March 2006. The clauses of the aforesaid documents provided that the Management and real control of the assessee Company was in the hands of 6 Directors appointed by KFI; the other two being Petitioner and his wife. The voting rights were with KFI to the extent of 74%. It is, therefore, the case of Petitioner that he and his wife were name-sake Directors and were at the mercy of the decision of KFI and they did not have any real control over any of KAPL’s decisions.
Disagreement arose; the petitioner and his wife were forcibly removed from the post of Managing Director. The petitioner was never given any access to KAPL - the assessee company. After 8 years, Petitioner was served with a show cause notice, directing him to reply as to why proceedings under Section 179 of the Act should not be initiated against him for outstanding demand against KAPL the assessee Company. Respondent No. 2 passed impugned order holding Petitioner. Petitioner then filed a Revision which was rejected vide second impugned order. Hence, the petitioner has approached this Court.
Contentions of the Petitioners:
The Learned Counsel for the Petitioner contended that impugned orders are passed solely on the ground that Petitioner was a Director during relevant Assessment Years of KAPL ― the assessee Company. It was submitted that impugned orders have been passed in complete disregard to the later part of Section 179(1) of the Act, which provides for an exception that if the concerned Director 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, then such Director cannot be held liable.
Contentions of the Respondent:
The Learned Counsel for the Respondent contended that during the Assessment Years under consideration, the Assessee Company, being a private Company, had received large sums of money as share application money or share premium, which would not have been possible without the involvement of its Directors. He submitted that Petitioner being Director of the private company at the relevant assessment years, was jointly & severally liable for the payment of tax by the assessee company.
Observations of the Court:
The Court noted that perusal of Section 179(1) of the Act shows that it provides for an escape route to the Director. It says that where a Director proves that non-recovery of tax dues cannot be attributed to any gross neglect, misfeasance, or breach of duty on his part in relation to the affairs of the Company, he shall not be liable for payment of tax dues. The Court observed that perusal of the impugned Orders shows that both the ITO as well as revisional Authority have mainly proceeded on the basis that the Petitioner was director during the assessment years and did not really consider whether there was any gross neglect or misfeasance for breach of duty on his part in relation to affairs of the company “in the context of non-recovery of tax dues”. The Court said that having brought on record material to show a lack of financial control, lack of decision-making power, and having a very limited role in the assessee company even as director and the entire decision-making process being with the directors appointed by KFI, Petitioner has sufficiently discharged the burden cast upon him in terms of section 179(1) of the Act to absolve him from the liability thereunder.
The decision of the Court:
The Bombay High Court, allowing the petition, held that both the impugned orders are quashed and set aside.
Case Title: Prakash B. Kamat vs Principal Commissioner of Income-tax & Ors.
Coram: Hon’ble Justice K. R. Shriram and Hon’ble Justice M. M. Sathaye
Case no.: WRIT PETITION NO. 3129 OF 2019
Advocate for the Petitioner: Mr. J.D. Mistri
Advocate for the Respondents: Mr. Suresh Kumar
Read Judgment @LatestLaws.com
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