On 24th September, a bench of Delhi High court consisting of Justices Manmohan and Navin Chawla held that Section 179 of the Act imposes a vicarious responsibility on the Directors for the dues of the company. It has, therefore, to be interpreted rigidly, subject to conditions, for application under Section 179. The primary condition is that the tax dues could not be recovered from the company before Section 179 could be invoked. The Assessing Officer has therefore to give a finding that the tax dues could not be recovered from the company before proceeding against the director.

FACTS OF CASE:

The facts of the case is that the present petition has been filed challenging the orders dated 1st April, 2021 passed under Section 264 of the Income Tax Act, 1961and 29th January, 2018 under Section 179 of the Act by respondent No.1 and respondent No.2 respectively. Petitioner seeks a direction to restrain the respondents from recovering the outstanding demand of Rs.5,89,68,019/- in the case of Realtech Group from the petitioner, pertaining to the Assessment Years 2006-07 to 2009-10.

ARGUMENTS ON BEHALF OF THE PETITIONER:

The following arguments was submitted on behalf of the petitioner:

  1. It was submitted no action to recover the demand from the Realtech Group of Companies had been taken by the Assessing Officer.
  2. He further submitted that the Revenue had failed to demonstrate that the Petitioner Director was guilty of any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of company.
  3. Learned senior counsel for petitioner lastly stated that the impugned orders were bad in law as the petitioner had not been given a fair and reasonable opportunity to present his case.

ARGUMENTS ON BEHALF OF THE RESPONDENT-REVENUE

The following observation has been made by the respondent:

  1. Per contra learned counsel for the respondents submitted that the present petition was an abuse of process of law as the petitioner was seeking to settle his private scores with different parties through the income tax department, which is evident from the fact that neither Mr. Pankaj Dayal nor the Realtech Group of companies had been impleaded as party-respondents to the writ petition.
  2. He further stated that petitioner’s argument that no opportunity was granted to him of being heard before passing an order under Section 179(1) of the Act is not correct. Vide notice F.No.ACIT/CC- 14/Recovery/2017-18/1045 dated 19th September, 2017, the petitioner was given an opportunity to file his reply and was required to show cause as to why action against him should not be taken under Section 179(1) of the Act.
  3. He stated that the order under Section 179(1) of the Act dated 29th January, 2018 was dispatched through speed post on the same address on which the notice dated 29th September, 2017 was issued and was delivered to the petitioner. Consequently, according to him principles of natural justice had been fully complied with in the present case.

OBSERVATION AND JUDGEMENT OF COURT:

The following observation has been made by the Hon'ble Court:

  1. Section 179 of the Act imposes a vicarious responsibility on the Directors for the dues of the company.
  2. The director of the private company can avoid his joint and several liabilities for payment of taxes if he proves that the non-recovery cannot be attributed to his gross neglect, misfeasance or breach of any duty on his part in relation to the affairs of a company.
  3. It is a settled law that while  rights in personam are arbitrable, rights in rem are unsuited for private arbitration and can only be adjudicated by the Courts or Tribunals

Thus the court held that private parties cannot apportion Income Tax liability by private agreement as the petitioner has sought to do in the present case.

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