Madras High Court
Ritesh Rai vs Income Tax Officer on 12 September, 2022
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
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.
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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
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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.
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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
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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………..
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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
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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
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.
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
https://www.mhc.tn.gov.in/judis
