[Bombay HC] Income-tax dues of a company cannot be recovered from the Director merely because of his directorship in a company.
The Hon’ble Bombay High Court in the case of Prakash B. Kamat v. Principal Commissioner of Income Tax – 10 and Ors, [2023] 151 taxmann.com 344 (Bombay) held that the income-tax dues of a private limited company cannot be recovered from the director u/s 179(1) of the Income Tax Act ("the Act") merely because the person was a director during the relevant period in the absence of any gross neglect or misfeasance which led to the non-recovery of the tax dues.
Facts
The Petitioner and his wife were two of the total eight directors in a company where the effective control of the said company was in the hands of the other directors except the Petitioner and his wife. The Petitioner and his wife held a 26% shareholding in the said company, while the remaining 74% of the shareholding was held by the other directors. Subsequently, the Petitioner and his wife ceased to be the directors of the company during September 2009.
The Income Tax Authorities had imposed a penalty amounting to Rs. 14 crores to the said company, where the Petitioner was not produced with any order or copies explaining how the said penalty was levied.
The Petitioner received a Show Cause Notice (“SCN”) dated 12.01.2017, after a lapse of 8 years, which directed him to respond as to why proceedings under Section 179 of the Income Tax Act should not be initiated by the Authorities. It is important to note that during the Petitioner's directorship, there were no outstanding demands for Income Tax.
The SCN was specifically issued for the Assessment Year ("A.Y") 2008-09 and 2009-10, which only mentioned the names of the Petitioner and his wife, excluding the other directors. However, the Income Tax Authorities adjudicated the said SCN and held the Petitioner responsible for the unpaid tax liabilities. Additionally, a revision application was filed by the Petitioner before the revisional authority, where it still held the Petitioner accountable for the penalty levied.
Held
After examining the impugned order of the revisional authority, this Hon’ble Court additionally noted that the Income Tax authorities relied only on the fact that the Petitioner was a director during the Assessment Year 2008-09, where the Petitioner was not in control of the affairs or the finances of the company.
The Hon'ble High Court stated that it is a well-established legal principle that in the absence of specific provisions in the statute, the tax department cannot recover duty or penalty from a director who is not personally liable for the company's liabilities.
Consequently, the Court concluded that the impugned orders could not be upheld since the SCN was not issued within a reasonable timeframe and the Court hence held that delaying the adjudication of such proceedings would be contrary to procedural fairness, violating the principles of natural justice.
The Hon'ble High Court also observed that the Income Tax authorities had demanded tax dues from the Petitioner after he ceased to be the director of the company. The Petitioner had duly provided the required information to the Hon'ble High Court, upon which the Court concluded that the Petitioner had no control over the company and did not have access to its affairs in any way.
Based on the aforementioned observations, the Hon'ble High Court observed that the Petitioner had discharged the burden cast upon him u/s Section 179(1) of the Act by placing relevant documents on record proving his lack of financial control, limited decision-making power, and a limited role in the assessed company. There was no gross neglect or misfeasance on behalf of the Petitioner as well. Hence considering these observations, the Hon’ble Court proceeded to quash both the impugned orders.
Analysis
The Hon'ble High Court in this order reaffirmed that the SCN should have been issued within a reasonable time frame which would hence not obstruct the principles of natural justice.
This decision is particularly significant in cases where directors do not possess control over the company's finances and have not neglected gross misfeasance or committed any breach of duty as laid down in the provisions of Section 179 (1) of the Act. Therefore, it is a positive development for directors facing allegations of non-compliance u/s 179 (1) of the Act. Such recognition of the Court towards the principles of natural justice and the importance of fair proceedings represents a notable stride forward.
Authored by Aishwarya Pawar, Associate at Metalegal Advocates. The views are personal and do not constitute legal opinion.