Jagesh Bhadra Kumar Savjani v. Union of India

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. [(2) Where a private company is converted into a public company and the tax assessed in respect of any income of any previous year during which such company was a private company cannot be recovered, then, nothing contained in sub-section (1) shall apply to any person who was a director of such private company in relation to any tax due in respect of any income of such private company assessable for any assessment year commencing before the 1st day of April, 1962.] [Explanation - For the purposes of this section, the expression "tax due" includes penalty, interest or any other sum payable under the Act.] (21) From a perusal of these provisions, it is clear that the Assessing Officer is vested with jurisdiction to recover the tax from a Director of a Private Company only when the officer is unable to recover such dues from that Company. It is also clear from this provision that the Assessing Officer assumes jurisdiction under Section 179 of the Act only when there is failure to recover dues from the Private Company after efforts have been made by the Revenue to recover such dues. (22) The argument that the petitioner was not a Director of the Company would be irrelevant at this stage, if the petitioner was able to demonstrate from the contents of the show cause notices and the impugned order that there was no compliance with the mandate of Section 179 of the Act. (23) In Vanraj Shah (supra), a Division Bench of this Court has set out the legal requirements contained in Section 179 of the Act, for the Assessing Officer to acquire jurisdiction to proceed under that provision against a Director of a Defaulting Private Company. This Court in Vanraj V. Shah Vrs. Dy. Commissioner of Income Tax - 10(1)(1) and another in Paragraph Nos.[4] and 5 has held as under:- "4. In terms of sub-section (1) of Section 179, from every person who was a director of a private company during the time when the tax dues arose, such tax could be recovered from such director holding him jointly and severally liable for payment of such tax. However, the same cannot be recovered from him unless he proves that non-recovery cannot be attributed to any gross negligence, misfeasance or breach of duty on his part in relation to the affairs of the Company. First requirement for application of subsection (1) of Section 176, therefore, is that the tax dues in question could not be recovered from private company. Even if this requirement is satisfied, it is open for the concerned director to prove that such nonrecovery cannot be attributed to any gross negligence, misfeasance or breach of duty on his part in relation to the affairs of the company. On all these counts, therefore, the petitioner had a right to oppose and resist the proposal of the Assessing Officer.

5. In the show-cause notice, it is not even averred that the dues of the company should not be recovered from the said Company and that therefore, the onus would be on the director to prove that the same could not be attributed to his gross neglect, misfeasance or breach of duty. The action of the Assessing Officer to order recovery of the unpaid tax dues of the company from the petitioner, thus, was without the foundation of the necessary facts in showcause notice." (24) Following on similar lines, another Division Bench of this Court in Rajendra R. Singh (supra) which considering the scope of Section 179 of the Act has held as under:- "5. By virtue of the order impugned dated 13th February 2018, the objections and contentions raised by the petitioner were rejected. It was held that the allegation that the proceedings under section 179 were directly initiated was baseless. It was held that after the tax demand, several phone calls were made to the ARs of the assessee which did not elicit any response whereafter the bank account of the assessee was attached for recovery of dues and further that proceedings under section 179 was initiated because the assessee was unwilling and non-co-operative to pay its tax dues.

16. The orders impugned are also unsustainable on another ground. Power under section 179 of the Act can be exercised against the Directors upon satisfaction of certain conditions only if the tax dues cannot be recovered from the private company. To justify that the tax dues cannot be recovered, the Assessing Officer has to enumerate the steps taken towards recovery of tax dues from the company. For example, attachment of the accounts of the company as also, its movable and immovable assets, efforts made by the Assessing Officer in identification of the various movable and immovable assets of the company, and so on and so forth. The Show cause notice under section 179 of the Act, dated 24th January, 2018, on the other hand, reads as under:- "1 In the case of M/s. Crest Paper Mills Limited (PAN: AAACCC4343D), the demand of Rs.3,98,19,430/- is outstanding.

2 The aforesaid demands have been raised vide order giving effect to the order of CIT (A) u/s 250 of the IT Act and have been outstanding since long but the same has not been paid by the assessee company so far...."

17. A reading the show cause notice would therefore clearly suggest that there was no satisfaction recorded that the tax cannot be recovered. It needs to be understood that recovery procedure under section 179 of the Act against the directors is not to be resorted to casually and only because it is convenient to do so far affecting recovery of the tax dues.

18. With a view to show that the respondent No.1 had mechanically resorted to the provisions of section 179 of the Act, the petitioner has relied upon an order of attachment, dated 6th March 2019, whereby the Tax Recovery Officer-2, Thane has ordered the attachment of land at Village Kalivali, Taluka Panvel, Dist. Raigad to show that if respondent had made an effort, the tax dues could be recovered from the company. An additional affidavit has also been filed by the petitioner. In response to this additional affidavit, an affidavit in reply has also been filed by the Deputy Commissioner of Income Tax-1(2)(1), Mumbai in which a stand is taken that steps for sale of the property attached would be initiated after getting the fair market value determined. This statement itself has the effect of nullifying the action initiated under section 179 of the Act against the petitioner rendering the order impugned unsustainable in law." (25) The Gujarat High Court in the case of Sonal Nimish Patel(supra) has held that it is prerequisite and necessary condition to be fulfilled before action under Section 179 of the Act can be taken, that the Revenue must establish, if such recovery from the Private Company cannot be made. While considering the scope of Section 179 of the Act and the facts required to be considered by the Assessing Officer before assuming jurisdiction under that provision, the Gujarat High Court has held thus:- "20......... The first requirement, therefore, to attract such liability of the director of a private limited company is that the tax cannot be recovered from the company itself. Such requirement is held to be a prerequisite and necessary condition to be fulfilled before action under section 179 of the Act can be taken. In the context of Section 179 of the Act, 1961, this Court held that before recovery in respect of the dues from a private company can be initiated against the directors, to make them jointly and severally liable for such dues, it is necessary for the Revenue to establish that such recovery cannot be made against the company and then alone it can reach to the directors who were responsible for the conduct of the business during the previous year in relation to which liability exists.

21. There is no escape from the fact that the perusal of the Notice under Section 179 of the Act, 1961, reveals that the same is totally silent as regards the satisfaction of the condition precedent for taking action under Section 179 of the Act, 1961, viz. that the tax dues cannot be recovered from the Company. In the show-cause notice, there is no whisper of any steps having been taken against the Company for recovery of the outstanding amount. Even in the impugned order, no such details or information has been staled." (26) We take note of the fact that in that case, an additional affidavit-in- reply was filed to demonstrate the steps taken by the Revenue against the Company for recovery of dues. The Gujarat High Court has further considered whether the absence of facts required to be stated in the show cause notices could be supplanted by filing of an affidavit-in-reply stating such facts, and has observed in Paragraph No.22 as under:- "22. In such circumstances, referred to above, the question is, whether such an order could be said to be sustainable in law. The answer has to be in the negative. At the same time, in the peculiar facts and circumstances of the case and more particularly, when it has been indicated before us by way of an additional affidavit-in-reply as regards the steps taken against the company for the recovery of the dues, we would like to give one chance to the department to undertake a fresh exercise so far as Section 179 of the Act, 1961, is concerned. If the show-cause notice is silent including the impugned order, the void left behind in the two documents cannot be filled by way of an affidavit-inreply. Ultimately, it is the subjective satisfaction of the authority concerned that is important and it should be reflected from the order itself based on some cogent materials. However, with a view to protect the interest of both, the writ applicant as well as Revenue, we are inclined to quash the impugned order and give one opportunity to the Revenue to initiate the proceedings afresh by issuance of fresh show-cause notice with all necessary details so that the writ-applicant can meet with the case of the Revenue. We are inclined to adopt such measure keeping in mind the statement made by the learned counsel Mr. Soparkar that till the fresh proceedings are not completed, his client will not operate the bank account." Notice may be taken of the fact that the Gujarat High Court in Sonal Nimish Patel (supra) has chosen to adopt the course of allowing the Revenue to initiate fresh proceedings after setting aside the original show cause notices and order, only on the basis of the statement made by learned counsel for the petitioner therein, that till fresh proceedings were completed, the petitioner would not operate his bank account. (27) We take further note of this Court's Judgment in Mehul Jadhavji Shah (supra) which considered the requirements of Section 179 while issuing show cause notices and consequent order under that provision. This Court held that setting out particulars of the efforts made by the Revenue and its failure to recover tax dues from the Private Company form the sine qua non for proceeding against the Director. It also considered that stating of such facts in the notice before assuming jurisdiction to proceed, was required in order to give opportunity to the Director against whom such a notice was issued, to point out why the efforts made by the Revenue to recover from the Company were inadequate or improper. Mehul Jadavji Shah (supra) refers to an earlier Judgment passed by this Court in Madhavi Kerkar Vrs. Assistant CIT, reported in (2018) 90 taxmann.com 55/253 Taxman 288 (Bom.) and has held in Paragraph Nos.[7] and 8 as under:- "7. So far as the second and third submission on behalf of the Revenue that in the facts of this case, the efforts which were made to recover the tax dues from the delinquent company though not stated in the show cause notice are found in the impugned order or in any event in the affidavit-in-reply dated 14th February,

2018. Thus, is sufficient compliance with Section 179 of the Act. It is the petitioner's case in the petition that, an amount of Rs.49.81 crores are loans advanced to companies/associates of its Director, Mr. Praful Setna. The attempts at recovery if made known in the show cause notice, would have given an opportunity to the petitioner to bring the above facts to the notice of the Assessing Officer who could have recovered from them before proceeding with the notice. Therefore, the giving of particulars of efforts made and failure to recover the tax dues for the delinquent Private Limited Company in a notice issued under section 179(1) of the Act is a sinaqua non for proceeding further. This is so as not only the Assessing Officer can assume/acquire jurisdiction only on failure to recover its dues from a Private Limited Company after proper efforts. But is also gives an opportunity to the assessee to point out why the efforts made are inadequate and/or improper.

8. In view of the above, it is clear that before the Assessing Officer assumes jurisdiction efforts to recover the tax dues from the delinquent Private Limited Company should have failed. This effort and failure of recovery of the tax dues must find mention in the show cause notice howsoever briefly. This would give an opportunity to the noticee to object to the same on facts and if the Revenue finds merit in the objection, it can take action to recover it from the delinquent Private Limited Company. This before any order under section 179 (1) of the Act is passed adverse to the noticee. In this case, admittedly the show cause notice itself does not indicate any particulars of the failed efforts to recover the tax dues from the delinquent Private Limited Company. Thus, the issue stands covered in favour of the petitioner by the order of this Court in Madhavi Kerkar (supra). In the above circumstances, the impugned order dated 26th December, 2017 is quashed and set aside." (28) Union of India Vrs. Manik Dattatreya Lotlikar (supra) cited by the Revenue, was a case where the contention raised by the petitioner was whether provisions of Section 179 (1) of the Act, which came into operation on 01/10/1975, would operate retrospectively and make Directors of a Defaulting Private Company liable for payment of tax due from the Company from 01/04/1962 onwards. That Judgment does not decide the issue raised in this petition i.e. whether the jurisdictional facts are required to be stated in the show cause notice itself to allow the Assessing Officer to proceed against a Director. In our view, therefore, Union of India Vrs. Manik Dattatreya Lotlikar (supra) would not apply to the facts of the present case. B. Muralidhar Vrs. Deputy Commissioner of Income Tax Corporate Circle-1, reported in (2019) 110 taxmann.com 54 (Madras) cited by the Revenue was to support its arguments that the petitioner had an alternate efficacious remedy in terms of statutory revision under Section 264 of the Act. (29) A perusal of the Judgment of the Madras High Court in B. Muralidhar (supra) would reveal that in that case, the only question that arose was whether the petitioner had validly submitted his resignation from the delinquent Company and was, therefore, not liable to pay its taxes in terms of provisions of Section 179 of the Act. There were no jurisdictional issues raised in that petition of the nature and the grounds raised in the present petition. It is in that light that the Madras High Court held that Section 264 of the Act provided the petitioner with an adequate alternate remedy of filing Revision under Section 264 of the Act rather than invoking jurisdiction of the High Court under Article 226. (30) In the present petition, the main ground of challenge is lack of jurisdiction of the Assessing Officer to proceed with the show cause notices issued by it under Section 179 of the Act and to pass impugned order in absence of stating the jurisdictional facts that were required under the provisions of the Act. The challenge therefore, is to the sustainability of the notice and the order on the touch stone of the provisions of Section 179 of the Act. (31) Applying the ratio of the Judgments cited above, in Vanraj V. Shah (supra), Rajendra R. Singh (supra) and Mehul Jadavji Shah (supra) to the facts of the present case, that the impugned show cause notices disclose no facts regarding the steps taken by the Revenue to recover tax dues from the delinquent Company. In fact, the show cause notices dated 24/02/2020, 19/03/2020 and 04/12/2020 are mere repetition of the contents of the show cause notice dated 15/10/2019. An affidavit-in-reply dated 21/04/2022 filed before us by the Assessing Officer attempts to list out various steps taken by the Revenue to recover tax dues from the Company between the year 2016 until the year 2020. However, as held by this Court in Mehul Jadavji Shah (supra), giving particulars of steps taken against the delinquent Company in an affidavit-inreply or even in the impugned orders does not meet the requirements of a proper notice to the Director. (32) A perusal of the impugned order dated 14/12/2020 discloses that it does not record any of the material which formed the basis for the Assessing Officer to conclude that all steps have been taken to recover the tax dues from the Company. Further, the impugned order does not refer to the Assessing Officer's subjective satisfaction based upon material before it, to conclude that all steps had been taken to proceed against the delinquent Company and such steps had failed. This being a sine qua non for proceeding further, and for assuming jurisdiction under Section 179 of the Act, failure to disclose this material and to record the satisfaction of the Assessing Officer in the manner required by the provisions of Section 179 of the Act renders the impugned show cause notices and the impugned order dated 14/12/2020 unsustainable at law. (33) We are therefore, of the considered opinion that the impugned show cause notices dated 24/02/2020, 19/03/2020 and 04/12/2020 and the impugned order 14/12/2020 issued under Section 179 of the Income Tax Act, 1961 are unsustainable and contrary to the Act; consequently, we quash and set aside three show cause notices dated 24/02/2020, 19/03/2020 and 04/12/2020 and the impugned order dated 14/12/2020. (34) Needless to state, from the conclusions we have arrived hereinabove, Interim Application IA(L)No.24778/2022 of the Company and Interim Application IA(L)No.26761/2022 of Shri Samir Savjani, Applicant-in-person are hereby rejected. The prayer contained in the I.A.'S. for an order of restraint against the petitioner from disposing of his assets are unsustainable. (35) The petition is allowed. The Rule is made absolute in terms of Prayer Clauses (b) and (c[1]). No costs. [VALMIKI SA MENEZES, J.] [DHIRAJ SINGH THAKUR, J.] Prity/Choulwar Location: