SURESH NARAIN BHATNAGAR vs. INCOME TAX OFFICER

The   petitioner   had   challenged   an   order   dated   3.1.2005 passed by the Income Tax officer under section 179 of the Income Tax Act, 1961 (“the said Act” for short).

Brief facts are as under: 2.1) The   petitioner   was   a   director   of   one   M/s.   Sirs Engineering Private Limited (“the company” for short). For the   assessment   year   2000­2001,   the   Assessing   Officer passed   order   of   assessment   on   28.3.2003,     raising   tax demand   of   Rs.40,99,967/­.   With   penalty,   it   came   to Rs.41,09,967/­. Five more separate orders of assessment dated   27.2.2004   were   also   passed   in   case   of   the   same company for the assessment year 1996­1997 to 1999­2000 and 2001­2002 raising different tax demands. 2.2) On 22.3.2004, the Income Tax officer issued a notice to the petitioner indicating that a tax demand of the said company of Rs.41,11,967/­ for the assessment year 2000­ 2001   was   still   outstanding.   He   was   the   director   of   the company during the relevant period. He was asked to show cause why he should not be held personally liable for such recovery under section 179 of the said Act. 2.3) The petitioner filed several replies to said notice. In his first reply dated 30.3.2004, he conveyed that records of the company were lost; that he himself was suffering from heart problem. During the assessment years 2002­2003, he was totally immobile and was not able to attend any of the meetings or day to day business of the company. He was therefore, not responsible for negligence, misfeasance or  breach   of  duty   in   connection  with   the   affairs   of  the company. Yet another reply came to be filed on 28.9.2004 in   which   he   contended   that   he   was   only   supplying technical support to the company. He was rendering such service for various other companies. He was never engaged in the day to day business of the company. In yet another reply dated 13.10.2004, he contended that he had already resigned   from   the   company   on   25.2.1996. He   also contended that by virtue of section 43­A of the Companies Act, 1956, since the company’s turn over had crossed the threshold limit, the company  would be a deemed public company.   In   his   further   reply   dated   26.10.2004,   he reiterated this aspect and stated thus : “Further by the virtue of the provisions of section 43A of the company’s act Sirs Engineering Pvt. Ltd. has became a public company by crossing the turnover criterion and the same   has   also   been   certified   by   the   assessment   order passed for the AY 1996­97.” 2.4)  In his further reply which is produced at Annexure­L, he elaborated the question of company having become a deemed public company and contended as under : “c) I am advised by my Chartered Accountant that this company falls in category of deemed Public Limited in view of its turnover being more than Rs.1 crores as estimated by the Department under section 144 of the IT Act, therefore section relating  to personal liability of Director does not arise in this case if the assessment of income is correct by the department. This issue has been raised by me in my first submission itself. A copy of the said section 43A of the companies Act is attached herewith.” 2.5)  In   his   last   reply   dated   1.1.2005,   he   once   again asserted that :

The  Assessing  Officer  passed  his  impugned  order  dated 3.1.2005. Regarding   the   petitioner’s   resignation,   he observed that he had signed and verified the return of the income of the company for the assessment year 2001­2002 on   23.3.2003. He   had   also   filed   appeals   before   the Commissioner(Appeals) for the assessment year 1996­1997 to  2001­2002  which  prove  that  he  continued  to  be the director   of   the   company   even   after   submission   of   his resignation. 3.1)  With respect to his involvement in the company, the Income Tax officer held that he failed to prove that non­ recovery of tax cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to affairs of the company. His contention that he was only a technical director was negated observing that section 179 includes   every   person   who   is   a   director   of   a   private company and the onus is on such director to prove non­ negligence, non­misfeasance or non­breach of duty  on his part. In the present case, the petitioner failed to produce any evidence to prove such facts. 3.2) With respect to the status of the company being a deemed public company, the Assessing Officer observed as under : “Another argument raised by him is M/s. Sirs Engg. Pvt. Ltd.   is   a   deemed   public   company   under   43A   of   the Companies Act, 1956, in view of its turnover being more than  Rs.1  crore  as estimated  by  the  department  in the assessment  order.  The  section  179   specifically  overrides the provisions of the Companies Act, 1956. The section 179 deals   with   only   private   limited   companies.   Hence   this contention is not tenable.”

Having heard learned counsel for the parties and having perused the documents on record, following facts emerge : 1) Notice  under  section  179(1)  of  the  Act  was  issued only for recovery of tax due pertaining to assessment year 2000­2001. 2) Without   any   further   notice,   the   final   order   under section   179   was   passed   for   recovery   of   dues   of   the company for all the years from 1996­1997 to 2001­2002. 5. The recovery demand therefore, for the assessment years 1996­1997 to 1999­2000 and 2001­2002 must fail on two counts. Firstly, there was no notice for recovery of such amounts. More importantly, the only notice of show cause which was issued was dated 22.3.2004. The assessment orders   of   the   said   assessment   years   were   passed   on 27.2.2004. Thus within less than a month of passing of the assessment orders, the notice came to be issued. The first requirement of application of section 179 is that any tax due from a private company cannot be recovered from such company. When obviously thus Assessing Officer had and could not have made any efforts for recovery of such tax dues, question of inquiring with the petitioner as a director of the company to pay up the same amount or else be held liable under section 179 of the Act, would not arise. In case of  Bhagwandas   J.   Patel   v.   Deputy   Commissioner   of Income­tax reported in (1999) 238 ITR 127, the Court had held   that   before   recovery   in   respect   of   dues   from   the private company can be initiated against the directors, it is necessary for the Revenue to establish that such recovery cannot be made against the company and then and then alone it can reach the directors who were responsible for conduct   of   the   business   during   the   previous   year   in relation to which liability existed.

Our   inquiry   therefore,   regarding   the   impugned   order   of Assessing Officer would be confined to the demands for the assessment years 2000­2001. In this context we are unable to hold that the petitioner having already resigned from the position of a director in the year 1996, could no longer be held   responsible   under   section   179   of   the   Act.   The undisputed facts which have come on record are that in the year 2003, the petitioner signed the returned of the company as its director. In the year 2004, the petitioner filed appeals against the orders of assessment passed by the Assessing Officer for the assessment years 1995­1996 and onwards. Thus, even if we believe that the petitioner had tendered his resignation as a director, he continued to act as one. Neither the company nor the petitioner acted on such resignation.

The   crucial   question   however,   is   of   the   status   of   the company.   As   noted,   the   petitioner   time   and   again contended before the Assessing Officer that the company had ceased to be a private company by virtue of provisions of section 43­A of the Companies Act, the company having crossed the maximum threshold turnover limit and also by virtue of 25% of its share capital being held by another company, had become a deemed public company. It was open for the Assessing Officer to inquire into these aspects. The question raised by the petitioner was a mixed question of fact and law. If the facts as asserted by the petitioner were   established,   the   legal   implications   flowing   thereof must follow. The Assessing Officer however, brushed aside this contention and held that whatever be the status of the company  for the purpose  of the Companies  Act, section 179 of the Income Tax Act would continue to apply. It was not a case of the Assessing Officer that the facts asserted by the petitioner  were not correct  or that for any other reason,   the   company   had   not   become   a   deemed   public company under section 46­A of the Companies Act, 1956. This being the position, the decision of the Supreme Court in case of  M. Rajamoni Amma and another v. Deputy Commissioner   of   Income­tax   (Assessment)   and   others reported in (1992) 195 ITR 873, would apply. In the said decision, it was held and observed as under : “Before us, learned counsel for the appellants relied upon the above communication from the Registrar of Companies but since the genuineness of this letter was doubted we issued notice to the Registrar  of Companies,  Kerala. An affidavit has now been filed on behalf of the Registrar. It clearly   shows   that   the   company   had   become   a   public limited   company   by   virtue   of   Section   43­A   of   the Companies   Act   w.e.f.   1st   October,   1975. As   already mentioned,  the arrears  sought  to be recovered  from  the appellants relate to the assessment years 1977­78 to 1982­

Obviously,   the   Company   being   a   public   limited company, proceedings against the directors for recovery of the   tax   due   from   the   company   cannot   be   taken,   and certainly not proceeded with, under Sec 179 of the Income Tax   Act,   1961. We   need   hardly   say   Article   265   of   the Constitution clearly prohibits any attempt to recover taxes except under the authority of law. It is, therefore, clear that further proceedings against the appellants for recovery of the tax due from the company have to be stayed.”

Learned counsel for the Revenue however, contended that in  a  given   case,   if  a   private   company  is  a   closely  held company, it would still be open for the Revenue to contend that despite being converted into a deemed public company by virtue of operation of statute, section 179 would apply. Such   are   not   the   facts   here   raised   by   the   Revenue.   In absence   of   any   such   foundation,   we   would   not   answer such a question in this petition.

Under   the   circumstances   on   this   count,   the   petition   is required to be allowed. We may briefly state that we are not influenced by the petitioner’s contention that merely being a technical director, section 179 of the Act would not apply to him. We are also broadly in agreement with the view of the Assessing Officer that duty is cast on the directors to establish   that   non­recovery   was   not   due   to   any   gross neglect, misfeasance or breach of duty on his part and in the   present   case,   he   produced   no   material   to   establish such facts. Nevertheless, when section 179 of the Act itself does not apply, question of seeking any recovery personally from the director would not arise.

In   the   result,   impugned     order   dated   3.1.2005   is quashed. Rule made absolute. Petition is disposed of. (AKIL KURESHI, J.) (MS SONIA GOKANI, J.) raghu