BHUPATLA J. SHETH vs. INCOME TAX OFFICER WARD 6(3) (3) AND 2 ORS.

Rule;

The   Petitioner   now   77   years   old, challenges: (a)   an order dated 6  January, 2010 of the Income Tax Officer, holding that  the petitioner is liable under   Section   179   of   the   Income   Tax   Act, 1961(hereinafter referred to as the “said Act” ) to pay the tax dues of a private limited company, in which he was a Director ; and (b   )   an   Order   dated   30th  March,   2011   passed   in Revision under Section 264 of the said Act by the Aswale 2/26 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:54:55 Commissioner of Income Tax upholding the said order dated 6th  January 2010, Both the orders have been challenged on merits as well as on account of a breach of the principles of natural justice.

The   facts   leading   to   this   petition   are   as under:­ (a)  The   petitioner   was   till   his   verification on 29th April, 1994 a non­executive Director on the Board of Directors of M/s. Metroni Drugs Pvt. Ltd. ( hereinafter referred to as “said company”). He contends that he was not involved with the day to day management of the company and was never  informed of any tax demands or that the tax dues of   the said company were outstanding. (b ) On 27 September, 2006, the Income Tax officer by notice called   upon the petitioner to show cause as to why, an amount of Rs.2.19 Aswale 3/26 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:54:55 crores being the tax dues of the said company for   the   Assessment   years   1986­87   to   1993­94 should not be recovered from him under Section 179 of the said Act. The petitioner responded to the above notice pointing out that he was a non­executive Director of the said company and had resigned as far back as April 1994. Further as   he   was   not   looking   after   the   day   to   day management of the said company he could not be liable for any neglect, malfeasance or breach of   duty   and   therefore   the   notice   should   be withdrawn. (c )    By an order   dated 25th  January, 2007, the Income Tax Officer confirmed the show cause notice dated 27th September 2006  and held the petitioner   liable to pay the tax arrears of Rs.2.19   crores   owed   by   the   said   company. Against   this   order   the   petitioner   filed   a Revision Application under Section 264 of the Aswale 4/26 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:54:55 said Act, with the Commissioner of Income Tax. On   5th  November,   2007,   the   Commissioner   of Income Tax   aside the order and remanded the matter for fresh adjudication by the Income Tax Officer with the following directions: “Under the circumstances, the A. O. was bound   to   give   a   specific   finding regarding   non­recovery   of   demand   and the   extent   to   which   it   cannot   be recovered   from   the   company.     In   the absence of any such categorical finding by   the   A.   O.,   order   passed   u/s.   179 holding the petitioner as liable to pay demand   in   the   case   of   the   company cannot be sustained and therefore the said order u/s. 179 of the Income Tax Act is hereby  cancelled.  However, the A.   O.   shall   be   at   liberty   to   pass   a fresh   order   u/s.   179   against   the petitioner after making all efforts to recover   the   demand   pertaining   to   the company   from   the   company   itself   and recording   a   finding   indicating   the extent   of   the   demand   which   cannot   be recovered   from   the   company   before passing such order u/s. 179, if deemed necessary.     The   petitioner   shall   be allowed   adequate   opportunity   of   being heard,   before   passing   any   such   fresh order u/s. 179 of the Income Tax Act.” (d)  The Income Tax Officer issued a fresh show Aswale 5/26 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:54:55 cause   notice   on   20th July,   2009   to   the petitioner.  The   notice   did not set out any particulars with regard to the efforts made and the extent of non recovery of the tax dues from the properties of the said company. (e )         By his reply dated 27th  July, 2009, the petitioner   reiterated what he had stated in   response   to   the   earlier   show   cause   while pointing out from the Balance Sheet of the said company for the year ending 31st   March, 1995, that it owned immovable properties in the form of plots of land with factory building thereon, residential flats  and  office premises in the name   of   M/s.   Deven's   Pharmaceuticals,   a partnership firm in which the said company had a 98% share along with its Director one J.D. Kale and J. C. Gohil who had  1% share each. (f ) On   2nd  December   2009,   the   Income   Tax Aswale 6/26 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:54:55 Officer     informed   the   petitioner     that   the flats and the two factory plots had been sold by the liquidator in the course of winding up. The   letter   however   makes   no   mention   of   the status of the office premises. The petitioner was called to pay the said tax dues  along with interest thereon within seven days. (g)   On   21st December   2009   the   Petitioner addressed   a   communication   to   the   Income   Tax Officer reiterating his earlier contention and sought  inspection  of   the  records   of  the  case available   with   him   and   information   about   the action   taken   against   other   Directors   of   the said company and the amounts, if any, realized from them. (h) The petitioner was thereafter awaiting an appointment   for   inspection   of   records   and   a date for personal hearing, when he  was shocked to receive the impugned order dated 6th  January Aswale 7/26 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:54:55 2010 passed under Section 179 of the said Act by the Income Tax Officer. By the above order the   Petitioner   as   a   Director   of   the   said company, was held liable  under Section 179 of the said Act, to pay the tax dues of Rs.2.19 crores  along with interest thereon payable by the said company during the financial years  1st April, 1985 to 31st   March, 1993 and assessment years 1985­86 to 1993­94. The aforesaid order was   passed   without   giving   the   petitioner   any inspection of the records nor an opportunity of a personal hearing. (i ) Being aggrieved by the order dated 6th January,   2010,   the   petitioner     preferred   a Revision Application  under Section 264 of the said Act, with the Commissioner of Income Tax. In its Revision Application, the petitioner has specifically mentioned that the order dated 6th January,   2010   had   been   passed   without   giving Aswale 8/26 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:54:55 inspection of record as prayed for or even a personal hearing.   The petitioner also made a grievance   that   though   there   was   a   property available at   Mahim, Mumbai  in the name of a partnership firm, in which the said company had a 98% share and its value was substantial yet the same was not being proceeded against before making the petitioner liable under Section 179 of the said Act.   He also contended that the order was contrary to the directions contained in the order of remand dated 5th  November 2007 passed by the Commissioner of Income Tax. (j ) By the impugned order dated 30th March, 2011, the Commissioner of Income Tax dismissed the   petitioner's   Revision   Application.     The order in its entirety is as under: “Order   u/s.164   of   the   Income   Tax Act,1961. In the present case, original order under   section   179   was   passed   on 25/01/2007. Against   the   said   order, Aswale 9/26 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:54:55 the   assessee   had   preferred   revision U/s.264. In the order u/s.264 dated 05/11/2007 the A. O. was directed to provide   to   the   assessee   adequate opportunity   of   being   heard,   before passing fresh order u/s. 179. 2 The   order   u/s.   179   dated   6/1/2010 and   the   submissions   made   by   the assessee   are   perused.     The   assessee has   grossly   failed   to   substantiate before  the  Assessing  Officer  that  he was not liable, as a Director for the outstanding   income­tax   dues   of   the company i.e.  M/s.  Metroni  Drugs Pvt. Ltd. 3 In view of the facts mentioned hereinabove, I decline to interfere in the order passed u/s.179.” (k) It   is   against   the   aforesaid   orders dated 6th   January, 2010   and 30 March, 2011 passed   by the   Income   Tax   Officer   and Commissioner   of   Income   Tax   respectively   that the petitioner has filed the present petition. The   Respondents   have   filed   an   Affidavit   in reply   dated   16th  December   2011   opposing   the Petition and praying that it be dismissed. Aswale 10/26 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:54:55

Mr.   Vipul   Joshi     in   support   of   the petition   submits   that   a)   the   orders   dated   6th January, 2010 and 30th March, 2011  have been passed in breach of   principles of natural justice.   The order   dated   6th  January,   2010   was   passed   without giving the petitioner a personal hearing, while the order dated 30th March, 2011 is without reasons; b) the order dated 6th  January, 2010   was passed in total disregard of the order dated 5th November, 2007   of   Commissioner   of   Income   Tax   which   had directed him to   give a personal hearing to the petitioner   before   passing   of   any   order   under Section 179 of the said Act; and   c) inspection asked for by the petitioner was not given and yet the   order   dated   6th  January   2010   relies   upon evidence   in   the   form   of   the   report   dated   9th November   2009   pointing   out   why   recovery   is allegedly not possible from the said company. He Aswale 11/26 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:54:55 submits therefore that the orders be set aside and the matter be remanded for de novo adjudication by the   Income   Tax   Officer   after   following   the principles   of   natural   justice.     On   merits,   he submitted that Section 179  of the said Act, would not apply in the case of a non­executive Director on the  Board of the company and particularly  in view of the fact that  failure to pay tax or  the outstanding   tax   demands   was   never   brought   before the Board of Directors with   the   result that in such   a   case   a   non­executive   Director   not   being aware of the non payment of taxes cannot be held liable for any neglect or breach of any duty in relation to the affairs of the said company.

As against the above submissions, Ms. Suchitra   Kamble, the learned counsel   appearing for the respondents submits that a) the order dated 6th  January, 2010 passed by the Income Tax Officer Aswale 12/26 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:54:55 after   considering   in   detail   the   representations made by the petitioner cannot be considered to be an   order   without   hearing   particularly   when   non grating   of   personal   hearing   has   not     caused   any prejudice to the petitioner; b) the order dated 30th March, 2011 of the Commissioner of Income Tax, was an order which merely  affirmed the order  dated 6th January,   2010   of   the   Income   Tax   Officer   and

In   a   writ   proceedings,   the   Court   is concerned   more   with   the   decision   making   process rather   than   the   merits   of   the   decision   per   se, unless the same is arbitrary or the decision itself revels that the decision making process was bad in law.   This is essentially so because   in judicial review, the Court does not sit in appeal over the decisions   of   the   quasi   judicial   authority,   but essentially   ensures   that   the   decision   making process is in accordance with law. Therefore before considering the merits of the matter viz. whether Section 179 of the said Act, is at all applicable in   respect   of   the   non­executive   Director   on   the Aswale 14/26 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:54:55 board   of   a   Private   Limited   Company   it   would   be appropriate to consider whether there has been any failure in the decision making process which would render the impugned orders dated 6th  January 2010 and 30th  March 2011 bad in law.

One   of   the   fundamental   principles   of Natural Justice is the Rule of Audi alteram Partem which   means   hear   the   other   side   or   that   no   man shall be condemned unheard.  The Apex court  in the matter   of   Assistant   Commissioner,   Commercial   Tax Department,   Works   Contract   and   Leasing   v.   Shukla and Brothers, (2010) 4 SCC 785, at page 790   has described   the   ingredients   of   the   Rule   of   Audi alteram partem  as under : “The   doctrine   of   audi   alteram   partem   has three basic essentials. Firstly, a person against   whom   an   order   is   required   to   be passed or whose rights are likely to be af­ fected adversely must be granted an oppor­ tunity   of   being   heard.   Secondly,   the   au­ thority concerned should provide a fair and transparent procedure and lastly, the au­ Aswale 15/26 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:54:55 thority concerned must apply its mind and dispose   of   the   matter   by   a   reasoned   or speaking order. This has been uniformly ap­ plied by courts in India and abroad.”

Keeping in mind the above tests, we shall now   examine   the   breach   of   natural   justice   com­ plained of by the Petitioner in respect of Orders dated 6 January 2010 and 30 March 2011 passed by the Income Tax Officer and the Commissioner of In­ come Tax respectively. In the first round of the proceedings under Section 179 of the said Act, the Aswale 18/26 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:54:55 Commissioner of Income Tax by order dated 5th   No­ vember, 2007 set aside the order dated 25th January, 2007 of the Income Tax Officer.  However whist set­ ting aside the order, the Commissioner of Income Tax directed the Income Tax officer that before any order under Section 179 of the said Act is passed against the petitioner, the Assessing Officer must give a specific finding to the effect that  efforts made to recover the tax dues from the said company had failed and that the  petitioner should be heard before any order is passed under Section 179 of the Income Tax Act. It is pertinent to note that before passing the order dated 6th January, 2010 the peti­ tioner was never informed of the efforts made by the department to recover the amounts from the said company.   In the order dated 6th  January, 2010 re­ liance is placed upon a report dated 9th   November 2009  of the  Tax Recovery Officer submitting a de­ tailed  report of the efforts made to recover  the Aswale 19/26 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:54:55 tax dues from the said company and the results of that effort.  However, no copy of the said communi­ cation of the Tax Recovery Officer was ever made known  to the petitioner and in spite of the peti­ tioner seeking inspection of all the documents on record, no such inspection was ever given to the petitioner.  This furnishing of material to the Pe­ titioner is important, in the present facts as it would enable the petitioner to point out whether some other properties of the said company are still available and also ensure that the department has exhausted   all   avenues   of   recovery   from   the   said company   before   proceeding   against   the   petitioner under Section 179 of the said Act.   It is not the case of the Respondents that non disclosure of the Report dated 9th  November 2011 of the Tax Recovery Officer   or   the     other   records   to   the   petitioner were governed by  the known exceptions to law.  In this case the Petitioner had sought inspection of Aswale 20/26 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:54:55 the record from the Income Tax officer and if the same was made available the Petitioner could have pointed out the flaws in it and/or the fact that some other property of the said company is avail­ able and no efforts have been made to recover the same. 9) Further the giving of a personal hearing in the facts of the present case would not be an empty formality.   Therefore the contention of the Respondent that no prejudice was caused to the pe­ titioner due to non giving of a personal hearing cannot be countenanced. 10) In the circumstances, the order dated 6th January, 2010 is an order which has been passed not only   on   the   basis   of   the   material   viz.     Tax Recovery Officer's letter/report dated 9th November, 2009 that was not   disclosed   to the petitioner, Aswale 21/26 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:54:55 but   also   passed   without   a   personal   hearing,   as directed by the order dated 5th  November, 2007 of the   Commissioner   of   Income   Tax.     Therefore   the order   dated   6th  January   2010   is   liable   to   the quashed and set aside and the matter ought to be remanded   to   the   Tax   Officer   for   de   novo adjudication. 11)   The order passed by the Commissioner of In­ come tax on 30th March, 2011, under Section 264 of the said Act, is an order without reasons. The or­ der has been reproduced in its entirety above and it speaks for itself. However the advocate for the respondents may be correct in her submission that an order in revision while affirming the order of a lower authority need not be an elaborate order dis­ cussing all the issues which had already been dis­ cussed by the order passed by the original authori­ ty. Even so some reason,   howsoever brief, should Aswale 22/26 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:54:55 be indicated even in the order affirming the order under challenge as it would ensure due application of mind.  However, as observed by the Supreme Court in   the   matter     of    Divisional    Forest   Officer, Kothagudem v. Madhusudhan Rao, (2008) 3 SCC 469, at page 473  : “It is no doubt also true that an appellate or   revisional   authority   is   not   required   to give detailed reasons for agreeing and con­ firming an order passed by the lower forum but, in our view, in the interests of jus­ tice, the delinquent officer is entitled to know at least the mind of the appellate or revisional authority in dismissing his appeal and/or revision. It is true that no detailed reasons are required to be given, but some brief reasons should be indicated even in an order affirming the views of the lower fo­ rum.” Similarly in the matter of  Chairman, Disciplinary Authority, Rani  Lakshmi  Bai Kshetriya Gramin Bank v. Jagdish Sharan Varshney, (2009) 4 SCC 240, at page 242 “In our opinion, an order of affirmation need not contain as elaborate reasons as an   order   of   reversal,   but   that   does   not Aswale 23/26 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:54:55 mean   that   the   order   of   affirmation   need not   contain   any   reasons   whatsoever.   In fact,   the   said   decision   in  Prabhu   Dayal Grover case has itself stated that the ap­ pellate order should disclose application of mind. Whether there was an application of mind or not  can only be disclosed by some reasons, at least in brief, mentioned in the order of the appellate authority. Hence,   we   cannot   accept   the   proposition that an order of affirmation need not con­ tain any reasons at all. That order must contain some reasons, at least in brief, so that one can know whether the appellate authority has applied its mind while af­ firming the order of the disciplinary au­ thority.”