Bombay HC Quashes Income Tax Recovery Proceedings Against Director Having Lack Of Financial & Decision-Making Power
The Bombay High Court recently quashed an order passed by the Income Tax Officer against the Petitioner finding him liable for the outstanding dues of a company where the Petitioner and his wife were name-sake Directors and were at the mercy of the company having no real control over any of the decision.
The Division Bench of Justice K.R. Shriram and Justice M.M. Sathaye observed that "No material is highligted by the ITO contrary to material placed on record by Petitioner, based on which he can be held to be guilty of gross neglect or misfeasance or breach of duty in the context of non recovery of tax dues." The Bench referred to the material to show lack of financial control and found that the "Petitioner has sufficiently discharged the burden cast upon him in terms of section 179(1) of the Income Tax Act to absolve him from the liability thereunder."
The Petitioner, Prakash B. Kamat, had approached the Bombay High Court under Articles 226 and 227 of the Constitution of India, seeking a writ of Certiorari for quashing and setting aside the orders passed under Section 179 of the Income Tax Act, 1961 holding Petitioner liable for taxes allegedly due from Company Kaizen Automation Pvt.
Appearing for the Petitioner, Senior Advocate J.D. Mistri contended that Management and real control of the assessee Company was in the hands of 6 Directors appointed by KFI (out of 8) the other two being Petitioner and his wife Geeta P. Kamat and decision in respect of Company’s accounts and/or audits were solely in the control of Board of Directors of KFI.
It was the case of Petitioner that he and his wife were name-sake Directors and were at the mercy of the decision of KFI and they did not have any real control over any of KAPL’s decisions. Petitioner was never given any access to KAPL-assessee company’s premises, data or anything else associated therewith including accounts, audits and income tax filing etc.
"During the time when he was Director of Company, there were no outstanding demand of tax / duty from Income Tax Department. It is contended that after a long period of 8 years, Petitioner was served with a show cause notice dated 12th January, 2017 directing him to reply as to why proceedings under Section 179 of the Act should not be initiated against him for outstanding demand against KAPL the assessee Company. The notice recorded name of Petitioner and his wife only and no other Directors of the Company for Assessment Year 2008-09 and 2009-10," submitted the Petitioner.
Appearing for the Respondents, Advocate Suresh Kumar submitted that Petitioner being Director of the private company at the relevant assessment years, was jointly & severally liable for the payment of tax by the assessee company. He vehemently argued that Petitioner despite being given ample opportunities, has failed to establish that non-recovery cannot be attributed to his gross negligence, misfeasance, or breach of duty in relation to the affairs of the assessee company and therefore impugned orders are justified.
Considering the submissions made, the High Court in its order stated that it is a settled position of law that in the absence of any specific provisions in the statute, the duty or penalty liability of the company cannot be recovered from its Director, who is not personally liable towards the liability of the Company.
It was also observed that it is not the case of Respondent that the tax dues (which is subject matter of the impugned orders) were demanded when Petitioner was Director of the Assessee Company. "Perusal of the impugned Orders further show that both the ITO as well as revisional Authority have mainly proceeded on the basis that the Petitioner was director during the assessment years and do not really consider whether there was any gross neglect or misfeasance for breach of duty on his part in relation to affairs of the company “in the context of non recovery of tax dues”. In such situation it is difficult to sustain the impugned Orders, which without any basis, simply says that Petitioner (Director) has failed to prove that non-recovery cannot be attributed to any gross neglect or misfeasance or breach of duty on his part," observed the Court.
Further noting that the action was initiated after 8 years, the High Court observed that "Time and again this Court has held that the action of the state must be conducted within a reasonable period of time.The delay in adjudication defeats very purpose of legal process and assessee as a taxable person must know where he stands and if there is no action from the departmental authorities for a long time, such delayed action would be in contravention of procedural fairness and thus violative of principles of natural justice."
Accordingly, the High Court quashed the impugned orders and stated that "In the circumstances, we are of the view that petitioner is squarely covered by the exception carved out by the later part of Section 179(1) of the Act and as such he cannot be held liable."
Cause Title: Prakash B. Kamat v. Principal Commissioner of Income-tax [Writ Petition No. 3129 Of 2019]
