C/SCA/3948/2019 ORDER IN HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 3948 of 2019 ASHITA NILESH PATEL Versus ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 4(1)(2) Appearance: MR B S SOPARKAR(6851) for Petitioner(s) No. 1 MR.M.R.BHATT, SENIOR ADVOCATE WITH MRS MAUNA M BHATT(174) for Respondent(s) No. 1 CORAM: HONOURABLE MR.JUSTICE J.B.PARDIWALA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 20/01/2020 ORAL ORDER (PER : HONOURABLE MR.JUSTICE J.B.PARDIWALA) 1. Rule returnable forthwith. Mrs.Mauna Bhatt, learned standing counsel waives service of notice of rule for and on behalf of Revenue. 2. By this writ application under Article 226 of Constitution of India, writ applicant has prayed for following relief(s): 7(a) quash and set aside impugned order at Annexure to this petition; (b) Pending admission, hearing and final disposal of this petition, to stay implementation and operation of order at Annexure 'A' to this petition. (c) any other and further relief deemed just and proper be granted in interest of justice; Page 1 of 14 Downloaded on : Tue Jan 28 10:44:53 IST 2020 C/SCA/3948/2019 ORDER (d) to provide for cost of this petition. 3. subject matter of challenge in this writ application at instance of writ applicant is order passed by respondent under Section 179 of Income Tax Act, 1961 (for short Act,1961 ). impugned order reads thus: ORDER U/S.179 OF Income Tax Act, 1961 In case of M/s. Tirupati Proteins Pvt.Ltd (PAN AABCT8423E) demand of Rs.9074.34 lakhs is outstanding as on date and breakup of demand as mentioned is given as under: No. A.Y. Demand Nature of (Lakhs) Demand (Tax/Interest /Penalty) 1 2011 12 7983.85 Tax + Interest 2 2012 13 782.36 Tax 3 2013 14 292.99 Tax 4 2014 15 15.14 Tax Total 9074.34 2. said demand has not been paid till date. Despite being given number of opportunities, company did not make payment of outstanding demand of Rs.9074.34 lacs. 3. At relevant point of time directors of assessee company were Smt. Sonal Nimish Patel and Smt. Ashita Nilesh Patel. Further, it is noticed from records of company that there are no recoverable assets in name of assessee company. In such circumstances, proceedings under Section 179 of I.T.Act were initiated on 02.11.2017 by way of issuing of notice to then Directors and all directors were requested to Page 2 of 14 Downloaded on : Tue Jan 28 10:44:53 IST 2020 C/SCA/3948/2019 ORDER show cause vide notice u/s 179 of Act as to why they should not be treated as jointly and severally liable for payment of such tax and why order u/s 179 of Income Act, 1961 should not be passed against them. In terms of said notice directors were to attend office of undersigned on 10.11.2017 with explanation. But no compliance was made in response to said notice. It is noticed that neither Directors or any of their authorized representatives attended nor any written submission was furnished. 4. Company, M/s. Tirupati Proteins Pvt.Ltd. is private company and hence, provisions of Section 179 of I.T.Act are clearly applicable in case of directors of said company. As directors of company it was duty bound on part of directors of company to pay tax due. directors of assessee company failed to discharge that duty, hence provisions of section 179(1) are clearly attracted. Reliance is placed on decision of Union of India vs. Praveen D.Desai (1988) 173 ITR 303. 5. provisions of Section 179 of Act are very clear in this matter and is reproduced below: Notwithstanding anything contained in Companies Act, 1956 (1 of 1956), where any tax due from 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 private company cannot be recovered, then, every person who was director of private company at any time during relevant previous year shall be jointly and severally liable for payment of such tax unless he proves that non recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to affairs of company. 6. It is further emphasized that Board had desired that provisions of Section 179 of IT Act should not be used more vigorously and frequently in such instances. Instruction No.1519 vide F.No.404/110/82 ITCC dated 20.07.1983 OF CBDT states that AO can proceed u/s. 179 simultaneously against company & directors and it Page 3 of 14 Downloaded on : Tue Jan 28 10:44:53 IST 2020 C/SCA/3948/2019 ORDER is not necessary that action against company should be exhausted. 7. Thus, from all angles, assessee company falls within ambit of Section 179 of I.T.Act. Smt.Sonal Nimish Patel and Smt. Ashita Nilesh Patel, were directors of company for period under consideration during which demand was raised the default of non payment of tax occurred. In response to proceedings initiated u/s. 179(1) of IT Ac, directors failed to furnish any reply to notice u/s. 179(1) of I.T.Act. It is therefore, presumed that directors have no objection for passing order u/s. 179 of I.T.Act. In light of discussion made in foregoing paragraphs, since demand is not recoverable from assessee company, responsibility is fixed upon then directors u/s. 179(1) of IT Act and they will be treated as assessee in default in respect of tax, interest and penalty recoverable from assessee company. 8. Considering above facts, Smt.Sonal Nimish Patel and Smt. Ashita Nilesh Patel are held jointly and severally liable to make payment of outstanding demand of RS.9074.34 lakhs as well as any future demand which may arise in case of Assessee Company, as provided under Section 179 of IT Act. [AKTA JAIN B] Asst.Commissioner of Income Tax, Cirlce 4(1)(2), Ahmedabad. 4. aforesaid order under Section 179 of Act, 1961 is outcome of show cause notice dated 02.11.2017 (Annexure to this writ application). show cause notice dated 02.11.2017 reads thus: To, Smt.Sonal Nimish Patel, Page 4 of 14 Downloaded on : Tue Jan 28 10:44:53 IST 2020 C/SCA/3948/2019 ORDER 13/6 Dariyapur Patel Society, Usmanpura, Ahmedabad 380 013 Sub: Show Cause notice u/s 179 of Income Tax Act, 1961 Recovery of outstanding demand of Rs.9074.34 lacs for A.Y.2011 12 to A.Y.2014 15 in case of M/s. Tirupati Proteins Pvt.Ltd. reg. total demand of Rs.9074.34 lacs is outstanding against M/s. Tirupati Proteins Pvt.Ltd. for A.Y. 2011 12. company has not made said payment despite various notices given to it in this regard. You are, therefore, requested to show cause as to why order u/s 179 of Act should not be made against you as you are/were director of company during period to which demand relates and show cause as to why you should not be held jointly and severally liable for payment of above demand of tax. You are requested to attend office on 10.11.2017 at 11.00 AM with your explanation, failing which, order u/s. 179 of Act shall be passed against you. You are also requested to furnish copy of latest balance sheet/statement of affairs including name and address of banks where you are holding accounts with bank A/c. Nos. Name & address of debtor and and also location of fixed assets owned by you. (AKTA JAIN B) Assistant Commissioner of Income Tax, Circle 4(1)(2), Ahmedabad. 5. Mr. B.S.Soparkar, learned counsel appearing for writ applicant, submitted that impugned order is not tenable in law. According to learned counsel, Section 179 of Act, 1961, is Page 5 of 14 Downloaded on : Tue Jan 28 10:44:53 IST 2020 C/SCA/3948/2019 ORDER with respect to liability of Directors of private company in liquidation. If any tax is due from private company and Revenue is not able to recover such tax from company, then every person being Director of private company at any time during relevant previous year can be held jointly and severally liable for payment of such tax, unless Director proves that non recovery of tax due against company could not be attributed to any gross negligence, misfeasance or breach of duty on their part in relation to affairs of company. 6. According to Mr.Soparkar, just because Department failed in recovering dues towards tax from company, it could not have proceeded to seek such recovery from properties of writ applicant. It is also case of writ applicant that she had resigned as Director of Company long time back, and therefore, could not have been fastened with any liability. 7. Mr.Soparkar has invited attention of this Court to show cause notice dated 02.09.2017. According to Mr.Soparkar, show cause notice is bereft of material particulars as regards steps said to have been taken by Department for purpose of recovering tax from company. It is submitted that it is obligatory on part of Department to demonstrate, by some material on Page 6 of 14 Downloaded on : Tue Jan 28 10:44:53 IST 2020 C/SCA/3948/2019 ORDER record, that it had taken necessary steps to recover dues from company, but such steps failed. 8. Mr.Soparkar would further submit that even order passed by Assistant Commissioner of Income Tax dated 11.12.2017 under Section 179 of Act, 1961 does not disclose any such material. According to Mr.Soparkar, in such circumstances, referred to above, Department could not have proceeded against writ applicant as Director of Company. condition precedent for purpose of invoking Section 179 of Act, 1961 is that it is only in event Department fails to recover dues from company that it can proceed against Director jointly or severally. 9. Mr.Soparkar further pointed out that after impugned order came to be passed under Section 179 of Act,1961, notice was issued under Section 226(3) of Act to Principal Officer of HDFC Bank limited with whom writ applicant has bank account and bank account has been accordingly freezed. In such circumstances, referred to above, Mr.Soparkar prays that impugned order passed by Assistant Commissioner of Income Tax under Section 179 of Act, 1961, be quashed and set aside and bank account be ordered to be defreezed. Page 7 of 14 Downloaded on : Tue Jan 28 10:44:53 IST 2020 C/SCA/3948/2019 ORDER 10. On other hand, this writ application has been vehemently opposed by Mr.M.R.Bhatt, learned counsel appearing for Revenue. According to Mr.Bhatt, no error not to speak of any error of law could be said to have been committed by respondent in passing impugned order. 11. According to Mr.Bhatt, burden is not on Department to prove that they could not recover tax from company on account of gross negligence, misfeasance or breach of duty on part of Directors of Company, but on contrary, it is for Directors against whom Department wants to proceed to prove that non recovery cannot be attributed to any gross negligence, misfeasance or breach of duty on their part. 12. According to Mr.Bhatt, in case on hand, due steps were taken against company for purpose of recovery of dues, but unfortunately such steps failed and Department is not able to recover anything. 13. Mr.Bhatt pointed out that they could not find any asset of company upon which there is no encumberance. In other words, according to Mr.Bhatt, there is charge of one institution or other on assets of company. However, Mr.Bhatt very fairly pointed out that show cause notice as well as impugned final order is silent Page 8 of 14 Downloaded on : Tue Jan 28 10:44:53 IST 2020 C/SCA/3948/2019 ORDER so far as steps taken by Department against company is concerned. 14. Today, when matter is taken up for further hearing, additional affidavit in reply, duly affirmed by Deputy Commissioner of Income Tax, Circle 4(1)(2), Ahmedabad, is being tendered to indicate steps taken against company for recovery of dues. copy of same has been furnished today to Mr.Soparkar, learned counsel appearing for writ applicant. additional affidavit in reply is ordered to be taken on record. 15. Over and above same, there is affidavit in reply on record dated 26.06.2019. 16. Mr.Bhatt would submit that there is quite sizable amount in bank account of writ applicant maintained with HDFC Bank Limited. As Department has not been able to recover anything from Company, only hope for Department is now to recover some of dues by attaching bank accounts of Directors. 17. In such circumstances, referred to above, learned counsel Mr.Bhatt prays that there being no merit in writ application, same be rejected. 18. Having heard learned counsel appearing for parties and having gone through materials on Page 9 of 14 Downloaded on : Tue Jan 28 10:44:53 IST 2020 C/SCA/3948/2019 ORDER record, only question that falls for our consideration is, whether respondent has committed any error in passing impugned order. 19. Section 179 of Act, 1961 reads thus: Liability of directors of private company in liquidation. 179. (1) Notwithstanding anything contained in Companies Act, 1956 (1 of 1956), where any tax due from 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 private company cannot be recovered, then, every person who was director of private company at any time during relevant previous year shall be jointly and severally liable for payment of such tax unless he proves that non recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to affairs of company. (2) Where private company is converted into public company and tax assessed in respect of any income of any previous year during which such company was private company cannot be recovered, then, nothing contained in sub section (1) shall apply to any person who was 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 1st day of April, 1962. Explanation. For purposes of this section, expression "tax due" includes penalty, interest or any other sum payable under Act. 20. In case of Maganbhai Hanrajbhai Patel vs. Assistant CIT [(2013) 353 ITR 57], this Court had occasion to examine Section 179 of Act, 1961 in detail. It has been held therein that sub section (1) of Section 179 of Act, 1961 provides for Page 10 of 14 Downloaded on : Tue Jan 28 10:44:53 IST 2020 C/SCA/3948/2019 ORDER joint and several liability of directors of private company, wherein tax dues from such company in respect of any income of any previous year cannot be recovered. first requirement, therefore, to attract such liability of director of private limited company is that tax cannot be recovered from company itself. Such requirement is held to be pre requisite and necessary condition to be fulfilled before action under Section 179 of Act can be taken. In context of Section 179 of Act, 1961, this Court held that before recovery in respect of dues from private company can be initiated against directors, to make them jointly and severally liable for such dues, it is necessary for Revenue to establish that such recovery cannot be made against company and then alone it can reach to directors who were responsible for conduct of business during previous year in relation to which liability exists. 21. There is no escape from fact that perusal of Notice under Section 179 of Act, 1961, reveals that same is totally silent as regards satisfaction of condition precedent for taking action under Section 179 of Act, 1961, viz. that tax dues cannot be recovered from Company. In show cause notice, there is no whisper of any steps having been taken against Company for recovery of outstanding amount. Page 11 of 14 Downloaded on : Tue Jan 28 10:44:53 IST 2020 C/SCA/3948/2019 ORDER Even in impugned order, no such details or information has been staled. 22. In such circumstances, referred to above, question is, whether such order could be said to be sustainable in law. answer has to be in negative. At same time, in peculiar facts and circumstances of case and more particularly, when it has been indicated before us by way of additional affidavit in reply as regards steps taken against company for recovery of dues, we would like to give one chance to department to undertake fresh exercise so far as Section 179 of Act, 1961, is concerned. If show cause notice is silent including impugned order, void left behind in two documents cannot be filled by way of affidavit in reply. Ultimately, it is subjective satisfaction of authority concerned that is important and it should be reflected from order itself based on some cogent materials. However, with view to protect interest of both, writ applicant as well as Revenue, we are inclined to quash impugned order and give one opportunity to Revenue to initiate proceedings afresh by issuance of fresh show cause notice with all necessary details so that writ applicant can meet with case of Revenue. We are inclined to adopt such measure keeping in mind statement made by learned counsel Mr.Soparkar that till fresh proceedings are not completed, his client will not operate Page 12 of 14 Downloaded on : Tue Jan 28 10:44:53 IST 2020 C/SCA/3948/2019 ORDER bank account. 23. In view of above, this writ application is partly allowed. impugned notice as well as order is hereby quashed and set aside. It shall be open for respondent to issue fresh show cause notice for purpose of proceeding against writ applicant under Section 179 of Act, 1961. We would like to give time bound program so that proceedings may not go on for indefinite period. We are also issuing such direction because of statement being made that writ applicant will not operate bank account till fresh proceedings are initiated and completed. In such circumstances, we grant two months' time from date of receipt of writ of this order to Department to initiate fresh proceedings and pass appropriate orders in accordance with law. Till final order is passed, writ applicant shall not operate bank account concerned. 24. In view of above, two notices under Section 226(3) of Act, 1961, i.e. one, to Kalupur Commercial Cooperative Bank Limited, and another, to HDFC Bank Limited, are also quashed and set aside. 25. With above, this writ application stands disposed of. Page 13 of 14 Downloaded on : Tue Jan 28 10:44:53 IST 2020 C/SCA/3948/2019 ORDER 26. One copy of this order shall be furnished to Mrs.Bhatt, learned standing counsel for respondent for its onward communication. (J. B. PARDIWALA, J) (BHARGAV D. KARIA, J) GIRISH Page 14 of 14 Downloaded on : Tue Jan 28 10:44:53 IST 2020 Ashita Nilesh Patel v. Assistant Commissioner of Income-tax, Circle-4(1)(2)