Should a private corporation fail to pay its tax debt, Section 179 of the Income Tax Act, 1961, allows the Tax Recovery Officer (TRO) to collect the company’s tax obligations from its directors jointly and severally. However, this clause is not absolute and includes several restrictions and circumstances.
One key condition is that the TRO must be sure that the non-recovery of tax dues from the company is owing to any gross carelessness, misfeasance, or breach of duty on the directors’ part concerning the company’s affairs. Another limitation is that the directors must be allowed to be heard before making an order under section 179.
In a recent case, the Bombay High Court quashed an order under section 179 made upon a dead director, as there was no proof that a warning was issued to him or that steps were taken to track the company’s assets.
Case Summary
The key facts of the case are:
- The dead assessee was a partner of a company called M/s. Rita Enterprises Pvt. Ltd.
- An assessment order was passed for the assessment year 2019-20, making several changes to the company’s income and bringing a tax demand of ₹1,18,75,260.
- The company filed a stay application before the TRO, which was refused.
- Thereafter, an order under section 179 was made upon the accused on 30.03.2020, making a tax claim of ₹1,18,75,260 from him as a company director.
- The assessee brought a writ case before the Bombay High Court, questioning the orders made by the TRO and the Principal Commissioner of Income Tax (PCIT).
Grounds Raised by the Assessee
The main reasons made by the assessee in his writ case were:
- The order under section 179 was passed without warning or giving him any chance of being heard, which is a requirement under section 179(2) and a violation of the standards of natural justice.
- There was nothing to show what steps the TRO took to find or collect the company’s assets before moving against the claimant as a director. Section 179(1) is not a blanket measure that permits the TRO to collect the tax dues of a company from its owners without any regard to the availability or otherwise of the company’s assets.
Bombay High Court’s Observations
The Bombay High Court made the following key observations:
- A letter sent by speed post cannot be compared with a warning under section 179(2), which needs personal service or affixation in a prominent place. The revenue did not present any mail ticket or tracking report to show that the letters were delivered to the debtor.
- Before applying section 179(1), the TRO must make reasonable efforts to find and take the assets of the company and must record his satisfaction that such efforts have failed or are likely to fail. The TRO must explain his happiness and reveal his steps to find or collect the company’s assets.
Conclusion
Considering the case facts, the Bombay High Court held that the order passed for starting actions under section 179 upon the assessee was to be quashed and set aside.
This case shows the importance of following the proper process and giving adequate chance to the directors before recovering tax dues from them under section 179 of the Income Tax Act, 1961. The TRO must also show that reasonable steps were made to find and collect the company’s assets before moving against the owners.