Devendra Babulal Jain v. Income Tax Officer, Ward 1(1)(4

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 12961 of 2019 FOR APPROVAL AND SIGNATURE: HONOURABLE MR. JUSTICE N.V.ANJARIA andHONOURABLE MR. JUSTICE BHARGAV D. KARIA ========================================================== ========================================================== DEVENDRA BABULAL JAIN Versus INCOME TAX OFFICER, WARD 1(1)(4) ==========================================================Appearance: MR. JAIMIN R DAVE(7022) for the Petitioner(s) No. 1,2MR NIKUNT RAVAL FOR MS KALPANA K RAVAL for the Respondent(s) No.1,2 ========================================================== CORAM:HONOURABLE MR. JUSTICE N.V.ANJARIAand HONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 16/12/2022 CAV JUDGMENT (PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA) 1.Heard learned advocate Mr.Jaimin Dave for thepetitioners and learned advocate Mr. NikuntRaval for the respondents. 2.The petitioners have challenged the orderdated 26.10.2017 passed by respondent no.1under section 179 of the Income Tax Act, 1961(For short “the Act”) fastening the liabilityupon the petitioners to pay the outstandingdues of M/s. Nakoda Syn-tex Private Limited (here-in-after referred to as “the saidcompany”) as the petitioners are theDirectors of the said company for theassessment year 2014-2015. The petitionershave also challenged order dated 29.01.2018passed under Rule 48 of the Second Scheduleto the Act attaching the residential propertyof the petitioners and notice of demand dated11.01.2018 under section 222 of the Act as a consequence of order dated 26.10.2017. petitioners were appointed as the Directorsof M/s. Nakoda Syn-tex Private Limited. assessment under section 143(3) of the Actagainst the said company for the AssessmentYear 2014-2015 and passed the assessmentorder dated 23.12.2016 making addition of Rs.7,00,00,000/- on account of bogus unsecuredloans. Consequently demand notice dated23.12.2016 under section 156 of the Act wasissued upon the said company raising a demandof Rs.3,06,63,860/-. 3.2) Being aggrieved by the said assessment order and demand notice, the said company preferred an appeal before theCommissioner of Income Tax Appeal-1, Surat on 17.01.2017. 3.3) On 9.02.2017, respondent no.1 issued a recovery notice demanding payment ofthe outstanding dues from the said company. 3.4) Pursuant to such recovery notice, the said company filed a stay application on22.02.2017 before the respondent no.1appraising about the appeal filed by the saidcompany. 3.5) It is the case of the petitioner that respondent no.1 rejected the staypetition of the said company vide order dated17.03.2017 without affording any opportunityof hearing to the Directors of the saidcompany. 3.6) Respondent no.1 thereafter issuedshow cause notice dated 6.7.2017 under section 179 of the Act. 3.7) The petitioners vide individualletters dated 16.08.2017 submitted reply tothe said show cause notice. 3.8) Respondent no.1 thereafter passedthe impugned order dated 26.10.2017 undersection 179 of the Act. 3.9) On 11.01.2018, respondent no.2issued a certificate under section 222 of theAct and notice of demand calling upon thepetitioners to pay the outstanding dues ofthe company within 15 days of receipt ofnotice. 3.10) The petitioner did not have adequatemeans to pay such a huge demand andtherefore, could not comply with the saidnotice. Respondent no.2 therefore, passed an order dated 29.01.2018 under Rule 48 of theSecond Schedule to the Act. 3.11) Being aggrieved by the impugned action of the respondents, the petitionershave preferred the present petition. 4.The coordinate Bench of this Court by orderdated 29.07.2019 issued the notice and granted the order of status-quo vis-a-vis the 3.9) On 11.01.2018, respondent no.2issued a certificate under section 222 of theAct and notice of demand calling upon thepetitioners to pay the outstanding dues ofthe company within 15 days of receipt ofnotice. 3.10) The petitioner did not have adequatemeans to pay such a huge demand andtherefore, could not comply with the saidnotice. Respondent no.2 therefore, passed an order dated 29.01.2018 under Rule 48 of theSecond Schedule to the Act. 3.11) Being aggrieved by the impugned action of the respondents, the petitionershave preferred the present petition. 4.The coordinate Bench of this Court by orderdated 29.07.2019 issued the notice and granted the order of status-quo vis-a-vis the properties of the petitioners which areattached by the respondents. 5.Learned advocate Mr. Jaimin Dave for the petitioners submitted that the impugned order passed under section 179 of the Act and consequential orders are without jurisdictionas the basic condition for invoking section179 of the Act are not satisfied in the factsof the case. 5.1) It was submitted that for invokingjurisdiction under section 179 of the Act,twin conditions with regard to the amount oftax dues from a private limited company whichis not recovered from such company isattributable to the gross neglect, misfeasance or breach of duty of theDirector, is not satisfied in the presentcase. It was submitted that in the facts ofthe case there is nothing on record tosuggest that the respondent authorities havebeen satisfied before invoking powers undersection 179 of the Act vis-a-vis the recoveryof the outstanding dues of the privatelimited company and there is no finding thatsuch non recovery of taxes is attributable tothe gross neglect, misfeasance or breach ofduty of the petitioners. It was submittedthat except issuance of recovery notice dated9.02.2017, respondent no.1 has neither issuedany notice of demand nor taken any assertive steps for the purpose of recovering theoutstanding tax dues from the private limitedcompany. In support of his submissions,reliance was placed on the followingdecisions: 1) In case of Bhagwandas J. Patel v. DeputyCommissioner of Income-tax reported in (1999)238 ITR 127 (Gujarat). 2)In case of Indubhai T. Vasa v. IncomeTax Officer, Ward 4(3) reported in (2006) 282ITR 120( Gujarat). 3)In case of Amit Suresh Bhatnagar v. Income-tax officer reported in (2009) 308 ITR113 (Gujarat). 4)In case of Mehul Jadavji Shah v. DeputyCommissioner of Income Tax reported in (2018)403 ITR 201 (Bombay). 5) In case of Sadhna Ramchandra Jeswani v. Income Tax Officer (judgment dated 27.08.2019 in Special Civil Application No.5354/2018 andallied matter). 6)In case of Susan Chacko Perumal v. Assistant Commissioner of Income-tax reported in (2017) 399 ITR 74 (Gujarat). 7)In case of Gul Gopaldas Daryani v. Income Tax Officer reported in (2014) 367 ITR558 (Gujarat). 6.On the other hand, learned advocate Mr.Nikunt Raval for the respondents submittedthat the compliance of the provisions ofsection 179 of the Act are made prior topassing of the impugned order. It wassubmitted that the private limited company ofwhich the petitioners are the Directors is liable to pay the demand of more than Rs. 3crores since 2016 and the said company didnot make any payment of the outstandingdemand within the due time inspite of givingrecovery notice by the Recovery Officer. Itwas submitted that the stay petition filed bythe private limited company was also notentertained by the competent authorityinspite of disposal of the stay applicationon 17.03.2017. Income Tax Officer reported in (2014) 367 ITR558 (Gujarat). 6.On the other hand, learned advocate Mr.Nikunt Raval for the respondents submittedthat the compliance of the provisions ofsection 179 of the Act are made prior topassing of the impugned order. It wassubmitted that the private limited company ofwhich the petitioners are the Directors is liable to pay the demand of more than Rs. 3crores since 2016 and the said company didnot make any payment of the outstandingdemand within the due time inspite of givingrecovery notice by the Recovery Officer. Itwas submitted that the stay petition filed bythe private limited company was also notentertained by the competent authorityinspite of disposal of the stay applicationon 17.03.2017. 6.1) Further opportunity was also givento make payment of outstanding demand bynotice dated 20.03.2017. However, no paymentis made by the petitioners or by the privatelimited company and there was total noncompliance with regard to the recovery stepstaken by the respondent authority. It waspointed out that the bank account of thepetitioners with Canara bank was alsoattached under section 226(3) of the Act on 2.05.2017. It was submitted that as per theprovisions of section 179 of the Act, thepetitioners are liable to pay the outstandingtax in capacity of the Directors of theassessee company who have neglected to makethe payment of outstanding demand. 6.2) Learned advocate Mr. Raval in support of his submissions relied upon thefollowing averements made in the affidavit inreply: “11. Further from the balance-sheetof the assessee, it is seen that itsinvestment was mostly in NakodaLimited. From the submission of theassessee dated 22/02/2017 (Annexedherewith and marked as Annexure : R-V Colly. is copies of Submission) itwas seen that huge income tax demandin the case of Nakoda Limited wasalso outstanding and no recovery waspossible from this company also.Nakoda Limited is also assessed inthis Range. From the record of thiscase it is seen that this companyhas closed down its business and E.Dhas registered a case of moneylaundering against this company.Moreover from the income-tax record of the assessee company it is seenthat no business activity in theassessee company from F.Y.2014-15onwards. In this case, ampleopportunity was given to theassessee to make payment of thedemand but no payment was made bythe assessee and even attachment ofthe bank account did not yield anyresult. Further, the assesseecompany is not doing any businessactivity. From the annual account ofthe assessee and outcome of variousefforts made by this office, it isapparent that recovery of income-taxdemand couldn't be made from theassessee company. Therefore thedepartment resorted to the provisionof section 179 of the income-tax actand initiated proceeding to recoverdemand from director. Therefore itis evident that in this casesufficient efforts were made torecover the outstanding demand fromthe assessee company, before passingorder u/s 179 of the IT Act). xxx 14. However in the instant case itis seen that show-cause noticeu/s.179 of the income-tax act wasissued on 06/07/2017 and as per theterms of the notice the directorswere required to submit their replyon or before 13/07/2017 but it isseen that there was no response fromthem till the date mentioned above.Later on after laps of 45 days ofthe due date, reply was filed. Intheir reply they did not submit any xxx 14. However in the instant case itis seen that show-cause noticeu/s.179 of the income-tax act wasissued on 06/07/2017 and as per theterms of the notice the directorswere required to submit their replyon or before 13/07/2017 but it isseen that there was no response fromthem till the date mentioned above.Later on after laps of 45 days ofthe due date, reply was filed. Intheir reply they did not submit any evidence to prove that non-recoverycannot be attributed to any grossneglect, misfeasance or breach ofduty on their part in relations tothe affairs of the company. It wasmerely submitted that they werevigilant in tax matters and appealbefore Ld. CIT (A) was pending. Itis important to mention here that itis necessary to pay 20% of thedemand outstanding in case appeal ispending before the Ld. CIT(A) as perthe Guidelines of the CBDT, whichthe assesse company has not compliedwith. Annexed herewith and marked asAnnexure: R-VI is a copy of theguidelines of the CBDT. It is theduty of the directors of the companyto comply with the statutoryprovisions and the Directors of theassessee company could have appliedfor stay of the existing demandafter paying minimum 20% of thedemand, however, the Directors ofthe assessee company have failed todo so. Therefore it is apparent thatthe directors have completely failedto establish that non- recovery oftax dues cannot be attributed to anygross neglect on their part. 15. In this case Shri DevendraBabulal Jain and Smt. PushpadeviBabulal Jain were directors of thecompany and as per the return ofincome filed for A.Y.2014-15 theywere the principal officers of theassessee company, therefore it wastheir duty to ensure the payment ofoutstanding demand of the assesseecompany. However it is seen that they have completely failed to provethat they have done their best toensure that payment of demand bemade. No provision for the income-tax demand was made in the books ofthe company. Nothing submittedbefore the AO to prove that thedirectors made any effort for thepayment of outstanding demand. Inview of the above all the conditionsfor passing order u/s.179 of theincome-tax act was full filled,therefore the action of AO forpassing order u/s.179 of the income-tax act is justified. 16. In view of the above facts, itis very much clear that theAssessing Officer had taken varioussteps to recover the outstandingdemand from the assessee company.But due to non-cooperation orcomplete negligence by the assesseecompany and its directors, therecovery in this case could not bemade. Therefore there was no optionleft but to make recovery from thedirector of the assessee company. Soproceeding u/s.179 of the Income-TaxAct was initiated and afterproviding sufficient opportunity ofbeing heard and considering thereply of the assessee order u/s.179was passed against the directors ofthe assessee.” 6.3) In support of his contention that outstanding tax dues could not be recoveredfrom the company leaving department with nooption but to recover the same from theDirectors, reliance was placed on thejudgment of Delhi High Court in case of Rajeev Behl v. Principal Commissioner ofIncome-tax reported in (2021) 132 taxmann.com283 (Delhi). 6.4) It was further submitted that reliance placed by the petitioners on thevarious decisions of this Court are notapplicable in the facts of the said case asit is for the petitioners to point out thatthe petitioners have not remained negligentfor non recovery of the outstanding dues ofthe private limited company. 7.Having heard the learned advocates for the respective parties, it appears that therespondent authorities have failed to take outstanding tax dues could not be recoveredfrom the company leaving department with nooption but to recover the same from theDirectors, reliance was placed on thejudgment of Delhi High Court in case of Rajeev Behl v. Principal Commissioner ofIncome-tax reported in (2021) 132 taxmann.com283 (Delhi). 6.4) It was further submitted that reliance placed by the petitioners on thevarious decisions of this Court are notapplicable in the facts of the said case asit is for the petitioners to point out thatthe petitioners have not remained negligentfor non recovery of the outstanding dues ofthe private limited company. 7.Having heard the learned advocates for the respective parties, it appears that therespondent authorities have failed to take any action for recovery of the outstandingdues except issuing notice for recovery andattaching the bank account of private limitedcompany. Section 179(1) of the Act reads asunder : “Liability of directors of privatecompany [44][***]. 179. (1) Notwithstanding anythingcontained in the Companies Act, 1956(1 of 1956), where any tax due froma private company in respect of anyincome of any previous year or fromany other company in respect of anyincome of any previous year duringwhich such other company was aprivate company cannot be recovered,then, every person who was adirector of the private company atany time during the relevantprevious year shall be jointly andseverally liable for the payment ofsuch tax unless he proves that thenon-recovery cannot be attributed toany gross neglect, misfeasance orbreach of duty on his part inrelation to the affairs of thecompany.” 8.On perusal of the above provisions, it isclear that the Assessing Officer is required to make efforts for recovery of theoutstanding dues from the assessee privatelimited company which has committed defaultin payment of the outstanding demand. Thepetitioners have prima facie shown that nonrecovery cannot be attributed to any grossnegligence, misfeasance or breach of duty asDirectors of the assessee company. In theimpugned order, the Assessing Officer hasfailed to consider the fact that thepetitioners have tendered their explanationand contended that the petitioners havechallenged the order of assessment before theappellate authority and the petitioners havenot remained negligent nor there is anymisfeasance or beach of trust on part of thepetitioners and only because the petitionershave been unable to deposit 20% of the demandraised in the assessment order to get stayfrom the appellate authority, the petitionerscannot be said to be negligent and respondent no.1 cannot therefore, invoke jurisdictionunder section 179 of the Act. 9.This Court in case of Sadhna Ramchandra Jeswani v. Income Tax Officer (supra) in similar situation has held as under : “8. Reverting back to the facts ofthe case, we notice that inshowcause notice the AssessingOfficer has not laid down sufficientfoundation for invoking section 179of the Act leave alone broadlypointing out he has not even allegedthat non-recovery was on account ofgross negligent, misfeasance orbreach of duty on part of thepetitioner in relation to theaffairs of the company. His finalconclusions in the impugned orderare therefore based on the materialat his command which was nevershared with the petitioner. 9. In the result, impugned order isset aside only on this ground makingit clear that nothing stated in theorder would prevent the AssessingOfficer from initiating freshexercise for the same purpose, if soadvised and, if the material at hiscommand is sufficient to permit himto do so.” 10.Similar view is also taken in decisionin case for Bhagwandas J. Patel v. Deputy Commissioner of Income-tax reported in 238ITR 127 (Guj). 9. In the result, impugned order isset aside only on this ground makingit clear that nothing stated in theorder would prevent the AssessingOfficer from initiating freshexercise for the same purpose, if soadvised and, if the material at hiscommand is sufficient to permit himto do so.” 10.Similar view is also taken in decisionin case for Bhagwandas J. Patel v. Deputy Commissioner of Income-tax reported in 238ITR 127 (Guj). 11.Reliance placed by the learned advocateMr. Nikunt Raval on the decision of DelhiHigh Court in case of Rajeev Behl v. Principal Commissioner of Income-tax (supra) is not helpful to the respondents inasmuch asthe basic ingredients of section 179 are notcomplied with by the respondent authoritiesand therefore, impugned actions are withoutjurisdiction more particularly, when thepetitioners have demonstrated that they havenot remained negligent for non recovery ofthe outstanding dues. 12.In view of above foregoing reasons, petition succeeds and accordingly impugnedorder dated 26.10.2017 and consequential order dated 29.01.2018 and demand noticedated 11.01.018 are hereby quashed and setaside. 13.Rule is made absolute to the aforesaidextent. No order as to costs. (N.V.ANJARIA, J) RAGHUNATH R NAIR (BHARGAV D. KARIA, J)