M.gomathi Shankar v. Income Tax Officer, Company Ward Iv(1)

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 05.09.2007 THE HON'BLE MR.JUSTICE M.JAICHANDREN M.Gomathi Shankar.. Petitioner in W.P.29108/07S.Surendaranathan .. Petitioner in W.P.29109/07vs. 1. Income Tax Officer, Company Ward IV(1) 121, M.G.Road, Aayahar Bhawan, Main Building, IV Floor, Chennai 600 034.2. Tax Recovery Officer-VII Income Tax Department, Company Range – IV, Chennai 600 034... Respondents in both W.Ps.Writ Petitions filed under Article 226 of the Constitution ofIndia praying for the issuance of a Writ of certiorari, to callfor the impugned records of the first respondent in PANAACCM49676C and quash the order dated 8.8.2007. For respondents : Mr.J.Narayanasamy, Standing Counsel for Income-tax Dept. C O M M O N O R D E R Heard Mr.P.Rajkumar, learned counsel appearing for thepetitioners and Mr.J.Narayanasamy, the learned Standing Counselappearing on behalf of the respondents. https://hcservices.ecourts.gov.in/hcservices/ 2. It is submitted by the petitioners that they wereDirectors in M/s Meld Chemicals (P) Ltd. which was involved in themanufacturing and trading of Chemicals. The petitioners haveresigned from the Board of Directors of the said Company, witheffect from 28.02.2003. In compliance with the provisions of theCompanies Act, Form 32 had been submitted before the Registrar ofCompanies, about the change in the Management of the Company.However, the first respondent had issued a show cause notice on19.07.2007, under Section 179 of the Income Tax Act to thepetitioners, with regard to the assessment years 2002-03 and 2003-04. In spite of the petitioners intimating the first respondentthat they had already resigned from the Company, the impugnedorder dated 08.08.2007, had been passed by the first respondent inPAN:AACCM49676C, under Section 179 of the Income Tax Act, 1961,holding the petitioners liable to pay the arrears of tax due fromM/s Meld Chemicals (P) Ltd., as stated therein. 3. The main contention of the learned counsel for thepetitioners is that the petitioners cannot be held liable underSection 179(1) of the Income Tax Act, 1961, unless there is afinding by the authority concerned that the tax due from theCompany cannot be recovered. Further, it is pointed out thatneither the show cause notice dated 19.07.2007, issued by thefirst respondent, nor the impugned order, dated 08.08.2007, passedby the first respondent, contains the finding that the tax duefrom the Company, viz., M/s Meld Chemicals (P) Ltd. cannot berecovered. Therefore, the show cause notice, dated 19.07.2007,and the impugned order, dated 08.08.2007, passed by the firstrespondent are illegal and invalid. 4. Mr.J.Narayanasamy, learned Standing Counsel appearing onbehalf of the respondents has not refuted the claims made onbehalf of the petitioners. It has also been pointed out that aDivision Bench of this Court, in C.Rajendran and another vs.Income-Tax Officer, by its order dated 02.08.2001, reported in 253ITR 139, had held as follows: "This section has been amended and it is theamended version which is reproduced above. The languageof the section is very clear to suggest that the actionunder the section can be activated only when the tax duefrom a private limited company pertaining to theprevious year cannot be recovered. The words "cannot berecovered" are most important. The phraseology suggestsessentially that in spite of the efforts made as per theprocedure followed in the Income-tax Act for recovery ofthe tax arrears when the said tax arrears cannot berecovered then alone the liability can be transferred "This section has been amended and it is theamended version which is reproduced above. The languageof the section is very clear to suggest that the actionunder the section can be activated only when the tax duefrom a private limited company pertaining to theprevious year cannot be recovered. The words "cannot berecovered" are most important. The phraseology suggestsessentially that in spite of the efforts made as per theprocedure followed in the Income-tax Act for recovery ofthe tax arrears when the said tax arrears cannot berecovered then alone the liability can be transferred under section 179(1) of the Income-tax Act to thedirectors. Therefore, in order to activate this sectionand the action thereunder, a finding would have to berecorded to the effect that in spite of the efforts torecover the tax arrears the said tax arrears could notbe recovered from the assessee-company. The second partof the section comes into effect only thereafter.Firstly, once there is a finding that such tax arrearscannot be recovered then the liability could betransferred to every person who was a director and itwould be then for such a person to show that the non-recovery cannot be attributed to any gross neglect,misfeasance or breach of duty on his part in relation tothe affairs of the company and when he discharges thisburden, he would no more be required to discharge thetax liability so transferred to him. However, thatstage would come only later on, after it is found thatthe tax arrears cannot be recovered from the assessee-company......Our attention was drawn by learned counsel for theappellant to the Division Bench judgment in K.V.Reddy v.Assistant CIT [1998] 232 ITR 306 (AP). The DivisionBench has taken a similar view therein. The DivisionBench observes (page 308):"The language used in the section is clear. It isonly in cases where the tax cannot be recovered from thecompany that the liability of the director arises. Theliability of the directors is joint and several. It isnot a joint and several liability with the company. Itis not a liability co-extensive with the liability ofthe company, unlike a principal debtor and the surety.In the case of the principal debtor and surety, theliability of the surety is co-extensive with that of theprincipal debtor and, therefore, both the principaldebtor and the surety can be proceeded againstsimultaneously. Whereas under section 179 of the Act itis only in case the tax cannot be recovered from thecompany that the liability of the director arises or theliability itself arises for the director. After thatliability arises, the liability is joint and severalamongst the directors and it is not a liability jointand several with that of the company. Therefore, before the Assessing Officer proceedsagainst the directors personally he has to give afinding that the income-tax due for the previous yearcannot be recovered from the company. In the absence ofgiving a finding conferring jurisdiction on him torecover the income-tax from the director personally, the Assessing Officer does not get the jurisdiction toinitiate proceedings under section 179 of the Act. Inthe absence of such a finding, the Assessing Officerdoes not get jurisdiction to invoke the provisions ofsection 179 of the Act." 5. Based on the submissions made by the learned counsel forthe petitioners and the learned Standing Counsel for therespondents and in view of the order passed by the Division Benchof this Court as noted above, this Court is of the considered viewthat the show cause notice, dated 19.07.2007, and the impugnedorder passed by the first respondent, on 08.08.2007, inPAN:AACCM49676C, are set aside, and the first respondent isdirected to cause an enquiry with regard to the liability of thepetitioners, and to pass appropriate orders, on merits and inaccordance with law, expeditiously. 5. Based on the submissions made by the learned counsel forthe petitioners and the learned Standing Counsel for therespondents and in view of the order passed by the Division Benchof this Court as noted above, this Court is of the considered viewthat the show cause notice, dated 19.07.2007, and the impugnedorder passed by the first respondent, on 08.08.2007, inPAN:AACCM49676C, are set aside, and the first respondent isdirected to cause an enquiry with regard to the liability of thepetitioners, and to pass appropriate orders, on merits and inaccordance with law, expeditiously. With the above directions, these writ petitions are disposedof. No costs. Consequently, connected miscellaneous petitionsare closed. gmsSd/Asst.Registrar/true copy/Sub Asst.RegistrarTo 1. The Income Tax Officer, Company Ward IV(1) 121, M.G.Road, Aayahar Bhawan, Main Building, IV Floor, Chennai 600 034. 2. The Tax Recovery Officer-VII Income Tax Department, Company Range – IV, Chennai 600 034. + 2 ccs to Mr. P. Rajkumar, Advocate SR No. 55469 & 55470 GG(CO)SR/5.10.2007 W.P.No.Nos.29108 and 29109 of 2007