Prakash B. Kamat, Adult, Indian Inhabitant ) Currently v. Principal Commissioner Of Income-Tax-10 ) Having His Office At Aaykar Bhavan, ) Maharashi Karve Road, Mumbai

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION WRIT PETITION NO. 3129 OF 2019 WITHINTERIM APPLICATION NO. 2150 OF 2021WITHINTERIM APPLICATION NO. 744 OF 2019 Prakash B. Kamat, Adult, Indian Inhabitant)currently residing at Plot No. 69, Laxmi Gruh)Flat No. 701, 7[th] floor, Hindu Colony, )Lane No. 1, Dadar (East), Mumbai-400014) … PetitionerVersus 1. Principal Commissioner of Income-tax-10)having his office at Aaykar Bhavan, )Maharashi Karve Road, Mumbai-400020.) 2. Income Tax Officer -10(1)(3), having his office )at Aaykar Bhavan, Maharashi Karve Road, )Mumbai-400020.) at Aaykar Bhavan, Maharashi Karve Road, )Mumbai-400020.) 3. Union of India, through the Secretary,)Department of Revenue, Ministry of Finance)Government of India, North Block, )New Delhi- 110001.) … RespondentsDepartment of Revenue, Ministry of Finance)Government of India, North Block, )New Delhi- 110001.) … Respondents ****** Mr. J.D. Mistri, Sr. Advocate a/w Mr. Madhur Agarwal, Mr. JasSanghavi and Mr. Fenil Bhatt i/b PDS Legal for the Petitioner. Mr. Suresh Kumar for Respondents. ****** CORAM:K.R.SHRIRAM & M.M.SATHAYE JJ.Date : 12[th] June 2023 1 /18 JUDGMENT [PER M.M.SATHAYE, J.] 415-WP-3129-2019 Final.doc 1.Rule. Rule made returnable forthwith. Learned Counsel Mr.Sureshkumar waives service for Respondents. Taken up for finaldisposal with consent. 2.By this Petition filed under Articles 226 and 227 of theConstitution of India, Petitioner is seeking a writ of Certiorari forquashing and setting aside (a) order dated 22[nd] December 2017passed by Income Tax Officer-10(1)(3), Mumbai under Section 179of the Income Tax Act, 1961 (“the Act” for short) holding Petitionerliable for taxes allegedly due from Company Kaizen Automation Pvt.Ltd. (“KAPL” for short) for Assesment Year 2008-09 & 2009-10 and(b) Order dated 18[th] March 2019 passed by Chief Commissioner ofIncome Tax(OSD) holding charge of Pr. Commissioner of IncomeTax-10, Mumbai, under Section 264 of the Act in Petitioner’s revisionagainst aforesaid order dated 22[nd] December 2017. Petitioner is alsoseeking a writ of mandamus directing Respondents to withdraw,revoke and cancel the said impugned orders. 3.Heard Mr. Mistry, learned senior counsel for Petitioner and Mr. 2 /18 Shubham Talle 415-WP-3129-2019 Final.doc Suresh Kumar for Respondents - Revenue. Perused the record. CASE 4.Petitioner has come with following case : 4.1) Petitioner is a mechanical Engineer who had developed a smartcard based ticketing solution in the year 2000, which could be usedfor various public transport like BEST and suburban trains on bothcentral and western railway-lines of Mumbai. It was agreed betweenPetitioner and said transport organisation that he would run a testproject to check its utility and viability. After the successful trial run,BEST as well as Central Railway gave their consents to go aheadwith implementation of the smart card ticketing system on built,operate and transfer (BOT) basis. Since implementation of the saidscheme required huge funds to the tune of Rs. 50 to 60 crores asinitial investment, one Khaleej Finance and Investment, a Companyregistered in Bahrain (“KFI”for short) agreed to make an investmentand MOU was executed between Petitioner and KFI. The said KFIinvested in said project through its Mauritius based Company AFCsystem Limited (“AFC” for short) and thereafter a Joint VentureAgreement, Deed of Pledge and Irrevocable Power of Attorney (JVA, 3 /18 Shubham Talle 415-WP-3129-2019 Final.docDP and IPOA for short) were executed in June 2006. ManagingDirector Agreement (MDA for short) was also executed in February2007. Thus the assessee company KAPL came to be incorporated on30[th] March 2006. 3 /18 Shubham Talle 415-WP-3129-2019 Final.docDP and IPOA for short) were executed in June 2006. ManagingDirector Agreement (MDA for short) was also executed in February2007. Thus the assessee company KAPL came to be incorporated on30[th] March 2006. 4.2)The clauses of the aforesaid documents provided that theManagement and real control of the assessee Company was in thehands of 6 Directors appointed by KFI (out of 8) the other two beingPetitioner and his wife Geeta P. Kamat and decision in respect ofCompany’s accounts and/or audits were solely in the control ofBoard of Directors of KFI. The important decisions could not betaken without approval of Directors of KFI. In the JVA it was clearlyprovided that management of the Company KAPL was under fullpower, authority and control of Board of Directors where the votingrights were with KFI to the extent of 74%. Said documents alsoprovided that KFI had not only reserved the absolute right, powerand control over the decision taken in respect of its 74%shareholding but had also taken right over power, control andauthorisation of Petitioner and his wife’s share holding in thecompany aggregating 26%. It is, therefore, case of Petitioner that he 4 /18 Shubham Talle 415-WP-3129-2019 Final.docand his wife were name-sake Directors and were at the mercy of thedecision of KFI and they did not have any real control over any ofKAPL’s decision.It is Petitioner’s further case that till his removalfrom the Company, composition of the Board did not change. 4.3) Since disagreement arose between the J V Partners, Petitionerwas forcibly removed from the post of Managing Director in January2009 and his wife as Director, pursuant to which though arbitrationclause was invoked, since KFI did not co-operate, arbitrationproceedings never took place. Finally, directorship of Petitioner andhis wife in KAPL was terminated in September 2009. After removalof Petitioner and his wife, they had no idea as to what was the statusof KAPL and its main Directors. Petitioner was never given any accessto KAPL-assessee company’s premises, data or any thing elseassociated therewith including accounts, audits and income tax filingetc. 4.4)It is specific case of Petitioner that during the time when hewas Director of Company, there were no outstanding demand oftax / duty from Income Tax Department. It is contended that after a 5 /18 Shubham Talle 415-WP-3129-2019 Final.doclong period of 8 years, Petitioner was served with a show causenotice dated 12[th] January, 2017 directing him to reply as to whyproceedings under Section 179 of the Act should not be initiatedagainst him for outstanding demand against KAPL the assesseeCompany. The notice recorded name of Petitioner and his wife onlyand no other Directors of the Company for Assessment Year 2008-09and 2009-10. It was learnt that assessment has been made andpenalties to the tune of Rs. 14 Crores levied on KAPL. No copies ofany orders or proceedings pursuant to which demand has arisen,were provided to Petitioner. 4.5)It is contended that Petitioner had filed detailed reply andsupplied all the documents, agreements etc contending that nonrecovery of tax from KAPL cannot be attributed to any gross neglector misfeasance or breach of duty of Petitioner or his wife. It iscontended that during the course of hearing Respondent No. 2directed Petitioner to produce information available with him inrespect of present Directors of KAPL which he duly supplied pointingout that at the relevant time KFI had merged with Idbar Bank.However, inspite of said information, Respondents have not 6 /18 Shubham Talle 415-WP-3129-2019 Final.docapparently taken any action against the present Directors of KFI orKFI’s directors at the relevant time of assessment and Respondentshave not even made them party. 5. Petitioner made various submissions to Respondents in 6 /18 Shubham Talle 415-WP-3129-2019 Final.docapparently taken any action against the present Directors of KFI orKFI’s directors at the relevant time of assessment and Respondentshave not even made them party. 5. Petitioner made various submissions to Respondents in October and November 2017, copies whereof are annexed to thePetition. Ultimately, Respondent No. 2 passed first impugned orderdated 22[nd] December 2017 under Section 179 of the Act holding thatPetitioner, as a Director of KAPL-assessee Company, was jointly andseverally liable for outstanding tax-dues of KAPL amounting to Rs.14,37,29,716/-. Accounts of Petitioner and his wife were freezed. 6.Petitioner and his wife were required to move this Court. Byorder dated 16[th] March, 2018 passed in Writ Petition Nos. 643 of2018 and 645 of 2018, Petitioner and his wife were permitted towithdraw the Petitions, with liberty to prosecute revisional remedyavailable under Section 264 of the Act. On written instructions fromRespondents, defreezing of the bank accounts of Petitioner and hiswife was directed on humanitarian grounds. 7 /18 Shubham Talle 415-WP-3129-2019 Final.doc7.Petitioner then filed Revision Application under Section 264 ofthe Act, which was heard. By second impugned order dated 18[th]March 2019, it was rejected, thereby confirming first impugnedorder dated 22[nd] December 2017 holding Petitioner liable for theamount stated therein. In these set of facts, Petitioner hasapproached this Court. SUBMISSIONS 8.Learned Senior counsel Mr. Mistry for Petitioner, submittedthat impugned orders are passed solely on the ground that Petitionerwas a Director during relevant Assessment Years of KAPL- theassessee Company. It was submitted that impugned orders havebeen passed in complete disregard to the later part of Section 179(1)of the Act, which provides for an exception that if the concernedDirector proves that “non recovery” cannot be attributed to any grossneglect, misfeasance or breach of duty on his part in relation to theaffairs of the company, then such Director cannot be held liable. Itwas further submitted that the impugned orders were passedwithout considering the true and correct purport and interpretationof Section 179(1) of the Act. 8 /18 415-WP-3129-2019 Final.doc 9.Mr. Mistry further urged that citizens like Petitioner or his wifecannot be subjected to arbitrary and unreasonable powers as wieldedby Respondents while passing the impugned orders. It was submittedthat true purport of Section 179(1) of the Act is that a person mustnot only be a Director at the relevant assessment year but also adirector at the time when the demand was raised and such Directorcan be held responsible only and only when “non recovery” isattributable to gross neglect, misfeasance or breach of duty on thepart of such Director. Mr. Mistry further urged that strictly speaking,question of non recovery being attributable to conduct of Petitionerwould be relevant only if he was a Director when the demand hasbeen raised. He submitted that in the present case Petitioner wasadmittedly not a Director when the reassessment proceedings wereinitiated in the year 2017 and hence there is no question of Section179(1) of the Act being attracted. Even otherwise, according to Mr.Mistry, the aspect of gross neglect, misfeasance etc has not beenproperly considered or dealt with by the Authorities. It was furthersubmitted that if the relevant clauses of documents under whichPetitioner was Director of the assessee Company are considered, it 9 /18 415-WP-3129-2019 Final.docwould show that Petitioner had no control or very limited control inKAPL- the assessee company and real power to run the affairsthereof, vested with the other 6 Directors appointed by KFI. 9 /18 415-WP-3129-2019 Final.docwould show that Petitioner had no control or very limited control inKAPL- the assessee company and real power to run the affairsthereof, vested with the other 6 Directors appointed by KFI. 10.Learned Senior counsel Mr. Mistry relied upon a Judgment dt.20/02/2023 passed by co-ordinate Bench of this Court in WritPetition No. 3159 of 2019 in the matter between Petitioner’s wife(Geeta P. Kamat) and Revenue, challenging identical orders passed inher case and has also produced the impugned orders therein. He alsorelied upon a Judgment of this Court in the matter of Mukesh D.Ramani Vs. State of Maharashtra[1] which is a Judgment consideringSection 18 of the Central Sales Tax Act, 1956 and Section 89 of theMaharashtra Goods and Services Tax Act, 2017 which are parimateria to section 179 of the Act. 11.Per contra, Mr. Suresh Kumar for the Revenue submitted thatduring the the Assessment Years under consideration, the assesseeCompany, being a private Company, had received large sums ofmoney as share application money or share premium, which wouldnot have been possible without involvement of its Directors. He1[2022]144 taxmann.com 135(Bombay) 10 /18 Shubham Talle 415-WP-3129-2019 Final.docsubmitted that Petitioner being Director of the private company atthe relevant assessment years, wass jointly & severally liable for thepayment of tax by the assessee company. He vehemently arguedthat Petitioner despite being given ample opportunities, has failed toestablished that non recovery cannot be attributed to his grossnegligence, misfeasance, breach of duty in relation to the affairs ofassessee company and therefore impugned orders are justified. REASONS AND CONCLUSIONS 12.At the outset, for ready reference, section 179(1) of the Act isreproduced below:- “179. (1) Notwithstanding anything contained in theCompanies Act, 1956 (1 of 1956), [ where any tax duefrom a private company in respect of any income of anyprevious year during which such other company was aprivate company] cannot be recovered, then, every personwho was a director of the private company at any timeduring the relevant previous year shall be jointly andseverally liable for the payment of such tax unless theproves that the non-recovery cannot be attributed to anygross neglect, misfeasance or breach of duty on his part inrelation to the affiars of the company.” 13.This Court in Mukesh D. Ramani’s case (supra) has considered various judgments of this Court as well as other High Courts. As 11 /18 Shubham Talle 415-WP-3129-2019 Final.docnoted in judgments of Satish D. Sanghavi v. Union of India[2] andNarinder Singh v. Union of India[3] , it is settled position of law that inabsence of any specific provisions in the statute, duty or penaltyliability of the company cannot be recovered from its Director, who isnot personally liable towards liability of the Company. Perusal ofSection 179(1) of the Act shows that it provides for an escape routeto the Director. It says that where a Director proves that non recoveryof tax dues cannot be attributed to any gross neglect, misfeasance orbreach of duty on his part in relation to the affairs of the Company,he shall not be liable for payment of tax dues. Of course, theresponsibility of establishing such fact is upon the Director. Once theDirector places before the authority his material and reasons why itshould be held that non-recovery cannot be attributed to any of thethree factors on his part, the Authority is bound to examine suchgrounds and come to a reasoned conclusion in this respect. 14.We are alive to the fact that the legislature in its wisdomhas used the words “gross neglect” and not mere neglect on the partof the Director. This view finds support in the judgment of the Gujrat 2(2012) 25 taxmann.com 328(Bombay)32019 (367) ELT 775 12 /18 415-WP-3129-2019 Final.doc 14.We are alive to the fact that the legislature in its wisdomhas used the words “gross neglect” and not mere neglect on the partof the Director. This view finds support in the judgment of the Gujrat 2(2012) 25 taxmann.com 328(Bombay)32019 (367) ELT 775 12 /18 415-WP-3129-2019 Final.doc High Court in Maganbhai Hansrajbhai Patel v. Assistant.CIT [2012]26 taxmann.com 226 where the said High Court has dealt with thesame present provision of Section 179 of the said Act. In the saidjudgment it is further held that gross negligence etc is to be viewedin the context of non recovery of tax dues of the Company and notwith respect to general functioning of the company. Useful referencecan be made to paragraph 15 and part of paragraph 21 from the said judgment reproduced below. “15. …… Section 179(1) of the Act thus statutorily provides forlifting of corporate veil under given set of circumstances. Theliability of tax dues which is basically fastened on the company,is permitted to be recovered from its Director in case of privatecompany, provided the conditions set out in said section notedabove are fulfilled”xxxx “21. ..... However, once the director places before the authorityhis reasons why it should be held that non recovery cannot beattributed to any of the three factors, the authority would haveto examine such grounds and come to a conclusion in thisrespect, the question of lack of gross negligence, misfeasance orbreach of duty on part of the director is to be viewed in thecontext of non recovery of the tax dues of the company. In otherwords, as long as the director establishes that the non recoveryof the tax cannot be attributed to his gross neglect, etc., hisliability under section 179(1) of the Act would not arise. Hereagain the legislature advisedly used the word gross neglect andnot a mere neglect on his part……” (emphasis supplied) 15.Same view is also taken by Gujarat High Court in the case ofGul Gopaldas Daryani v. ITO[4] wherein it is held in paragraph 14 asunder: 4[2014] 46 taxmann.com 35 13 /18 415-WP-3129-2019 Final.doc “14. It can thus be seen that once it is established that thetaxes of a private company cannot be recovered from thesaid company, the directors of the company at the relevanttime would be jointly and severally liable for payment ofsuch taxes, unless, it is proved that non-recovery cannot beattributed to any gross negligence, misfeasance or breachof duty on their part in relation to the affairs of thecompany. The burden cast by statute is thus in the negativeand is on the director concerned as is observed in case ofMaganbhai Hansrajbhai Patel (supra). However, once indefence, the director places necessary facts before the Tax-Recovery Officer to establish that nonrecovery cannot beattributed to gross negligence, misfeasance or breach ofduty on his part, the Tax Recovery Officer is required toapply his mind and come to definite findings……” (emphasis supplied) 16.Viewed from the aforesaid settled position of law, now let usexamine the material produced by Petitioner before the authoritiespassing the impugned orders. 17. Petitioner had produced all the documents in support of hiscase that he was not in the controlling capacity of KAPL the assesseecompany specially its financial affairs. It is not the case ofRespondent that the tax dues (which is subject matter of theimpugned orders) were demanded when Petitioner was Director ofthe assessee Company. Perusal of the documents produced on recordshows that after Petitioner’s removal from the directorship which hastaken place in the year 2009 itself, Petitioner had no connection withthe said company or any access to its affairs. Perusal of theimpugned Orders further show that both the ITO as well asrevisional Authority have mainly proceeded on the basis that the 14 /18 415-WP-3129-2019 Final.doc 17. Petitioner had produced all the documents in support of hiscase that he was not in the controlling capacity of KAPL the assesseecompany specially its financial affairs. It is not the case ofRespondent that the tax dues (which is subject matter of theimpugned orders) were demanded when Petitioner was Director ofthe assessee Company. Perusal of the documents produced on recordshows that after Petitioner’s removal from the directorship which hastaken place in the year 2009 itself, Petitioner had no connection withthe said company or any access to its affairs. Perusal of theimpugned Orders further show that both the ITO as well asrevisional Authority have mainly proceeded on the basis that the 14 /18 415-WP-3129-2019 Final.doc Petitioner was director during the assessment years and do not reallyconsider whether there was any gross neglect or misfeasance forbreach of duty on his part in relation to affairs of the company “inthe context of non recovery of tax dues”. In such situation it isdifficult 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 orbreach of duty on his part. It is important to note that the firstimpugned Order dt. 22/12/2017, in para 9, in fact re-iterates all thesubmissions made by Petitioner. Therefore the authority certainlywas aware of the case of Petitioner. Still the ITO in a cryptic mannerin para 10(vi) and (vii) simply says that Petitioner has not been ableto establish requirements of later part of section 179(1) of the Act.Also both the Authorities have not considered the role of Petitionerduring the relevant Assessment Years “in the context of non recoveryof tax dues”as mandated in caselaw discussed above. No material ishighligted by the ITO contrary to material placed on record byPetitioner, based on which he can be held to be guilty of grossneglect or misfeasance or breach of duty in the context of non-recovery of tax dues. Having brought on record material to showlack of financial control, lack of decision making power and havingvery limited role in the assessee company even as director and entiredecision making process being with the directors appointed by KFI(Being single largest share holder of the assessee company), in ouropinion, Petitioner has sufficiently discharged the burden cast uponhim in terms of section 179(1) of the Act to absolve him from theliability thereunder. 15 /18 415-WP-3129-2019 Final.doc 18.Although the burden cast upon the director of a privatecompany in the later part of Section 179(1) of the Act is a negativeburden of proving that non-recovery “cannot be attributed” to anygross neglect misfeasance or breach of duty on his part, in thepresent case, as observed above, Petitioner has discharged suchburden by placing on record his specific case and supportingmaterial. It was therefore imperative for the Authorities to considerthe same and come to a reasoned conclusion in terms of section179(1) of the Act. The same is awfully lacking in the impugnedOrders. 19.In the circumstances, we are of the view that petitioner issquarely covered by the exception carved out by the later part ofSection 179(1) of the Act and as such he cannot be held liable. Forsuch conclusion, we also draw support from a judgment of GujaratHigh Court in Ram Prakash Singeshwar Rungta v. ITO[5]. In para 14thereof, it is held:- 19.In the circumstances, we are of the view that petitioner issquarely covered by the exception carved out by the later part ofSection 179(1) of the Act and as such he cannot be held liable. Forsuch conclusion, we also draw support from a judgment of GujaratHigh Court in Ram Prakash Singeshwar Rungta v. ITO[5]. In para 14thereof, it is held:- “14............ Thus, the very basis on which the respondent-has proceeded, suffers from nonapplication of mind to therequirements for exercise of powers under section 179(1)-of the Act. In the absence of any finding that nonrecoveryof the tax due from the company can be attributed to anygross negligence, misfeasance or breach of duty on the partof the petitioners, no order could have been made undersection 179(1) of the Act for recovering the same from thedirectors.The upshot of the above discussion is that theimpugned order being inconsistent with the provisions of 5[2015] 59 taxmann.com 174. 16 /18 Shubham Talle 415-WP-3129-2019 Final.doc section 179(1) of the Act, cannot be sustained.” (emphasis supplied) 20.There is one more reason why the impugned orders cannot besustained. Time and again this Court has held that the action of thestate must be conducted within a reasonable period of time. TheDivision Bench of this Court in Parle International Limited Vs. Unionof India[6] , has held that delay in adjudication defeats very purpose oflegal process and assessee as a taxable person must know where hestands and if there is no action from the departmental authorities fora long time, such delayed action would be in contravention ofprocedural fairness and thus violative of principles of natural justice.In the present case Respondent has initiated action after long periodof about 8 years and therefore the said action resulting in impugnedorders, is vitiated on the touchstone of procedural fairness too. 21.Also, perusal of the Judgment of the co-ordinate bench of thisCourt in Petitioner’s wife case (W.P.No. 3159/19) shows that not onlythe dates of the impugned orders therein are same as the presentimpugned orders but the demand of money and basis for suchdemand is identical. This Court by Judgment dated 20/02/2023passed in aforesaid writ petition filed by Petitioner’s wife, hasquashed and set aside those identical impugned Orders also, as beingunsustainable. 22.In the result the petition succeeds. Impugned Order dated 18[th]March 2019 passed in Petitioner’s revision, by Chief Commissioner of6Writ Petition No – 12904 of 2019, Order dated- 26.11.2020. 17 /18 Shubham Talle 415-WP-3129-2019 Final.doc Income Tax(OSD) holding charge of Pr. Commissioner of IncomeTax-10, Mumbai is quashed and set aside. Consequently impugnedorder dated dt. 22[nd] December 2017 passed by Income Tax Officer-10(1)(3), Mumbai holding Petitioner liable for outstanding dues ofM/s. Kaizen Automation Pvt. Ltd is also quashed and set aside. Ruleis made absolute in above terms. No order as to cost 23.In view of disposal of main petition, all pending interimapplications are disposed. [M.M.SATHAYE,J.] [K.R.SHRIRAM, J.] 18 /18