Shraddha Talekar, Ps v. Principal Commissioner Of Income-Tax

Digitallysigned bySHRADDHASHRADDHAKAMLESHKAMLESHTALEKARTALEKARDate:2023.02.2019:45:43+0530 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION WRIT PETITION NO. 3159 OF 2019 Geeta P. 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.]… PetitionerVersus1. Principal Commissioner of Income-tax-10,]having his offce at Aaykar Bhavan,]Maharshi Karve Road, Mumbai-400020.]]]2. Income Tax Offcer-10(1)(3),]having his offce at Aaykar Bhavan,]Maharshi Karve Road, Mumbai-400020.]]4.Union of India through the Secretary,]Department of Revenue, Ministry of Finance,]Government of India, North Block,]New Delhi-110 001.]..Respondents WITHINTERIM APPLICATION NO. 752 OF 2019 INWRIT PETITION NO. 3159 OF 2019 Geeta P. 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.]… Applicant In the matter between : ]]]]]… Petitioner Geeta P. 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. Versus 1. Principal Commissioner of Income-tax-10,having his offce at Aaykar Bhavan,Maharshi Karve Road, Mumbai-400020. 2. Income Tax Offcer-10(1)(3),having his offce at Aaykar Bhavan,Maharshi Karve Road, Mumbai-400020. 4.Union of India through the Secretary,Department of Revenue, Ministry of Finance,Government of India, North Block,New Delhi-110 001. **** ]]]]]]]]]]]]]..Respondents Mr.J.D. Mistri, Senior Advocate with Mr.Madhur Agrawal, Mr.Fenil Bhatt, Mr. Jas Sanghavi and Mr.Viraj Y. Bhate i/b PDSLegal, Advocates for petitioner. Mr.Suresh Kumar, Advocate for respondents. ***** CORAM : DHIRAJ SINGH THAKUR &ABHAY AHUJA, JJ. PRONOUNCED ON : 20[th] FEBRUARY, 2023 J U D G M E N T PER DHIRAJ SINGH THAKUR, J. 1.The petitioner challenges the order dated 22[nd] December2017 passed by the Income Tax Offcer under section 179 of the Income Tax Act, 1961 (‘the Act’) treating the petitioner liable fortaxes allegedly due from the company M/s. Kaizen AutomationPvt. Ltd. (KAPL) for the assessment years 2008-09 and 2009-10.Order dated 18[th]March 2019 passed by the PrincipalCommissioner of Income-tax, Mumbai dismissing the revisionpetition under section 264 of the Act is also challenged in thepresent petition. 2.Briefy stated the material facts are as under : 2.1A show cause notice dated 12[th] January 2017 was servedupon the petitioner in terms of section 179 of the Act requiring thepetitioner to show cause as to why recovery proceedings be notinitiated against her in her capacity as a director of KAPLinasmuch as the assessee company was not traceable on theavailable addresses and further that the tax dues could not berecovered despite attachment of the bank accounts as the fundsavailable were insuffcient. An amount of Rs.1404.42 lacs wasthus sought to be recovered from the petitioner. 2.2With a view to prove that the non-recovery of the taxes duecould not be attributed to any gross neglect, misfeasance, breach 2.Briefy stated the material facts are as under : 2.1A show cause notice dated 12[th] January 2017 was servedupon the petitioner in terms of section 179 of the Act requiring thepetitioner to show cause as to why recovery proceedings be notinitiated against her in her capacity as a director of KAPLinasmuch as the assessee company was not traceable on theavailable addresses and further that the tax dues could not berecovered despite attachment of the bank accounts as the fundsavailable were insuffcient. An amount of Rs.1404.42 lacs wasthus sought to be recovered from the petitioner. 2.2With a view to prove that the non-recovery of the taxes duecould not be attributed to any gross neglect, misfeasance, breach of duty on her part, in relation to the affairs of the company, thepetitioner in her response to the show cause noticed dated 23[rd]October 2017, took a stand that the petitioner, as a director in thecompany had no liberty, authorization or independence to act in aparticular manner for the beneft of KAPL and that she did nothave any control over the company’s affairs. It was stated that thepetitioner did not have any authority to sign any chequeindependently or take any decision on behalf of the company nordid KAPL provide any operational control or space to the petitionerto perform her duties. It was also stated that the petitioner did nothave any functional responsibility assigned to her and no onefrom KAPL reported to her or her husband Shri Prakash Kamat,who was also a shareholder and director in the company. 3.With a view to elucidate that the operational control and thedecision making authority did not lie with the petitioner, certaindetails were referred to in the said reply to the show cause notice.Averments have also been made in that regard in the present writpetition. It would be worthwhile to briefy advert to them forpurposes of clarity. This would also give the background in whichthe assessee company was formed and the agreements that wereexecuted between various entities in that regard. Brief Background : 4.The petitioner’s husband, Shri Prakash Kamat is stated tohave developed a smart card based ticketing solution for beingused at various public transport organizations like BEST, Centraland Western Suburban trains etc. Trials were run successfullyand an agreement was entered into between Shri Prakash Kamatand BEST and Central Railways in 2006. The projects with BEST and Railways were to beimplemented on “BOT” model and required funds to the tuneof Rs.50 to 60 Crores as initial investment. Khaleej Financeand Investment, a company registered in Baharain(hereinafter referred to as “KFI”) agreed to make aninvestment in the said project subject to certain conditions,according to which a Special Purpose Vehicle was to beincorporated to carry on the said project which lead toincorporation of KAPL on 30[th] March 2006. Investment wasmade by KFI in the said project through its Mauritius basedcompany “AFC System Ltd. (hereinafter referred to as“AFC”)”. A Joint Venture Agreement dated 21[st] June 2006(“JVA”), Deed of Pledge dated 21[st] June 2006 (‘”DP”) along with Irrevocable Power of Attorney dated June 2006 (“IPOA”),was between into among Shri Prakash Kamat, the petitioner,KFI and the said company-KAPL. A Joint Venture Agreement dated 21[st] June 2006(“JVA”), Deed of Pledge dated 21[st] June 2006 (‘”DP”) along with Irrevocable Power of Attorney dated June 2006 (“IPOA”),was between into among Shri Prakash Kamat, the petitioner,KFI and the said company-KAPL. 5.Some of the clauses of the JVA were referred to by Mr.Mistri,learned counsel for the petitioner. It was stated that as per clause7.2.1 in Article 7, the Auditor of the JVC had to be nominated bythe investor i.e., majority shareholding directors as long as KFIheld 50% shares in the JVC, and had be to appointed by theBoard. Clause 7.2.2 in Article 7 envisaged that the internalAuditors of the JVC were to be nominated by the investors.Reference was made to clause 8.1 in Article 8 to show that themanagement of the JVC had to be vested with the Board, whichwould exercise all such powers and do all such things as would beexercised or done by the JVC. Reliance was placed upon Clause8.2.1 in Article 8 to highlight the fact that maximum strength ofthe Board was to be eight directors out of which 6 were of KFI.Clause Clause 8.4 in Article 8 was referred to show that theChairman of the Board, at all times was to be from the Directorsnominated by the investor and fnally Clause 8.5.4 in Article 8was referred to show that the decisions of the Board were to be taken by a simple majority till such time the investor held morethan 50% of the total paid up share capital of the JVC. 6.In the reply to the show cause notice, the petitioner alsostated and highlighted the fact that due to some differences thathad cropped up with KFI since January 2009 the petitioner’shusband was removed as Managing Director of KAPL inSeptember 2009 along with the petitioner herein. It was alsostated that while the petitioner was a director during the fnancialyear 2007-08, since the petitioner stood removed as such directorin September 2009, she could not be held liable for the liability ofKAPL for the fnancial year 2008-09 relevant to assessment year2009-10. It was also stated that the petitioner was not at all awaretill after she had been removed that there was any tax liabilitywhich was due and payable by KAPL, and therefore, it was statedthat she could not have been held guilty of any gross neglect,malfeasance or breach of duty on her part in relation to the affairsof the company. 7.The Assessing Offcer (‘AO’), by virtue of the order impugneddated 22[nd] December 2017 passed under section 179 of the Act rejected the contention of the petitioner. It was held that not onlyhad the petitioner failed to establish that she was not activelyinvolved in the management of the company during the fnancialyear 2007-08 and 2008-09 and further that she had failed toestablish that there was no gross neglect, malfeasance or breachof duty on her part. The AO held that there was not a ‘shred ofdoubt’ that Mrs.Kamat was actively involved in the day-to-dayaffairs of the company till she was removed in September 2009. Asregards the disputes between the petitioner and KFI, the AO heldthat it was normal to have such disputes during the working of anenterprise. 8.The petitioner preferred a revision petition under section 264of the Act against the order dated 22[nd] December 2017 passedunder section 179 of the Act, which too, came to be dismissed videorder dated 18[th] March 2019 simply on the ground that thepetitioner was a director for the relevant assessment years andhence was liable. 9. Mr.Mistri, learned senior counsel for the petitioner urgedthat the entire approach adopted by the AO in passing the order under section 179 of the Act was misplaced and the mistake wasperpetuated by the revisional authority in dismissing the revisionpetition fled by the petitioner against the said order. Reliance wasplaced upon the judgment in Maganbhai Hansrajbhai Patel Vs.Assistant Commissioner of Income-tax & Anr. [1]and Ram PrakashSingeshwar Rungta & Ors. Vs. Income-tax Offcer [2 ] 9. Mr.Mistri, learned senior counsel for the petitioner urgedthat the entire approach adopted by the AO in passing the order under section 179 of the Act was misplaced and the mistake wasperpetuated by the revisional authority in dismissing the revisionpetition fled by the petitioner against the said order. Reliance wasplaced upon the judgment in Maganbhai Hansrajbhai Patel Vs.Assistant Commissioner of Income-tax & Anr. [1]and Ram PrakashSingeshwar Rungta & Ors. Vs. Income-tax Offcer [2 ] 10.It was urged that the order passed by the AO was perverseinasmuch as based upon the facts on record, no proceedingsunder section 179 of the Act could have been initiated against thepetitioner for the purposes of recovery from the petitioner theliability of the company for the assessment years 2007-08 and2008-09. It was urged that even when the petitioner had placedenough material on record refecting that the petitioner was notthe Managing Director of the company and was not at the helm ofaffairs as such, and that she had not any independent authorityto take any decision on behalf of the company nor did she haveany independent operational control, yet the AO proceeded to holdthat the petitioner had failed to prove that there was no grossneglect, malfeasance or breach of duty on her part in relation to 1[2013] 353 ITR 567 (Guj.)2[2015] 370 ITR 641 (Guj.)2[2015] 370 ITR 641 (Guj.) the affairs of the company. 11.In the reply affdavit fled by the revenue, it is reiterated thatthe petitioner was an important working director of the assessee-company and was bestowed with many important responsibilitiesin order to run the day-to-day affairs of the company and herclaim that she did not hold any important position for purposes ofday-to-day affairs of the company was incorrect. This statementwas sought to be made based upon the minutes of the BoardMeeting which was referred to by the AO. It was, therefore, urgedthat the proceedings under section 179 of the Act were rightlyinitiated against the petitioner. 12.Heard learned counsel for the parties. 13.Section 179 of the Act inter-alia envisages that the whereany due from a private company in respect of any income of anyprevious year cannot be recovered then every person who was adirector of the private company at any time during the relevantprevious year shall be jointly and severally liable for the paymentof such tax unless he proves that the non-recovery cannot beattributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company. It thereforefollows that if tax dues from a private company cannot berecovered then the same can be recovered from every person whowas a director of a private company at any time during therelevant previous year. However, such a director can absolvehimself if he proves that the non-recovery cannot be attributed toany gross neglect, misfeasance or breach of duty in relation to theaffairs of the company. 14.In so far as the requirement of the frst part of the section isconcerned, it can be seen from the order passed under section179 of the Act that steps were taken for recovery against thecompany M/s. Kaizen Automation Pvt. Ltd. (KAPL) includingattachment of its bank accounts which did not yield any results.The company is also stated to be not traceable on the addressesavailable with the AO, and therefore, according to the AO, the onlycourse left was to proceed against the directors in terms of section179 of the Act. 15.The stand of the petitioner is that she could not beproceeded against, inasmuch as there was no gross neglect,malfeasance or breach of duty on her part in relation to the affairs 14.In so far as the requirement of the frst part of the section isconcerned, it can be seen from the order passed under section179 of the Act that steps were taken for recovery against thecompany M/s. Kaizen Automation Pvt. Ltd. (KAPL) includingattachment of its bank accounts which did not yield any results.The company is also stated to be not traceable on the addressesavailable with the AO, and therefore, according to the AO, the onlycourse left was to proceed against the directors in terms of section179 of the Act. 15.The stand of the petitioner is that she could not beproceeded against, inasmuch as there was no gross neglect,malfeasance or breach of duty on her part in relation to the affairs of the company. The AO, however, did not accept this assertion. Itlaid emphasis on the fact that the petitioner had activelyparticipated in the affairs of the company atleast till the date ofher removal in September 2009 and proceeded to hold that thepetitioner had failed to prove that there was any gross neglect,misfeasance or breach of duty on her part as regards the affairs ofthe company. However, in the order impugned dated 22[nd] December 2017passed under section 179 of the Act, although the AO did make areference to various Board meetings which were attended by thepetitioner from time to time from 2006 till 8[th] January 2008, therewas no material highlighted by the AO, contrary to the materialon record placed by the petitioner, based upon which thepetitioner could be held to be guilty of gross neglect, malfeasanceor breach of duty in regard to the affairs of the company. Thepetitioner having brought on record material to suggest lack offnancial control, lack of decision making powers in the light ofher stand that she had a very limited role to play in the companyas a director and that the entire decision making process waswith the directors appointed by the investors, i.e., KFI which wasthe single largest shareholder of the JVC had, in our opinion, suffciently discharged the burden cast upon her in terms ofsection 179 to absolve herself of the liability of the company. 16.The AO appears to have applied himself more on the issue ofthe petitioner participating in the affairs of the company forpurposes of pinning liability in terms of section 179 rather thandiscovering the element of ‘gross neglect’, misfeasance or ‘breachof duty’ on the part of the petitioner in relation to the affairs of thecompany and establishing its corelation with non-recovery of taxdues. The petitioner having discharged the initial burden, the AOhad to show as to how the petitioner could be attributed such agross neglect, misfeasance or breach of duty on her part. InMaganbhai Hansrajbhai Patel (Supra), it was held : “20……………..Thus the responsibility toestablish such facts are on the director.However, once the director places before theauthority his reasons why it should be heldthat non recovery cannot be attributed to anyof the three factors, the authority would haveto examine such grounds and come to aconclusion in this respect. Signifcantly, thequestion of lack of gross negligence,misfeasance or breach of duty on part of thedirector is to be viewed in the context of nonrecovery of the tax dues of the company. Inother words, as long as the directorestablishes that the non recovery of the taxcannot be attributed to his gross neglect, etc.,his liability under section 179(1) of the Act “20……………..Thus the responsibility toestablish such facts are on the director.However, once the director places before theauthority his reasons why it should be heldthat non recovery cannot be attributed to anyof the three factors, the authority would haveto examine such grounds and come to aconclusion in this respect. Signifcantly, thequestion of lack of gross negligence,misfeasance or breach of duty on part of thedirector is to be viewed in the context of nonrecovery of the tax dues of the company. Inother words, as long as the directorestablishes that the non recovery of the taxcannot be attributed to his gross neglect, etc.,his liability under section 179(1) of the Act would not arise. Here again the legislatureadvisedly used the word gross neglect and nota mere neglect on his part. The entire focusanddiscussionoftheAssistantCommissioner in the impugned order is withrespect to the petitioner's neglect infunctioning of the company when thecompany was functional. Nothing came to bestated by him regarding the gross negligenceon part of the petitioner due to which the taxdues from the company could not berecovered. In absence of any suchconsideration, the Assistant Commissionercould not have ordered recovery of dues of thecompany from the director. We would clarifythat in the present case the petitioner hadputforth a strong representation to theproposal of recovery of tax from him undersection 179 of the Act. In suchrepresentation, he had detailed the stepstaken by him and the circumstances due towhich non recovery of tax cannot beattributed to his gross neglect. It was thisrepresentation and the factors which thepetitioner had putforth before the AssistantCommissioner which had to be taken intoaccount before the order could be passed. Itis not even the case of the department thatthe petitioner paid the dues of other creditorsof the company in preference to the tax duesof the department. It is not the case of thedepartment that the petitioner negligentlyfrittered away the assets of the company dueto which the dues of the department couldnot be recovered, To suggest that thepetitioner did not oppose the GSFC's auctionsale is begging the question. GSFC had soldthe property after several attempts throughauction. It is not the case of the departmentthat proper price was not fetched.” 17.A similar view was expressed in Ram Prakash SingeshwarRungta & Ors. (Supra) in the following words : “12 ……..On a plain reading of theimpugned order, it is apparent thatnothing has been stated therein regardingany gross-negligence, misfeasance orbreach of duty on the part of thepetitioners due to which the tax dues ofthe Company could not be recovered. Therespondent, has, therefore, passed theimpugned order under section 179(1) ofthe Act against the directors in respect ofalleged neglect on their part in thefunctioning of the Company due to whichthe demand in question has arisen andnot on account of any gross neglect,misfeasance or breach of duty on theirpart in the non-recovery of the dues of theCompany. Thus, the very basis on whichthe respondent has proceeded, suffersfrom non-application of mind to therequirements for exercise of powers undersection 179(1) of the Act. In the absence ofany fnding that non recovery of the taxdue from the company can be attributedto any gross-negligence, misfeasance orbreach of duty on the part of thepetitioners, no order could have beenmade under section 179(1) of the Act forrecovering the same from the directors.The upshot of the above discussion is thatthe impugned order being inconsistentwith the provisions of section 179(1) of theAct, cannot be sustained…...” 18.The ratio of the aforementioned judgments squarely apply tothe present case as well. Even in the present case, the AO has notspecifcally held the petitioner to be guilty of gross neglect,misfeasance or breach of duty on part in relation to the affairs ofthe company. Not a single incident, decision or action has been highlighted by the AO, which would be treated as an act of grossneglect, breach of duty or malfeasance which would have theremotest potential of resulting in non-recovery of tax due infuture. 19.In our opinion, in the order impugned dated 22[nd] December2017 as also the order dated 18[th] March 2019 in revision passed byrespondent No.1 on similar grounds is unsustainable. 20.Be that as it may, the petition is allowed. The impugnedorders dated 22[nd] December 2017 and 18[th] March 2019 are setaside. 21.In view of disposal of the petition, interim application doesnot survive and accordingly stands disposed of. [ ABHAY AHUJA, J. ] [DHIRAJ SINGH THAKUR, J.]