Gujarat High Court
Suresh Narain Bhatnagar vs Income Tax Officer & on 19 February, 2014
Author: Akil Kureshi
Bench: Akil Kureshi
C/SCA/18008/2005 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
SPECIAL CIVIL APPLICATION NO. 18008 of 2005
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MS JUSTICE SONIA GOKANI
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1 Whether Reporters of Local Papers may be allowed to see
the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy of the
judgment ?
4 Whether this case involves a substantial question of law as
to the interpretation of the Constitution of India, 1950 or any
order made thereunder ?
5 Whether it is to be circulated to the civil judge ?
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SURESH NARAIN BHATNAGAR....Petitioner(s)
Versus
INCOME TAX OFFICER & 1....Respondent(s)
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Appearance:
MR MANISH J SHAH, ADVOCATE for the Petitioner(s) No. 1
MR KM PARIKH, ADVOCATE for the Respondent(s) No. 1
RULE SERVED for the Respondent(s) No. 2
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CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI
and
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C/SCA/18008/2005 JUDGMENT
HONOURABLE MS JUSTICE SONIA GOKANI
Date : 19/02/2014
ORAL JUDGMENT
(PER : HONOURABLE MR.JUSTICE AKIL KURESHI)
1. The petitioner had challenged an order dated 3.1.2005 passed by the Income Tax officer under section 179 of the Income Tax Act, 1961 ("the said Act" for short).
2. Brief facts are as under:
2.1) The petitioner was a director of one M/s. Sirs Engineering Private Limited ("the company" for short). For the assessment year 20002001, the Assessing Officer passed order of assessment on 28.3.2003, raising tax demand of Rs.40,99,967/. With penalty, it came to Rs.41,09,967/. Five more separate orders of assessment dated 27.2.2004 were also passed in case of the same company for the assessment year 19961997 to 19992000 and 20012002 raising different tax demands.
2.2) On 22.3.2004, the Income Tax officer issued a notice to the petitioner indicating that a tax demand of the said company of Rs.41,11,967/ for the assessment year 2000 2001 was still outstanding. He was the director of the company during the relevant period. He was asked to show cause why he should not be held personally liable for such recovery under section 179 of the said Act.
2.3) The petitioner filed several replies to said notice. In Page 2 of 9 C/SCA/18008/2005 JUDGMENT his first reply dated 30.3.2004, he conveyed that records of the company were lost; that he himself was suffering from heart problem. During the assessment years 20022003, he was totally immobile and was not able to attend any of the meetings or day to day business of the company. He was therefore, not responsible for negligence, misfeasance or breach of duty in connection with the affairs of the company. Yet another reply came to be filed on 28.9.2004 in which he contended that he was only supplying technical support to the company. He was rendering such service for various other companies. He was never engaged in the day to day business of the company. In yet another reply dated 13.10.2004, he contended that he had already resigned from the company on 25.2.1996. He also contended that by virtue of section 43A of the Companies Act, 1956, since the company's turn over had crossed the threshold limit, the company would be a deemed public company. In his further reply dated 26.10.2004, he reiterated this aspect and stated thus :
"Further by the virtue of the provisions of section 43A of the company's act Sirs Engineering Pvt. Ltd. has became a public company by crossing the turnover criterion and the same has also been certified by the assessment order passed for the AY 199697."
2.4) In his further reply which is produced at AnnexureL, he elaborated the question of company having become a deemed public company and contended as under :
"c) I am advised by my Chartered Accountant that this company falls in category of deemed Public Limited in view of its turnover being more than Rs.1 crores as estimated by Page 3 of 9 C/SCA/18008/2005 JUDGMENT the Department under section 144 of the IT Act, therefore section relating to personal liability of Director does not arise in this case if the assessment of income is correct by the department. This issue has been raised by me in my first submission itself. A copy of the said section 43A of the companies Act is attached herewith."
2.5) In his last reply dated 1.1.2005, he once again asserted that :
"5. Further it has also brought to the notice of the learned ITO that u/s. 43A of the company's act states that where one of the share holder of the company is a body corporate holding more than 25% of its paid up capital it should be treated as public limited company. I have also provided the copy of annual return for the FY 9495 along with the copy of shareholders register, which I could found from the factory premises of the company after so many efforts. They are provided along with the letter dated 30.12.2004, which is also enclosed herewith."
3. The Assessing Officer passed his impugned order dated 3.1.2005. Regarding the petitioner's resignation, he observed that he had signed and verified the return of the income of the company for the assessment year 20012002 on 23.3.2003. He had also filed appeals before the Commissioner(Appeals) for the assessment year 19961997 to 20012002 which prove that he continued to be the director of the company even after submission of his resignation.
3.1) With respect to his involvement in the company, the Income Tax officer held that he failed to prove that non recovery of tax cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to Page 4 of 9 C/SCA/18008/2005 JUDGMENT affairs of the company. His contention that he was only a technical director was negated observing that section 179 includes every person who is a director of a private company and the onus is on such director to prove non negligence, nonmisfeasance or nonbreach of duty on his part. In the present case, the petitioner failed to produce any evidence to prove such facts.
3.2) With respect to the status of the company being a deemed public company, the Assessing Officer observed as under :
"Another argument raised by him is M/s. Sirs Engg. Pvt. Ltd. is a deemed public company under 43A of the Companies Act, 1956, in view of its turnover being more than Rs.1 crore as estimated by the department in the assessment order. The section 179 specifically overrides the provisions of the Companies Act, 1956. The section 179 deals with only private limited companies. Hence this contention is not tenable."
4. Having heard learned counsel for the parties and having perused the documents on record, following facts emerge :
1) Notice under section 179(1) of the Act was issued only for recovery of tax due pertaining to assessment year 20002001.
2) Without any further notice, the final order under section 179 was passed for recovery of dues of the company for all the years from 19961997 to 20012002.
5. The recovery demand therefore, for the assessment years 19961997 to 19992000 and 20012002 must fail on two Page 5 of 9 C/SCA/18008/2005 JUDGMENT counts. Firstly, there was no notice for recovery of such amounts. More importantly, the only notice of show cause which was issued was dated 22.3.2004. The assessment orders of the said assessment years were passed on 27.2.2004. Thus within less than a month of passing of the assessment orders, the notice came to be issued. The first requirement of application of section 179 is that any tax due from a private company cannot be recovered from such company. When obviously thus Assessing Officer had and could not have made any efforts for recovery of such tax dues, question of inquiring with the petitioner as a director of the company to pay up the same amount or else be held liable under section 179 of the Act, would not arise. In case of Bhagwandas J. Patel v. Deputy Commissioner of Incometax reported in (1999) 238 ITR 127, the Court had held that before recovery in respect of dues from the private company can be initiated against the directors, it is necessary for the Revenue to establish that such recovery cannot be made against the company and then and then alone it can reach the directors who were responsible for conduct of the business during the previous year in relation to which liability existed.
6. Our inquiry therefore, regarding the impugned order of Assessing Officer would be confined to the demands for the assessment years 20002001. In this context we are unable to hold that the petitioner having already resigned from the position of a director in the year 1996, could no longer be held responsible under section 179 of the Act. The undisputed facts which have come on record are that in the year 2003, the petitioner signed the returned of the Page 6 of 9 C/SCA/18008/2005 JUDGMENT company as its director. In the year 2004, the petitioner filed appeals against the orders of assessment passed by the Assessing Officer for the assessment years 19951996 and onwards. Thus, even if we believe that the petitioner had tendered his resignation as a director, he continued to act as one. Neither the company nor the petitioner acted on such resignation.
7. The crucial question however, is of the status of the company. As noted, the petitioner time and again contended before the Assessing Officer that the company had ceased to be a private company by virtue of provisions of section 43A of the Companies Act, the company having crossed the maximum threshold turnover limit and also by virtue of 25% of its share capital being held by another company, had become a deemed public company. It was open for the Assessing Officer to inquire into these aspects. The question raised by the petitioner was a mixed question of fact and law. If the facts as asserted by the petitioner were established, the legal implications flowing thereof must follow. The Assessing Officer however, brushed aside this contention and held that whatever be the status of the company for the purpose of the Companies Act, section 179 of the Income Tax Act would continue to apply. It was not a case of the Assessing Officer that the facts asserted by the petitioner were not correct or that for any other reason, the company had not become a deemed public company under section 46A of the Companies Act, 1956. This being the position, the decision of the Supreme Court in case of M. Rajamoni Amma and another v. Deputy Commissioner of Incometax (Assessment) and others Page 7 of 9 C/SCA/18008/2005 JUDGMENT reported in (1992) 195 ITR 873, would apply. In the said decision, it was held and observed as under :
"Before us, learned counsel for the appellants relied upon the above communication from the Registrar of Companies but since the genuineness of this letter was doubted we issued notice to the Registrar of Companies, Kerala. An affidavit has now been filed on behalf of the Registrar. It clearly shows that the company had become a public limited company by virtue of Section 43A of the Companies Act w.e.f. 1st October, 1975. As already mentioned, the arrears sought to be recovered from the appellants relate to the assessment years 197778 to 1982
83. Obviously, the Company being a public limited company, proceedings against the directors for recovery of the tax due from the company cannot be taken, and certainly not proceeded with, under Sec 179 of the Income Tax Act, 1961. We need hardly say Article 265 of the Constitution clearly prohibits any attempt to recover taxes except under the authority of law. It is, therefore, clear that further proceedings against the appellants for recovery of the tax due from the company have to be stayed."
8. Learned counsel for the Revenue however, contended that in a given case, if a private company is a closely held company, it would still be open for the Revenue to contend that despite being converted into a deemed public company by virtue of operation of statute, section 179 would apply. Such are not the facts here raised by the Revenue. In absence of any such foundation, we would not answer such a question in this petition.
9. Under the circumstances on this count, the petition is required to be allowed. We may briefly state that we are not influenced by the petitioner's contention that merely being Page 8 of 9 C/SCA/18008/2005 JUDGMENT a technical director, section 179 of the Act would not apply to him. We are also broadly in agreement with the view of the Assessing Officer that duty is cast on the directors to establish that nonrecovery was not due to any gross neglect, misfeasance or breach of duty on his part and in the present case, he produced no material to establish such facts. Nevertheless, when section 179 of the Act itself does not apply, question of seeking any recovery personally from the director would not arise.
10. In the result, impugned order dated 3.1.2005 is quashed. Rule made absolute. Petition is disposed of.
(AKIL KURESHI, J.) (MS SONIA GOKANI, J.) raghu Page 9 of 9