The Bombay High Court’s recent decision in Prakash B. Kamat v. Principal Commissioner of Income-tax and Others (Writ Petition No. 3129 of 2019), on 12.06.2023, draws attention to the greater judicial care to be exercised by the Revenue whilst also reiterating certain basic principles of vicarious liability under S. 179, IT Act.
The relevant portion of S.179 reads thus:
179. (1) Notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), where any tax due from a private company in respect of any income of any previous year or from any other company in respect of any income of any previous year during which such other company was a private company cannot be recovered, then, every person who was a director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.
The High Court, in this case, reiterated the basic principles that once a director sought to be made responsible under S.179 places materials and reasons before the Authority to demonstrate that non-recovery cannot be attributed to him, the Authority is bound to examine such grounds and come to a reasoned conclusion.
Facts of the case
The brief facts of the case are as follows:
Petitioner entered into a JV with a Bahrain-incorporated company called Khaleej Finance and Investment (“KFI”), to implement – on built, operate and transfer (BOT) basis – a smart card ticketing system developed by him, for use by BEST and the Railways. Various agreements were signed between the parties, pursuant to which a JV company called KAPL was incorporated in India in March 2006.
The several agreements between Petitioner and KFI clearly demonstrated that management and control of KAPL was in the hands of the majority of the Board and, therefore, KFI, since six Directors out of eight were appointed by KFI. The other two directors were the Petitioner and his wife who, the documents disclosed, could not take any major decisions absent majority approval. Decisions in respect of Company’s accounts and/or audits were also solely made by majority of the Board.
Pursuant to certain disagreements that arose between the Petitioner and his wife on the one hand, and the Bahrain company on the other, Petitioner was removed from office as Managing Director and his wife from office as Director in January 2009. Thereafter, the Petitioner was never given any access to KAPL’s premises, data or anything else associated therewith including accounts, audits and income tax filing, etcetera.
Eight years later, Petitioner was served with notice to show cause why proceedings under Section 179, IT Act, should not be initiated against him for recovery of outstanding tax dues for Assessment Year 2008-09 and 2009-10 of about INR 14 crores owed by KAPL. The notice was issued only to the Petitioner and his wife only and no other Directors of KAPL.
The Petitioner filed a detailed reply and supplied all the documents, agreements etcetera contending that non recovery of tax from KAPL cannot be attributed to any gross neglect or misfeasance or breach of duty on his part or his wife.
However, Respondent No. 2 (the Income Tax Officer) passed an order holding the that the Petitioner, as a Director of KAPL, was jointly and severally liable for outstanding tax-dues of KAPL pursuant to which the bank accounts of the Petitioner and his wife were also frozen (which freezing order was later lifted by the High Court). A revision petition filed under Section 264 of the Act was rejected by Revisional Authority. The Petitioner moved the High Court against the Order-in-Original and the Revisional Order.
Decision and findings
The court relied on certain decisions of the High Court of Gujarat and held:
- Under S. 179, it is the Director’s responsibility to establish that non recovery of tax dues cannot be attributed to any gross neglect, misfeasance or breach of duty on the part of the director in relation to the affairs of the Company.
- Once the Director places before the Authority his material and reasons why it should be held that non-recovery cannot be attributed to any of the three factors on his part, the Authority is bound to examine such grounds and come to a reasoned conclusion in this respect.
- It is gross neglect that is required to make a director liable and not mere neglect.
- Gross negligence is to be viewed in the context of non-recovery of tax dues of the Company and not with respect to general functioning of the company.
The Court observed that the Petitioner had produced all the documents to support his case that he did not have control over KAPL, and especially its financial affairs. The Court also noted that both the ITO as well as Revisional Authority proceeded mainly on the basis that the Petitioner was a director during the assessment years and did not really consider whether there was any gross neglect or misfeasance or breach of duty on the director’s part. Further, the impugned Orders say that Petitioner failed to prove that non-recovery cannot be attributed to any gross neglect or misfeasance or breach of duty on his part, however there was no material to disbelieve the material produced by Petitioner, and to establish that he was guilty of gross neglect or misfeasance or breach of duty in the context of nonrecovery of tax dues.
Thus, the High Court allowed the writ Petition and while holding that:
“17. … Having brought on record material to show lack of financial control, lack of decision making power and having very limited role in the assessee company even as director and entire decision making process being with the directors appointed by KFI (being single largest share holder of the assessee company), in our opinion, Petitioner has sufficiently discharged the burden cast upon him in terms of section 179(1) of the Act to absolve him from the liability thereunder.
18. … It was therefore imperative for the Authorities to consider the same and come to a reasoned conclusion in terms of section 179(1) of the Act. The same is awfully lacking in the impugned Orders. In the circumstances, we are of the view that petitioner is squarely covered by the exception carved out by the later part of Section 179(1) of the Act and as such he cannot be held liable.”
Although there was abundant evidence to drop the proceedings against the Petitioner, the Income Tax Officer and the Revisional Authority failed to assess the evidence before it.
Several cases under S. 179 which come up to the High Courts show that the basic principles that the High Court enunciated are consistently not applied by the Revenue whilst passing orders affixing liability on directors. Mechanical exercise of quasi-judicial power by the Revenue results in unnecessary and cumbersome litigation (any allied expenses). Moreover, this crowds up the dockets – and consumes valuable judicial time – of the constitutional courts of the country.
It is highly desirable that the Revenue decides matters keeping in mind that the power is to be carefully exercised in a judicial manner, and cannot be aimed at recovery of taxes, at any cost.