M. Gomathi Shankar and S. Surendaranathan vs Income Tax Officer and Tax Recovery Officer-VII, Income Tax Department, Company Range - IV

M. Jaichandren, J.—Heard Mr. P. Rajkumar, learned Counsel appearing for the petitioners and Mr. J. Narayanasamy, the learned Standing

Counsel appearing on behalf of the respondents.

It is submitted by the petitioners that they were Directors in M/s Meld Chemicals (P) Ltd. which was involved in the manufacturing and trading

of Chemicals. The petitioners have resigned from the Board of Directors of the said Company, with effect from 28.02.2003. In compliance with

the provisions of the Companies Act, Form 32 had been submitted before the Registrar of Companies, about the change in the Management of the

Company. However, the first respondent had issued a show cause notice on 19.07.2007, u/s 179 of the Income Tax Act to the petitioners, with

regard to the assessment years 2002-03 and 2003-04. In spite of the petitioners intimating the first respondent that they had already resigned from

the Company, the impugned order dated 08.08.2007, had been passed by the first respondent in PAN:AACCM49676C, u/s 179 of the Income

Tax Act, 1961, holding the petitioners liable to pay the arrears of tax due from M/s Meld Chemicals (P) Ltd., as stated therein.

The main contention of the learned Counsel for the petitioners is that the petitioners cannot be held liable u/s 179(1) of the Income Tax Act,

1961, unless there is a finding by the authority concerned that the tax due from the Company cannot be recovered. Further, it is pointed out that

neither the show cause notice dated 19.07.2007, issued by the first respondent, nor the impugned order, dated 08.08.2007, passed by the first

respondent, contains the finding that the tax due from the Company, viz., M/s Meld Chemicals (P) Ltd. cannot be recovered. Therefore, the show

cause notice, dated 19.07.2007, and the impugned order, dated 08.08.2007, passed by the first respondent are illegal and invalid.

Mr. J. Narayanasamy, learned Standing Counsel appearing on behalf of the respondents has not refuted the claims made on behalf of the

petitioners. It has also been pointed out that a Division Bench of this Court, in C. Rajendran and Another Vs. ITO, , had held as follows:

This section has been amended and it is the amended version which is reproduced above. The language of the section is very clear to suggest that

the action under the section can be activated only when the tax due from a private limited company pertaining to the previous year cannot be

recovered. The words ""cannot be recovered"" are most important. The phraseology suggests essentially that in spite of the efforts made as per the

procedure followed in the Income Tax Act for recovery of the tax arrears when the said tax arrears cannot be recovered then alone the liability can

be transferred u/s 179(1) of the Income Tax Act to the directors. Therefore, in order to activate this section and the action thereunder, a finding

would have to be recorded to the effect that in spite of the efforts to recover the tax arrears the said tax arrears could not be recovered from the

assessee-company. The second part of the section comes into effect only thereafter. Firstly, once there is a finding that such tax arrears cannot be

recovered then the liability could be transferred to every person who was a director and it would 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 to the affairs of the company and when he

discharges this burden, he would no more be required to discharge the tax liability so transferred to him. However, that stage would come only

later on, after it is found that the tax arrears cannot be recovered from the assessee-company.

...

Our attention was drawn by learned Counsel for the appellant to the Division Bench judgment in K.V. Reddy and Another Vs. Assistant

Commissioner of Income Tax, Hyd. and Another, . The Division Bench has taken a similar view therein. The Division Bench observes (page 308):

The language used in the section is clear. It is only in cases where the tax cannot be recovered from the company that the liability of the director

arises. The liability of the directors is joint and several. It is not a joint and several liability with the company. It is not a liability co-extensive with

the liability of the company, unlike a principal debtor and the surety. In the case of the principal debtor and surety, the liability of the surety is co-

extensive with that of the principal debtor and, therefore, both the principal debtor and the surety can be proceeded against simultaneously.

Whereas u/s 179 of the Act it is only in case the tax cannot be recovered from the company that the liability of the director arises or the liability

itself arises for the director. After that liability arises, the liability is joint and several amongst the directors and it is not a liability joint and several

with that of the company.

Therefore, before the Assessing Officer proceeds against the directors personally he has to give a finding that the Income Tax due for the previous

year cannot be recovered from the company. In the absence of giving a finding conferring jurisdiction on him to recover the Income Tax from the

director personally, the Assessing Officer does not get the jurisdiction to initiate proceedings u/s 179 of the Act. In the absence of such a finding,

the Assessing Officer does not get jurisdiction to invoke the provisions of Section 179 of the Act.

Based on the submissions made by the learned Counsel for the petitioners and the learned Standing Counsel for the respondents and in view of

the order passed by the Division Bench of this Court as noted above, this Court is of the considered view that the show cause notice, dated

19.07.2007, and the impugned order passed by the first respondent, on 08.08.2007, in PAN:AACCM49676C, are set aside, and the first

respondent is directed to cause an enquiry with regard to the liability of the petitioners, and to pass appropriate orders, on merits and in

accordance with law, expeditiously.

With the above directions, these writ petitions are disposed of. No costs. Consequently, connected miscellaneous petitions are closed.