2021 (9) TMI 1238 - HC - Income Tax

Recovery of outstanding tax demands from the director of a private company in liquidation - Joint or severe liability - As per the MOU / Settlement agreement, all the income tax liabilities will be borne and paid by one of the Directors (Not the present petitioner) - HELD THAT - Section 179 of the Act imposes a vicarious responsibility on the Directors for the dues of the company. It has, therefore, to be interpreted rigidly, subject to conditions, for application under Section 179. The primary condition is that the tax dues could not be recovered from the company before Section 179 could be invoked. The director of the private company can avoid his joint and several liability for payment of taxes if he proves that the non-recovery cannot be attributed to his gross neglect, misfeasance or breach of any duty on his part in relation to the affairs of a company. The contention of the petitioner that no action to recover the demand from the Realtech Group of Companies was taken by the Assessing Officer is not correct - as mentioned in the impugned order dated 29th January, 2018 under Section 179(1) that the demand notices were served upon the said companies on 29th March, 2014. Thereafter, notices under Section 221(1) of the Act were issued to the companies on 14th November, 2014. It was only when the demand was not paid, bank accounts of the companies were attached and partial recovery was made through the said attachments. In fact, the impugned order passed under Section 179(1) of the Act dated 29th January, 2018, as well as the Order passed under Section 264 dated 01st April, 2021 clearly demonstrate that only a small part of the demand was recovered despite all possible efforts by the Department including action of attachment of bank accounts of the Realtech Group of companies. Tax dues against Realtech Construction Pvt. Ltd. which was developing The City Emporio Mall was only ₹ 12.17 lakhs. The tax demand against the other companies could not be recovered from the assets of that company. Section 179 only permits recovery against a director and not against other group companies which are distinct legal entities. In the impugned order dated 01st April, 2021 there is a specific finding that despite issuing notices and attachment orders the entire outstanding tax dues could not be recovered from the Realtech Group of companies leaving the Department with no other option, but to recover the same from the Directors including the petitioner. The submission of petitioner that it is for the respondent-Revenue to demonstrate that the petitioner Director was guilty of gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company is contrary to the explicit language used in Section 179. The burden is on the individual Director to prove that the non-recovery was not due to his gross negligence, misfeasance or breach of duty on his part. MOU, Settlement Deed and an Arbitral Award govern rights in personam and cannot bind a statutory authority like the respondent-Revenue. It is a settled law that while rights in personam are arbitrable, rights in rem are unsuited for private arbitration and can only be adjudicated by the Courts or Tribunals - private parties cannot apportion Income Tax liability by private agreement as the petitioner has sought to do in the present case. WP dismissed.

Issues Involved:

1. Challenge to orders under Section 264 and Section 179 of the Income Tax Act, 1961.
2. Recovery of outstanding tax demand from the petitioner.
3. Adequacy of assets of Realtech Group to pay tax demand.
4. Gross neglect, misfeasance, or breach of duty by the petitioner.
5. Validity of private agreements (MOU and Settlement Deed) in apportioning tax liability.
6. Compliance with principles of natural justice.

Issue-Wise Detailed Analysis:

1. Challenge to Orders under Section 264 and Section 179 of the Income Tax Act, 1961:
The petitioner challenged the orders dated 01st April 2021 and 29th January 2018 under Sections 264 and 179 of the Income Tax Act, respectively. The petitioner sought to restrain the respondents from recovering the outstanding demand of ?5,89,68,019/- from him, pertaining to Assessment Years 2006-07 to 2009-10.

2. Recovery of Outstanding Tax Demand from the Petitioner:
The petitioner argued that no action had been taken by the Assessing Officer to recover the demand from the Realtech Group of Companies. The court, however, found that the Assessing Officer had issued demand notices, notices under Section 221(1), and attached the bank accounts of the companies, making partial recoveries. Despite these efforts, the entire outstanding tax dues could not be recovered, necessitating recovery from the directors, including the petitioner.

3. Adequacy of Assets of Realtech Group to Pay Tax Demand:
The petitioner contended that there were adequate assets within the Realtech Group to cover the tax liabilities. However, the court noted that the tax dues could not be recovered from the assets of the companies, and Section 179 only permits recovery against a director and not against other group companies, which are distinct legal entities.

4. Gross Neglect, Misfeasance, or Breach of Duty by the Petitioner:
The petitioner argued that the Revenue had failed to demonstrate his gross neglect, misfeasance, or breach of duty. The court clarified that under Section 179, the burden is on the director to prove that non-recovery was not due to his gross neglect, misfeasance, or breach of duty. The court cited the Bombay High Court's decision in Union of India and Ors vs Manik Dattatreya Lotlikar, which held that the burden of proof lies on the director.

5. Validity of Private Agreements (MOU and Settlement Deed) in Apportioning Tax Liability:
The petitioner relied on a Memorandum of Understanding (MOU) and a Settlement Deed, which allocated tax liabilities to another director, Mr. Pankaj Dayal. The court held that private parties cannot apportion income tax liability through private agreements as it involves rights in rem, which are unsuited for private arbitration and can only be adjudicated by courts or tribunals. The court referenced Booz Allen & Hamilton Inc. vs SBI Home Finance Limited & Ors. to support this view.

6. Compliance with Principles of Natural Justice:
The petitioner claimed that he was not given a fair and reasonable opportunity to present his case. The court found that the petitioner was given an opportunity to file his reply and was informed of the consequences of non-compliance. Notices were issued to all directors, and the petitioner failed to respond. Therefore, the court concluded that principles of natural justice had been fully complied with.

Conclusion:
The court dismissed the writ petition, holding that the petitioner failed to prove that the non-recovery of tax dues was not due to his gross neglect, misfeasance, or breach of duty. The court emphasized that private agreements cannot bind statutory authorities and that the Revenue had taken all possible steps to recover the dues from the companies before proceeding against the directors. The petition was dismissed with no order as to costs.

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