TMI Blog2023 (6) TMI 885X X X X Extracts X X X X X X X X Extracts X X X X ..... words gross neglect and not mere neglect on the part of the Director. This view finds support in the judgment of Maganbhai Hansrajbhai Patel [ 2012 (11) TMI 189 - GUJARAT HIGH COURT ] where the said High Court has dealt with the same present provision of Section 179 - In the said judgment it is further held that gross negligence etc 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. Perusal of the documents produced on record shows that after Petitioner s removal from the directorship which has taken place in the year 2009 itself, Petitioner had no connection with the said company or any access to its affairs. Perusal of the impugned Orders further show that both the ITO as well as revisional Authority have mainly proceeded on the basis that the Petitioner was director during the assessment years and do not really consider whether there was any gross neglect or misfeasance for breach of duty on his part in relation to affairs of the company in the context of non recovery of tax dues . In such situation it is difficult to sustain the impugned Orders, which without any basis, simply says that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used the record. CASE 4. Petitioner has come with following case : 4.1) Petitioner is a mechanical Engineer who had developed a smart card based ticketing solution in the year 2000, which could be used for various public transport like BEST and suburban trains on both central and western railway-lines of Mumbai. It was agreed between Petitioner and said transport organisation that he would run a test project to check its utility and viability. After the successful trial run, BEST as well as Central Railway gave their consents to go ahead with implementation of the smart card ticketing system on built, operate and transfer (BOT) basis. Since implementation of the said scheme required huge funds to the tune of Rs. 50 to 60 crores as initial investment, one Khaleej Finance and Investment, a Company registered in Bahrain ( KFI for short) agreed to make an investment and MOU was executed between Petitioner and KFI. The said KFI invested in said project through its Mauritius based Company AFC system Limited ( AFC for short) and thereafter a Joint Venture Agreement, Deed of Pledge and Irrevocable Power of Attorney (JVA, DP and IPOA for short) were executed in June 2006. Man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dings under Section 179 of the Act should not be initiated against him for outstanding demand against KAPL the assessee Company. The notice recorded name of Petitioner and his wife only and no other Directors of the Company for Assessment Year 2008-09 and 2009-10. It was learnt that assessment has been made and penalties to the tune of Rs. 14 Crores levied on KAPL. No copies of any orders or proceedings pursuant to which demand has arisen, were provided to Petitioner. 4.5) It is contended that Petitioner had filed detailed reply and supplied all the documents, agreements etc contending that non recovery of tax from KAPL cannot be attributed to any gross neglect or misfeasance or breach of duty of Petitioner or his wife. It is contended that during the course of hearing Respondent No. 2 directed Petitioner to produce information available with him in respect of present Directors of KAPL which he duly supplied pointing out that at the relevant time KFI had merged with Idbar Bank. However, inspite of said information, Respondents have not apparently taken any action against the present Directors of KFI or KFI s directors at the relevant time of assessment and Respondents have not e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time when the demand was raised and such Director can be held responsible only and only when non recovery is attributable to gross neglect, misfeasance or breach of duty on the part of such Director. Mr. Mistry further urged that strictly speaking, question of non recovery being attributable to conduct of Petitioner would be relevant only if he was a Director when the demand has been raised. He submitted that in the present case Petitioner was admittedly not a Director when the reassessment proceedings were initiated in the year 2017 and hence there is no question of Section 179(1) of the Act being attracted. Even otherwise, according to Mr. Mistry, the aspect of gross neglect, misfeasance etc has not been properly considered or dealt with by the Authorities. It was further submitted that if the relevant clauses of documents under which Petitioner was Director of the assessee Company are considered, it would show that Petitioner had no control or very limited control in KAPL- the assessee company and real power to run the affairs thereof, vested with the other 6 Directors appointed by KFI. 10. Learned Senior counsel Mr. Mistry relied upon a Judgment dt. 20/02/2023 passed by c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that in absence of any specific provisions in the statute, duty or penalty liability of the company cannot be recovered from its Director, who is not personally liable towards liability of the Company. Perusal of Section 179(1) of the Act shows that it provides for an escape route to the Director. It says that where a Director proves that non recovery of tax dues cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the Company, he shall not be liable for payment of tax dues. Of course, the responsibility of establishing such fact is upon the Director. 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. 14. We are alive to the fact that the legislature in its wisdom has used the words gross neglect and not mere neglect on the part of the Director. This view finds support in the judgment of the Gujrat High Court in Maganbhai Hansrajbhai Patel v. Assistant.CIT [2012] 26 taxmann.com 226 where the sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e attributed to gross negligence, misfeasance or breach of duty on his part, the Tax Recovery Officer is required to apply his mind and come to definite findings (emphasis supplied) 16. Viewed from the aforesaid settled position of law, now let us examine the material produced by Petitioner before the authorities passing the impugned orders. 17. Petitioner had produced all the documents in support of his case that he was not in the controlling capacity of KAPL the assessee company specially its financial affairs. It is not the case of Respondent that the tax dues (which is subject matter of the impugned orders) were demanded when Petitioner was Director of the assessee Company. Perusal of the documents produced on record shows that after Petitioner s removal from the directorship which has taken place in the year 2009 itself, Petitioner had no connection with the said company or any access to its affairs. Perusal of the impugned Orders further show that both the ITO as well as revisional Authority have mainly proceeded on the basis that the Petitioner was director during the assessment years and do not really consider whether there was any gross neglect or misfeasa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct and as such he cannot be held liable. For such conclusion, we also draw support from a judgment of Gujarat High Court in Ram Prakash Singeshwar Rungta v. ITO [2015] 59 taxmann.com 174. In para 14 thereof, it is held:- 14............ Thus, the very basis on which the respondent has proceeded, suffers from non-application of mind to the requirements for exercise of powers under section 179(1) of the Act. In the absence of any finding that non-recovery of the tax due from the company can be attributed to any gross negligence, misfeasance or breach of duty on the part of the petitioners, no order could have been made under section 179(1) of the Act for recovering the same from the directors. The upshot of the above discussion is that the impugned order being inconsistent with the provisions of section 179(1) of the Act, cannot be sustained. (emphasis supplied) 20. There is one more reason why the impugned orders cannot be sustained. Time and again this Court has held that the action of the state must be conducted within a reasonable period of time. The Division Bench of this Court in Parle International Limited Vs. Union of India Writ Petition No 12904 of 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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