Petitioner a director in a private limited company resigned from directorship of Company, said company had unpaid outstanding tax demands. Assessing Officer proceeded against petitioner on premise that petitioner was a director of said private company and she was liable to discharge such liability under section 179. No effort was made by department to recover tax due of company from trade debtors and shares. Whether respondents should have inquired and should have made efforts to recover tax due from company to extent possible and merely for balance amount which could not be recovered from company, proceeding could be initiated against Directors. Held, yes – Whether since, petitioner-director had proved that non recovery of tax due against company could not be attributed to any gross negligence, misfeasance or breach of duty on her part in relation to affairs of company, section 179 could not be invoked against her. Held, yes [In favour of assessee].

Facts of the Case:

• The petitioner, a director in a private limited company, resigned from the directorship of the company by submitting a letter to the board of directors of the said company.
• A search was conducted at the office premise of the company and its then directors. Thereafter assessment orders in respect of the company were passed and certain demands were created for the assessment years 1984-85 to 1988-89. Proceeding under section 179 was initiated by the Deputy Commissioner (Investigation circle) against the petitioner and her husband who was also director of the company. The Deputy Commissioner passed the order against which the petitioner filed an application under section 264 before the Commissioner who set aside the order of the Deputy Commissioner.
• Thereafter the Deputy Commissioner issued a show cause notice to the petitioner to which the petitioner submitted reply contending that she was director in the company merely for namesake and was not concerned with day to day working of the company, she had not caused any loss to the company, the appeal of the company was pending before the Tribunal and the dues of the company could not be recovered from directors without recovering first from the company.
• The Assisstant Commissioner did not agree with the submission of the petitioner and passed an order holding the petitioner to be liable to pay the outstanding demand against the company under section 179.
• On appeal, the Commissioner rejected the application holding that the Assessing Officer had proceeded against the director under section 179 only after having failed to recover the demand from the company. The fact that petitioner was an inactive director has no relevance to the legal position, because section 179 places a liability on the directors of the defaulting companies, without any consideration as to whether the director was active or passive. Further the liability of the director under section 179 relates to all liability covered by the notice of demand issued under section 156.

Held by the High Court:

• From the plain reading of section 179, it was clear that where any tax due from a private company in respect of any previous year or from any other company in respect of any income of any previous year during which other company was a private company, could not be recovered, then, every person who was a director of the private company at any time during relevant previous year shall be jointly and severely liable for payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on the part of the petitioner in relation to the affairs of the company.
• The words ‘tax due’ have not been defined under the Act. However, the word ‘tax’ has been defined under section 2(43), according to which it is clear that tax under the Act does not include penalty and interest. For the purposes of notice of demand, section 156 specifically authorises the Assessing Officer to issue it for any tax, interest, penalty, fine or any other sum payable in consequence of any order passed under the Act. The Explanation added to section 179 by Finance Act 2013 with effect from 1-6-2013 also clearly indicates that for the purposes of section 179 penalty and interest has been included with effect from 1-6-2013 within the expression ‘tax due’. Prior to 1-6-2013 there was no provision under the Act to include penalty and interest within the expression ‘tax due’ used in section 179. Thus prior to insertion of the Explanation by the Finance Act, 2013, only the ‘tax’ as defined under section 2(43) and found to be due could be recovered under section 179.
• No effort was made by the department to recover the tax due of the company from trade debtors and shares so as to assess jurisdiction to invoke section 179 against the petitioner. In the order passed on the application of the petitioner the Commissioner has also neither disbelieved nor rejected the afore noted contention of the petitioner rather he held that ‘fact that she was an inactive director has no relevance to the legal position, because section 179 places a liability on the directors of the companies without any consideration as to whether the director was active or passive’.

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