By TIOL News Service

AHEMDABAD, AUG 31, 2018: THE ISSUE BEFORE THE DIVISION BENCH IS - Whether Section 179 permits lifting of corporate veil for recovery of unpaid tax dues of a private company from its directors, without establishing that non-recovery was on account of misfeasance or breach of duty on part of such directors in relation to affairs of company. NO IS THE VERDICT.

Facts of the case:

The assessee is an ex-director of one Brajvashi Caterers Private Limited. For the A.Y 2010-11, the AO passed an order of assessment in case of said company imposing demand of unpaid tax of Rs. 17.06 lacs. However, since the company did not pay the same, the AO desired to invoke section 179 and issued notice to the assessee requiring him to show cause as to why he should not be recovered for outstanding dues of the company in his capacity of Director. In response, the assessee opposed the notice contending that she had already resigned as Director from the company w.e.f. Dec 29, 2009. Since her resignation, she had no association with the company and the affairs of the company were managed by one Narendrasinh Chauhan along with his brother Kalpeshkumar Chauhan and another. The assessee explained that these directors had defrauded the company and the Revenue. Thus, it was pleaded that there was no negligence, misfeasance or breach of duty on her part as a director which led to revenue defalcation. The AO however, ignored such pleas and passed an order asking her to pay up dues of the company, observing that no provision was made by the company or any of its Directors to ensure payment of government dues which were bound to arise on account of deliberate and known acts of gross neglect, misfeasance and breach of duty by all directors of the company.

High Court held that,

++ it is noticed that section 179 would enable the Revenue to recover unpaid tax dues of a private company from its director, unless he proves that the non-recovery cannot be attributed to any gross negligent, misfeasance or breach of duty on his part in relation to the affairs of the company. Of course this requirement is cast in the negative and the burden is on the person who was a director of the company at the relevant time to establish the relevant facts. Nevertheless, it would be the onus of AO to draw the primary facts to the notice of assessee on the basis of which, he proposes to invoke powers u/s 179 of the Act. Essentially, this statutory provision provides for lifting of corporate veil and enable the Revenue to recover the unpaid tax dues of a private company from its directors, provided the requirements referred to in sub-section (1) of section 179 are satisfied;

++ it is found that in the showcause notice, the AO has not laid down sufficient foundation for invoking section 179, leave alone broadly pointing out he has not even alleged that non-recovery was on account of gross negligent, misfeasance or breach of duty on part of assessee in relation to the affairs of the company. His final conclusions in the order are therefore based on the material at his command which was never shared with the assessee. In the result, the order passed by AO is set aside only on this ground making it clear that nothing stated in the order would prevent the AO from initiating fresh exercise for the same purpose, if so advised and, if the material at his command is sufficient to permit him to do so.

(See 2018-TIOL-1776-HC-AHM-IT)