Director not liable to pay due taxes of company if he is not grossly negligent for such default

Maganbhai Hansrajbhai Patel 

v. 

ACIT

The Tax Recovery Officer attached personal property of the petitioner-Director on account of dues of company. The petitioner contended that he couldn't be held liable for company's demands as requirement of Sec. 179 was not fulfilled. In this regard he submitted that department could take necessary steps against the company to recover the demand as department had already issued a prohibitory order against the sale of the company's assets. The ACIT, however, was not convinced with the petitioner's argument, thus, this present writ was filed by the petitioner.

The High Court held in favour of director as under:

• Over the attached property of the company another company, namely, GSFC had first charge. Such property was sold by GSFC to recover its dues. Moreover, the company didn't have any other property from which dues could be recovered;

• Thus, it couldn't be said that basic requirement of section 179(1) of the Act was not satisfied;

• However, corporate veil of company could be lifted under Sec. 179(1) if the taxes couldn't be recovered from company and the director was unable to prove that non-recovery couldn't be attributed to gross negligence, misfeasance or breach of duty on his part in relation to the affairs of the company;

• The Legislature advisedly used the word 'gross neglect' and not a 'mere neglect' on his part, however, the focus of revenue was with respect to petitioner's neglect in functioning of the company;

• Further, the factors, dates and events referred to by ACIT which, according to him, established gross negligence on part of the petitioner were without putting the petitioner to notice about such factors and events.

Therefore, the petitioner's writ was allowed by High Court and it was held that the director couldn't be held liable under section 179 for recovery of due taxes of company.

[2012] (Gujarat)