Under s.179 the burden is on me to disprove gross neglect. Does the Tax Recovery Officer have to deal with what I say?
Yes. The burden under the proviso to s.179(1) is cast in the negative and lies on the director, but once he places the necessary facts before the Tax Recovery Officer, the officer must apply his mind and record definite findings. Here the three grounds on which the Officer had found gross neglect were held unsustainable and the order was quashed. The Court also held the department need not wait for the company's appeal to be decided before invoking s.179.
Decided by the High Court (Mr. Justice Akil Kureshi and Ms. Justice Sonia Gokani) on 2014-04-29, reported as C/SCA/2257/2014 with C/SCA/2258/2014 and C/SCA/2259/2014 (Special Civil Applications Nos. 2257, 2258 and 2259 of 2014), High Court of Gujarat at Ahmedabad. It bears on section 179, section 179(1) of the Income Tax Act 1961, in Demand, Recovery & Stay matters.
This is the case for the second stage of a s.179 defence — once the department has cleared the condition precedent, the fight is over the proviso. It tells you exactly what the officer owes you in return for your evidence, and it is honest about the point that goes the other way: pendency of the company's appeal is no answer.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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M/s. Flamingo Hotels Private Limited was incorporated to run a five-star hotel at Gandhidham. The hotel building was destroyed in the earthquake of 26 January 2001, shortly before inauguration in February 2001. The company never recovered and eventually sold its leasehold land in financial year 2009-10, applying the proceeds to pay creditors. For assessment year 2010-11 the Assessing Officer computed long-term capital gain of Rs. 4.14 crores after set-off of business losses, raising a demand of about Rs. 1.95 crores. The Tax Recovery Officer invoked s.179 against the petitioner-directors by order dated 5 December 2013.
The order dated 5.12.2013 was quashed and the petitions were allowed, with a direction that if the company receives insurance proceeds for the destroyed building the petitioners must inform the income tax department within four weeks (paras 19 and 20).
Setting out s.179(1) at para 10, the Court held at paras 11 and 12 that what can be recovered from a director is the tax due of the company which cannot be recovered from the company, and that there is no mandate in s.179(1) that the department must await the outcome of the company's appeals — if stay pending appeal is refused, the tax becomes recoverable from the company, subject to the outcome of the appeal, and if not paid it becomes a tax due. At paras 13 and 14 the Court turned to whether the Officer was right that non-recovery could be attributed to gross negligence, misfeasance or breach of duty, holding that once it is established that the company's taxes cannot be recovered from it, the directors are jointly and severally liable unless it is proved that non-recovery cannot be so attributed, the burden being cast in the negative on the director, as observed in Maganbhai Hansrajbhai Patel. At paras 16 to 18 the Court examined the three grounds relied on by the Officer and found each unsustainable: the criticism that no provision for tax liability was made when creditors were paid failed because the assessment order had not then been finalised; the ground founded on the insurance claim was held neither maintainable in law nor in fact, and a commercial decision was distinguished from negligence; and the allegation of a deliberately false claim lacked evidentiary support and in any event required the material to be disclosed to the director.
The burden cast by statute is thus in the negative and is on the director concerned as is observed in case of Maganbhai Hansrajbhai Patel(supra). However, once in defence, the director places necessary facts before the Tax Recovery Officer to establish that non recovery cannot be 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.
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Handle my notice → Ask a CA on WhatsAppYes. The burden under the proviso to s.179(1) is cast in the negative and lies on the director, but once he places the necessary facts before the Tax Recovery Officer, the officer must apply his mind and record definite findings. Here the three grounds on which the Officer had found gross neglect were held unsustainable and the order was quashed. The Court also held the department need not wait for the company's appeal to be decided before invoking s.179. This was decided by the High Court (Mr. Justice Akil Kureshi and Ms. Justice Sonia Gokani) and bears on section 179, section 179(1) of the Income Tax Act 1961. It is reported as C/SCA/2257/2014 with C/SCA/2258/2014 and C/SCA/2259/2014 (Special Civil Applications Nos. 2257, 2258 and 2259 of 2014), High Court of Gujarat at Ahmedabad. This is the case for the second stage of a s.179 defence — once the department has cleared the condition precedent, the fight is over the proviso. It tells you exactly what the officer owes you in return for your evidence, and it is honest about the point that goes the other way: pendency of the company's appeal is no answer. If it applies to you, the first step is this: Put the facts on the file in writing — board minutes, accounts, correspondence, the commercial reasons for what was done — because the burden of showing that non-recovery is not attributable to gross neglect, misfeasance or breach of duty is on you.
M/s. Flamingo Hotels Private Limited was incorporated to run a five-star hotel at Gandhidham. The hotel building was destroyed in the earthquake of 26 January 2001, shortly before inauguration in February 2001. The company never recovered and eventually sold its leasehold land in financial year 2009-10, applying the proceeds to pay creditors. For assessment year 2010-11 the Assessing Officer computed long-term capital gain of Rs. 4.14 crores after set-off of business losses, raising a demand of about Rs. 1.95 crores. The Tax Recovery Officer invoked s.179 against the petitioner-directors by order dated 5 December 2013. The matter was decided on 2014-04-29 by the High Court (Mr. Justice Akil Kureshi and Ms. Justice Sonia Gokani). On those facts the High Court held as follows. The order dated 5.12.2013 was quashed and the petitions were allowed, with a direction that if the company receives insurance proceeds for the destroyed building the petitioners must inform the income tax department within four weeks (paras 19 and 20).
Setting out s.179(1) at para 10, the Court held at paras 11 and 12 that what can be recovered from a director is the tax due of the company which cannot be recovered from the company, and that there is no mandate in s.179(1) that the department must await the outcome of the company's appeals — if stay pending appeal is refused, the tax becomes recoverable from the company, subject to the outcome of the appeal, and if not paid it becomes a tax due. At paras 13 and 14 the Court turned to whether the Officer was right that non-recovery could be attributed to gross negligence, misfeasance or breach of duty, holding that once it is established that the company's taxes cannot be recovered from it, the directors are jointly and severally liable unless it is proved that non-recovery cannot be so attributed, the burden being cast in the negative on the director, as observed in Maganbhai Hansrajbhai Patel. At paras 16 to 18 the Court examined the three grounds relied on by the Officer and found each unsustainable: the criticism that no provision for tax liability was made when creditors were paid failed because the assessment order had not then been finalised; the ground founded on the insurance claim was held neither maintainable in law nor in fact, and a commercial decision was distinguished from negligence; and the allegation of a deliberately false claim lacked evidentiary support and in any event required the material to be disclosed to the director. In the words reproduced by the source cited on this page: "The burden cast by statute is thus in the negative and is on the director concerned as is observed in case of Maganbhai Hansrajbhai Patel(supra). However, once in defence, the director places necessary facts before the Tax Recovery Officer to establish that non recovery cannot be 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." The decision followed or applied Maganbhai Hansrajbhai Patel v. Assistant Commissioner of Income Tax (Guj.) - relied on for the nature of the burden under s.179(1).
It was decided by the High Court on 2014-04-29 and is reported as C/SCA/2257/2014 with C/SCA/2258/2014 and C/SCA/2259/2014 (Special Civil Applications Nos. 2257, 2258 and 2259 of 2014), High Court of Gujarat at Ahmedabad. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 179, section 179(1), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The order dated 5.12.2013 was quashed and the petitions were allowed, with a direction that if the company receives insurance proceeds for the destroyed building the petitioners must inform the income tax department within four weeks (paras 19 and 20). It arises in Demand, Recovery & Stay matters, on section 179, section 179(1) of the Income Tax Act 1961, and was decided by Mr. Justice Akil Kureshi and Ms. Justice Sonia Gokani. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Read the s.179 order for whether it engages with those facts. Bare assertions of gross neglect, without definite findings on your material, are the ground of challenge. If the officer relies on material you were never shown, take that separately; the Court required the material behind an allegation of a deliberately false claim to be disclosed to the director. Do not rest on the company's pending appeal. Once stay is refused, the tax is recoverable from the company and becomes a tax due, and s.179 can be invoked subject to the outcome of that appeal. Distinguish commercial decisions that turned out badly from neglect — the Court refused to treat a commercial choice as negligence.
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The order dated 5.12.2013 was quashed and the petitions were allowed, with a direction that if the company receives insurance proceeds for the destroyed building the petitioners must inform the income tax department within four weeks (paras 19 and 20).
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Can the department recover a private company's tax from you personally as a director?
The department wants to recover the company's tax dues from me because I was a director. Can they?
The department has passed an order under s.179 making me liable for my company's tax. Must the notice first show that recovery from the company failed?
The s.179 order against me recites that the company had no assets and that all the directors were guilty of gross neglect. The show-cause notice said none of that. Is the order good?