Without gross negligence, misfeasance, or a breach of the assessee’s duty, the order under 179(1) is untenable

Fact and issue of the case

Briefy stated the material facts are as under :

A show cause notice dated 12th January 2017 was served upon the petitioner in terms of section 179 of the Act requiring the petitioner to show cause as to why recovery proceedings be not initiated against her in her capacity as a director of KAPL inasmuch as the assessee company was not traceable on the available addresses and further that the tax dues could not be recovered despite attachment of the bank accounts as the funds available were insuffcient. An amount of Rs.1404.42 lacs was thus sought to be recovered from the petitioner.

With a view to prove that the non-recovery of the taxes due could not be attributed to any gross neglect, misfeasance, breach of duty on her part, in relation to the affairs of the company, the petitioner in her response to the show cause noticed dated 23rd October 2017, took a stand that the petitioner, as a director in the company had no liberty, authorization or independence to act in a particular manner for the beneft of KAPL and that she did not have any control over the company’s affairs. It was stated that the petitioner did not have any authority to sign any cheque independently or take any decision on behalf of the company nor did KAPL provide any operational control or space to the petitioner to perform her duties. It was also stated that the petitioner did not have any functional responsibility assigned to her and no one from KAPL reported to her or her husband Shri Prakash Kamat, who was also a shareholder and director in the company.

With a view to elucidate that the operational control and the decision making authority did not lie with the petitioner, certain details were referred to in the said reply to the show cause notice. Averments have also been made in that regard in the present writ petition. It would be worthwhile to briefy advert to them for purposes of clarity. This would also give the background in which the assessee company was formed and the agreements that were executed between various entities in that regard.

The petitioner’s husband, Shri Prakash Kamat is stated to have developed a smart card based ticketing solution for being used at various public transport organizations like BEST, Central and Western Suburban trains etc. Trials were run successfully and an agreement was entered into between Shri Prakash Kamat and BEST and Central Railways in 2006.

The projects with BEST and Railways were to be implemented on “BOT” model and required funds to the tune of Rs.50 to 60 Crores as initial investment. Khaleej Finance and Investment, a company registered in Baharain (hereinafter referred to as “KFI”) agreed to make an investment in the said project subject to certain conditions, according to which a Special Purpose Vehicle was to be incorporated to carry on the said project which lead to incorporation of KAPL on 30th March 2006. Investment was made by KFI in the said project through its Mauritius based company “AFC System Ltd. (hereinafter referred to as “AFC”)”.

Observation of the court

Heard learned counsel for the parties.

Section 179 of the Act inter-alia envisages that the where any due from a private company in respect of any income of any previous year cannot be recovered then every person who was a director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company. It therefore follows that if tax dues from a private company cannot be recovered then the same can be recovered from every person who was a director of a private company at any time during the relevant previous year. However, such a director can absolve himself if he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty in relation to the affairs of the company.

In so far as the requirement of the frst part of the section is concerned, it can be seen from the order passed under section 179 of the Act that steps were taken for recovery against the company M/s. Kaizen Automation Pvt. Ltd. (KAPL) including attachment of its bank accounts which did not yield any results. The company is also stated to be not traceable on the addresses available with the AO, and therefore, according to the AO, the only course left was to proceed against the directors in terms of section 179 of the Act.

The stand of the petitioner is that she could not be proceeded against, inasmuch as there was no gross neglect, malfeasance or breach of duty on her part in relation to the affairs of the company. The AO, however, did not accept this assertion. It laid emphasis on the fact that the petitioner had actively participated in the affairs of the company atleast till the date of her removal in September 2009 and proceeded to hold that the petitioner had failed to prove that there was any gross neglect, misfeasance or breach of duty on her part as regards the affairs of the company.