INTRODUCTION
The High Court of Bombay- passed a judgement on 12 June 2023. In the case of PRAKASH B KAMAT Vs PR. COMMISSIONER OF INCOME TAX-10 AND 2 OTHERS IN WRIT PETITION NO. 3129 OF 2019 which was passed by a single bench comprising of HONOURABLE SHRI JUSTICE K.R. SHRIRAM, HONOURABLE SHRI JUSTICE M. M. SATHAYE, the court examined the liability of directors for tax dues in the case of Kaizen Automation Pvt. Ltd. (KAPL) and its former director, Mr. Sureshkumar. The judgment revolved around the interpretation of Section 179(1) of the Income Tax Act, 1961, which holds directors jointly and severally liable for the payment of tax dues of a private company under certain conditions. The key issue was whether the non-recovery of tax dues could be attributed to gross neglect, misfeasance, or breach of duty on the part of the director.
FACTS OF THE CASE
Mr. Sureshkumar, a mechanical engineer, developed a smart card-based ticketing solution for public transportation. After a successful trial run, a joint venture agreement was executed between Mr. Sureshkumar, Kaizen Automation Pvt. Ltd. (KAPL), and Khaleej Finance and Investment (KFI). According to the agreement, KFI had significant control over the management and decision-making processes of KAPL.
However, due to disagreements between the joint venture partners, Mr. Sureshkumar and his wife were forcibly removed from their positions as directors of KAPL in 2009. Subsequently, they had no access to KAPL’s information or involvement in its affairs.
PETITIONER’S CASE
Mr. Sureshkumar argued that he should not be held liable for the outstanding tax dues of KAPL as he had no real control over the company’s decisions. He contended that the impugned orders passed by the income tax authorities disregarded the exception provided in Section 179(1) of the Act, which states that a director cannot be held liable if they can prove that the non-recovery of tax dues was not due to their gross neglect, misfeasance, or breach of duty.
He further claimed that he was not a director of KAPL when the demand for tax dues was raised, and therefore, Section 179(1) should not be applicable in his case. Additionally, Mr. Sureshkumar argued that the authorities had failed to consider the true purport and interpretation of Section 179(1) and had not properly examined the aspect of gross neglect or misfeasance.
COUNTER-ARGUMENTS
The revenue, represented by Mr. Suresh Kumar, contended that as a director of KAPL during the relevant assessment years, Mr. Sureshkumar was jointly and severally liable for the payment of tax by the company. They argued that the involvement of directors was necessary for KAPL to receive large sums of money as share application money or share premium.
The revenue further emphasized that Mr. Sureshkumar had failed to establish that the non-recovery of tax dues could not be attributed to his gross neglect, misfeasance, or breach of duty. They asserted that the impugned orders were justified and that ample opportunities were given to Mr. Sureshkumar to present his case.
COURT’S ANALYSIS
The court carefully examined the provisions of Section 179(1) of the Income Tax Act and the arguments presented by both parties. It acknowledged that directors can be held jointly and severally liable for tax dues of a private company if they are found to be guilty of gross neglect, misfeasance, or breach of duty. However, the court emphasized that this liability is not automatic and must be proven based on the specific circumstances of the case.
In evaluating Mr. Sureshkumar’s case, the court considered the fact that he was forcibly removed from his position as a director of KAPL and had no involvement or control over the company’s affairs after that point. The court noted that he and his wife were denied access to KAPL’s information and decision-making processes, which significantly limited their ability to prevent or address any tax-related issues that may have arisen.
The court also took into account the joint venture agreement between KAPL, Mr. Sureshkumar, and KFI, which granted significant control to KFI over the management and decision-making processes of KAPL. This raised questions regarding the extent of Mr. Sureshkumar’s responsibility and authority as a director during the relevant assessment years.
Furthermore, the court considered the revenue’s argument that Mr. Sureshkumar’s involvement as a director was necessary for KAPL to receive large sums of money as share application money or share premium. However, the court noted that this alone does not establish gross neglect, misfeasance, or breach of duty on the part of Mr. Sureshkumar, as these terms require a higher threshold of culpability.
CONCLUSION
After careful consideration of the provisions of Section 179(1) of the Income Tax Act and the circumstances of the case, the court concluded that Mr. Sureshkumar cannot be held liable for the outstanding tax dues of KAPL. The court found that he had been forcibly removed from his position as a director and had no real control or involvement in the company’s affairs after that point.
The court emphasized that the burden of proving gross neglect, misfeasance, or breach of duty lies with the revenue, and in this case, they failed to establish that Mr. Sureshkumar’s actions or inactions directly contributed to the non-recovery of tax dues. The court clarified that mere involvement as a director does not automatically imply liability, and the circumstances must be carefully examined to determine the level of culpability.
Therefore, the court set aside the impugned orders passed by the income tax authorities and ruled in favour of Mr. Sureshkumar, absolving him from liability for the outstanding tax dues of KAPL.
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JUDGEMENT REVIEWED BY VETHIKA D PORWAL, BMS COLLEGE OF LAW
