SCA/11905/2008 1/7 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No. 11905 of 2008 With SPECIAL CIVIL APPLICATION No. 11921 of 2008 With SPECIAL CIVIL APPLICATION No. 11922 of 2008 For Approval and Signature: HONOURABLE MR.JUSTICE D.A.MEHTA HON'BLE SMT. JUSTICE ABHILASHA KUMARI ===================================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ===================================================== AMIT SURESH BHATNAGAR - Petitioner(s) Versus INCOME TAX OFFICER - Respondent(s) ===================================================== Appearance : MR MANISH J SHAH for Petitioner Mr.Manish R.Bhatt,senior advocate with MRS MAUNA M BHATT for Respondent ===================================================== SCA/11905/2008 2/7 JUDGMENT CORAM : HONOURABLE MR.JUSTICE D.A.MEHTA and HON'BLE SMT. JUSTICE ABHILASHA KUMARI Date : 21/10/2008 COMMON ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE D.A.MEHTA) 1. As the issue involved in all the three petitions is common, all the three petitions have been taken up for hearing together. 2. Rule in each of the petition. Learned counsel appearing for the respondent-authority in each of the petition is directed to waive service of rule. By consent of the learned advocates appearing for the respective parties, petitions are taken up for final hearing and disposal today. 3. Each of the petitioner has challenged order dated 19-8-2008 made by respondent-authority under Section 179 of the Income Tax Act, 1961 (“The Act”). Each of the petitioner is a Director of a SCA/11905/2008 3/7 JUDGMENT Company,named, Diamond Project Ltd. (hereinafter referred to as “the Company”). For assessment year 2001-02, pursuant to assessment order dated 31-12- 2006 demand of Rs.3,62,01,913/- was raised in hands of the Company. The appeal filed by the Company before Commissioner (Appeals) came to be dismissed vide order dated 31-3-2008. The Company has preferred Second Appeal before the Tribunal and the said Appeal bearing No.ITA-1536/Ahd/2008 is pending as of today. It appears that the respondent-authority called upon the Company to make payment during pendency of the First Appeal for liquidating a part of the demand and correspondence ensued between the respondent- authority and the Company. Ultimately, on 8-8-2008 the Company wrote to the respondent-authority pointing out that a sum of Rs.15,09,946/- had been paid and the company was also making payment of Rs.1 lac every month. The Company,therefore, requested for further stay against recovery of demand till the disposal of the appeal pending before Tribunal. On 1- 9-2008 the request for stay was rejected. The impugned order has been made on 19-8-2008. In the impugned order, the demand that has been shown to be SCA/11905/2008 4/7 JUDGMENT outstanding vis-a-vis the Company is at a figure of 3,48,95,985/- considering the interest on the outstanding dues. 4. The learned advocate for the petitioner submitted that in light of the provisions of Section 179 of the Act,before recovery in respect of dues from a private Company can be initiated against the Directors, the Revenue was required to establish that such recovery could not be effected from the Company and only then could the Directors be called upon to discharge the liability of the Company. In support of the submission made, reliance has been placed on judgment of this Court in the case of Indubhai T.Vasa (HUF) v. Income-Tax Officer, (2006)282 ITR 120 (Guj). 5. Learned senior advocate appearing for respondent-authority has placed reliance on the affidavit-in-reply dated 13-10-2008 of the respondent-authority. It was submitted that in fact from the correspondence it was apparent that the Company having expressed its inability to discharge the liability, respondent-authority was justified in SCA/11905/2008 5/7 JUDGMENT acting under Section 179 of the Act. That the respondent-authority need not thereafter take any steps to show that recovery was sought to be effected against the Company and such recovery was not possible. The learned counsel did not dispute that otherwise the ratio of aforesaid decision of this court in case of Indubhai T.Vasa (HUF) v. Income-Tax Officer,(Supra) would squarely apply. 6. Having heard the learned advocates for the parties, it is apparent that the controversy raised in the petitions stands concluded by judgment of this Court. The record reveals that except for accepting the amount paid by the Company from time to time, respondent-authority has not taken any steps to effect recovery from the Company. This High Court in the case of Indubhai T.Vasa (HUF) v. Income-Tax Officer (Supra) has stated that the phrase “cannot be recovered” requires the Revenue to establish that such recovery could not be made against the Company and then and then alone would it be permissible for the Revenue to initiate action against the Director or Directors responsible for conducting the affairs SCA/11905/2008 6/7 JUDGMENT of the Company during the relevant accounting period. 7. Thus in effect, before action under Section 179 of the Act can be initiated against the Director or Directors of a private Company, Revenue has to first of all show that such a Director or Directors were responsible for the conduct of the business during the previous year in relation to which the liability exists. Revenue has also to establish that it has taken effective steps to recover the outstanding dues from the Company and has not been able to recover the entire outstanding liability. Applying the aforesaid ratio to the facts of the case, it is apparent that except for calling upon the Company and/or the petitioners-Directors to discharge the liability, Revenue has taken no effective steps to effect recovery of outstanding dues from the Company. In the circumstances, the impugned order dated 19-8-2008 made in case of each of the three petitioners, cannot be permitted to operate. Order dated 19-8-2008 made under Section 179 of the Act is, therefore, quashed and set aside. SCA/11905/2008 7/7 JUDGMENT 8. Needless to state that this order shall not preclude the Revenue from taking necessary steps to effect recovery from the Company. Rule is made absolute in the aforesaid terms in each of the petitions. There shall be no order as to costs. (D.A.Mehta,J) (Smt.Abhilasha Kumari,J) arg