Tax dues could not be recovered from the company before Section 179 could be invoked: Delhi HC

Issue

Writ petition has been filed before the Delhi HC challenging the orders dated 01st April, 2021 passed under Section 264 of the Income Tax Act, 1961 [for short ‘the Act’] and 29th January, 2018 under Section 179 of the Act by respondent No.1 and respondent No.2 respectively. Petitioner seeks a direction to restrain the respondents from recovering the outstanding demand of Rs.5,89,68,019/- in the case of Realtech Group from the petitioner, pertaining to the Assessment Years 2006-07 to 2009-10.

Facts

• The petitioners along with two other promoters, namely, Sh. Pankaj Dayal and Sh. Yogesh Gupta formed and promoted the Realtech group of companies in 2005 comprising M/s Realtech Projects Pvt. Ltd., M/s Real Infrastructure Pvt. Ltd., M/s Vivid Builders Pvt. Ltd. and M/s Realtech Constructions Pvt. Ltd.
• During the year 2010-11, allegedly disputes arose amongst the promoters and to settle the said inter se disputes a Memorandum of Understanding (MOU) was executed on 02n d June, 2011. In terms of the MOU, the petitioner allegedly resigned as Director from M/s Vivid Builders Pvt. Ltd., M/s Realtech Construction Pvt. Ltd. as well as some other group companies of Realtech group and stopped participating in the management of the Realtech group.
• It was also allegedly agreed in the MOU that all the income tax liabilities in respect of Realtech Construction Pvt. Ltd, Realtech Projects Pvt. Ltd., Vivid Builders Pvt. Ltd. and Realtech Infrastructure will be borne and paid by Mr. Pankaj Dayal (one of the Directors). Mr. Pankaj Dayal was allegedly separately allocated 17000 sq. ft. in City Emporia Mall, Chandigarh to meet the tax liabilities of Realtech group of companies.
• Subsequent to the MOU, an alleged Settlement Deed dated 16th December, 2015, was also entered into between Mr. Rajeev Behl and Mr. Pankaj Dayal, in which the MOU dated 02nd June, 2011 was given assent to and it was reiterated that Mr. Pankaj Dayal will bear the income tax liabilities of the Realtech group.
• The petitioner was called upon by the income tax authorities to provide details of arrangement for discharge of income tax liability of Realtech group of companies. In response thereto, the petitioner vides its letters dated 10th March, 2015 and 18th March, 2015 addressed to CCIT gave details of assets of Realtech group, which were sufficient to discharge the income tax liability and requested the authorities to take appropriate steps as early as possible for recovery of income tax.
• The petitioner was served with the impugned order dated 29th January, 2018 under Section 179 of the Act wherein it was held that tax dues of a private limited company that cannot be recovered from the company can be recovered from a Director of the said company as the Director is jointly and severely liable for payment of outstanding tax demands of the company. Petitioner’s revision petition under Section 246 of the Act was also dismissed vide order dated 01st April, 2021.

Findings

Section 179(1) of the Income Tax Act– Liability of directors of private company in liquidation.

In the opinion of this Court, Section 179 of the Act imposes a vicarious responsibility on the Directors for the dues of the company. It has, therefore, to be interpreted rigidly, subject to conditions, for application under Section 179. The primary condition is that the tax dues could not be recovered from the company before Section 179 could be invoked. The Assessing Officer has therefore to give a finding that the tax dues could not be recovered from the company before proceeding against the director.

Moreover, the director of the private company can avoid his joint and several liability for payment of taxes if he proves that the non-recovery cannot be attributed to his gross neglect, misfeasance or breach of any duty on his part in relation to the affairs of a company.

Judgement

Delhi HC held that the MOU, Settlement Deed and an Arbitral Award govern rights in personam and cannot bind a statutory authority like the respondent-Revenue. It is a settled law that while rights in personam are arbitrable, rights in rem are unsuited for private arbitration and can only be adjudicated by the Courts or Tribunals. Consequently, this Court is of the opinion that private parties cannot apportion Income Tax liability by private agreement as the petitioner has sought to do in the present case.

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