Directors can only be held liable under Section 179 if there is a prior finding that the tax cannot be recovered from the company, and lapses must be attributable to their negligence.

JUDGMENT

The petitioners are before this Court challenging Ext.P11 order passed by the second respondent, whereby the proceedings taken by the first respondent under Section 179 of the Income Tax Act against the Directors of the first petitioner Company was upheld. The petitioners, who are the Company as well as the Directors, contend that there is absolutely no rhyme or reason in proceeding against the Directors of the Company, without arriving at a finding by the departmental authorities that the amount cannot be recovered from the Company, invoking the provisions under , which is cited as a mandatory requirement.

2. The contentions of the petitioners are mainly of two fold:

firstly, petitioners submit that while issuing Ext.P9 order, no finding was arrived at as to the mandatory requirement that the amount cannot be recovered from the Company. Secondly, even if in a case where such a finding is there, a proceeding under Section 179 will be justified only if the lapse is directly attributable to the gross negligence, misfeasance etc on the part of the Directors.

3. In support of the contentions raised as above, particularly with respect to the first point, the learned counsel for the petitioners places reliance on the decisions rendered by Division Bench of different High Courts as reported inK.V. Reddy and another Vs. Assistant Commissioner of Income Tax and Another ( 232 ITR 306 ) (rendered by the Division Bench of the Andra Pradesh),Bhagwandas J. Patel Vs. Deputy Commissioner of Income Taxe ( 238 ITR 127 ) (rendered by the Division Bench of the Gujarath High Court),Indubhai T. Vasa (HUF) Vs. Income Tax Officer (282 ITR 120) (rendered by the Division Bench of the Gujarath High Court), where it has been categorically held that, though Section 179 of the Income Tax Act is an exemption to the liability as discernible from the provisions of the Companies Act, the authority has necessarily be arrive at a finding before invoking the said provision that the due amount cannot be recovered from the Company.

4. Coming to the case is hand, Ext.P9 order passed by the first respondent does not reveal that any such finding was arrived at before invoking the said provision. The position is more clear from Ext.P6 show cause notice issued, seeking for the explanation of the Directors as to why the proceedings shall not be taken against them in respect of the recovery of the tax due from the Company, but for simply mentioning that the Company has not paid the tax and that Directors are liable to satisfy the same by virtue of the provision under Section

179 of the Act.

5. The learned standing counsel appearing for the respondents submits that, the requirement contemplated under Section 179 is only a subjective satisfaction of the departmental authorities and that no specific finding needs to be recorded that the amount cannot be recovered from the Company. It is also submitted that, in Ext.P7 reply submitted by the petitioners in response to Ext.P6 notice, there is no case for the Directors/petitioners that the amount can be recovered from the Company or that the Company is having assets in this regard. However, in view of the mandate prescribed under of the Act giving an exemption to the statutory requirement under the Companies Act, by virtue of the non obstante clause, the requirements contemplated therein are to be considered, appreciated and dealt with in a more meticulous manner. More so, when the range, scope and applicability of the said provision have been specifically considered by the different High Courts as referred to above, whereby it has been held that a specific finding has to be arrived at before proceeding with the steps under , holding that the amount cannot be recovered from the Company. There is considerable force in the submissions made from the part of the learned counsel appearing for the petitioners in this regard and this Court does not find any reason to take a deviation. Ext.P11 order passed by the second r