The Bombay High Court (HC) bench of Justice Abhay Ahuja and Justice Bhiraj Singh Thakur observed that there is no proof of negligence or breach of duty of malfeasance against the petitioner and the Assessing Officer (AO) couldn’t state any such act.
Thus, the HC quashed the recovery of Rs. 1404.42 lakhs from the director of M/s. Kaizen Automation Pvt. Ltd. (KAPL).
In pursuant to section 179 of the Income Tax Act, 1961 a Show Cause Notice was served on the petitioner, director of KAPL, given that the assessee company could not be located at the addresses listed and that the tax debt could not be collected despite the bank accounts being attached because there were insufficient funds. Hence, it was requested to recover Rs. 1404.42 lacs from the petitioner.
The background is that the company of the petitioner had a project with BEST and Central Railways 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 Bahrain (KFI) agreed to make an investment in the said project subject to certain conditions.
There were numerous provisions pertaining to the selection of the directors. The petitioner further mentioned and emphasised the fact that she and her husband were both removed from their positions as managing directors of KAPL in September 2009 as a result of disagreements that had arisen with KFI since January 2009.
The petitioner, Geeta Kammat in response stated that she 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 further stated that the petitioner could not have been held responsible for any egregious negligence, misconduct, or duty breach on her part with regard to the company’s activities because she was not even aware that KAPL had any tax obligations until after she had been dismissed.
The petitioner’s claim was rejected by the AO and decided that the petitioner had failed to prove not only that she had not actively participated in the management of the business during the fiscal years 2007–2008 and 2008–2009, but also that there had been no willful misconduct, gross negligence, or duty violation on her part.
The petitioner preferred a revision petition under section 264 of the Income Tax Act passed under section 179 of the Income Tax Act, however, came to be dismissed simply on the ground that the petitioner was a director for the relevant assessment years and hence was liable.
According to the revenue’s reply affidavit, the petitioner’s claim that she did not hold any important positions for purposes of running the day-to-day operations of the company was false.
Pertaining to the first half of the section’s requirement, it is transparent from the order made in accordance with that provision of the Act that attempts to collect money from the company KAPL, including the attachment of its bank accounts, were futile. According to the AO, the only option left was to take action against the directors in accordance with section 179 of the Act because the company is also claimed to be untraceable at the addresses on file with the AO.
The bench noted that not a single instance, choice, or action made by the AO was cited as evidence of gross negligence, a failure to perform a duty, or any wrongdoing that even remotely might have prevented future tax obligations from being recovered.
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