Recovery of tax: Liability of directors: Section 179: A. Y. 1998-99: Debts Recovery Tribunal directing recovery of bank’s dues by sale of properties of company: Balance due to bank supplied by directors from their personal resources: Directors agreeing to forgo their loans to company in order to have its name struck of register of companies: Facts establishing that non-recovery of tax due from company not attributable to gross neglect, misfeasance or breach of duty on part of directors: Recover<

The petitioners were directors of a private company. On 24-06-2002, the Assessing Officer issued notices to the directors u/s. 179(1) of the Income-tax Act, 1961, for recovery of the tax dues of the company of Rs. 7,53,649/- in respect of the A. Y. 1998-99. Being not satisfied by the reply given by the directors, the Assessing Officer passed order u/s. 179 for recovery of the tax dues from the directors. The Commissioner dismissed the revision petition made u/s. 264 of the Act.

The Gujarat High Court allowed the writ petition filed by the directors and held as under:

“i) The company had run into losses. The company had substantial dues towards the bank from which it had taken loan. Certain properties were also mortgaged to the bank. To realise its dues, the bank filed a petition before the Debt Recovery Tribunal where the parties agreed to settle the total dues for Rs. 25 lakh. The properties of the company were valued at Rs. 18 lakh. The balances was supplied by the directors from their personal resources. Additionally, in order to strike the name of the company off the register of companies, the directors agreed to forgo their loans to the company which were in excess of Rs. 16 lakh.

ii) When such facts were established, the Assessing Officer ought to have held that the petitioners had succeeded in establishing that non-recovery of the tax dues of the company could not be attributed to gross neglect, misfeasance or breach of duty on the part of the directors in relation to the affairs of the company.

iii) The assets of the company may not have been mortgaged to the bank. Nevertheless, the Debts Recovery Tribunal held the bank entitled to recover the suit dues by sale of hypothecated machinery and movables and by sale of immovable property. This would not bring the action of the petitioners within the expression of gross neglect, misfeasance or breach of duty on their part.

iv) The contention of the counsel of the Revenue that the petitioners should have offered the properties for recovery of the Department was not tenable. The orders passed by the Income Tax Officer and the Commissioner were to be quashed.”