Taxation Law | Director Must Be Given Notice to Prove Lack of Negligence: Telangana High Court Quashes Order Against Director in Tax Recovery Case

Telangana High Court quashed an order issued against Sri Subba Rao Pavuluri, a director of a private company, in a tax recovery case under Section 179 of the Income Tax Act, 1961. The court ruled that the order, passed without giving the petitioner an opportunity to be heard, violated principles of natural justice.

The bench, comprising Justice Sujoy Paul and Justice Nagesh Bheemapaka, held that under Section 179 of the Income Tax Act, a director can only be held personally liable for a company’s unpaid taxes if they fail to prove that the non-recovery was not due to their gross neglect, misfeasance, or breach of duty. The court stressed that the director must be given an opportunity to present their case before such liability is imposed.

“The petitioner could have proved that the non-recovery of tax was not attributable to his conduct only if he was given notice and an opportunity to explain.”

The Assistant Commissioner of Income Tax issued an order on March 7, 2023, holding Pavuluri liable for the tax dues of his company. The tax authorities proceeded under Section 179, which allows them to recover unpaid taxes from directors of private companies. Pavuluri, however, challenged the order in the High Court, arguing that he was not given any notice before the order was passed, preventing him from presenting his defense.

The petitioner relied on a Gujarat High Court ruling in Susan Chacko Perumal v. Assistant Commissioner of Income Tax (2017), which had set aside a similar order on the grounds of natural justice, emphasizing that the director must be given notice and an opportunity to prove that the non-recovery of taxes was not due to their misconduct.

The court rejected the tax department's argument that no notice was required before issuing an order under Section 179. Referring to Supreme Court rulings in C.B. Gautam v. Union of India and other cases, the bench reiterated that natural justice principles must be followed in taxation matters where an individual’s personal liability is in question.

“The absence of notice renders the process faulty, and such an order, passed without adhering to the principles of natural justice, cannot be sustained.”

The Telangana High Court set aside the impugned order dated March 7, 2023, and allowed the income tax department to reinitiate proceedings, provided it follows the principles of natural justice. The court granted the revenue authorities liberty to issue a fresh notice to the petitioner and pass a new order based on a fair hearing.
 

Date of Decision: October 1, 2024