Facts of the Case

The petitioner, Rajeev Behl, was one of the promoters and directors of the Realtech Group of companies. Disputes arose among promoters, leading to a Memorandum of Understanding (MOU) in 2011, under which another director agreed to bear all income tax liabilities of the group.

Subsequently:

  • The petitioner resigned from directorship and ceased involvement in management.
  • A Settlement Deed and Arbitration Award reaffirmed that another director would bear tax liabilities.
  • However, tax dues amounting to approximately ₹5.89 crore remained unpaid.

The Income Tax Department initiated proceedings under Section 179 of the Income Tax Act, holding the petitioner jointly and severally liable for recovery of dues when recovery from the company failed.

Issues Involved

  1. Whether recovery proceedings under Section 179 can be initiated against a director without exhausting remedies against the company.
  2. Whether private agreements (MOU/Arbitral Award) can shift statutory tax liability.
  3. Whether the burden lies on the Revenue or the director to prove absence of negligence.
  4. Whether principles of natural justice were violated.

Petitioner’s Arguments

  • No adequate steps were taken by the department to recover dues from company assets.
  • The company had sufficient assets to discharge tax liability.
  • Liability had been contractually shifted to another director via MOU and arbitration award.
  • The petitioner was not guilty of gross neglect, misfeasance, or breach of duty.
  • Proper opportunity of hearing was not granted.

Respondent’s Arguments (Income Tax Department)

  • Recovery efforts were made, including notices, penalties, and attachment of bank accounts.
  • Only partial recovery could be achieved from company assets.
  • Notices were duly served, but the petitioner failed to respond.
  • Section 179 permits recovery from directors when company dues remain unpaid.
  • The petition was an abuse of process and lacked necessary parties.

Court’s Findings / Judgment

The Delhi High Court dismissed the writ petition and held:

1. Pre-condition for Section 179 Satisfied

The department had taken multiple recovery steps (notices, attachment of accounts), but dues remained unpaid. Hence, invocation of Section 179 was valid.

2. Burden of Proof on Director

The Court clarified that:

  • The burden lies on the director to prove absence of gross negligence, misfeasance, or breach of duty.
  • The petitioner failed to discharge this burden.

3. Private Agreements Cannot Override Statutory Liability

  • MOU, Settlement Deed, and Arbitration Award cannot bind tax authorities.
  • Tax liability is a matter of public law (rights in rem), not private arrangement.

4. Natural Justice Not Violated

  • Notice was issued and opportunity was provided.
  • Failure to respond cannot invalidate proceedings.

5. Legal Principle Reinforced

Directors are jointly and severally liable if company dues cannot be recovered, unless they prove absence of fault.

Result: Petition dismissed.

Important Clarifications by the Court

  • Section 179 imposes vicarious liability and must be strictly interpreted.
  • Recovery from directors is permissible only after genuine efforts to recover from the company.
  • Private arbitration or agreements cannot allocate tax liability against statutory provisions.
  • Rights in personam (contracts) cannot override rights in rem (tax obligations).

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2021:DHC:3012-DB/MMH24092021CW78692021_112928.pdf

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