2009 (6) TMI 628 - HC - Income Tax

Liability of Directors - recovery of tax interest and penalty - proceedings initiated against the petitioners under section 179 - It is made clear that this interpretation of phrase tax would not be is under section 179 of the Act and does not encompass the assessee - If the company is not in a position to meet the demands of payment of income-tax the directors are personally liable to satisfy the said claim. Hence proceedings were initiated against the petitioners who are the directors of the company. - Indeed the assessee as contemplated under section 222 of the Act is liable to pay all the three components i.e. tax interest and penalty and any other sum due or recoverable from him - Petitioners as directors of the company are not liable to pay the interest and penalty - Assessee-company is liable to pay all the three components under section 222 of the Act as observed - Accordingly petition is rejected

Summary

Issues Involved:
1. Liability of directors under Section 179 of the Income-tax Act, 1961.
2. Definition and scope of "tax" under Section 179 of the Act, including whether it encompasses penalty and interest.

Issue-wise Detailed Analysis:

1. Liability of Directors under Section 179 of the Income-tax Act, 1961
The petitioners, directors of a private limited company, challenged the proceedings initiated against them under Section 179 of the Income-tax Act, 1961. The company had incurred losses since its inception in 1990 and had not filed returns from 1991 to 2001. A search conducted on January 18, 2001, led to the assessment of undisclosed income and tax liability. The petitioners contended that directors could only be held liable if the company could not meet the tax demand and if the non-recovery was due to gross neglect, misfeasance, or breach of duty on their part.

The court emphasized that Section 179 imposes a burden on directors to prove that non-recovery cannot be attributed to their gross neglect, misfeasance, or breach of duty. The court found that the petitioners had failed to file returns for over a decade, which constituted gross neglect. The court held that it was not necessary for all three conditions (gross neglect, misfeasance, and breach of duty) to be satisfied; any one condition was sufficient for liability under Section 179.

The court also noted that the company had significant dues to statutory authorities and other creditors, including the Bank of India and the Commercial Tax Department, which further demonstrated the directors' gross neglect. Therefore, the petitioners were liable under Section 179.

2. Definition and Scope of "Tax" under Section 179 of the Act
The petitioners argued that the term "tax" under Section 179 did not include penalty and interest. They relied on the definition of "tax" under Section 2(43) and the notice of demand under Section 156, which differentiate between tax, interest, and penalty. The respondents, however, contended that "tax" should include penalty and interest, citing Section 222, which allows recovery of tax, penalty, and interest from an assessee in default.

The court examined the definition of "tax" and relevant case law, including the decision in Soma Sundarams (P.) Ltd. v. CIT and the Supreme Court's ruling in Pratibha Processors v. Union of India. These cases clarified that "tax" does not include penalty and interest, which are distinct concepts. Penalty is punitive, interest is compensatory, and tax is a compulsory exaction of money.

The court concluded that under Section 179, the term "tax" does not encompass penalty and interest concerning the directors of the company. However, the company itself is liable for all three components under Section 222.

Conclusion:
1. The petition was rejected, and the order of the respondents was confirmed.
2. The directors of the company are not liable to pay interest and penalty under Section 179.
3. The assessee-company is liable to pay tax, interest, and penalty under Section 222.