2012 (10) TMI 615 - HC - Income Tax

Refund payment to assessee as individual proposed to be adjusted against tax liability of the company in which he is a director - section 179 - assessee in default - Revenue submission that petitioner had not proved the alone surviving director why should not be treated as the assessee in default - Held that - As decided in Dinesh T. Tailor Versus 1. The Tax Recovery Officer 2. Income Tax Officer 3. Union of India 2010 (4) TMI 218 - BOMBAY HIGH COURT Section 179(1) refers to any tax due from a private company and every director of the company is jointly and severally liable for the payment of such tax which cannot be recovered from the company. The expression tax due and for that matter the expression such tax must mean tax as defined for the purposes of the Act by Section 2(43). Tax due will not comprehend within its ambit a penalty. The provisions of the Act make a clear distinction between the imposition of a tax on the one hand and a penalty on the other. Section 2(43) defines the expression tax in relation to an assessment year and any subsequent assessment year to mean inter alia Income Tax chargeable under the provisions of the Act. The structure and construct of the Act has consciously used different words to create constructive liability on third parties in the case of default in payment of taxes by an assessee. The treatment of the same subject matter by using different terms - in some instances expansive and in others restrictive mean that the Court has to adopt a circumspect approach and limit itself to the words used in the given case (in the present case tax due under Section 179) and not travel outside them on a voyage of discovery The petitioner cannot be made liable for anything more than the tax (defined under Section 2 (43)). The first respondent is consequently directed to determine the liability of the Petitioner

Issues Involved:
1. Validity of the orders dated 3.11.2011 and 2.7.2012 under Sections 179/154 of the Income Tax Act.
2. Scope and ambit of "tax due" under Section 179 of the Income Tax Act.
3. Inclusion of interest and penalties in the definition of "tax" under Section 179.
4. Procedural fairness and service of notice under Section 179.
5. Jurisdiction of the High Court to decide factual issues under Article 226.

Detailed Analysis:

1. Validity of the Orders under Sections 179/154 of the Income Tax Act:
The petitioner challenged the orders dated 3.11.2011 and 2.7.2012 passed by the first respondent. The initial order held the petitioner liable for the outstanding dues of the company amounting to Rs. 27,93,05,184/-, and the subsequent order increased this liability to Rs. 35,13,35,804/- due to interest and penalties. The petitioner argued that the outstanding dues were primarily interest and penalties, which should not be included under "tax due" as per Section 179.

2. Scope and Ambit of "Tax Due" under Section 179:
The principal question was the interpretation of "tax due" under Section 179. The court noted that Section 179(1) states that directors are liable for "tax due" from a private company if it cannot be recovered from the company, unless they prove that the non-recovery was not due to their gross neglect, misfeasance, or breach of duty. The court emphasized that the term "tax" as defined in Section 2(43) of the Act does not include interest and penalties, which are distinct liabilities.

3. Inclusion of Interest and Penalties in the Definition of "Tax":
The petitioner argued that "tax due" under Section 179 should not include interest and penalties. The court referred to various judgments, including those of the Bombay High Court and the Karnataka High Court, which supported the view that "tax" does not encompass interest and penalties. The court also cited the Supreme Court's decision in Harshad Shantilal Mehta, which distinguished between tax, interest, and penalties, reinforcing that "tax due" under Section 179 should be interpreted narrowly to exclude interest and penalties.

4. Procedural Fairness and Service of Notice under Section 179:
The court examined the procedural fairness in the issuance and service of notice under Section 179. It was noted that the petitioner was not adequately informed or given a fair opportunity to respond to the notice, as the communication was not properly served. The court emphasized the importance of procedural fairness and the right to be heard before passing any order under Section 179.

5. Jurisdiction of the High Court to Decide Factual Issues under Article 226:
The revenue argued that factual issues, such as whether the non-recovery of tax was due to the petitioner's neglect or misfeasance, should not be decided in writ proceedings under Article 226. However, the court held that the fundamental question of whether the petitioner is liable to pay interest and penalties under Section 179 falls within the legitimate scope of its jurisdiction. The court rejected the revenue's objection, stating that it is within its purview to determine the legal interpretation of "tax due."

Conclusion:
The court concluded that the term "tax due" under Section 179 does not include interest and penalties. Consequently, the petitioner cannot be held liable for these additional amounts. The impugned orders were quashed, and the first respondent was directed to reassess the petitioner's liability based solely on the "tax due" as defined under Section 2(43). The writ petitions were allowed without any order on costs.

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