2012 (11) TMI 189 - HC - Income Tax

Liability of directors of private company in liquidation - Section 179 v/s 156 - Penalty u/s 271(1)(c) - Held that - Comparing the language used in section 179(1) with that of section 156 i.e. Notice of demand, it emerges that in section 179, the term used is tax due where as in section 156 which is a recovery provision refers to a notice of demand which would specify the sum payable. The sum payable may as provided in the section itself include tax, interest, penalty fine or any other sum which is payable in consequence of any order under the Act. Section 220 pertains to when tax payable and when assessee deemed to be in default . Section 220(2) provides that if the amount so specified is not paid within such time, the assessee shall be liable to pay interest. Such interest thus would be on the entire sum payable which may include the tax, interest and penalty or any other source found payable. It would therefore, not be possible to stretch the language of section 179(1) to include interest and penalty also in the expression tax due as decided in Ratanlall Murarka And Others Versus Income-Tax Officer, a Ward, Companies Circle, Ernakulam, And Others 1980 (7) TMI 60 - KERALA HIGH COURT . Thus it can be stated here that authority completely failed to appreciate in proper perspective the requirement of section 179(1). Once it is shown that there is a private company whose tax dues have remained outstanding and same cannot be recovered, any person who was a director of such a company at the relevant time would be liable to pay such dues but in the present case the petitioner had putforth a strong representation to the proposal of recovery of tax from him under section 179. In such representation, he had detailed the steps taken by him and the circumstances due to which non recovery of tax cannot be attributed to his gross neglect. It was this representation and the factors which the petitioner had putforth before the Assistant Commissioner which had to be taken into account before the order could be passed. It is not even the case of the department that the petitioner paid the dues of other creditors of the company in preference to the tax dues of the department or petitioner negligently frittered away the assets of the company due to which the dues of the department could not be recovered. To suggest that the petitioner did not oppose the GSFC s auction sale is begging the question. GSFC had sold the property after several attempts through auction. It is not the case of the department that proper price was not fetched. Also the Assistant Commissioner has referred to several factors, dates and events which, according to him, established gross negligence on part of the petitioner without even putting the petitioner to notice about such factors and events. Therefore, quite apart from our conclusion that the Assistant Commissioner did not record that the petitioner failed to prove that non recovery of tax from the company could not be attributed to his gross neglect, misfeasance or breach of duty, such findings were also based on materials relied upon by the Assistant Commissioner without notice to the petitioner.

Summary

Issues Involved:
1. Whether the tax dues from the company could not be recovered before invoking Section 179 of the Income Tax Act, 1961.
2. Whether under Section 179 of the Act, only the principal tax dues or also the interest and penalties can be recovered from the director.
3. Whether the Assistant Commissioner was justified in ordering recovery against the petitioner.

Issue-Wise Detailed Analysis:

1. Recovery of Tax Dues from the Company:
The court examined whether the prerequisite condition that tax dues from the company could not be recovered was satisfied. The petitioner argued that the department did not establish this essential fact. However, the court noted that the department had taken strenuous steps over a decade, including issuing recovery notices, attaching properties, and issuing prohibitory orders. Despite these efforts, no recovery was made from the company. The court concluded that the requirement under Section 179(1) of the Act, that tax dues could not be recovered from the company, was satisfied.

2. Scope of Recovery Under Section 179:
The court analyzed whether Section 179 of the Act allows for the recovery of only the principal tax dues or also includes interest and penalties. The petitioner contended that only the principal tax could be recovered, citing the Supreme Court's interpretation of "tax due" in Harshad Shantilal Mehta v. Custodian. The court agreed with this interpretation, noting that the term "tax due" in Section 179 does not include penalties and interest. The court referred to the statutory definition of "tax" under Section 2(43) of the Act and distinguished it from penalties and interest, which are treated separately in the Act. The court also considered the decisions of other High Courts, including the Bombay High Court in Dinesh T. Tailor v. Tax Recovery Officer, which supported the view that "tax due" does not encompass penalties and interest.

3. Justification for Recovery Against the Petitioner:
The court evaluated whether the Assistant Commissioner was justified in ordering recovery against the petitioner. The petitioner argued that he was not negligent and had taken steps to challenge the assessment and oppose the sale of the company's properties. The court found that the Assistant Commissioner failed to appreciate the requirement of Section 179(1) of the Act, which requires proving that non-recovery of tax dues cannot be attributed to the director's gross negligence, misfeasance, or breach of duty. The court noted that the Assistant Commissioner did not focus on whether the non-recovery was due to the petitioner's gross neglect but rather on the petitioner's conduct when the company was operational. The court also highlighted that several factors and events relied upon by the Assistant Commissioner were not communicated to the petitioner, violating principles of natural justice. Consequently, the court quashed the impugned order dated 27.2.2012.

Conclusion:
The court allowed the petition, quashing the order dated 27.2.2012 under Section 179 of the Income Tax Act. The court emphasized that the department must establish that tax dues could not be recovered from the company and that recovery from the director is justified only if non-recovery is attributable to the director's gross negligence, misfeasance, or breach of duty. The court also clarified that "tax due" under Section 179 does not include penalties and interest.