2013 (6) TMI 125 - HC - Income Tax

Liability of directors of private company in liquidation - penalty levied against the company under section 271(1)(c) for outstanding demand of Rs. 2.47 lac for AY 1988-89 & Rs. 4.38 lac for AY 1989-90 - whether u/s 179 department has no authority to seek recovery against the director of company any dues of the said company arising out of the penalty order u/s 271 (1)(c) - Held that - As decided in Maganbhai Hansrajbhai Patel v. Asstt. CIT 2012 (11) TMI 189 - GUJARAT HIGH COURT 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 . Thus 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 ITO 1980 (7) TMI 60 - KERALA HIGH COURT . The director may be considered an assessee under section 2(7) of the Act which provides that assessee means a person by whom any tax or any other sum of money is payable under the Act. However, the same must be qua the tax of the company which was due and remained unpaid. By virtue of section 179(1) of the Act the director cannot be held liable for interest and penalty and thereupon be treated as an assessee under section 2(7) of the Act as a person by whom any tax or any other sum of money is payable under the Act. Against revenue.

Summary

Issues Involved:
1. Validity of the notice issued under Section 179 of the Income-tax Act, 1961.
2. Interpretation of "tax due" under Section 179 of the Income-tax Act, 1961.
3. Liability of directors for penalties imposed on the company.

Issue-wise Detailed Analysis:

1. Validity of the Notice Issued Under Section 179 of the Income-tax Act, 1961:
The petitioner challenged the notice dated 13.02.2013 issued by the Income Tax Officer under Section 179 of the Income-tax Act, 1961. The petitioner, a director of M/s. Gipilon Texurising Pvt. Ltd., contended that the respondent had no authority to seek recovery against him for the company's dues arising from a penalty order under Section 271(1)(c) of the Act. The notice stated that the company had failed to make provisions for the payment of government dues, attributing the failure to gross neglect, misfeasance, or breach of duty by all directors. Consequently, the petitioner was held jointly and severally liable under Section 179 for the payment of the company's tax, interest, and penalty.

2. Interpretation of "Tax Due" Under Section 179 of the Income-tax Act, 1961:
The court examined whether "tax due" under Section 179 includes penalties and interest. Referring to the Supreme Court's interpretation in Harshad Mehta's case, the court noted that "tax due" refers to an ascertained and quantified liability for payment of taxes. The court highlighted that the term "tax due" does not include penalties or interest, as these are distinct from the tax itself. The Bombay High Court in Dinesh T Tailor's case also held that "tax due" under Section 179 does not encompass penalties.

3. Liability of Directors for Penalties Imposed on the Company:
The court discussed the distinction between tax and penalties under the Income-tax Act. Section 2(43) defines "tax" as income tax chargeable under the Act, while penalties are not included in this definition. The court emphasized that Section 179 permits recovery of tax dues from directors under certain conditions but does not extend to penalties imposed on the company. The court referred to various judgments, including those of the Bombay and Kerala High Courts, to support this interpretation. The Kerala High Court's view that directors' liability includes interest was distinguished, as the primary liability under Section 179 pertains to tax dues, not penalties or interest.

Conclusion:
In light of the above analysis, the court quashed the impugned notices at Annexure A collectively. The petition was disposed of accordingly, with no costs awarded. The judgment clarified that under Section 179, directors are not liable for penalties imposed on the company, and the term "tax due" does not include penalties or interest.