Guarantee to be used in a case where a person did not clear his tax liabilities. - Income Tax - 925/CBDT

INSTRUCTION NO. 925/CBDT Dated : February 26, 1976 Section(s) Referred: 230 Statute: Income - Tax Act, 1961 Attention is invited to Board's F.No. 485/3/72-FTD dated the 15th May, 1973 (Instruction No. 548) with which revised form of guarantee to be executed by an employer was circulated. It was also clarified that this form of guarantee was to be used in a case where a person did not clear his tax liabilities before his departure and the tax clearance certificate was to be issued to him on the basis that satisfactory arrangements had been made to meet his current and anticipated tax liabilities. 2. Recently the Board had occasion to consider the procedure to be followed for the enforcement of the guarantee executed by the employer. In this connection, a question was raised whether the proceedings for the recovery of the tax could be initiated under Rule 2 of the Second Schedule against the person who had given guarantee to pay the tax due from the assessee. This matter has since been examined in consultation with Ministry of Law Justice and Company Affairs. 3. The Board has been advised that according to Section 128 of the Indian Contract Act, the liability of a surety is co-extensive with that of the principal debtor. Clause 2 of Form of Guarantee executed by the guarantor says "My/our liability under this guarantee shall be co-extensive with that of the assessee". The said form of Guarantee also contains an undertaking that the guarantor "do hereby unconditionally and irrevocably guarantee due payment on demand. The important words here are "on demand" and as such the Income-tax Officer has to make a demand from the guarantor. The relevant provision which authorises the Income-tax Officer to name such a demand is section 156 of the Income-tax Act, 1961. There fore, the moment a demand is made from the guarantor, he acquires all the characteristics of an assessee. 4. Thus, where a person (hereinafter referred to as the 'Guarantor') has stood guarantee for the payment of taxes of another person (hereinafter referred to as the 'principal debtor') and the guarantee has been given in the form referred to in para 1 above, the procedure for the recovery of the taxes from the guarantor will be as follows:- (1) The Income-tax Officer should write to the guarantor to the effect that so much amount has been determined to be payable by the "principal debtor" for whom the "guarantor" had stood guarantee and ask the guarantor to make the payment in terms of the guarantee bond, failing which the Income-tax Officer will be constrained to proceed against the guarantor under the Second Schedule to the Income-tax Act, 1961, as stipulated in para 7 of the guarantee bond. (2) Where the guarantor does not make the payment, the Income-tax Officer should start proceedings under Second Schedule as if the guarantor was the defaulter and the Tax Recovery Officer should take coercive measures to recover the amount from the guarantor. In doing so, the Tax Recovery Officer would be acting in the discharge of his duties and in terms of para 7 of the guarantee bond executed by the guarantor. 5. These instructions may please be brought to the notice of all Income-tax Officers in your charge.