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TMI Blog2012 (11) TMI 189X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of records it was observed that an amount of Rs. 26,55,117/- and penalty of Rs. 11,41,702/- was payable by the company. 2.4 On 1.8.2001, the Tax Recovery Officer issued a prohibitory order stating that in view of the warrant of attachment issued on 19.1.2001, the machinery lying in the factory premises of the company shall not be sold or transferred or removed from the place of the factory without the permission of the Tax Recovery Officer of the Income Tax department. 2.5 On 8.10.2010, the Assistant Commissioner of income tax wrote a letter to the company stating that the arrears of amounts demanded are still outstanding for the assessment year 1997-1998 which included unpaid tax of Rs.20,77,896/- and penalty of Rs.11,41,701/-, i.e. total of Rs.32,19,597/-. He called upon the company to immediately make payment of such outstanding amount with interest under section 220 of the Act. 2.6 In response to such notice, the petitioner as a director of the company addressed a letter dated 8.11.2010 in which it was stated that the Assessing Officer had framed the assessment which was completely incorrect. The assessee had already filed appeal before the Tribunal. 2.7 There is furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd at the time when GSFC failed to release the balance amount of loan and the Company was facing acute working capital shortage, I arranged for funds from friends and relatives to keep the business of the Company moving. It was unfortunate that Shri Mahendrabhai died and the balance amount of his part of commitment remained unfulfilled due which thereafter the company's unit was forced to shut down. Even after the closure I have not repaid any of the depositors nor have I withdrawn any funds from the company for my personal use. During the period uptill today, I have been continuously trying to realize the assets for various outstanding payments including tax arrears. I have diligently carried on the affairs of the Company and have put in all efforts for realisation of the assets to settle off all the pending dues of the Company. It is strongly submitted that my submission be taken into consideration before making any adverse Order. The non recovery of tax arrears cannot be attributed to my negligence or breach of duty on my part in relation to the affairs of the Company. I have managed the affairs of the Company and I am in no way responsible for any tax arrears of the Company in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s failed to prove that the non-recovery of the arrears of outstanding demand from the company cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company as required u/s. 179(1) of the I.T. Act, 1961." 2.11 After some more correspondence with the department's higher authorities, the petitioner filed the present petition in which in addition to challenging the said order dated 27.2.2012 passed by the Assistant Commissioner under section 179 of the Act, he has challenged various other consequential communications as also the very notice pursuant to which the said order came to be passed. The central challenge of the petitioner is however to the above-noted order passed under section 179 of the Act. 3. At this stage, we may notice that the petitioner and other co-owners of the immovable property situated at Gujarat Saw Mill compound, Anand first entered into an agreement to sale with one Siddhi Earth Infraspace Pvt. Ltd. Later on the parties also entered into a writing dated 2.8.2011 under which the purchaser was put in possession of the land in question. Since on account of the action initiated by the income tax d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that the petitioner had taken various steps to challenge the order of the Assessing Officer, as also to oppose the sale of the properties of the company by the GSFC. However, GSFC being the secured creditor and enjoying first charge over the property, had auctioned the same to recover its dues. Even the department who had attached the property did not object to any such sale by auction. No negligence therefore, can be attributed to the petitioner. 5. On the other hand learned counsel Shri Parikh for the department opposed the petition contending that after taking series of steps for recovery of the dues of the company, but having failed in effecting any recovery whatsoever, notice was issued against the petitioner why such dues be not recovered from the petitioner as the director of the company. After giving full opportunity, impugned order came to be passed in which at length the aspects of the petitioner's negligence have been recorded. 5.1 Counsel submitted that under section 179 of the Act, recovery of not only the tax but also the penalty and interest could be effected. In this respect, he relied on the following decisions : (1) In the decision of Bombay High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f any previous year cannot be recovered. First requirement therefore, to attach such liability of the director of a private limited company is that the tax due cannot be recovered from the company itself. Such requirement is held to be pre-requisite and a necessary condition to be fulfilled before action under section 179 of the Act can be taken. There are series of decisions of various High Courts on the point. We may notice three leading decisions of this Court. (1) In case of Bhagwandas J. Patel v. Deputy Commissioner of Income-tax reported in [1999] 238 ITR 127(Guj), Division Bench of this Court observed that : "A bare perusal of the provision shows that before recovery in respect of dues from the private company can be initiated against director, to make them jointly and severally liable for such dues, it is necessary for the revenue to establish that such recovery cannot be made against the company and then and then alone it can reach the directors who were responsible for the conduct of business during the previous year in relation to which liability exists ." (2) In case of Indubhai T. Vasa (HUF) v. Income-tax officer reported in [2006] 282 ITR 120 (Guj.), following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the company. Over the immovable property of the company which was attached by the Income Tax department, GSFC had first charge. Such property was sold by GSFC to recover its dues. It is not even the case of the petitioner that the company has other property from which the tax dues can be recovered. It therefore, cannot be stated that basic requirement of section 179(1) of the Act that the tax due cannot be recovered from the company was not satisfied. 10. Coming to the question no.2 controversy arises in view of the fact that under section 179 of the Act what is made recoverable from the director of a private company is "tax due". The Apex Court in case of Harshad Mehta (supra) interpreted such term "tax due" and commented that : "The first question on which the arguments have been advanced, relates to the meaning of the phrase "tax due" used in Section 11(2)(a). Block's Law Dictionary at page 499 defines the word 'due', inter alia, as, "owing; payable; justly owed...Owed or owing as distinguished from payable. A debt is often said to be due from a person where he is the party owing it, or primarily bound to pay, whether the time for payment has or has not arrived. . . Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. It was held and observed as under : "7. The first submission which has been urged on behalf of the petitioner is that as a director of the company until 14 October 1989, he cannot be held liable in respect of the penalty that was imposed on the company under Section 271(1) (c). As already noted earlier, 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. 8. 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 commencing on 1 April 1965 and any subsequent assessment year to mean inter alia income tax chargeable under the provisions of the Act. Section 2(43) is as follows : "2. In this Act, unless the context otherwise requires... (43) "tax" in relation to the assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notice had been served on the company demanding arrears of tax for the years 1959-60, 1960-61 and 1963-64, as early as April 1, 1969, long before the order, Ex. P-7. The company was thus liable for interest under Section 220(2). The liability of the petitioner is co-extensive with that of the company. His obligation to pay the tax for the assessment year 1963-64 is obvious and is undisputed. That makes him an assessee within Section 2(7) of the Act. That being the position, we do not see how he could escape liability for interest under Section 220(2) despite the distinction between tax and interest emphasised by counsel for the petitioner. The contention is, therefore, futile." 13. Decision of Kerala High Court in case of Alex Cherian (supra) cited by the Revenue however, stands on a different footing. In the said decision the question whether under section 179(1) of the Act the tax dues would include even the interest and penalty did not come up for consideration. Similarly in the decision of Punjab and Haryana High Court in case of S. Hardip Singh Sandhu (supra), such a question did not arise. 14. From the above discussion, it can be seen that the Apex Court in case of Harsh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o notice of demand provides that where any tax, interest, penalty, fine or any other sum is payable in consequence of any order passed under the Act, the Assessing Officer shall serve upon the assessee a notice of demand in the prescribed form specifying the sum so payable. Section 156 reads as under : "156. Where any tax, interest, penalty, fine or any other sum is payable in consequence of any order passed under the Act, the Assessing Officer shall serve upon the assessee a notice of demand in the prescribed form specifying the sum so payable : (Provided that where any sum is determined to be payable by the assessee under sub-section (1) of section 143, the intimation under the sub-section shall be deemed to be a notice of demand for the purposes of this section.)" 18. When we compare the language used in section 179(1) of the Act with that of section 156, 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of its dues. The tax department had issued attachment order but done nothing thereafter, to prevent the sale by GSFC. The Assistant Commissioner however, in the impugned order rejected all such contentions. He was of the opinion that the petitioner failed to establish that non recovery of arrears cannot be attributed to any gross negligence, misfeasance or breach of duty on part of the petitioner in relation to the affairs of the company. 21. To our mind, the authority completely failed to appreciate in proper perspective the requirement of section 179(1) of the Act. We may recall that said provision provides for a vicarious liability of the director of a public company for payment of tax dues which cannot be recovered from the company. However, such liability could be avoided if the director proves that the non recovery cannot be attributed to any gross negligence, misfeasance or breach of duty on his part in relation to the affairs of the company. It is of-course true that the responsibility of establishing such facts is cast upon the director. Therefore, once it is shown that there is a private company whose tax dues have remained outstanding and same cannot be recovered, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oner 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. 22. Additionally, we also notice that 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. This is only an additional ground on which we are inclined to quash the order. 23. In the result, petition is allowed. Impugned order dated 27.2.2012 is quashed. 24. In view of such conclusions, it is not necessary to independently examine the prayers made by the purchaser of the property in Special Civil Application No. 4227/2012. 25. Petitions ..... X X X X Extracts X X X X X X X X Extracts X X X X
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