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Judgment
Surya Prakash Kesarwani, J.—In this writ petition, the petitioner has prayed for the following relief: (i) issue a writ, order or direction in the nature of prohibition against respondent No. 1 prohibiting it from continuing further with the proceedings;
(ii) issue a writ, order or direction in the nature of certiorari calling for bringing up of the records of the said case and quashing the order dt. 29th March, 2007 (Annex. 10 to the writ petition);
(iii) issue a writ, order or direction in the nature of mandamus directing the respondent No. 1 to desist from acting further as its order dt. 29th March, 2007 (Annex. 10 to the writ petition) and to treat it as non est.
(iv) issue a writ, order or direction in the nature of certiorari to quashing the order of attachment dt. 22nd Sept., 2006 of the only residential flat of the petitioner situate at B-10/4 IInd Floor, Ramesh Nagar, New Delhi (Annex. 9A to this writ petition).
(v) issue any other writ, order or direction, which this Hon''ble Court may deem fit and proper in the facts and circumstances of this case;
(vi) award the cost to the petitioner.
Briefly stated the facts of the present case are that the petitioner was director in M/s Sri Ganesh Chemicals (P) Ltd. (the company) which is a private limited company incorporated under the Companies Act, 1956. The petitioner undisputedly resigned from the directorship vide letter dt. 20th Oct., 1983 submitted to the board of directors of the company. A search was conducted on 17th June, 1985 at the office premises of the company and its then directors. Thereafter, the assessment order in respect of the company was passed and certain demands were created for the asst. yrs. 1984-85 to 1988-89. Proceeding under s. 179 of the IT Act, 1961 (hereinafter referred to as "the Act") was initiated by the Dy. CIT (Investigation Circle), Muzaffarnagar against the petitioner and her husband Sri Santosh Kumar Garg who was also director of the company. The Dy. CIT passed the order dt. 28th March, 2000 against which the petitioner filed an application under s. 264 of the Act before the CIT, Muzaffarnagar who vide order dt. 15th July, 2002 (Annex. 7) set aside the order of the Dy. CIT dt. 28th March, 2000 and held as under:
Now it is clear that the assessee was a director in the company for a part of period i.e. 1st April, 1982 to 27th Oct., 1983 relevant to asst. yr. 1984-85 only. Thus it is obvious that these facts were not before the AO when he passed the order under s. 179(1). Under the circumstances the order passed under s. 179(1) of IT Act, 1961 on 28th March, 2000 is hereby set aside.
Thereafter the Dy. CIT issued a show-cause notice dt. 9th Sept., 2002. Petitioner submitted reply dt. 16th Sept., 2002 (Annex. 7A) contending that she was director in the company merely for namesake and was not concerned with day to day working of the company, she has not caused any loss to the company, the appeal of the company is pending before the Tribunal and the dues of the company cannot be recovered from directors without recovering first from the company. The Asstt. CIT, Circle 2, Muzaffarnagar did not agree with the submission of the petitioner and passed the order dt. 15th March, 2004 (Annex. 8) holding the petitioner to be liable to pay the outstanding demand against the company for asst. yr. 1984-85 under s. 179 of the Act. In the said order, the Asstt. CIT observed that as on today the demand against the company for the asst. yr. 1984-85 is Rs. 3,34,832 + interest under s. 220(2) and penalties Rs. 3,20,500 under ss. 271(1)(c) and 273(2)(b). Aggrieved with the order of the Asstt. CIT, the petitioner filed an application under s. 264 of the Act before the CIT. Muzaffarnagar who rejected the application vide order dt. 29th March, 2007 (Annex.-10) and held as under:
Having considered the arguments Smt. Pratibha Garg my findings are discussed below:
(i) as per the provisions of s. 264(3) an application for revision must be made within one year from the date on which the order was communicated to the applicant on the date on which he otherwise came to know of it, whichever is earlier.
(a) In the case before us the order passed under s. 179 by the Asstt. CIT is dated 15th March. 2004 but Smt. Pratibha Garg claims to have received it only on 28th Feb., 2006 i.e. after a lapse of almost 2 years. I find that a copy of the order under s. 179 dt. 15th March, 2004 passed by the Asstt. CIT, Muzaffarnagar was endorsed to Smt. Pratibha Garg, this endorsement raises the presumption that a copy of the order was communicated to her. Whenever, a copy of a Government order is endorsed to an individual, it raises a strong presumption that a copy of the order was dispatched to the individual concerned.
(b) The plea of Smt. Pratibha Garg regarding non-receipt of order under s. 179 for two years is further weakened by the fact that Smt. Pratibha Garg had participated in the proceedings under s. 179 and replies were filed by Smt. Pratibha Garg which was considered by the Asstt. CIT in his order dt. 15th March, 2004. Consequently, this also raises the presumption that Smt. Pratibha Garg would have taken notice of the order under s. 179 which was consequent to her participation in the proceedings thereof.
(c) I also take notice of the fact that this is an old case relating to asst. yr. 1984-85 and Smt. Pratibha Garg has been adopting various dilatory tactics with a view to depriving the exchequer of the tax etc. demand raised by the Revenue against her.
(ii) The fact that she had resigned from the directorship of the company, has already been taken cognizance of and therefore, the Asstt. CIT in his order dt. 15th March, 2004 has held that Smt. Pratibha Garg would be responsible for making payments of demand only for asst. yr. 1984-85. The fact that she was an inactive director has no relevance to the legal position, because s. 179 of the Act places a liability on the directors of the defaulting companies, without any consideration as to whether the director was active or passive. Therefore, this plea of the applicant, Smt. Pratibha Garg, is not accepted.
(iii) With regard to the plea of the applicant that only tax can be recovered and not interest and penalty, I find that under s. 220(1) ''any amount...............specified as payable under s. 156 shall be paid within 30 days.............'' when s. 220(1) is read in conjunction with s. 156 it is seen that s. 156 states that ''when any tax, interest, penalty..........is payable in consequence of any order passed under this Act, the AO shall serve upon the assessee a notice of demand...........
(A) from the above it is clear that the liability of the director under s. 179 shall relate to all liability covered by the notice of demand issued under s. 156.
(iv) With regard to opportunities to be heard during proceedings under s. 179 I find that Smt. Pratibha Garg had filed written submission before the Asstt. CIT who has discussed them in the body of the order (on p. 3) as below:
Replies of Smt. Pratibha Garg on compliance to the notice under s. 179 of the Act were received. She has stated that the company had appealed before the Tribunal, New Delhi against the orders of the CIT(A). Smt. Pratibha Garg had requested for keeping these demands in abeyance till the disposal of the appeal by the Tribunal. It was further stated that Smt. Pratibha Garg does not have any substantial income of her own hence she was in no position to pay these demands. She has stated that the demands be recovered from the shares and trade debtors seized from the premises of Smt. S.K. Garg during the course of search in 1985.
(a) From the above, it is clear that Smt. Pratibha Garg was granted adequate opportunity and that she did participate in the proceedings under s. 179.
(v) With regard to the plea of Smt. Pratibha Garg that recovery cannot be made from her before first attempting to recover tax from the company. I find that the AO had proceeded against the director under s. 179 only after having failed to recover the demand from the company. The Asstt. CIT in his order dt. 15th March, 2004 has stated as under:
The efforts made for recovery of demands in these cases were fruitless. The bank accounts of the company which were attached by the Department had hardly any funds, hence the demands could not be recovered. Further, the latest return of the company reveals a paltry bank balance, hence recovery cannot be made therefrom. Moreover, the business of the company is virtually closed.
In light of the above discussions, I see no merit in the application under s. 264 and accordingly reject the same.
Aggrieved with the above order of the CIT dt. 29th March, 2007, the petitioner has filed the present writ petition.
We have heard Sri Shakeel Ahmed, learned counsel appearing for the petitioner and Sri Dhananjay Awasthi, learned counsel appearing for the respondents.
Submission on behalf of petitioner
Sri Shakeel Ahmed submits that:
(i) In the impugned order the CIT has admitted that the petitioner was an inactive director. Thus the stand of the petitioner that she was name sake director stands accepted. In view of this, it stands proved that non-recovery of tax due against the company was not attributable to any gross neglect, misfeasance or breach of duty on the part of the petitioner in relation to the affairs of the company. But Asstt. CIT has wrongly held that it makes no difference whether the petitioner was inactive or active director.
(ii) The conditions for invoking s. 179 of the Act do not exist. Therefore, the impugned order of the Asstt. CIT was wholly without jurisdiction.
(iii) Non-recovery of income tax against the company is not attributable to any gross neglect, misfeasance or breach of duty on the part of the petitioner relating to the conduct of affairs of the company.
(iv) The impugned order has been passed in violation of principles of natural justice in as much as no opportunity was actually afforded to the petitioner.
(v) The word "tax due" used in s. 179 of the Act is confined only to the tax amount as defined under s. 2(43) of the Act. The Explanation to s. 179 by the Finance Act, 2013 w.e.f. 1st June, 2013 also supports the stand of the petitioner in as much as in view of the Explanation, penalty and interest shall become part of the "tax due" for the purposes of s. 179 of the Act w.e.f. 1st June, 2013 and not prior to it.
(vi) No effort has been made by the Department to realise the tax from the assets of the company and, therefore, the entire proceedings under s. 179 of the Act initiated against the petitioner is wholly illegal and without jurisdiction.
In support of his submission Sri Shakeel Ahmed has placed reliance on the following judgments:
(i) Harshad Shantilal Mehta Vs. Custodian and Ors, ;
(ii) S.C. Jain Vs. Union of India, ;
(iii) Indubhai T. Vasa (HUF) Vs. Income Tax Officer, .
Submission on behalf of respondents
Sri Dhananjay Awasthi, learned counsel for the respondents submits that:
(i) None of the grounds raised in the writ petition were raised before the CIT and, therefore, the arguments'' are not entertainable.
(ii) No defect in the impugned order could be pointed out by the petitioner.
(iii) The ratio of Harshad Mehta''s judgment (supra) is not applicable to the provisions of s. 179 of the Act.
(iv) As per Explanation to s. 179 of the Act "tax due" includes penalty and interest.
(v) The entire proceedings under s. 179 of the Act initiated against the petitioner and the impugned order passed by the authorities are wholly valid and they do not suffer from any infirmity.
In support of his submissions Sri Dhananjay Awasthi has relied on the following judgments:
(i) Roop Chandra Sharma Vs. Deputy Commissioner of Income Tax (Assessment), ;
(ii) Alex Cherian Vs. Commissioner of Income Tax, .
Discussions and findings
We have considered the submissions of learned counsel for the parties. We find that the following questions arise for adjudication in this case:
(1) Whether the word "tax due" used in s. 179 of the Act would include penalty and interest?
(2) Whether the petitioner has established that the recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on the part of the petitioner in relation to the affairs of the company?
(3) Whether the CIT has correctly held that tax dues of the company are liable to be recovered from the petitioner as director for the asst. yr. 1984-85?
(4) Whether the order passed under s. 179 of the Act against the petitioner is liable to be set aside on the ground of violation of principles of natural justice?
Question No. 1: (i) Whether the word "tax due" used in s. 179 of the Act would include penalty and interest?
Before we proceed to examine the question whether "tax due" would include penalty and interest under s. 179 of the Act, it would be appropriate to reproduce s. 179 as under:
(1) Notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), where any tax due from a private company in respect of any income of any previous year or from any other company in respect of any income of any previous year during which such other company was a private company cannot be recovered, then, every person who was a director of the private company at any time during the relevant previous year, shall be jointly and Severally liable for the payment of such tax, unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.
(2) Where a private company is converted into a public company and the tax assessed in respect of any income of any previous year during which such company was a private company, cannot be recovered, then, nothing contained in sub-s. (1) shall apply to any person who was a director of such private company in relation to any tax due in respect of any income of such private company assessable for any assessment year commencing before the 1st day of April, 1962.
Explanation (inserted by Finance Act, 2013 w.e.f. 1st June, 2013)--For the purposes of this section, the expression ''tax due'' includes penalty, interest or any other sum payable under the Act.
From the plain reading of s. 179 of the Act, it is clear that where any tax due from a private company in respect of any previous year or from any other company in respect of any income of any previous year during which other company was a private company, cannot be recovered, then, every person who was a director of the private company at any time during relevant previous year shall be jointly and severally liable for payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on the part of the petitioner in relation to the affairs of the company.
The words "tax due" has not been defined under the Act. However, we find that the word "tax" has been defined under s. 2(43) of the Act as under:
''tax'' in relation to the assessment year commencing on the 1st day of April, 1965, and any subsequent assessment year means income tax chargeable under the provisions of this Act, and in relation to any other assessment year income tax and super tax chargeable under the provisions of this Act prior to the aforesaid date and in relation to the assessment year commencing on the 1st day of April, 2006, and any subsequent assessment year includes the fringe benefit tax payable under s. 115WA.
From a reading of s. 2(43) of the Act it is clear that tax under the Act does not include penalty and interest. For the purposes of notice of demand, s. 156 specifically authorises the AO to issue it for any tax, interest, penalty, fine or any other sum payable in consequence of any order passed under the Act. The Explanation added to s. 179 of the Act by Finance Act, 2013 w.e.f. 1st June, 2013 also clearly indicates that for the purposes of s. 179 penalty and interest has been included w.e.f. 1st June, 2013 within the expression "tax due". Prior to 1st June, 2013 there was no provision under the Act to include penalty and interest within the expression "tax due" used in s. 179 of the Act. Thus prior to insertion of the Explanation by the Finance Act, 2013, only the "tax" as defined under s. 2(43) of the Act and found to be due could be recovered under s. 179 of the Act.
The view taken by us as above is also fortified by the decision of Hon''ble Supreme Court in the case of Harshad Shantilal Mehta (supra) in which the definition of ''tax'' under s. 2(43) of the Act was considered with reference to the provisions of s. 11(2)(a) and it was held as under:
Question No. 5--One other connected question remains: Whether ''taxes'' under s. 11(2)(a) would include interest or penalty as well? We are concerned in the present case with penalty and interest under the IT Act. Tax, penalty and interest are different concepts under the IT Act. The definition of ''tax'' under s. 2(43) does not include penalty or interest. Similarly, under s. 156, it is provided that when any tax, interest, penalty, fine or any other sum is payable in consequence of any order passed under this Act, the AO shall serve upon the assessee a notice of demand as prescribed. The provisions for imposition of penalty and interest are distinct from the provisions for imposition of tax. The learned Special Court Judge, after examining various authorities in paras 51 to 70 of his judgment, has come to the conclusion that neither penalty nor interest can be considered as tax under s. 11(2)(a). We agree with the reasoning and conclusion drawn by the Special Court in this connection.
(Emphasis, italicised in print, supplied by us)
In view of the above discussions we hold that any "tax due" for the purposes of s. 179 of the Act would not include penalty and interest for the period prior to insertion of the Explanation in s. 179 by Finance Act, 2013.
Question Nos. 2 and 3:
(2) Whether the petitioner has established that the recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on the part of the petitioner in relation to the affairs of the company?
(3) Whether the CIT has correctly held that the tax dues of the company are liable to be recovered from the petitioner as director for the asst. yr. 1984-85?
In the reply dt. 16th Sept., 2002, submitted to the Asstt. CIT, Circle-2, Muzaffarnagar, the petitioner has clearly stated as under:
In the order dt. 15th March, 2004 the Asstt. CIT while considering the submission of the petitioner for recovery from the assets of the company, observed as under:
The efforts made for recovery of demands in these cases were fruitless. The bank accounts of the company which were attached by the Department had hardly any funds, hence the demands could not be recovered. Further, the latest return of the company reveals a paltry bank balance, hence recovery cannot be made therefrom. Moreover, the business of the company is virtually closed.
For the above reasons the demand in arrears could not be recovered from the company. Accordingly with a view to recover the aforesaid arrear demands from the then directors of the company during the period from 84-85 to 88-89 (to which these demands relate) notices under s. 179 of the Act were issued upon the following directors of the company on different dates by registered post:
Shri Santosh Kumar Garg, B-2/14, Rajouri Garden, New Delhi. The notices under s. 179 were served by registered post.
Smt. Pratibha Garg B-2/14, Rajouri Garden, New Delhi.
Replies of Smt. Pratibha Garg in compliance to the notice under s. 179 of the Act were received. She has stated that the company had appealed before the Tribunal New Delhi against the orders of the CIT(A). Smt. Pratibha Garg had requested for keeping these demands in abeyance till the disposal of the appeal by the Tribunal. It was further stated that Smt. Pratibha Garg does not have any substantial income of her own hence she was in no position to pay these demands she has stated that the demands be recovered from the shares and trade debtors seized from the premises of stated above. It is also noticed that the debtors of the company do not file their return in this circle hence it is not possible to know their financial status. Moreover, if the entire amount of debt owed by them to the company would be far short of the outstanding demand plus interest under s. 220(2).
Therefore, the entire demand of company plus interest under s. 220(2) cannot be recovered from its trade debtors and shares hence the same has to be recovered from its directors.
The Asstt. CIT while passing the order dt. 15th March, 2004 (Annex. 8) has not disbelieved the aforequoted contention of the petitioner. He, however, rejected the reply of the petitioner on the ground that "tax dues" of asst. yr. 1984-85 could not be recovered from the company despite the efforts made, the trade debtors of the company do not file their return in this circle and hence, it is not possible to know their financial status and the entire demand of the company including interest cannot be recovered from its trade debtors and shares and the named directors of the company have not proved that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on the part of the petitioner in relation to the affairs of the company. No effort was made by the Department to recover the tax due of the company from trade debtors and shares so as to assessee (assume) jurisdiction to invoke s. 179 against the petitioner. In the order dt. 29th March, 2007 (Annex. 9) passed on the application of the petitioner under s. 264 of the Act, the CIT, Muzaffarnagar has also neither disbelieved nor rejected the aforenoted contention of the petitioner rather he held that "fact that she was an inactive director has no relevance to the legal position, because s. 179 of the Act places a liability on the directors of the companies without any consideration as to whether the director was active or passive".
The CIT has completely ignored the findings of Asstt. CIT with regard to recovery from the shares seized from the premises and trade debtors. The view of the Asstt. CIT that the debtors of the company had not filed their return in this circle and hence it is not possible to know their financial status, is wholly misconceived. There is no restriction under the Act that such amount cannot be recovered where debtor is not within the territorial jurisdiction of the assessing authority of the assessee in question. The respondents should have inquired and should have made efforts to recover the tax due from the company to the extent possible and merely for the balance amount which could not be recovered from the company, the proceeding could be initiated against the directors in view of s. 179 of the Act.
The other contention of the Department that the grounds raised in the writ petition were not raised before the CIT, is incorrect inasmuch as the CIT has noted in brief the written submission of the petitioner in para 5 of the order as under:
Smt. Pratibha Garg has raised the following points in her application under s. 264 and in her written submission:
(i) The order of the Asstt. CIT under s. 179 dt. 16th March, 2004 was received by her only on 28th Feb., 2006. Thus her application dt. 6th March, 2006 under s. 264 is not barred by limitation.
(ii) She was an inactive director of the company and she had resigned on 26th Oct., 1983.
(iii) Sec. 179 only applies to recovery of tax and does not cover cases of recovery of interest and penalty.
(iv) She was denied opportunity of being heard and the order under s. 179 was passed ex parte and that no notice of hearing received by her.
(v) Taxes can be recovered from the directors only if such recoveries cannot be made from the company.
There cannot be any quarrel to the proposition that tax dues of a private company can be recovered from its directors in the circumstances specified in s. 179 of the Act. Sec. 179 of the Act however cannot be invoked if such a director proves that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on the part of the petitioner in relation to the affairs of the company. In the present set of facts the stand of the petitioner in the reply dt. 16th Sept., 2002 in pursuance to the notice under s. 179 of the Act has not been disputed by the Department rather the CIT has admitted that the petitioner was an inactive director. He however found that the fact that she was an inactive director has no relevance for the purposes of s. 179 of the Act. In our view the admission of the fact that the petitioner was an inactive director and she has not caused any loss to the company. She resigned from directorship of the company on 27th Oct., 1983 i.e. in the middle of the asst. yr. 1984-85. The petitioner has thus proved that non-recovery of the tax due against the company cannot be attributed to any gross neglect, misfeasance or breach of duty on her part in relation to the affairs of the company. Neither the Asstt. CIT nor the CIT have referred to any material nor they have referred to any evidence to indicate any gross neglect, misfeasance or breach of duty on the part of the petitioner in relation to the affairs of the company. In view of this factual position, we are of the view that s. 179 of the Act could not be invoked against the petitioner.
Question No. 4.--In view of the conclusions reached by us in respect of question Nos. 1, 2 and 3, we are of the view that the question of breach of principles of natural justice need not to be answered.
Sri Dhananjay Awasthi has heavily relied the judgment of this Court in the case of Roop Chandra Sharma (supra) and the judgment of Kerala High Court in the case of Alex Cherian (supra) to contend that the tax dues of the company are recoverable from the petitioner. In the case of Roop Chandra Sharma (supra) this Court has held that the directors of a private company though not under liquidation may be liable for the dues which is pending against the company. In the present case, the controversy is different. The stand of the petitioner is different in as much as the petitioner has firstly denied her liability and alternatively her stand is that "tax dues" for the purposes of s, 179 of the Act for the asst. yr. 1984-85 shall not include penalty and interest. The judgment in the case of Alex Cherian (supra) also has no application on the facts of the present case as in that case it was found that the concerned authority has recorded satisfaction that there exists basic ingredients of s. 179 i.e. whether the amount can be recovered from the company or not and whether the non-recovery was because of gross neglect, misfeasance or breach of duty attributable to the director concerned.
In view of the above discussions we set aside the order dt. 9th March, 2007 (Annexure No. 10) as well as the order of attachment dt. 22nd Sept., 2006 (Annexure No. 9A) and restrain the respondent No. 1 from recovering the tax dues of the company from the petitioner. The writ petition succeeds and is hereby allowed with costs.