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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 ..... sioner. The Commissioner however, dismissed the appeal whereupon the assessee approached the Income Tax Appellate Tribunal ("the Tribunal" for short). The Tribunal dismissed the assessee's appeal on 23.2.2007 on the ground that the notice of hearing of the appeal when sent to the company, the same was returned with a postal remark "left". 2.3 On 4.12.2002, the Income Tax Officer, Anand, issued a tax demand on the company stating that upon verification 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cisions of this Court to contend that in such a situation recovery against the Director could not be effected. He pointed out that the department had not taken effective steps to recover the dues from the company. He also contended that non recovery of the tax arrears cannot be attributable to any negligence or breach of duty on his part. In this respect, he averred as under : "13. It is submitted that I am the promoter Director of the Company and 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 Even after the closure I have not repaid any of the depositors nor have I withdrawn any funds from the company for my personal use.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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been sold by GSFC for recovery of the loan given. These assets form major part of the assessee's fixed assets and after selling of the above assets by the GSFC, there remain meager assets with the assessee company from which whole recovery of the demand cannot be made by the Department. h. In view of the discussion made in the foregoing paragraphs, it is found that Shri Maganbhai Hansrajbhai Patel, the director the assessee company has 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 secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Tailor v. Tax Recovery Officer and others reported in [2010] 326 ITR 85 (Bom) in which the decision in case of Harshad Mehta (supra) was followed. (3) Counsel submitted that in the present case the authority was even other-wise not justified in seeking recovery of the dues against the petitioner. He contended that there was no negligence much-less, gross negligence on part of the petitioner to which non recovery can be attributed. He submitted 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red, then, nothing contained in sub-section (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.]" 8. Sub-section (1) of section 179 provides for joint and several liability of the directors of a private company wherein the tax due from such company in respect of any income of 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 init ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken strenuous steps to make recovery against the company itself. As noted earlier, as many as 23 different steps were enumerated which included, issuance of recovery notices, of summonses to the directors of the company, of recovery letters to the company and its directors, of attachment of the property and issuance of prohibitory orders. Despite such detailed steps by the department spanning from the year 2001 till the year 2011, no recovery could be made 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 commente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relating to transactions in Securities) Act, 1992 and not in the context of section 179 of the Act. However, the above observations throw much light on the interpretation which we are trying to make. Bombay High Court in case of Dinesh T. Tailor (supra) had occasion to consider the decision in case of Harshad Mehta (supra) in context of the question whether penalty imposed under section 271(1)(c) of the Act can be part of "tax due" under section 179(1) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enge of the levy of interest on the tax for the year 1963-64. Counsel for the petitioner maintained that the Act draws a distinction between tax and interest, as appears from Section 156, that tax does not take in interest and that as Section 179 is silent about interest, the demand for interest is unsustainable. The contention overlooks the petitioner's position and the consequences of his default. It is admitted in the original petition that a 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 (sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 2(28A) of the Act but is in context of interest payable in any manner in respect of any moneys borrowed or debt incurred and has no relation to interest chargeable under various provisions of the Act on tax arrears. We may however, notice that as observed by the Apex Court in case of Harshad Mehta (supra), the Act uses the term 'tax', interest and penalties at various places having different connotations. Section 156 which pertains to 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 purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the last question namely, whether in facts of the case respondent was justified in ordering recovery against the petitioner. In this respect we have noticed that the petitioner before the authority in response to the notice under section 179 of the Act made a detailed representation and contended that he had taken all the steps within his powers. He had not been negligent in his duties. The GSFC had auctioned the property for realisation 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, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issioner 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. It is not the case of the department that the 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. 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 mate ..... X X X X Extracts X X X X X X X X Extracts X X X X
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