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HIGH COURT OF GUJARAT
Maganbhai Hansrajbhai Patel
Assistant Commissioner of Income-tax
SPECIAL CIVIL APPLICATION No. 3910 & 4227 of 2012
September 25 & 26, 2012
Akil Kureshi, J.
The petitioner has challenged an order dated 27.2.2012 as at Exh.S to the petition passed by the Assistant Commissioner of Income Tax, Anand under section 179 of the Income Tax Act, 1961 (“the Act” for short).
2. Facts may be noted at the outset :
2.1 The petitioner was one of the two directors of one Agni Briquette Pvt. Ltd. (here-in-after to be referred to as “the said company”). For the assessment year 1997-1998, the said company filed its return of income declaring nil income. Such return was taken in scrutiny by the Assessing Officer. The Assessing Officer framed assessment on 18.2.2000 holding that the said company had income of Rs. 26,55,117/- from undisclosed sources. He also issued a notice for imposing penalty under section 271(1)(c) of the Act.
2.2 The company challenged the order of the Assessing Officer before the Appellate Commissioner. 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.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 further correspondence between the company and the income tax department which is not of much interest to us, except to record that on 29.8.2011 the Tax Recovery Officer even attached personal property of the petitioner namely, his share in an immovable property situated at survey no. 990/4 at Gujarat Saw Mill Compound, Anand.
2.8 On 14.2.2012, the Assistant Commissioner of income tax issued a notice to the petitioner pointing out that as per the records of the assessment year 1997-1998, amount of Rs.20,77,896/- and Rs.11,41,701/- has remained unpaid by the company. Such demand is outstanding since long. No efforts are made to make payments for such demands. It was pointed out that the petitioner was a director during the previous year relevant to the assessment year in which the demand related. He was called upon to state why he should not be personally held liable for payment of demands of the company with interest as per the provisions of section 179 of the Act.
2.9 The petitioner filed a detailed reply dated 21.2.2012 in response to such notice. He contended that the tax department had issued a prohibitory order against the sale of the company’s assets as far back as in August 2001. The department therefore, could have taken necessary action for recovery of the dues. If proper care had been taken, dues of GSFC (in whose favour the company had created a first charge over its immovable properties) could have been recovered and residue could have been sufficient to cover company’s tax dues. The petitioner also contended that he had filed a writ petition before the High Court questioning the action of the GSFC in auctioning the property. Despite the fact that negotiations were going on, GSFC had auctioned the property to recover its dues. The petitioner also contended that requirements of section 179 of the Act were not fulfilled. It cannot be stated that the dues of the company could not be recovered. He relied on decisions 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 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 my individual capacity. The above contention is supported by the following decision :
Jatinder Bhalla & Another v. ITO & Another (268 ITR 266) (DEL) (HC).”
2.10 Rejecting all such contentions of the petitioner, the Assistant Commissioner passed the impugned order on 27.2.2012 under section 179 of the Act. He recorded that various effective steps for recovery of outstanding dues of the company were taken by the department from time to time. He listed as many as 23 such different efforts made, of issuance of recovery notices, of orders of attachment of immovable properties, of summonses issued to the officers of the company and so on. He concluded that inspite of such various steps, the arrears of outstanding demand remained unpaid by the company. He also took into account various contentions of the petitioner raised in his communication dated 21.2.2012. He concluded that the petitioner as a director of the company had failed to prove that non recovery of arrears of outstanding demand cannot be attributed to his gross negligence, misfeasance or breach of duty in relation to the affairs of the company as required under section 179 of the Act. In this respect the discussion in the impugned order reads as under :
“f. In order to recover the demand by auction and sale, the TRO had made reference to the Valuation Officer, Baroda/Ahmedabad for valuation of plot No.614 & 615 at village : Uchchad and plot No. 990/4 at Anand. The at Para-2.3 of the Valuation Report dated 14/10/2003, it is categorically noted by the DVO, Ahmedabad that the defaulter has not submitted any details/documents to his office as called for valuation purpose. Thus there also, there was gross negligence, misfeasance or breach of duty on the part of the assessee company and the director to enable early recovery of the arrears of demand by the Department.
g. The assessee company’s Plot No. 614 & 615 at vilalge Uchchad including building and machineries 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 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 department against the present petitioner, such sale transactions could not be completed, the purchaser Siddhi Earth Infraspace Pvt. Ltd. has filed Special Civil Application No.4227/2012 and prayed for reliefs for lifting the attachment of the said immovable property. Since the prayer of Siddhi Earth Infraspace Pvt. Ltd. is substantially in the nature of consequential relief to the challenge of the director of the company to the order passed by the Assistant Commissioner under section 179 of the Act, we have concentrated principally on such challenge.
4. Drawing our attention to the statutory provisions contained in section 179 of the Act and other applicable provisions, learned counsel Shri J.P. Shah for the petitioner raised following contentions :
(1) That in order to invoke the provisions of section 179 against a director of a private limited company, the department must first establish that tax dues from the company cannot be recovered. He submitted that in the present case such essential and prerequisite fact was not established. In absence of such essential fact, the Assistant Commissioner could not have proceeded against the petitioner under section 179 of the Act.
In support of such contention, counsel relied on decision of this Court in case of Amit Suresh Bhatnagar v. Income-tax officer reported in  308 ITR 113 (Guj.)
(2) Counsel contended that under section 179 of the Act, in any case, what could be recovered from the director of a private limited company is the tax due and not interest or penalty. In the present case, the department has sought to recover not only the principal tax dues but also the interest thereon and the penalty imposed against the company.
In this respect counsel relied on the decision of the Apex Court in case of Harshad Shantilal Mehta v. Custodian and others reported in  231 ITR 871 (SC) . Counsel also relied on decision of Bombay High Court in case of Dinesh T. Tailor v. Tax Recovery Officer and others reported in  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 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 in case of Union of India and others v. Manik Dattatreya Lotlikar reported in 172 ITR 1.
(2) In the decision of Kerala High Court in case of Alex Cherian v. Commissioner of income-tax and others reported in  320 ITR 49 (Ker).
(3) In the decision of Punjab and Haryana High Court in case of S. Hardip Singh Sandhu v. Tax Recovery Officer and another reported in 166 ITR 759.
6. From the submissions made before us following three questions need to be answered :
(1) Whether before seeking recovery of the arrears from the petitioner, the pre-requirement of the department not being able to recover the tax from the company was satisfied?
(2) Whether under section 179 of the Act, it is only the principal dues of tax which can be recovered or the interest thereon and penalties also can be the subject matter of recovery?
(3) In facts of the case, whether the Assistant Commissioner was justified in ordering such recovery against the petitioner?
7. At this stage, we may notice the statutory provisions contained in section 179 of the Act which reads as under :
“179. [(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-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  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  282 ITR 120 (Guj.), following the decision in case of Bhagwandas J. Patel (supra), this Court observed that :
“In these circumstances, it is not possible to accept the stand of the respondent that despite best efforts the taxes due from the Company cannot be recovered. As laid down by this Court the phrase “cannot be recovered” requires the Revenue to establish that such recovery cannot be made against the Company and then and then alone would it be permissible for the Revenue to initiate action against the director or directors responsible for conducting the affairs of the Company during the relevant accounting period. Hence, the prerequisite condition stipulated by Section 179 of the Act remains unfulfilled in context of the facts available on record by virtue of the impugned order as well as the affidavit-in-reply.”
(3) In case of Amit Suresh Bhatnagar (supra) Division Bench upheld the assessee’s challenge to the order under section 179 of the Act making following observations :
“6. Having heard the learned advocates for the parties, it is apparent that the controversy raised in the petitions stands concluded by judgment of this Court. The record reveals that except for accepting the amount paid by the Company from time to time, respondent-authority has not taken any steps to effect recovery from the Company. This High Court in the case of Indubhai T. Vasal (HUF) v. Income-Tax Officer (Supra) has stated that the phrase “cannot be recovered” requires the Revenue to establish that such recovery could not be made against the Company and then and then alone would it be permissible for the Revenue to initiate action against the Director or Directors responsible for conducting the affairs of the Company during the relevant accounting period.”
9. Thus insofar as requirement of law is concerned, there is unanimity of view of this Court. In the present case however, from the impugned order itself we notice that the department had 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 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. . . The word ‘due’ always imports a fixed and settled obligation or liability, but with reference to the time for its payment there is considerable ambiguity in the use of the term, the precise signification being determined in each case from the context.” (underlining ours) Jowitt’s Dictionary of English Law Vol. I, 2nd Edn. at page 669 defines ‘due’ as, “anything owing, that which one contracts to pay or perform to another. . . As applied to a sum of money, ‘due’ means either that it is owing or that it is payable; in other words, it may mean that the debt is payable at once or at a future time. It is a question of construction which of these two meanings the word ‘ due’ has in a given case….”
“”Tax due” usually refers to an ascertained liability. However, the meaning of the words ‘taxes due’ will ultimately depend upon the context in which these words are used.
In the present case, the words ‘taxes due’ occur in a section dealing with distribution of property. At this stage the taxes ‘due’ have to be actually paid out. Therefore, the phrase ‘taxes due’ cannot refer merely to a liability created by the charging section to pay the tax under the relevant law. It must refer to an ascertained liability for payment of taxes quantified in accordance with law. In other word, taxes as assessed which are presently payable by the notified person are taxes which have to be taken into account under Section 11(2)(a) while distributing the property of the notified person. Taxes which are not legally assessed or assessments which have not become final and binding on the assessee, are not covered under Section 11(2) (a) because unless it is an ascertained’ and quantified liability, disbursement cannot be made. In the context of Section 11(2), therefore, “the taxes due” refer to “taxes as finally assessed”.”
11. We are conscious that such interpretation was rendered in the background of the Special Court (Trial of offences 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 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 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 section 115WA;”
9. In several provisions of the Act, a distinction has been made by Parliament between a tax and a penalty.
16 The question which arises before the Court is not resintegra and is covered by the judgment of the Supreme Court in Harshad Shantilal Mehta v. Custodianl. The Supreme Court considered the provisions of Section 11(2) (a) of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992, under which, inter alia, all revenues taxes, cesses and rates due from persons notified by the custodian under sub-section (2) of section 3 to the Central Government or to any State Government or local authority have to be paid or discharged in full. The Supreme Court considered as to whether the expression “tax” under section 11(2) (a) would include interest or penalty under the Income-tax Act, 1961. This question was answered in the negative.”
12. We are not unmindful of the fact that before the decision of the Apex Court in case of Harshad Mehta (supra), Bombay High Court in case of Manik Dattatreya Lotlikar (supra) had held that the term ‘tax due’ under section 179(1) of the Act would include interest and penalties also. We may also notice that Kerala High Court in case of Ratanlall Murarka and others v. Income tax Officer, “A” Ward, Companies Circle, Ernakulam, and others reported in  130 ITR 797 (Ker) had taken a similar view making following observations :
“The only other question in the case relates to the petitioner’s challenge 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 (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 Harshad Mehta (supra) had an occasion to interpret the term ‘tax due’. It was noticed that the Act uses the terms the tax, interest and penalty differently. Ratio of the decision of the Apex Court in case of Harshad Mehta (supra) was applied by the Bombay High Court in case of Dinesh T. Tailor (supra). Additionally, Bombay High Court also gave its own interpretation to the statutory provisions contained in the Act and held that for the purpose of section 179(1) of the Act, term “tax due’ would not include the penalty.
15. We may add that section 179(1) of the Act permits recovery of tax dues of any private company from its Directors under certain circumstances. Such circumstances being that such tax cannot be recovered from the company and unless the Director proves that the non recovery cannot be attributed to gross negligence, misfeasance or breach of duty on his part in relation to the affairs of the company. Section 179(1) of the Act thus statutorily provides for lifting of corporate veil under given set of circumstances. The liability of tax dues which is basically fastened on the company, is permitted to be recovered from its Director in case of private company, provided the conditions set out in said section noted above are fulfilled.
16. In section 179 of the Act, term used is “tax due”. Section 2(43) of the Act defines tax and reads as under :
“(43) ‘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 tot he 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 section 115WA.”
17. Term ‘penalty’ has not been defined. Term ‘interest’ is defined in section 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 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 any order under the Act. Section 220 of the Act pertains to “when tax payable and when assessee deemed to be in default”. Section 220(1) provides for time limit for payment of amount otherwise than advance tax specified in notice demand under section 156. Section 220(2) provides that if the amount so specified is not paid within such time, the assessee shall be liable to pay interest. Such interest thus would be on the entire sum payable which may include the tax, interest and penalty or any other source found payable. It would therefore, not be possible to stretch the language of section 179(1) of the Act to include interest and penalty also in the expression ‘tax due’.
19. In case of Ratanlall Murarka and others (supra), as already noted, Kerala High Court did hold that under section 179 of the Act not only the tax dues but also interest can be recovered from the director of a public company. This was on the basis that according to the Court, the company was liable for interest under section 220(2) of the Act. The liability of the Director would be co-extensive with that of the company and that would make the director an assessee within section 2(7) of the Act. To our mind, the liability of the director to pay the dues of the company arises in terms of section 179(1) of the Act and such liability would be co-extensive as provided in the said provision which as we notice refers to tax dues. 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.
20. This brings us to 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, 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, any person who was a director of such a company at the relevant time would be liable to pay such dues. However, such liability can be avoided if he proves that the non recovery cannot be attributed to the three factors mentioned above. Thus the responsibility to establish such facts are on the director. However, once the director places before the authority his reasons why it should be held that non recovery cannot be attributed to any of the the three factors, the authority would have to examine such grounds and come to a conclusion in this respect. Significantly, the question of lack of gross negligence, misfeasance or breach of duty on part of the director is to be viewed in the context of non recovery of the tax dues of the company. In other words, as long as the director establishes that the non recovery of the tax cannot be attributed to his gross neglect, etc., his liability under section 179(1) of the Act would not arise. Here again the legislature advisedly used the word gross neglect and not a mere neglect on his part. The entire focus and discussion of the Assistant Commissioner in the impugned order is with respect to the petitioner’s neglect in functioning of the company when the company was functional. Nothing came to be stated by him regarding the gross negligence on part of the petitioner due to which the tax dues from the company could not be recovered. In absence of any such consideration, the Assistant Commissioner could not have ordered recovery of dues of the company from the director. We would clarify that in the present case the petitioner had putforth a strong representation to the proposal of recovery of tax from him under section 179 of the Act. 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. 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 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 are disposed of. Rule made absolute.