HIGH COURT OF DELHI
Sanjay Ghai
versus
Assistant Commissioner of Income-tax
W.P.(C) Nos. 2303 & 5175 OF 2012
AND C.M. APPL. Nos. 4936 & 10572 OF 2012
OCTOBER 11, 2012
ORDER
S. Ravindra Bhat, J.
These writ petitions challenge the orders dated 3.11.2011 and 2.7.2012 passed by the first respondent under Sections 179/154/ of the Income Tax Act (the “Act”) respectively.
2. The facts, to the extent necessary for the deciding the petitions, are that the petitioner is an individual and was a director of M/s Sarvodaya Realtors Pvt. Ltd (the “Company”), which has its registered office at New Delhi. The only other director of the company was late Shri D.K. Ghai, the petitioner’s father. While the petitioner was assessed by DCIT Circle-1, Dehradun, the company was assessed with the first Respondent. By letter dated 15.3.2010, the petitioner was informed by DCIT Circle-1, Dehradun that he was entitled to tax refund of Rs. 38,92,957/- and Rs. 15,00,276/- in respect of A.Y. 1999-2000 and 2003-2004. However, at the same time, he was intimated that the first Respondent had computed the outstanding tax liability of the company at Rs. 28,71,84,883/-, and proposed that the refund payable to the petitioner, be set off with the tax liability of the company. The writ Petitioner wrote a letter to the ACIT, Dehradun, on 23rd March, 2010, and inspected the record in Delhi; he claims that at this stage, he became aware of the Income tax liabilities of the company, and the order made against him on 14th November, 2007, under Section 179 of the Act. The petitioner felt aggrieved by the order and the move to recover the arrears of the company’s taxes and related liabilities, from him. He preferred a writ petition before this Court. That petition was disposed of in the following terms:
“5. We have examined the said contentions. We have also looked at the quantum of demand and the legal issues raised by the petitioner. Keeping in view the aspects and questions raised, we feel that it will be appropriate and proper if the petitioner is given a hearing, and a fresh order under Section 179 of the Act is passed. There is a dispute regarding service of notice dated 27th September, 2007. The respondent in the counter affidavit has stated that Abhay Singh had informed that the petitioner was out of station and intimation may be sent to him by writing to him another letter. However, the respondent did not communicate or correspond with the petitioner thereafter. It may be noted that the notice was received by Abhay Singh on 11th October, 2007 at 12.30 pm and hearing was fixed on 15th October, 2007, i.e. just four days later. Therefore, no communication was made by the respondent to the petitioner fixing the hearing or calling for reply. On 14th November, 2007 order under Section 179 was passed. It is not clear and there is no material/evidence whether the order under Section 179 of the Act dated 14th November, 2007 was ever served on the petitioner. No steps for recovery were undertaken even after passing of the order. Keeping in view the aspects and questions raised, we feel that it will be appropriate and proper if the petitioner is given a hearing and a fresh order under Section 179 of the Act is passed.
6. Accordingly, the impugned order dated 14th November, 2007 is set aside with a direction that the petitioner or his authorized representative will appear before the Deputy Commissioner of Income Tax, Circle 7(1), New Delhi on 29th August, 2011 at 2 p.m. He shall also file his reply to the notice under Section 179 of the Act on the said date. If required and necessary, the Assessing Officer can grant further opportunity of hearing to the petitioner. However, the proceedings under Section 179 of the Act will be disposed of within three months from the first date of hearing.”
3. After the conclusion of the proceedings before the first Respondent, he made the impugned order dated 3.11.2011 holding the petitioner liable for the outstanding dues of Rs. 27,93,05,184/- of the company. It was held that the petitioner had not proved how he, the lone surviving director of the company, should not be treated as the assessee in default, and the whole amount should not be recovered from him in accordance with the provisions of Section 179(1) of the Act; furthermore, it was held that he was unable to show that the non-recovery of taxes cannot be attributed to gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.
4. The Petitioner filed an application for rectification/amendment under section 154/155 of the Act. In these proceedings, the first Respondent, by the second impugned order dated 2.7.2012, enhanced the outstanding dues of the company, and consequently, of the petitioner to Rs. 35,13,35,804/-. The increase was on account of interest due under section 234A and section 234B, and penalty leviable under section 271(1)(b)/(c) of the Act.
5. The petitioner contends that the outstanding dues of the company were in the form of interest and penalties. He contended that “tax due” under Section 179 does not include within its ambit interest and penalty. It is submitted that the language of the provision is clear, and has to be construed in its terms; the Act makes a clear distinction between taxes, penalties and interest, which are distinct liabilities. Learned counsel relied on the definition of “tax” under Section 2(43) of the Act. Further, reliance was placed on the decision of the Bombay High Court in Dinesh T. Tailor v. Tax Recovery Officer [2010] 326 ITR 85 (Bom.), H. Ebrahim & Ors. v. Dy. CIT & Anr. [2011] 332 ITR 122 (Karn.), Harshad Shantilal Mehta v. Custodian [1998] 231 ITR 871 (SC) and Pratibha Processors v. Union of India, [1996] 11 SC 101.
6. Ms. Rashmi Chopra, counsel for the revenue, on the other hand, urged that a purposive interpretation of Section 179 has to be adopted. It was urged that Section 179 is intended to shift the tax liability, in cases of such dues which are of a private company and have not been recovered, upon the directors of such private company, and that whatever is recoverable from the private company, inclusive of interest and penalties due, becomes recoverable at the hands of the directors. Every director, she pointed out, is jointly and severally liable, to pay all the dues, including penalties, and interest, unless it is proved that the non-recovery was not due to gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company. It was emphasized that in the present case, the company had only two directors, the petitioner, and his late father, and thus, there is no scope for the petitioner to escape the liability under Section 179 of the Act.
7. Counsel for the revenue relied on Union of India and others v. Manik Dattatreya Lotlikar 1988 172 ITR 1 (Bom.) and the Kerala High Court in Ratanlall Murarka and Ors. v. Income-tax Officer, “A” Ward and Ors., [1981] 130 ITR 797 (Ker.) in support of the proposition that all tax arrears would be payable by a director, under Section 179(1). It was also argued that a question of fact cannot be agitated in a writ petition and that whether the director, against whom proceedings for recovery of arrears of tax are initiated, has discharged the burden of proving that the non-recovery of the arrears of tax cannot be attributed to neglect, misfeasance or breach of duty on his part is a question of fact which should not be gone into in writ proceedings. The revenue relied on Union of India v. Praveen D. Desai [1988] 173 ITR 303 (Bom.), Sunderaraman (M.R.) v. CIT [1995] 215 ITR 9 (Mad.), and Roop Chandra Sharma v. DCIT (Assessment) [1998] 229 ITR 570 (All.). It was, lastly, contended that Section 179 enacts a statutory presumption and places the burden on the director to prove that the non-recovery was not due to his gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company. For this, reliance is placed on Sunderaraman (M.R.) v. CIT [1995] 215 ITR 9 (Mad.) and the Gujarat High Court view in Indubhat T. Vasa (HUF) v. ITO [2006] 282 ITR 120 (Guj.).
8. The principal question which has to be resolved by the Court in this case is the true ambit and scope of the provisions of Section 179. Section 179(1), as it exists at present, reads as:
“(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.”
This provision, prior to its amendment, read as under:
“179. Notwithstanding anything contained in the companies Act, 1956 (1 of 1956), when any private company is wound up after the commencement of this Act, and any tax assessed on the company, whether before or in the course of or after its liquidation, in respect of any income of any previous year 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.”
9. Section 2 (43) defines “tax”:
“2. In this Act, unless the context otherwise requires, –
