Sanjay Ghai Vs. Asst. Commissioner of Income Tax & ors.

Judgment of the above noted case bearing Writ Petition (Civil) No. 5175 of 2012 was delivered by division bench of Hon’ble High Court of Delhi comprising of Mr. Justice S. Ravindra Bhat and Mr. R. V. Easwar Singh on 11^th October, 2012.

Question in issue in above said writ petition was whether the words “tax due” as stipulated in section 179(1) of Income Tax Act would include within its ambit other components like interest and penalty?  

In order to arrive at any conclusion, hon’ble court first referred to Section 179(1) of Income Tax Act, as it exists at present, and reads as follows:

“(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.”

Although, the revenue authorities were interested in purposeful interpretation of the words “tax due” in above provision so as to include interest and penalty, but hon’ble court observed that in similar other sections of Income Tax Act itself, the words used are “any sum payable”, “the sum payable”, etc. which carries wider connotation than the words “tax due”. Hence, hon’ble court did not try to give such purposeful interpretation.

Instead, hon’ble court referred to the judgment of the Karnataka High Court in H. Ebrahim vs. The DCIT and The Tax Recovery Officer, [2011] 332 ITR 122 (KAR) relied on by the Petitioner, wherein said High Court held that the phrase tax' as contemplated under Section 179 of the Act does not include penalty and interest insofar as the Directors of the Company are concerned. While holding so, said court relied on Prathibha Processors and Ors. v. Union of India and Ors. reported in(1996)11 SCC 101, which was rendered under the Customs Act but however, the words and phrases "interest", "tax" and "penalty" fell for consideration and the Supreme Court has observed that:

“In fiscal statutes, the import of the words 'tax', Interest', penalty', etc. are well known. They are different concepts. Tax is the amount payable as a result of the charging provision. It is a compulsory exaction of money by a public authority for public purposes, the payment of which is enforced by law. Penalty is ordinarily levied on an assessee for some contumacious conduct or for a deliberate violation of the provisions of the particular statute. Interest is compensatory in character and is imposed on an assessee who has withheld payment of any tax as and when it is due and payable. The levy of interest is geared to actual amount of tax withheld and the extent of the delay in paying the tax on the due date. Essentially, it is compensatory and different from penalty - which is penal in character.”

Hon’ble High court also referred to Harshad Shantilal Mehta v. Custodian (1998) 231 ITR 871 (SC), where in apex court of country hon’ble 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 and answered the same in the negative.

Finally, hon’ble High Court held that it is the amount of “tax” only which can be recovered from the director(s) u/s 179 and no other demand i.e. “interest” or “penalty” can be recovered from director(s) u/s 179 of the Income Tax Act.

Explanation by author of this blog:

The directors as individual may get relief as under section 179 of Income Tax Act, revenue authorities can claim only tax and not penalty & interest from directors of private companies in case of default of such company, but the assessee as contemplated under Section 222 of the Act remains liable to pay all the three components i.e., 'tax' 'interest' and 'penalty' and any other sum due or recoverable from him. Hence, liability of the said company in respect of penalty and interest remains there, however same cannot be recovered from directors personally.