ORAL JUDGMENT (Per Dr. D.Y Chandrachud, J.)

1. Rule. With the consent of the learned counsel appearing on behalf of the petitioner and the learned counsel appearing on behalf of the Revenue, the petition is taken up for hearing and final disposal. Counsel for the respondents waives service.

2. The petitioner was appointed as an Additional director of a company by the name of Yazad Investment & Finance Private Limited on 2 January 1987. During the period when he was a director, the petitioner signed audited accounts of the company on 30 June 1987 and 30 June 1988. The petitioner resigned as a director of the company on 14 October 1989. Form 32 was filed with the Registrar of Companies notifying that the petitioner ceased to be a director.

3. A demand was raised on the company for assessment year 1990-1991. An assessment order under Section 143(3) was made by the Assistant Commissioner of Income Tax, Central Circle — 30, Mumbai for the company. The Assessing Officer initiated proceedings under Section 179 of the Income Tax Act, 1961 against the petitioner on the ground that though

there was a demand of Rs. 25.64 lakhs against the company for the period between 1990-1991 to 1995-1996, the dues could not be recovered from the company. By an order dated 3 September 2006, the Assessing Officer held the petitioner to be jointly and severally liable under Section 179 for the payment of the tax dues of the company in the aforesaid amount together with interest payable under Section 220(2). A revised order was issued by the Assessing Officer on 11 October 2006 setting out correct details of the tax due from the company. The amount which was claimed from the petitioner as jointly and severally liable under Section 179 was not altered. An attachment has been levied in respect of a residential flat belonging to the petitioner by an order dated 29 November 2006. The petitioner submitted a representation on 19 June 2007, in which he contended that the non recovery of the tax due from the company was not as a result of any neglect, misfeasance or breach of duty on his part. The petitioner sought that the attachment be lifted.

4. The petitioner moved proceedings under Article 226 of the Constitution before this Court on an earlier occasion in order to complain of the attachment and the failure of the Revenue to consider his request for lifting the attachment. By an order of a Division Bench of this Court dated 16 February 2009, the Assessing Officer was directed to consider the representation of the petitioner dated 19 June 2007 and to pass an appropriate order thereon within six weeks and, during the interregnum, the

4 respondents were directed not to take action in respect of the flat which had been attached. The Assessing Officer, in pursuance of the order passed by the Division Bench, passed the impugned order on 24 March 2009, reducing the liability of the petitioner from Rs. 25.64 lakhs to Rs. 12.47 lakhs. The Assessing Officer noted that the petitioner was a director of the company until 14 October 1989, namely during the financial year 1989-1990 relevant to assessment year 1990-1991. The petitioner was held responsible to the extent of the outstanding demand for assessment year 1990-1991 which was quantified at Rs. 12.74 lakhs. According to the Assessing Officer, the petitioner has signed the audited accounts for the year ending on 30 June 1987 and 30 June 1988, which brings forth his association with the financial affairs of the company of which he was a director. The petitioner is stated to have not furnished any additional evidence in support of his request for not being held liable under Section 179. The petitioner has been held to be liable under Section 179 to meet the liability of the company in respect of the penalty imposed under Section 271(1)(c) which, the Assessing Officer has held has a direct linkage with the addition made under Section 143(3), for assessment year 1990-1991.

5. Counsel appearing on behalf of the assessee has assailed the order passed by the Assessing Officer, principally on two grounds: firstly it has been submitted that on a plain reading of Section 179, the petitioner cannot be held liable in respect of the penalty that was imposed on the

5 company under Section 271(1)(c). Reliance is placed on the provisions of Sub-section (1) of Section 179 under which a director of a company is to be jointly and severally liable where any tax due from a private company cannot be recovered. The submission is that the expression “tax due” cannot comprehend a penalty. The statute makes a distinction between a tax and penalty. Secondly, it has been submitted that non recovery of the tax due from the company 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 assessment order that was issued on 31 March 1990 under Section 143(3) made an addition on two counts, namely (i) An addition on account of variation of opening stock at market value in the amount of Rs. 8,71,699/-; and (ii) Interest written back to the extent of Rs. 8,69,594/-. The submission of the petitioner is that both these decisions of the Board of Directors were after the petitioner had ceased to be a director of the company on 14 October 1989 and hence the petitioner cannot be attributed with any conduct in the nature of neglect, misfeasance or breach of duty leading to the non recovery of tax.

6. Sub-section (1) of Section 179 provides that notwithstanding anything contained in the Companies Act, 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

6 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. Sub-section (1) of Section 179 provides for the liability of a director of a private company. Though the marginal note appended to Section 179 speaks of the liability of the directors of a private company in liquidation, it is apparent from a bare reading of the substantive part of the provision that the liability is not restricted to a situation where a private company is in liquidation. In any event, it is a well settled principle of law that a marginal note appended to a section cannot control the plain meaning and ambit of the substantive part of a statutory provision. By subsection (1) of section 179, every person who is a director of a private company at any time during the relevant previous year is jointly and severally liable for the payment of tax due from the company, if such tax cannot be recovered. Though the liability of the directors of a private company for the payment of tax due from the company is made joint and several, the provision is attracted only where tax cannot be recovered from the company. It is only if the tax cannot be recovered from the company that every person who was a director of the company at any time during the relevant previous year becomes jointly and severally liable. The provision however enables a director to establish 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

a company. The burden to establish this must necessarily rest on the director concerned and it is only if the burden is discharged that he / she can be exempted from the liability that is imposed by the provision.

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 1 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.

Section 170 deals with succession to a business otherwise than on death and provides that where a person carrying on any business or profession has been succeeded therein by any other person who continues to carry on that business or profession, the predecessor shall be assessed in respect of the income of the previous year in which the succession took place up to the date of succession. The successor shall be assessed in respect of the income of the previous year after the date of succession. Sub-section (3) of Section 170 provides that when any sum payable under the section in respect of the income of such business or profession for the previous year in which the succession took place up to the date of succession or for a previous year preceding that year, assessed on the predecessor, cannot be recovered from him, the Assessing Officer shall record a finding to that effect and the sum payable by the predecessor shall thereafter be payable by and recoverable from the successor. In Sub-section (3) of Section 170, Parliament has used the expression “any sum payable”

Section 177 deals with an association of persons where the business or profession carried on has been discontinued or where an association is dissolved. In such a case, the Assessing Officer has to make an assessment of the total income, as if no such discontinuance or dissolution had taken place, and all the provisions of this Act, including the provisions with respect to levy of a penalty or any other sum chargeable under the Act are to apply. Sub-section (3) stipulates that every person who was, at the time of such discontinuance or dissolution, a member of an association of persons and a legal representative of any such person who is deceased shall be jointly and severally liable for the amount of tax, penalty or other sum payable. This is a clear indicator of the circumstance that where Parliament intends to impose a liability for the payment of tax, penalty or any other sum payable, specific words to that effect have been used.

In Section 188A, it has been provided that every person who was, during the previous year, a partner of a firm, and the legal representative of any such person who is deceased, shall be jointly and severally liable along with the firm for the amount of tax, penalty or other sum payable by the firm for the assessment year.

Section 189 similarly provides that every person who was at the time of discontinuance or dissolution of a partnership firm as well as a legal representative of any such person who is deceased shall be jointly and

10 severally liable for the amount of tax, penalty or other sum payable in respect of a firm which has been dissolved or whose business has been discontinued.

Section 221(1) provides that where an assessee is in default or is deemed to be in default in making a payment of tax, he shall, in addition to the amount of arrears and the amount of interest payable under sub-section

(2) of section 220, be liable by way of penalty, to pay such amount as the Assessing Officer may direct. Hence, in the case of an assessee in default, Parliament has made a specific provision making such a person liable to pay tax and in addition thereto the amount of interest payable under sub-section

(2) of Section 220 and penalty.

Section 226 which speaks of other modes of recovery provides in clause (x) of sub-section (3) that if a person to whom a notice under this subsection is sent fails to make payment in pursuance thereof to the Assessing Officer or Tax Recovery Officer, he shall be deemed to be an assessee in default in respect of the amount specified in the notice and further proceedings may be taken for the realization of the amount as if it were an arrears of tax due.

10. We have adverted to these provisions of the statute in order to amplify the point that where Parliament has intended to make a specific provision imposing a liability to pay penalty apart from the tax which is due and payable, a specific provision to that effect has been made. Section 179,

11 which falls for interpretation in the present case imposes a joint and several liability upon a director of a private company where tax due from the company cannot be recovered. The expression “tax due” cannot comprehend within the meaning of that expression a liability to pay a penalty that may have been imposed on the company.

11 The question which arises before the Court is not res-integra and is covered by the judgment of the Supreme Court in Harshad Shantilal Mehta v. Custodian1. 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 subsection (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. The Supreme Court observed as follows :

“33. ....... Tax, penalty and interest are different concepts under the Act. The definition of ‘tax’ under section 2(43) does not include penalty or interest. Similarly, under section 157, 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 Assessing Officer shall serve upon the assessee a notice of

1 (1998) 231 ITR 871 (S.C)

demand as prescribed Provisions for imposition of penalty and interest are distinct from the provisions for imposition of tax. Learned Special Court Judge, after examining various authorities in paragraphs 51 to 70 of his Judgment, has come to the conclusion that neither penalty nor interest can be considered as tax under section 11(2)(a). We agree with the reasoning and conclusion drawn by the Special Court in this connection.”

These observations interpreted the Income Tax Act, 1961.

12. In Union of India v. Manik Dattatreya Lotlikar2, a Division Bench of this Court held that the expression “tax” for the purposes of Section 179 would include a penalty (at para 11). The judgment of the Division Bench cannot now be reflective of the correct position in law in view of the judgment of the Supreme Court in Harshad Mehta's case in so far as the aforesaid issue is concerned.

13. The second aspect of the submission which has been urged on behalf of the petitioner is that the non-recovery of the tax 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. In order to consider the submission, both the counsel appearing on behalf of the Revenue and the counsel appearing on behalf of the assessee have adverted to the assessment order that was passed on 31 March 1990 under Section 143(3). There are two aspects of the assessment order, which merit emphasis. The company, which was an assessee had valued its opening stock as on 1 April 1989,

2 (1988) 172 ITR 1 (Bom)

13 relevant to assessment year 1990-1991 at cost. The opening stock of shares was converted from investment to stock in trade. According to the petitioner, this exercise was carried out after he had ceased to be a director of the company on 14 October 1989. The contention of the petitioner is that after his retirement as a director, the other directors of the company valued the closing stock on the basis of market value, which was lower than the cost, leading to a reduction in the profits reported by the company by an amount of Rs. 8,26,216/-. The submission of the petitioner that the conversion from investment to stock in trade took place after his retirement from the company is sought to be supported by placing reliance on the Director's report dated 18 May 1992, which makes a reference to the fact that the company had decided to treat its investments as stock in trade in accordance with the generally accepted practise for investment companies. The second issue on which an addition was made by the Assessing Officer was in respect of a write back of interest in the amount of Rs. 8,69,594/-. Here, the contention of the petitioner is that he was not responsible for the decisions of the Board which led the Assessing Officer to make a write back. The Assessing Officer noted that the assessee company had claimed this as an expenditure which had already been allowed in respect of an earlier previous year.

14. In the present case, we are of the view that the question as to whether the non-recovery of tax from the assessee company was or was not a result of a gross neglect, misfeasance or breach of duty on the part of the

14 petitioner in relation to the affairs of the company ought to have been considered by the Assessing Officer having regard to the submissions which have been urged by the petitioner. This issue would raise a mixed question of law and fact, upon which an adequate determination cannot be found in the order passed by the Assessing Officer.

15. In the circumstances, we are of the view that it would be appropriate and proper for this Court to direct the Assessing Officer to arrive at a fresh determination, considering the observations which have been made in the earlier part of this judgment. In order to facilitate this exercise, we set aside the impugned order passed by the Assessing Officer on 24 March 2009, and direct that the Assessing Officer shall upon remand pass a fresh order after furnishing to the assessee an opportunity of being heard, preferably within a period of three months from today. In the meantime, until a fresh order is passed, the attachment which has been levied shall continue, but the respondents shall not take any action in respect of the flat which has been attached.

16. Rule is made absolute in the aforesaid terms. There shall be no order as to costs.

(J.P Devadhar, J.) (Dr. D.Y Chandrachud, J.)