N Surya Prakash Rao, Hyderabad vs Assessee

These two appeals pertain to two Directors of a company against whom, orders have been passed u/s.179(1) of the Income Tax Act (Act) on 31-10-2012 holding assessees jointly and severally liable for taxes :- 2 -: I.T.A. Nos. 1579 & 1580/Hyd/2014 Sri N. Surya Prakash Rao Smt. N. Padmaja

due from M/s.SPR Infrastructure (India) Ltd., in which assessees are Directors. In that order, the company was considered as private company. Later, Assessing Officer passed an order u/s.154 modifying the status of the company to that of public limited company by the order dt.20-03-2013. However, in that order, he went on to hold that even though the company is a public limited company, substantial interest was held by the Directors and therefore by lifting the corporate veil, he held that the Directors are personally liable to pay the taxes which are due and not recoverable from the company M/s.SPR Infrastructure (India) Ltd.,

2. Aggrieved on the above orders, assessees preferred appeals before the Ld. Commissioner of Income Tax(Appeals)-IV, Hyderabad contesting that the orders passed u/s.179(1), as modified by the order u/s.154 is not correct as the provisions do not apply to the Directors of a public limited company. It was also contended that Assessing Officer did not give any reasonable opportunity of being heard before passing either of the orders.

3. Ld.CIT(A) however, held that appeal is not maintainable on the reason that this is an order on which provisions of Section 246A(1)(c) are not applicable. Her order vide para 2 is as under:

"An order u/s.179(1) is not appealable u/s.246A. Though the impugned order in appeal has been passed u/s.154, it does not have 'the effect of enhancing the assessment or reducing the refund' and therefore, does not fall within the ambit of Sec.246A(1)(c). I, therefore, hold that the impugned order is not appealable u/s.246A".

Assessees are in appeal before us.

:- 3 -: I.T.A. Nos. 1579 & 1580/Hyd/2014 Sri N. Surya Prakash Rao Smt. N. Padmaja

4. At the outset, we asked the Ld.Counsel how the appeals are maintainable when there is no provision under the Income Tax Act to make the order u/s.179, an appealable order. The Ld.Counsel filed detailed written submissions which are partly extracted as under:

"4. In this connection the appellant herein prays that the appeal before the Hon'ble ITAT may be adjudicated on merits of the case, in view of the following in which case "justice" is not denied to the appellant.

i. The original order passed u/s 179(1) was itself invalid abinitio, since the provisions of section 179(1) cannot be applied to the company M/ s. SPR Infrastructure (India) Ltd. which, admittedly, is a Public Ltd. company. In the order passed u/s 179(1) dated 31-10-2012, the company viz., M/s SPR Infrastructure (India) Ltd. was considered only as a company in which public are substantially interested where as the Assessing Officer modified the order u/s 179(1) and passed the order u/s 154 dated 20- 03-2013. It is submitted that the question whether a company is a deemed public company or not cannot be a matter of rectification u/s 154. In support of this, the appellant relies on the case law of Rajamoni Ammu (N) v. DCIT (1990) 86 CTR (Ker.) 12.

ii. While invoking the provisions of section 179(1), the Assessing Officer has not acted as per the provisions of the I.T. Act, 1961 as detailed below:

(a) In order to invoke section 179, the primary condition is that the amount should not be recoverable from the company i.e. M/ s SPR Infrastructure (India) Ltd and this condition is not satisfied in the appellant's case. In this connection, the appellant relies on the following case laws:

• Indubhai T.Vasa (HUF) v. ITO [2006] 282 ITR 120 (Guj.) • Arvind Kumar Gupta v. TRO [2005] 276 ITR 373 (All) • Dipak Dutta v. Union of India [2004] 268 ITR 302 (Cal.)

(b) The Assessing Officer is required to give a finding that the amount in arrears is not recoverable from the company :- 4 -: I.T.A. Nos. 1579 & 1580/Hyd/2014 Sri N. Surya Prakash Rao Smt. N. Padmaja

before proceedings against the appellant-director. In this connection, the appellant relies on the case law of

• C. Rajenderan v. ITa [2002] 253 ITR 139 (Mad.)

(c) Without establishing that effective steps for recovery of outstanding dues from the company have been taken, it is not correct on the part of the Assessing Officer to fasten the liability on the directors u/s 179(1) of the Act. in support of this, the appellant relies on the following case laws:

• Amit Suresh Bhatnagar v. ITO [2009] 308 ITR 113 (Guj.) • Indubhai T Vasa (HUF) v. ITO [2006] 282 ITR 120 (Guj.)

iii. No opportunity was given to the appellant herein.

iv. The appellant herein, was prevented from proving himself that non recovery of taxes in the case of the company was not due to gross negligence or misfeasance or breach of duty on his part.

v. The rectifications made in the original order passed u/s 179(1) cannot be considered as "mistakes apparent from record" for the purpose of passing the impugned order u/s

154.

vi. The power conferred by the provisions of section 154 is a power to correct mistake and not a power to review.

vii. The power of rectification u/s 154 cannot be used to cure lapses.

The power u/s 154 is one to correct errors and not perpetration or readjustment of errors.

viii. The power to rectify u/s 154 cannot be utilized to change the status of the assessee from a public limited company to a company in which public are not substantially interested.

ix. The point which is not examined on fact or in law cannot be dealt with as "mistake apparent on record" as held in the case of CIT v. Hero cycles (P) ltd., reported in :- 5 -: I.T.A. Nos. 1579 & 1580/Hyd/2014 Sri N. Surya Prakash Rao Smt. N. Padmaja

[228 ITR 463 (SC)].

5. Prayer: Since the provisions of sec.179(1) are not applicable to M/s SPR Infrastructure (India) Ltd., which is a public Ltd. company, the order passed u/s 179(1) dated 31-10-2012 passed in the appellant's case is null and void. Accordingly, the impugned order u/s 154 dated 20- 03-2013 which has modified the order u/s 179(1) dated 31-10-2012 becomes invalid. It is, therefore, requested your honour to kindly allow the appellant's appeal and cancel the order passed u/s 154 of the Act".

5. Ld.DR however, relied on the orders of the CIT(A) that the order is not an appealable order, therefore, there is no need to consider the present appeals and CIT(A) is correct in dismissing the appeals as not maintainable.

6. We have considered the issue and perused the proceedings and provisions of law. Before adverting the issue, it would be necessary to examine the provisions of Sec 179 of IT Act 1961. Section 179 is as under:

"Section 179: Liability of directors of private company in liquidation.

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 :- 6 -: I.T.A. Nos. 1579 & 1580/Hyd/2014 Sri N. Surya Prakash Rao Smt. N. Padmaja

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.]

[Explanation.--For the purposes of this section, the expression "tax due" includes penalty, interest or any other sum payable under the Act.]"

The Board circular No.179 dt.30-09-1975 also reiterates the same as under:

"17. Section 179 of the Income-tax Act imposes, in certain cases, a personal liability on the directors of a private company in respect of the tax payable by the company. Under this provision, in a case where a private company is wound up on or after 1 st April, 1962, and it is found that any tax assessed on the company, whether before the commencement of the liquidation, or in the course of or after the liquidation, cannot be recovered from the company, then, every person who was a director of the company at any time during the relevant previous year is held jointly and severally responsible for the payment of the tax that cannot be so recovered. A director can escape this vicarious liability if he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part. The Amending Act has enlarged the scope of this provision so as to impose personal liability on the directors of a private company in respect of any tax payable by the company even in cases where the company has not gone into liquidation. Further, 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 from the company, persons who were directors of the company in any such previous year will be jointly and severally responsible for the payment of such un-recovered tax, so, however, that the personal liability of a director in such a case will not extend to the tax payable for any assessment year prior to the assessment year 1962-63".

The provisions are attracted where -

- any tax was due from any such company

- in respect of any income of any previous year during which such company was a private company which cannot be recovered then :- 7 -: I.T.A. Nos. 1579 & 1580/Hyd/2014 Sri N. Surya Prakash Rao Smt. N. Padmaja

- every person who was a Directors of the 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 non-recovery of the tax cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.

The bare perusal of Section 179 shows that before recovery in respect of dues from the private company can be initiated against the Directors, it is necessary for the Revenue to establish that such recovery cannot be made against the private company and then and then alone, it can reach the Directors who are responsible for the conduct of business during the previous year in relation to which liability exists (Bhagwan Das J.Patel V. DCIT [238 ITR 127 (Guj)]). The section cannot be used against the Director while the recovery proceedings against the company are continuing [Gadadhar Dey and Anr. Vs. TRO (96 ITR 543) (Calcutta)].

7. Before holding any Director as vicariously liable for the taxes of a private limited company, the Revenue has to establish that the taxes could not be recovered from the private limited company. The status of company in which the assessees are directors was also accepted as a public limited company. It seems Assessing Officer has not done any such exercise to establish application of Sec.179. However, this is besides the issue. Here we are concerned with the question whether the appeals are maintainable. As there is no provision to make an appeal against the order of the Assessing Officer u/s.179(1), the CIT(A) is correct in dismissing the appeal as not maintainable. We also do not get any jurisdiction to decide the issue on merits, as there is no right of appeal provided under the statute. This forum cannot adjudicate on the :- 8 -: I.T.A. Nos. 1579 & 1580/Hyd/2014 Sri N. Surya Prakash Rao Smt. N. Padmaja

issues either legally or on merits. For these reasons, we are of the opinion that appeals preferred by assessees cannot be maintained.

8. In the case of M.Rajamoni Amma Vs. DCIT [195 ITR 873 (SC)] it was held by Honourable Supreme Court that company being a public limited company, the proceedings against Directors for recovery of the tax due from the company cannot be taken and certainly not proceeded with u/s.179. Article 265 of the Constitution clearly prohibits any attempt to recover taxes except under the authority of law. In case the Revenue proceeds with recovery of taxes of a public limited company from its directors in their personal capacity, then, the option left with assessee is to prefer a writ before the jurisdictional High Court. Assessee is free to take any other legal remedies available, in case the Revenue authorities proceed against assessee for recovery of taxes of a public limited company u/s.179 of the Act.

9. With these observations, the appeals are dismissed as not maintainable.

Order pronounced in open Court on 31st March, 2015.

Sd/- Sd/- (D. MANMOHAN) (B. RAMAKOTAIAH) VICE PRESIDENT ACCOUNTANT MEMBER

Hyderabad, Dated 31st March, 2015

TNMM :- 9 -: I.T.A. Nos. 1579 & 1580/Hyd/2014 Sri N. Surya Prakash Rao Smt. N. Padmaja

Copy to :

1.Sri N. Surya Prakash Rao, C/o. P. Murali & Co., Chartered Accountants, 6-3-655/2/3, 1st Floor, Somajiguda, Hyderabad.

2.Smt. N. Padmaja, C/o. P. Murali & Co., Chartered Accountants, 6-3-655/2/3, 1st Floor, Somajiguda, Hyderabad.

3. Assistant Commissioner of Income Tax, Circle-3(2), Hyderabad.

4. CIT(Appeals)-IV, Hyderabad

4. CIT-III, Hyderabad

5. D.R. ITAT, Hyderabad.