Whether recovery proceedings can be initiated against an assessee, without passing an order u/s 170(3);

NEW DELHI, DEC 03, 2013: THE issues before the Bench are - Whether recovery proceedings can be initiated against an assessee, without passing an order u/s 170(3); Whether liability to penalty does not arise merely upon proof of default; Whether liability to pay penalty is a liability to pay tax and Whether penalty can be levied on the deceased persons payable on behalf of the assessee. And the writ is allowed partly.

Facts of the case

Assessee, a proprietorship concern had claimed that it had only taken over and acquired rights as a stock broker of DSE Association Limited pursuant to transfer of share certificates by S.C. Mangal in favour of the petitioner. One Sanjay Jain had filed civil suit against S.C. Mangal and his wife. In the said civil suit, an application u/s 151 read with Order XXIII, Rule 3 of the CPC, 1908, was filed. The compromise application recorded that without prejudice to the contentions, S.C. Mangal and his wife had agreed to transfer the brokerage business and attached business as member broker of the DSE Association Limited carried on in the name and style of M/s S.C. Mangal & Co. together with all assets and liabilities of the said business for a consideration of Rs.40 lakhs. S.C. Mangal Co. was sole proprietorship of S.C. Mangal. The application further provided that defendants therein would sign share transfer forms, and any other applications to be given to DSE Association Ltd. for the transfer of said share and brokerage business of S.C. Mangal & Co. together with its assets and liabilities. As and from the date thereof, Sanjay Jain shall be exclusively entitled to all benefits and rights whatsoever attached to the said shares and the said brokerage business. Defendants therein would put Sanjay Jain in possession of all books of accounts, documents, and other assets of S.C. Mangal & Co. in his possession to assist Sanjay Jain in determining the correct and proper liabilities of the said business and also to enable him and his nominees with immediate effect to reopen, start and conduct business. Pursuant to the application, statements of parties were recorded in the Court and a compromise decree was passed. DSE Association Limited was also a party to the suit as defendant. The compromise decree clarified that DSE Association Limited was not a party to the compromise decree and that the question of membership interse would not be binding on the said defendant; the parties to the compromise shall move appropriately in the matter for transfer of membership. Subject to the aforesaid, the application was allowed. Petitioner company was incorporated for carrying on stock brokerage business on the DSE Association Ltd with Sanjay Jain as one of the Directors. On 8th August, 1994, petitioner company filed an application for admission as a corporate member of the said Stock Exchange in the prescribed proforma. Upon completion of formalities, on 6th February, 1995, the application was allowed and the shares originally belonging to S.C. Mangal and his wife were transferred in the name of the petitioner.

Before HC, assessee's counsel had argued that AO had not passed any order u/s 170(3) and without first adjudicating and passing an order under the said section, no recoveries could be made. An order u/s 170(3) was a pre-requisite and was also an appealable order u/s 246 before the CIT(A). The AO had, therefore, erred in initiating or pressing for recoveries of the dues of S.C. Mangal from the petitioner and even rejecting the objections, without first passing an order u/s 170(3). Petitioner was not a successor and the tax liabilities payable by S.C. Mangal cannot be recovered from them. It was also contended that the assessment/penalty order and order u/s 170(3) should be a singular or one order. It was submitted that the assessment order itself should determine and decide the question of succession. An order u/s 170(3) was/is made appealable u/s 246 before the CIT(A). It was not correct to propound and hold that no separate order u/s 170(3) could be passed by an AO. Of course the Act does not bar/prohibit a common order. The petitioner himself had contended and in our opinion rightly that in case an AO feels that any sum payable in respect of income from business or profession which cannot be recovered from the predecessor for the year in which succession took place upto the date of succession or the year preceding it, then the AO shall record a finding to that effect and the sum payable by the predecessor shall thereafter be payable and recoverable from the successor. Successor was, however, entitled to recover from the predecessor any sum so paid. Explanation to section 170(3) was introduced to get over the difficulty and the position in law expounded by the SC in CIT vs. K.H. Chambers (1965) 55 ITR 674. Scope of the Section by a deeming fiction now includes any income or gain arising from the transaction in which succession of business or profession took place. In the present case, it was accepted by the counsel for the Revenue that no order u/s 170(3) had been passed by the AO. It was however, submitted that the petitioner had filed objections and they had been dismissed by a speaking order of the AO after notice for recoveries were served.

Held that,

++ we would not like comment in detail on the contention of the petitioner that they are not successor of S.C. Mangal. Prima facie on reading of the documents of transfer i.e. the compromise application, agreement etc., the said contention does not appear to be correct. But we leave this issue open to be decided by the authorities i.e. the assessing officer when he passes an order under Section 170(3) of the Act. In view of the aforesaid position, it is clear that recovery proceedings cannot be initiated against the petitioner for recovery of the dues under the IT Act without the Assessing Officer first passing an order under Section 170(3). If and when any adverse order is passed by the Assessing Officer, the petitioner herein would be entitled to file an appeal as provided under Section 246. We refrain from delving into the legal issues and contentions of the petitioner on the question of applicability of Section 170(3) or succession as these will have to be debated, considered and examined by the Assessing Officer at the first instance itself and then debated in the appellate proceedings. However, our observations above, or below on the question of nature and character of penalty for concealment under the WT Act, are relevant and to this extent will be binding on the Assessing Officer. In other words, the assessing officer will examine scope and ambit of Section 170(3) and decide whether penalty amount can be recovered from the successor under the said section, though the penalty order is subsequent to the date of succession. This brings us to the second issue regarding recovery proceedings on penalties initiated under the WT Act;

++ it appears that wealth tax liability pursuant to the said order is not subject matter of challenge in the writ petition and possibly the department does not seek to recover the dues from the petitioner herein. At this instance, we notice that the WT Act does not have any para materia or equivalent section as under the IT Act i.e. section 170(3) for recovery of dues of the predecessor from the successor. The contention of the Revenue, however, is that the petitioner had taken over the liabilities payable by S.C. Mangal and, therefore, under the common law recoveries can be made from the petitioner. No decision or ruling, however, has been relied upon to support the said proposition. The aforesaid proposition propounded by the revenue is not acceptable in terms of the ratio expounded by the SC in State of Punjab v. Jullunder Vegetables Syndicate, AIR 1966 SC 1295 and our ratio expounded in decision in Central Excise Act Reference No. 1/2011, Freezair India (P) Ltd. v. CCE, Commissionerate, Delhi-1 (2011-TIOL-117-SC-CX). Moreover and importantly, issue has to be decided against the Revenue as the recoveries sought to be made in the present case are on account of penalty imposed u/s 18(1)(c) of the WT Act, which were passed after/post 12th May,1995 thus the liability was created after the date of transfer. Similar is the position in respect of penalty order under Section 271(1)(c), but the question of recovery has to be decided in terms of Section 170(3). It has been observed that penalty u/s 271(1)(c) or 18(1)(c) is additional tax and partake character of tax but the said principle cannot be expanded beyond reasonable limits and has its limitations. Liability to penalty does not arise merely upon proof of default. Penalty is imposed on failure to carry out the statutory obligation and is normally considered to be quasi criminal in nature though mens rea or contumacious conduct may not be required. There is always an element of discretion as the authorities concerned have to act judiciously and on consideration of all relevant circumstances, decide whether or not to impose penalty. Penalty under the two provisions is not imposed automatically and is not mandatory. To this extent penalty proceedings are distinct from statutory liability of payment of tax which arises or accrues under the charging section and the adjudication proceedings only quantify the liability. Liability to tax is therefore different from the liability to pay penalty under section 18(1)(c) and 271(1)(c) of the WT Act and the IT Act respectively. Obligation and liability to penalty arises, when the penalty order is passed, and not before;

++ in Jain Brothers vs. UOI (1970) 77 ITR 107, SC dealt with legality of levy of penalty under the (1961) IT Act with reference to a return filed under the earlier (1922) IT Act and observed that although penalty was regarded as an additional tax in certain facts and for certain purposes, it was not possible to hold that penalty proceedings were essentially continuation or proceedings relating to assessment where return was filed. Madras High Court in Commissioner of Wealth Tax vs. V. Vardharajan (1980) 122 ITR 1014 has observed that IT Act carries within it a dichotomy of treating the tax and penalty separately. In the said case, the question raised was whether penalty imposed under Section 18(1)(a) of the WT Act could be recovered from the legal heirs. Referring to the then applicable Section including Section 19 of the WT Act, it was observed that legal heirs were not liable as there was no relevant corresponding provision in the WT Act as in Section 159(2)(b) of the IT Act. Reference was made to decision of Andhra Pradesh High Court in Smt. Yawarunnissa Begum Vs. Wealth Tax Officer, A Ward (1975) 100 ITR 645, wherein writ petition under Article 226 of the Constitution was allowed and notice for penalty issued to the legal heirs after the death of the assessee, was set aside. It was observed that the penalty could not be levied on the legal representatives of the deceased assessee for belatedly filing of return by the deceased assessee (There have been statutory amendments w.e.f. 1st April, 1989 but the effect of the said amendments need not be examined in the present decision as we are concerned with the proposition of law);

++ a Division Bench of Delhi High Court in Commissioner of Wealth Tax vs. H.S. Chauhan (2000) 245 ITR 704 again referred to provisions of Sections 14, 15, 17 and 19 of the WT Act as they existed and were applicable for the assessment years 1960-61 to 1971-72. It was held that these provisions have no applicability to proceedings relating to imposition of penalty against the legal representatives. The provisions as existed, penalty under Section 18 did not come under the ambit of Section 19 of the WT Act. It was further held that Section 159 had a clear prescription for continuation of proceedings for imposing penalty against the legal heirs but Section 19 of the WT Act was contextually different from sub-section (2) to Section 159. Jurisprudentially, the person is actionable and responsible for himself, for what he does and not for what others do or for events or acts of others. Family per se or a spouse is not actionable or responsible for other family members and for the spouse. Doctrine of vicarious liability is not of general application and is applied in cases of statutory crimes. (For detailed elucidation refer Central Excise Act. Reference 1/2011 Freezeair India (P) Ltd v. Commissioner of Central Excise Delhi-1)(2011-TIOL-117-SC-CX). Normally, there are specific provisions in the statute which imposes an obligation which are invoked to fasten vicarious liability [see P. N. P. Thulkarunai & Co. Vs. Director, Enforcement Directorate, Finance Ministry (1969) 71 ITR 149 (Mad.)];

++ the Bombay High court in Controller of Estate Duty (Central), Bombay vs. N.H. Kotak (1982) 134 ITR 256, had the occasion to consider the question whether penalty levied under the IT Act on a firm of which the deceased was a partner should be deducted in determining the value of the property passing on the death of the deceased. The debt, it was opined, means a sum of money which was now payable or would become payable in future by reason of a present obligation; debitum in praesenti, solvendum in futuro. Thus, the fact that the amount was to be ascertained does not make it any less a debt if the liability was certain. However, liability qua penalty arises only when an order imposing penalty stands/was passed by the appropriate authority. Until then, there was no liability whatsoever. Thus, liability to pay an amount by way of penalty cannot be equated or compared with tax liability which remains certain, though may be quantified at a later date. Whether or not penalty was to be imposed and the amount of penalty could be only ascertained and accrued for the first time when the penalty order was passed by the appropriate authority. Thus, liability on account of penalty was not a case of liability in praesenti. Such being the nature of liability of penalty, it was not a debt which could be deducted. The aforesaid reasoning would equally be applicable to the liability of penalty under Section 18(i)(c) of the WT Act. The said liability was not in existence on the date of the compromise i.e. 12th May, 1994 and, therefore, it is not recoverable and cannot be fastened and forced upon the petitioner;

++ we express no opinion in that regard, as in the said decisions penalty has been quashed for technical reasons and the Revenue may have preferred appeals. Moreover, in the present writ petition, we are not concerned with the order of penalty but with the recovery of the penalty amount. At this stage, we would like to deal with one contention of the petitioner that respondents should be prohibited and barred from passing any order u/s 170(3) as the demands in question relate to the assessment year 1995-96. We are not inclined to accept the said submission as the petitioner has filed this writ petition which has been pending since 1998. By order dated 11th November, 1999, the respondents 1 and 2 were restrained from making recovery from the petitioner of the demand raised against S.C. Mangal in respect of assessment years 1991-92, 1992-93 and 1995-96, subject to the petitioner furnishing security for the amounts in question to the satisfaction of the Assessing Officer. It was also directed that the order will not preclude the appellate authorities from proceedings with the appeal stated to be pending. The writ petition is accordingly partly allowed. It is directed that the penalty amounts under Section 18(1)(c) of the WT Act relating to assessment years 1991-92 and 1992-93 cannot be recovered from the petitioner. With regard to the income tax demand including penalty for the assessment year 1995-96, relating to S.C. Mangal, it is open to the respondents to initiate recovery proceedings after deciding the dispute by passing an order under Section 170(3) of the Act. While passing an order under Section 170(3), the assessing officer will decide whether penalty amount under Section 271(1)(c) of the IT Act can be recovered from the petitioner, even when the liability was determined subsequent to the date of succession. Petitioner, if aggrieved, by the said order will be entitled to file an appeal and question the same. The writ petition is disposed of.