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.
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