* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ Writ Petition (Civil) No. 6531/1998
Reserved on: 3rd October, 2013
% Date of Decision: 20th November, 2013
MOONGIPA SECURITIES LIMITED ....Petitioner
Through Mr. Salil Aggarwal, Advocate.
Versus
ASSISTANT COMMISIONER OF INCOME TAX &
WEALTH TAX ...Respondent
Through Mr. Anmol Sinha, Sr. Standing Counsel.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE SANJEEV SACHDEVA
SANJIV KHANNA, J.
Impugned notices/ communications/penalty orders passed by
Assistant Income Tax Commissioner, Circle 7(4), New Delhi, direct
Moongipa Securities Ltd, the petitioner to pay liabilities and dues of
S.C. Mangal, (respondent No. 3, herein) under the Income Tax Act,
1961 (IT Act, for short) and Wealth Tax Act, 1957 (WT Act, for
short). The petitioner disputes their liability to pay dues of the third
respondent. The said respondent has not entered appearance and as
per the facts pleaded, has migrated to United States of America.
2. The details of the dues claimed from the petitioner relating to
and due and payable by S.C. Mangal are as under:-
Assessment Statute Order dated On Account Amount (Rs)
Year of
1995-96 Income Tax 30th March, Tax Demand 7,99,430
Act 1998 and penalty Plus penalty
th
30 September,
1998
Writ Petition (C) 6531/1998 Page 1 of 15
1991-92 Wealth Tax 25th March, Penalty 1,12,875
Act Section 1998
18(1)(c)
1992-93 Wealth Tax 25th March, Penalty 1,79,950
Act Section 1998
18(1)(c)
3. Revenue claim that they are entitled to recover said dues under
I.T. Act and W.T. Act, payable by S.C. Mangal from the petitioner as
the successor who has taken over the assets and liabilities of S.C.
Mangal.
4. Contention of the petitioner is to the contrary and it is
submitted that the petitioner had only taken over and acquired rights
as a stock broker of Delhi Stock Exchange Association Limited
pursuant to transfer of share certificates by S.C. Mangal in favour of
the petitioner.
5. In order to decide the said contentions, necessary facts in brief
may be noticed. One Sanjay Jain had filed civil suit No. 1950/1992
against S.C. Mangal and his wife. In the said civil suit, an application
under Section 151 read with Order XXIII, Rule 3 of the Code of Civil
Procedure, 1908, was filed. The compromise application records that
without prejudice to the contentions, the defendants therein S.C.
Mangal and his wife had agreed to transfer the brokerage business
and attached business as member broker of the Delhi Stock Exchange
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
Writ Petition (C) 6531/1998 Page 2 of 15
that defendants therein would sign share transfer forms, and any other
applications to be given to Delhi Stock Exchange 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. Paragraph (e) of the said compromise and the said
application reads as under:-
e. The plaintiff shall be exclusively responsible
to pay and discharge all proper liabilities of the said
brokerage business conducted under the name and
style of S.C. Mangal & Company.
6. Pursuant to the application, statements of parties were recorded
in the Court and a compromise decree dated 12th May, 1994 was
passed. Delhi Stock Exchange Association Limited was also a party
to the suit as defendant No. 4. The compromise decree clarified that
Delhi Stock Exchange 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
and clause (e) became part of the binding decree, to which Sanjay
Jain was a party.
Writ Petition (C) 6531/1998 Page 3 of 15
7. The petitioner company was incorporated on 18th March, 1994
for carrying on stock brokerage business on the Delhi Stock
Exchange 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.
8. Contentions raised on behalf of the petitioner are required to be
stated in seriatim:
(1) The Assessing Officer had not passed any order under Section
170(3) of the IT Act and without first adjudicating and passing an
order under the said section, no recoveries could be made. An order
under Section 170(3) of the IT Act was a pre-requisite and was also
an appealable order under Section 246 of the IT Act before the
Commissioner of Income Tax (Appeals). The Assessing Officer 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 under Section 170(3) of the IT Act.
(2) The petitioner was not a successor and the tax liabilities
payable by S.C. Mangal cannot be recovered from them for the
following reasons:
(a) The petitioner had taken over and bought the trade and had
agreed to pay the liabilities relating to trade and not personal
liabilities of S.C. Mangal. Tax liabilities were personal liabilities. In
Writ Petition (C) 6531/1998 Page 4 of 15
alternative, the liabilities of S.C. Mangal were quantified at Rs.30
lakhs and the petitioner was not liable to pay any tax beyond the said
sum.
(b) There was time gap or difference between the date of decree
and when the petitioner had taken over the business of S.C. Mangal &
Co. The share in the Delhi Stock Exchange Association Limited was
transferred in the name of the petitioner on 6 th February, 1995 and
thereafter Security and Exchange Control Board of India granted
certificate of registration to the petitioner under Section 12 of the
Securities and Exchange Board of India Act, 1992 and Regulation 6
of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 on 16th
May, 1995. Subsequently, Delhi Stock Exchange Association
Limited granted corporate permission to the petitioner on 25th May,
1995 under a different code. Thus, there was no succession of
business.
(c) Liabilities created by the penalty orders under Section
271(1)(b) and (c) of the IT Act cannot be recovered from the
petitioner as the penalty orders were passed against S.C. Mangal in
his personal capacity and for personal lapses, after the compromise
decree dated 12th May, 1995 and even after the petitioner was granted
corporate membership on 25th May, 1995. The penalty orders under
the IT Act were received on 5th October, 1998.
(d) There was no provision in the WT Act for recovery of dues
from a successor. There was/is no equivalent provision or Section
like Section 170(3) of the IT Act, in the WT Act.
Writ Petition (C) 6531/1998 Page 5 of 15
(e) Penalty under Section 18(1)(c) of the WT Act was personal.
Lapses or defaults were on the part of S.C. Mangal. Said penalty
orders were received on 5th October, 1998 i.e. after the compromise
decree dated 12th May, 1994 and 25th May, 1995, when the petitioner
was granted corporate permission by Delhi Stock Exchange
Association Ltd. Even if the penalty pertains to assessment years
1991-92 and 1992-93, the said liability cannot be recovered from the
petitioner, assuming that the petitioner was/is a successor.
9. Simultaneously, we note and rejected the supplementary
contention raised by the petitioner that the assessment/penalty order
and order under Section 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. Reliance was placed on sub-
section (1) and (2) to Section 170. For convenience, we reproduce
sub-section (3) to Section 170 along with explanation to the said
Section which is applicable and the same reads:-
"Succession to business otherwise than on death.
170. ..........
(3) When any sum payable under this 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 the 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, and the successor shall
be entitled to recover from the predecessor any sum so
paid.
.............
Writ Petition (C) 6531/1998 Page 6 of 15
Explanation.--For the purposes of this section,
"income" includes any gain accruing from the transfer,
in any manner whatsoever, of the business or profession
as a result of the succession.
The contention has to be noted and rejected, as it is clearly self-
contradictory to contention No. 1 raised by the petitioner above. Sub-
section (3) to Section 170 mandates and stipulates a specific order
before an Assessing Officer proceeds under the said provision. This
clearly indicates and stipulates contrary to the contention of the
petitioner that the issue of succession must be dealt with and
examined in the assessment or penalty order or the assessment or
penalty order itself must decide whether Section 170(3) of the IT Act
is applicable. An order under Section 170(3) was/is made appealable
under Section 246 of the IT Act before the Commissioner of Income
Tax (Appeals). It is not correct to propound and hold that no separate
order under Section 170(3) could be passed by an Assessing Officer.
Of course the Act does not bar/prohibit a common order.
10. The petitioner himself has contended and in our opinion rightly
that in case an Assessing Officer 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 Assessing
Officer shall record a finding to that effect and the sum payable by
the predecessor shall thereafter be payable and recoverable from the
successor. Successor is, 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 Supreme Court in CIT vs. K.H. Chambers (1965)
Writ Petition (C) 6531/1998 Page 7 of 15
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. Under the Income Tax Act,
1922, income or gain as a result of transaction resulting in succession
was personal liability of the predecessor alone and could not be
recovered from the successor. The explanation by deeming fiction
now stipulates to the contrary.
11. In the present case, it was accepted by the counsel for the
Revenue that no order under Section 170(3) has been passed by the
Assessing Officer. It was however, submitted that the petitioner had
filed objections and they have been dismissed by a speaking order of
the Assessing Officer after notice for recoveries were served. Our
attention was drawn to letter dated 31st August, 1998 written by the
Asstt Commissioner of Income Tax and Wealth Tax to the petitioner
rejecting the contention that the petitioner was not liable to pay the
liabilities as untenable and holding that the liability was on account of
business of S.C. Mangal. The said letter is not in the form of an order
and on reading the said letter no one can assume that this was an
order under Section 170(3) of the IT Act.
12. 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.
Writ Petition (C) 6531/1998 Page 8 of 15
13. 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) of the IT Act. 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 of the IT
Act. We refrain from delving into the legal issues and contentions of
the petitioner on the question of applicability of Section 170(3) of the
IT Act 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) of the IT Act
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.
14. The penalty order under Section 18(1)(c) of the WT Act, was
passed as noticed above sometime in the end of September/October
1999 (penalty order is undated but the petitioner claim that they
received the penalty order on 5th October, 1998). The penalty order,
it appears, refers to assessment proceedings under Section 16(5) of
the WT Act which concluded on 20th March, 1998. It appears that
wealth tax liability pursuant to the said order is not subject matter of
Writ Petition (C) 6531/1998 Page 9 of 15
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) of the IT
Act 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 Supreme Court
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. Commissioner of
Central Excise, Commissionerate, Delhi-1. 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 under Section 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) of the IT Act, but the question of recovery
has to be decided in terms of Section 170(3) of the IT Act.
15. It has been observed that penalty under Section 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
Writ Petition (C) 6531/1998 Page 10 of 15
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.
16. In Jain Brothers vs. UOI (1970) 77 ITR 107, the Supreme
Court 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
Writ Petition (C) 6531/1998 Page 11 of 15
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).
17. 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 of the IT Act 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 of the IT Act.
18. 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
Writ Petition (C) 6531/1998 Page 12 of 15
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). 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.)].
19. 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
Writ Petition (C) 6531/1998 Page 13 of 15
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.
20. During the course of hearing, learned counsel for the petitioner
has produced before us copies of two orders dated 27 th August, 2013
passed by the Commissioner (Appeals) deleting penalties imposed
under Section 18(1)(c) and 271(1)(c) in respect of assessment years
1991-92 and 1992-93 for penalty proceedings under the WT Act and
assessment years 1995-96 for penalty proceedings under the IT Act.
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.
21. 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 under Section 170(3) of the IT Act 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 11 th
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
Writ Petition (C) 6531/1998 Page 14 of 15
directed that the order will not preclude the appellate authorities from
proceedings with the appeal stated to be pending.
22. 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. No
costs.
(SANJIV KHANNA)
JUDGE
(SANJEEV SACHDEVA)
JUDGE
NOVEMBER 20th, 2013
kkb
Writ Petition (C) 6531/1998 Page 15 of 15
|
