Court upholds alternative remedy for tax dispute, closes writ petition

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Case Name:

Dr. Atul Magan Vs Deputy Commissioner of Income Tax (High Court of Uttarakhand)

Writ Petition (M/S) No. 3271 of 2016 

Date: 7th December 2016

Key Takeaways:

1. The court emphasized the importance of exhausting alternative remedies before filing a writ petition.

2. Section 179 of the Income Tax Act's applicability to public limited companies was questioned.

3. The court highlighted the availability of revision under Section 264 of the Income Tax Act as an alternative remedy.

Issue: 

Is a writ petition maintainable when an alternative remedy under Section 264 of the Income Tax Act is available to challenge the applicability of Section 179 in recovering tax dues from a former director of a public limited company?

Facts:

Let's break down the key facts of this case in a conversational manner:

1. Dr. Atul Magan was one of the directors of Yogi Pharmacy Ltd., which was incorporated on July 2, 1986, as a private limited company. 

2. The company later transformed into a public limited company on May 22, 1992. 

3. On February 26, 1997, a search and seizure operation was conducted on the Yogi Group of Companies, including Yogi Pharmacy Ltd. 

4. Following this, a block assessment order was passed on February 26, 1999, assessing the company's income at ₹6,41,24,395 for the block period from April 1, 1986, to February 26, 1997. 

5. The company appealed against this assessment, and the Commissioner of Income Tax (Appeals) partially allowed the appeal, reducing the tax liability by ₹27,91,441 and directing reassessment of ₹3,66,56,822. 

6. On November 6, 2008, the company went into liquidation following a court order. 

7. Dr. Magan ceased to be a director of Yogi Pharmacy Ltd. in 1999. 

8. On June 19, 2015, Dr. Magan received a notice under Section 179(1) of the Income Tax Act, asking him to show cause why a demand of ₹8.49 crores shouldn't be recovered from him. 

9. Dr. Magan responded on July 8, 2015, arguing that Section 179 doesn't apply to public limited companies. 

10. Despite this, on August 20, 2016, the Deputy Commissioner of Income Tax ordered Dr. Magan to pay ₹8.49 crores. 

11. Dr. Magan then filed this writ petition to challenge the order. 

Arguments:

Petitioner (Dr. Atul Magan):

1. Section 179 of the Income Tax Act applies only to private limited companies in liquidation, not public limited companies like Yogi Pharmacy Ltd.

2. Dr. Magan ceased to be a director in 1999 and had no communication with tax authorities after the company went into liquidation.

3. The tax demand of ₹8.49 crores was illegally shown as outstanding despite the CIT (Appeals) order dated March 31, 2006.

Respondent (Deputy Commissioner of Income Tax):

1. The writ petition is not maintainable as the petitioner has an alternative remedy under Section 264 of the Income Tax Act.

2. The search was conducted in 1997, and the block assessment covered the period 1986-97, during which the company was both a private and public limited company at different times.

Key Legal Precedents:

The judgment doesn't explicitly mention any specific legal precedents. However, it does refer to the following sections of the Income Tax Act:

1. Section 179: Dealing with the liability of directors of private companies in liquidation

2. Section 264: Providing for revision of orders by the Commissioner

Judgement:

The High Court closed the writ petition with the following observations:

1. The court agreed that the petitioner has an alternative remedy available in the form of filing a revision before the Commissioner under Section 264 of the Income Tax Act. 

2. The court noted that the plea regarding the non-applicability of Section 179 to the petitioner's case can be raised before the revisional authority. 

3. The writ petition was closed with liberty granted to the petitioner to avail the appropriate remedy under the law. 

FAQs:

1. Q: Why did the court close the writ petition?

  A: The court closed the writ petition because an alternative remedy was available to the petitioner under Section 264 of the Income Tax Act.

2. Q: Can Dr. Magan still challenge the tax demand?

  A: Yes, Dr. Magan can challenge the tax demand by filing a revision before the Commissioner under Section 264 of the Income Tax Act.

3. Q: What is the significance of Section 179 in this case?

  A: Section 179 deals with the liability of directors of private companies in liquidation. The applicability of this section to a public limited company was a key point of contention in this case.

4. Q: Does this judgment decide on the applicability of Section 179 to public limited companies?

  A: No, the judgment doesn't decide on this issue. It suggests that this argument can be raised before the revisional authority.

5. Q: What's the main takeaway from this judgment?

  A: The main takeaway is the importance of exhausting alternative remedies provided by law before approaching the High Court with a writ petition.

Petitioner has approached this Court seeking the following relief:

“(i) A writ order or direction in the nature of certiorari calling for the records and quashing the order/letter dated 20-08-2015 passed by Ld. Dy. Commissioner of Income Tax-Circle, Haridwar under Section 179 of the Act (ANNEXURE NO.-1)”.

2. Briefly put, the case of the petitioner is as follows:

Petitioner was one of the Directors of company, namely, Yogi Pharmacy Ltd. On 02.07.1986, the said company was incorporated under the provisions of Companies Act, 1956, as a Private Ltd. Company. It was converted into Public Ltd. Company on 22.05.1992. A search and seizure operation was carried out on 26.02.1997 in Yogi Group of Companies, including Yogi Pharmacy Ltd. Consequent thereto, assessments order under Section 158BC read with Section 143(3) dated 26.02.1999 was passed. According to the block assessment order, the company was assessed at an income of `6,41,24,395/- for the block period 01.04.1986 to 26.02.1997 by making various additions and disallowances. The said company preferred an appeal against the aforesaid assessment order before the Commissioner of Income Tax (Appeal). The said appeal was partly allowed by the Commissioner of Income Tax (Appeals) and the tax of 27,91,441/- was reduced from liability and tax of 3,66,56,822/- was directed to be reassessed. However, by an order dated 06.11.2008 of this Court, the company went into liquidation. Consequent to this, the official liquidator took control of the company and Board of Directors ceased to have any control or power on the company. In the year 1999, petitioner ceased to be a Director of the Yogi Pharmacy Ltd. (A Public Ltd. Company). After ceasing to be a Director and consequent to the company being in liquidation, the petitioner was having no communication whatsoever with the Income Tax Authorities. Surprisingly, the petitioner received a notice under Section 179(1) on 19.06.2015, whereby the petitioner was asked to show cause, why the demand of `8.49 crores, which was illegally shown as outstanding towards Yogi Pharmacy Ltd. despite the CIT (Appeals) order dated 31.03.2006, may not be recovered from the petitioner. Thereafter, vide letter dated 08.07.2015, petitioner informed the Ld. Dy. CIT that provisions of Section 179 applies for ascertaining the liability of Directors of Private Ltd. Company in liquidation. Since, M/s Yogi Leasing & Finance Ltd. is a Public Ltd. Company, incorporated under the provisions of Companies Act, 1956, hence the provisions of Section 179 are not applicable. Thereafter, on 20.08.2016 the learned Deputy Commissioner, Income Tax passed the impugned order directing the petitioner to make payment of ` 8.49 crores. Hence, this writ petition.

3. A preliminary objection has been raised by Mr. H.M. Bhatia, learned counsel for the respondent regarding maintainability of the writ petition. He submits that the petitioner has an alternative remedy to file revision before the Commissioner under Section 264 of the Income Tax Act.

4. Besides above, learned counsel for the respondent also submits that the search was made in the premises of the company in the year 1997 and the block assessment was made for the block period 1986-97 and for some of the period the company was Private Ltd. and for some of the period the company was Public Ltd. The same argument has also been advanced by the learned counsel for the petitioner. He, therefore, submits that provisions of Section 179 are not applicable.

5. I have considered the submissions of the learned counsel for the parties. In my considered opinion, the petitioner has an alternative remedy to file a revision before the Commissioner under Section 364 of the Income Tax Act. The plea that the provision of Section 179 are not applicable in the case of the petitioner can be raised by the petitioner before the revisional authority.

6. In view of the above, the writ petition is closed with liberty to the petitioner to avail appropriate remedy under the law.

(V.K. Bist, J.)

07.12.2016