Tax Dues to include Penalty and Interest, if due from Director or partner of Co. or LLP

Clarification of the phrase “tax due” to include interest and penalty also for the purposes of recovery in certain cases to overcome court decisions

(1)  Existing provisions of Section 167C and Section 179:

(aSection 167C provides that, in case of liquidation, where tax is due from a Limited Liability Partnership and such tax cannot be recovered from the Limited Liability Partnership, then the relevant partners shall be jointly and severally liable for payment of the ‘tax due’ unless they can prove that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty.

(b)  On similar line, Section 179 provides that, in case of liquidation, where tax is due from a private company and such tax cannot be recovered from the company, then the relevant directors shall be jointly and severally liable for payment of the ‘tax’ unless they can prove that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty.

This provision is intended to recover outstanding demand under the Act of a private company/LLP from the directors/partners of such company/LLP in certain cases.

(2)  Amendment proposed by the Finance Bill, 2013 - Finance Bill, 2013 proposes a clarificatory amendment by way of an explanation with effect from June 1, 2013 that provides as under:

Explanation – For the purposes of this section, the expression “tax due” includes penalty, interest or any other sum payable under the Act.

(3)  Impact of the Amendment

(a)  The proposed amendment has been made because some of the courts have interpreted the phrase ‘tax due’ used in section 179 to hold that it does not include penalty, interest and other sum payable under the Act. In Maganbhai Hansrajbhai Patel v. ACIT [2012] 26 taxmann.com 226 (Guj.), it was held that the Act uses the term ‘tax’, interest and penalties at various places having different connotations. It would therefore, not be possible to stretch the language of section 179(1) of the Act to include interest and penalty also in the expression ‘tax due’.

(b)  The Finance Minister by proposing to introduce the Explanation seeks to put this debate to rest.

(c)  To overcome judicial decisions such as the above, it is proposed to insert Explanation to section 179/167C to clarify that for the purposes of this section, the expression “tax due” includes penalty, interest or any other sum payable under the Act.

(d)  These amendments will take effect from 1st June, 2013.

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