Madras High Court
M.R. Sundararaman vs Commissioner Of Income-Tax And Another on 5 January, 1995
Equivalent citations: [1995]215ITR9(MAD)
Author: M. Srinivasan
Bench: M. Srinivasan
JUDGMENT Srinivasan, J.
1. The petitioner was one of the directors of a company by name, General Commercial Corporation (P.) Ltd., which was incorporated in 1946. There was one, R. Subramanian, who was the managing director. Another director was the father of the petitioner by name M. S. Ramamurthy. In 1951, the petitioner resigned his post as director. His father died in 1954. In January, 1969, the company was wound up in Company Petition No. 76 of 1968. On March 13, 1970, the Income-tax Officer, Circle I(2), Madras, wrote to the petitioner calling upon him to pay the income-tax arrears of the company for the assessment years 1948-49 and 1949-50 to the tune of Rs. 80,144.69. It was stated that the petitioner was liable to pay the tax under section 179 of the Income-tax Act of 1961. The petitioner sent a reply on April 16, 1970, stating that it was only the managing director who would be responsible and he furnished the details of the managing director. The official liquidator filed an application before this court in Company Application No. 33 of 1973 for making the petitioner liable as a director of the company for default in filing the statement of affairs of the company. This court dismissed the application by order dated March 8, 1974, holding that the petitioner was not liable as he had already resigned in 1951.
2. On June 12, 1975, the Income-tax Officer wrote to the petitioner that a sum of Rs. 14,523 due to the petitioner personally as refund of tax for the years 1973-74 and 1974-75 would be adjusted towards tax arrears of the company referred to earlier. The petitioner replied to the Income-tax Officer in July, 1977, that he was not responsible for payment of tax arrears of the company and if at all it was only the managing director who could be called upon to meet the liabilities. On July 27, 1977, the Income-tax Officer reiterated by a letter to the petitioner that he was liable to pay the tax payable by the company and called upon him to show that non-recovery of arrears of tax from the company was not attributable to any gross neglect, misfeasance or breach of duty on the part of the petitioner, as required by section 179(1) of the Income-tax Act, 1961. The petitioner wrote to the Commissioner of Income-tax, Tamil Nadu IV, on June 25, 1979, that the arrears of income-tax claimed by the officials related to assessments made under the previous Income-tax Act of 1922 and no proceedings could be initiated against him for recovery of the amount under section 179 of the later Act of 1961 as the section would not apply. The petitioner's contention was rejected by the Commissioner by his memo in C. No. 1336(2)/80/IV dated February 2, 1980. It is the statement of the petitioner that the said memo was never communicated to the petitioner. Be that as it may, the petitioner was informed by a communication dated December 16, 1982, sent by the Income-tax Officer, Circle I(2), Nagapattinam, that the refund amount due to him would be appropriated towards the tax arrears payable by the company, as he was a director thereof during the relevant period. The relevant part of the communication is in the following terms :
"From the above, it will be seen that a refund of Rs. 15,777 is due to you. However, since your petition to the Commissioner had been rejected, vide Commissioner's memo in C. No. 1336(2)/80/IV dated February 2, 1980, the refund due to you is to be appropriated towards the tax arrears in the case of Messrs. Commercial Corporation Private Limited in which you were a director. Please also let me know whether you have moved further in the matter against the orders of the Commissioner regarding the appropriation of the refund due to you towards arrears in the company's case. You may appear before me on January 22, 1983, for further discussion in the matter. Please note that if there is no response from you, I shall be issuing refund order favouring the Income-tax Officer, City Circle V(ii), towards appropriation of the arrears."
3. Thereafter, the petitioner filed the present writ petition with a prayer for issue of a writ of certiorarified mandamus calling for the records relating to the order passed by the Income-tax Officer, Circle I(2), Nagapattinam (second respondent), dated December 30, 1982, holding that the sum of Rs. 15,777 refundable to the petitioner will be adjusted towards the tax arrears alleged to be payable by the petitioner as the ex-director of the company for the assessment years 1948-49 and 1949-50 amounting to Rs. 80,144.69, and quash the same and directing the Commissioner of Income-tax, Tamil Nadu IV (first respondent), not to hold the petitioner liable to pay the tax arrears for the company for the assessment years 1948-49 and 1949-50 under section 179 of the Income-tax Act of 1961. In paragraph 3 of the affidavit filed in support of the writ petition, it is stated that the alleged order of the Commissioner dated February 2, 1980, was not communicated to him and the reference thereof by the second respondent in his communication had resulted in considerable hardship and injury to him.
4. The first contention of learned counsel for the petitioner is that the refund amount payable to him individually in his personal capacity cannot be appropriated towards the liability due from the company. If section 179 of the Income-tax Act, 1961, is applicable in this case, this contention has to fail, as the section makes him liable personally. The question, therefore, arises whether section 179 of the Income-tax Act is applicable or not.
5. It is argued by learned counsel for the petitioner that in the prior Act of 1922, there was no provision similar to section 179 and as per the provisions of the Companies Act, a director was not personally liable for the tax arrears of the company and when section 179 was introduced for the first time in the Act of 1961, it could have only prospective operation, being applicable only to assessments made on and after April 1, 1962, when the Act came into force. It is also his contention that section 297(2)(j) of the Act of 1961, which provides that any sum payable by way of income-tax under the repealed Act may be recovered under the present Act, without prejudice to any action already taken for the recovery of such sum under the repealed Act, does not apply. According to learned counsel, there is no section in the present Act charging the director individually with the liability to pay the tax due by the company. It is also contended that there was no statutory fiction previously in the Act of 1922 and the present Act cannot introduce a fiction by which the director can be made liable for any liability which arose prior to the passing of the Act. It is the next contention of learned counsel that the director had no liability till March 31, 1962, and the Act cannot impose a liability retrospectively with respect to arrears due prior to that date by the company. In support of these contentions, learned counsel for the petitioner placed reliance on a passage in Kanga and Palkhivala's "The Law and Practice of Income Tax", Seventh edition, volume I, at page 1000, which reads as follows :
"This section introduces a dangerous innovation in fiscal legislation. It cuts at the root of the doctrine of limited liability of companies. Whereas under company law, a director is not personally liable for the company's debts unless a court of competent jurisdiction finds him guilty of misfeasance or other wrong, the vicarious liability under this section can be imposed on a director by the Income-tax Officer without an adjudication by a court. Secondly, whereas company law proceeds on the basic principle of jurisprudence that a director is presumed to be innocent till he is proved to be a wrong-doer, this section is an instance of the disquieting drift in modern Indian legislation towards presuming a citizen to be a wrong-doer till he is proved to be innocent. A director is liable under this section unless he proves the absence of gross neglect, misfeasance or breach of duty on his part."
6. That passage does not deal with the question which has arisen before me. It is only the opinion of the author that the section introduces a new provision in fiscal legislation which is very dangerous and disquieting. That will not help the petitioner in the present case.
7. My attention is drawn to a judgment of the Kerala High Court in Ratanlall Murarka v. ITO [1981] 130 ITR 797. There was a company which was incorporated in 1945 and converted into a private company in 1959. Again it was reconverted into a public company in 1969. During the assessment years 1959-60 to 1963-64, of which the case was concerned, only with 1959-60, 1960-61 and 1963-64, the company's directors were the petitioner and two others. The other two directors resigned their offices in 1969. The company was assessed to income-tax, surcharge and corporation tax for the assessment years 1959-60 to 1963-64. By a resolution passed on June 9, 1975, by the members and the creditors, it was decided to wind up the company voluntarily. Steps in the winding up were in progress. The Income-tax Officer served a notice on June 14, 1976, upon the petitioner proposing to recover from him the arrears of tax shown therein which were due from the company, by invoking the provisions of section 179 and asking him to file his objections, if any. The petitioner filed his objections which were rejected by the officer. Notices of demand were issued to the petitioner. The petitioner challenged the order of rejection by a revision before the Commissioner, who was the second respondent, and it ended in failure. At that stage, the petitioner approached the court. The court held that the petitioner was not liable for income-tax, surcharge, corporation tax and interest for the assessment years 1959-60 and 1960-61 and quashed the relevant notices and orders. To that extent, the original petition was allowed. While doing so, the court said (at page 799) :
"Section 179 is a new provision introduced in the Act in the sense that there was no corresponding provision in the Indian Income-tax Act, 1922. It imposes a vicarious liability upon the directors in respect of the tax arrears of the companies, although the companies themselves are entities independent of the directors. The liability is linked to the income of the previous year which has been assessed to tax. From its very scheme the section is prospective and there is nothing in its wording that would attract its provisions to the previous year before the commencement of the Act on April 1, 1962. The previous years relative to the assessment years 1959-60 and 1960-61 are far prior to the commencement of the Act and are clearly outside the sweep of section 179. The petitioner's contention that he could not be saddled with the tax liability of the company for these two years, by resorting to section 179, is thus well founded and has to be sustained."
8. That judgment was challenged by way of a special leave petition before the Supreme Court in S.L.P. (Civil) Nos. 11405-11407 of 1980 and those petitions were dismissed : vide [1983] 142 ITR (St.) 8. With respect, I am unable to agree with the view expressed by the Kerala High Court. The order of the Supreme Court dismissing the special leave petition in limine cannot be considered to be a binding precedent, as it is a non-speaking one. That position has been considered and laid down in Philip Jeyasingh v. Joint Registrar Co-operative Societies ([1992] 1 LW 216 [FB]).
9. In Union of India v. Manik Dattatreya Lotlikar [1988] 172 ITR 1, a Division Bench of the Bombay High Court had to consider whether the two sub-sections of section 179 were to be read independent of each other. The relevant assessment years were 1964-65 and 1965-66. The contention advanced before the court was that when section 179(1) was amended in 1975, the provisions of the Amendment Act were prospective in nature and the amended provisions cannot be invoked with reference to assessment years prior to the passing of the Amendment Act. That contention was rejected by the court holding that the amendment would take effect even from the initial incorporation of the section in the Act, viz, April 1, 1962. The court held that sub-sections (1) and (2) of section 179 must be read together. While doing so, the court made the following observations, on which reliance is placed by learned counsel for the petitioner (at page 9) :
"The Legislature, by adopting a negative phraseology, has prescribed that liability of a director of a private company, which is subsequently converted into a public company, is only in respect of tax due for the assessment year commencing subsequent to April 1, 1962. It is not in dispute and indeed cannot be disputed that the director of a private company was not liable for the tax dues of the company prior to the enactment of the Income-tax Act, 1961, and, therefore, the liability under the amended section 179(1) and (2) cannot also travel beyond the assessment year commencing before April 1, 1962, the Income-tax Act, 1961, having come into operation from April 1, 1962. Reading the two sub-sections together, it is obvious that sub-section (1) also confers a power on the tax authorities to recover the tax arrears from the directors of a private company with effect from the assessment year commencing from April 1, 1962, onwards. Any other construction would lead to very anomalous results, and, therefore, it is not possible to accept the submission of Shri Patil that sub-sections (1) and (2) should be read independently. In case it is held that the directors of a private company covered by sub-section (1) are liable only for tax arrears subsequent to October 1, 1975, it would lead to a very curious result, because sub-section (2) specifically provides that if a private company is converted into a public company, then the directors of such private company, in relation to any tax due in respect of the income of such private company, are liable for the assessment years commencing subsequent to April 1, 1962."
10. The question which has arisen before me did not arise directly for consideration before the Bombay High Court in that case. Strictly speaking, the observation is only obiter dicta and as evident from the report, the matter was not disputed before the Bench. However, the same Bench reiterated the same proposition in Union of India v. Praveen D. Desai [1988] 173 ITR 303 (Bom). But, in that case also, there was no discussion. The Bench merely observed (at page 304) :
"Mr. Dwarkadas is right in saying that this amount of tax due for the assessment year 1961-62 cannot be included while determining the liability of the respondent-director."
11. In my opinion, none of the above judgments would be helpful to the petitioner herein. With great respect to the learned judges, I am unable to agree with the view expressed that the provisions of section 179 cannot be invoked for assessments relating to years prior to April 1, 1962. The section as it stood in the Act of 1961 initially read as follows :
"Notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), when any private company is wound up after the commencement of this Act, and any tax assessed on the company, whether before or in the course of or after its liquidation, in respect of any income of any previous year cannot be recovered, then, every person who was a director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company."
12. The section was amended by the Taxation Laws (Amendment) Act, 1975, with effect from October 1, 1975. After the amendment, the section is in the following terms :
"(1) Notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), where any tax due from a private company in respect of any income of any previous year or from any other company in respect of any income of any previous year during which such other company was a private company cannot be recovered, then, every person who was a director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.
(2) Where a private company is converted into a public company and the tax assessed in respect of any income of any previous year during which such company was a private company cannot be recovered, then, nothing contained in sub-section (1) shall apply to any person who was a director of such private company in relation to any tax due in respect of any income of such private company assessable for any assessment year commencing before the 1st day of April, 1962."
13. In so far as this case is concerned, there is no material difference between the section prior to October 1, 1975, and the section as amended in 1975. The question is, whether the words "any previous year" found in sub-section (1) would apply to any year preceding April 1, 1962. On a plain reading of the section, there is nothing to exclude such years. The object of the section itself is to make the directors liable when the company has gone into liquidation and been wound up and the State is not in a position to recover the arrears of tax from the company. This is made clear by the Supreme Court in S. Hardip Singh v. ITO [1979] 118 ITR 57. After referring to the section, the court said (at page 59) :
"The section was amended in 1975 making it more stringent against the directors of a private company, but we are not concerned with the said amendment in this case.
There are three stages when a company goes into liquidation, namely :
1. The commencement of the winding up of the company; (2) the continuation of the proceeding or the steps for winding up; and (3) the final winding up and dissolution of the company. If all the three stages were complete before the Act came into force on and from the 1st April, 1962, obviously, section 179 will not be attracted. If all the three stages happened after the commencement of the Act, it is manifest that section 179 would undoubtedly be attracted. But the difficulty presented before us by learned counsel for the appellants was because of some speciality of the facts of this case; the commencement of the winding up of the company began on a date which was prior to the date of commencement of the Act. As it appears from the orders of the Income-tax Officer and the Commissioner, the company had not even till then been finally wound up and dissolved. The proceedings for its winding up were pending. The submission, therefore, is that in such a case section 179 will not be attracted. We have no difficulty in rejecting this argument. In our opinion, the section will be attracted if any one or more of the three events occurred after the commencement of the Act even though the first or the first and second events had happened earlier. The section was meant also to net a case like the instant one where it was resolved that the private company should be sent to liquidation and nobody cared to pay the huge arrears of income-tax due from it. The directors were sought to be caught exactly for this purpose. When the company goes into liquidation, it becomes difficult for the Department to realise its dues from the assets of the company and more so when the company has been finally wound-up and dissolved. The directors, therefore, have been made liable to pay such dues. Section 179 is meant to squarely cover such a case also and the appellants cannot escape their liability for the dues."
14. Though the question was not argued a Division Bench of this court expressed the view that the section would attract liabilities arising even prior to 1962 in N. Bella Gowder v. Thasildar, Coonoor [1969] 71 ITR 26 (Mad). The assessment years in that case were 1959-60 and 1960-61. One of the points urged was that the petitioner before the court was not negligent or guilty of misfeasance or breach of duty in relation to the affairs of the company and he would not be personally proceeded against for recovery of the penalty. Rejecting that contention, the Bench said (at page 27) :
"Two points for the petitioner are urged. One of them is that he has not been negligent or guilty of misfeasance or breach of duty in relation to the affairs of the company and, therefore, he could not be personally proceeded against for recovery of the penalty. The petitioner adds that he has been given no opportunity to show that he is not liable under section 179 of the Income-tax Act, 1961. It is not disputed that during the accounting years, the petitioner was one of the directors. If that be so, section 179 of the Income-tax Act makes every person, who was a director of the private company at any time during the relevant previous years, jointly and severally liable for payments of tax and this liability attaches notwithstanding anything contained in the Companies Act, 1956. Nowhere before filing the writ petition had the petitioner stated that he was not negligent or was not guilty of misfeasance or breach of duty in relation to the affairs of the company. Quite apart from that, in a petition addressed to the Commissioner of Income-tax not to proceed with recovery, he admitted his joint and several liability, but only pleaded that all the shareholders of the company should be made responsible and not himself alone. Even before us, there is no proof that he has not been grossly negligent or has not been guilty of misfeasance or breach of duty. We are, therefore, of opinion that under section 179, the liability to pay the penalty clearly attached to the petitioner. It follows the certificate for recovery proceedings was properly issued."
15. I have no doubt whatever in holding that the section makes no distinction between a liability which arose prior to April 1, 1962, and a liability which arose on and after April 1, 1962. The words "any previous year" are quite significant. In 1961, when the Act was passed and when it came into force on April 1, 1962, the words "any previous year" could refer only to a year prior to that and the liability arising prior to that date. Consequently, the section would apply to such a case also. Reading that section along with section 297(2)(j), it follows that the liability of the company which was subsisting on April 1, 1962, was enforceable against the directors of the company jointly and severally by virtue of the provisions of section 179. There is no necessity whatever for introducing any fiction as contended by learned counsel for the petitioner. The Legislature has expressly declared under section 179 that the directors will be jointly and severally liable. That section itself is the charging section and there is no necessity for any other separate section to be a charging section. There is no merit in the contention that the director was not jointly and severally liable prior to April 1, 1962, and, therefore, he cannot be made liable for any tax liability of the company which had arisen prior to that date. The words of the section are quite clear and explicit and there is no escape from the rigour thereof.
16. The next contention of learned counsel is that the last part of sub-section (1) of section 179 which provides that unless the director proves that the non-recovery cannot be attributed to any gross neglect, misfeasance ar breach of duty on his part in relation to the affairs of the company, he shall be jointly and severally liable for payment of tax, is violative of the principle of article 19(1)(g) of the Constitution of India. This contention is raised in paragraph 9 of the affidavit filed in support of the writ petition. I am unable to appreciate how article 19(1)(g) of the Constitution is violated by the said provisions contained in the last part of section 179. The section only provides a sort of statutory presumption and places the burden on the individual director to prove that the non-recovery was not due to his gross negligence, etc. Such a provision cannot at all contravene the fundamental right guaranteed under article 19(1)(g) of the Constitution.
17. The question was urged in a different fashion before the Bombay High Court in the case referred to already, viz., Union of India v. Manik Dattatreya Lotlikar [1988] 172 ITR 1. Rejecting that contention, the court observed (at page 12) :
"Finally, Shri Patil submitted that the liability of a director under section 179 is not absolute and the director would be liable only if the non-recovery can be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company. Learned counsel urged that the respondent was a former director and was more busy in performing social work and in that connection was involved in several legal battles and, therefore, was not guilty of gross neglect in attending to the affairs of the company. It was also contended that the director should not be held liable, as the company had no assets whatsoever for any of the assessment years subsequent to the year 1964-65 and the assessment was 'nil'. We fail to appreciate any merit in this submission. In the first instance, sub-section (1) of section 179 casts a burden upon the director to prove that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part. The burden being on the director, the respondent ought to have established the requirements of the sub-section to escape the liability and the respondent has failed to do so. The question as to whether the respondent discharged the burden is a pure question of fact and could not have been entertained in a writ petition filed under article 226 of the Constitution of India when the finding was recorded by the Commissioner of Income-tax against the respondent, on this count. Apart from this consideration, it is clear that the non-recovery can well be attributed to the breach of duty on the part of the respondent. The respondent loved to continue as the director of a defunct private company and while holding the office of the director, it was the bounden duty of the respondent to ensure that the tax amount is paid. The respondent having failed in his duty, cannot escape the liability prescribed under section 179 of the Act. The contention that the company had no income and suffered losses does not impress us, as the assessments for the relevant years were complete and final and it is not open to the director to challenge those assessments in a proceeding under section 179 of the Act. In our judgment, the respondent was not entitled to any relief in the writ petition and the impugned judgment of the learned single judge cannot be sustained."
18. Similarly, in Union of India v. Praveen D. Desai [1988] 173 ITR 303, the same Bench said (at page 305) :
"Mr. Dwarkadas then submitted that the liability of the director of a private limited company under section 179(1) arises provided the non-recovery can be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company. Learned counsel submitted that the non-recovery cannot be attributed to any of the reasons set out in the section. We are unable to accept the submission, because the non-recovery can very well be attributed to the breach of duty on the part of the respondent in relation to the affairs of the company. As a director of the company, it was the bounden duty of the respondent to pay tax due from the company and as the respondent has failed to discharge that duty, the provisions of section 179(1) are clearly attracted."
19. In this case, there is one other factual feature which has to be taken note of. In the impugned communication dated December 30, 1982, the Income-tax Officer has referred to the memo of the Commissioner in C. No. 1336(2)/80/IV dated February 2, 1980, rejecting the petitioner's petition sent to him earlier. It is for the petitioner to challenge the order of the Commissioner in appropriate proceedings. According to the petitioner, the said memo was not communicated to him. I have already referred to such a statement in the affidavit filed in support of the writ petition. Learned senior counsel for the respondents is not a position to say whether the said order was communicated to the petitioner. If the order had already been communicated and the petitioner had not taken steps to challenge the same, it is his look out. If the order is communicated hereafter, it is for the petitioner to take steps to challenge the said order. I am referring to that aspect of the matter only to point out that the present contention as against the presumption under section 179(1) of the Act will not strictly arise in these proceedings and it will be premature for him to raise that contention. Further, in the impugned communication itself, the second respondent had called upon the petitioner to meet him in order to have further discussion. The petitioner had admittedly not done so. If the petitioner had appeared before the second respondent and urged before him that the statutory presumption would not apply in this case, it might be open to him to raise that here. Learned senior counsel brings to my notice that in the letter dated July 27, 1977, written by the Income-tax Officer to the petitioner, he was specifically called upon to show cause why the non-recovery of the tax due by the company could not be attributed to his gross neglect and breach of duty in relation to the affairs of the company. The petitioner does not seem to have sent any reply to that communication of the Income-tax Officer. In his communication dated June 25, 1979, to the Commissioner of Income-tax, Tamil Nadu IV, the petitioner has made a reference to the letter of the Income-tax Officer dated July 27, 1977, to contend that section 179(1) was not applicable. But, he has not whispered anything about the statutory presumption, its invalidity or non-applicability.
20. The last contention of learned counsel for the petitioner is that the Department can initiate action against the petitioner only after exhausting its remedies against the company and its assets and before doing so, no proceeding can be taken against the petitioner. There is no merit whatever in this contention as section 179(1) of the Act makes the liability joint and several.
21. In the result, all the contentions of the petitioner fail and the writ petition is dismissed. There will be no order as to costs.