Andhra HC (Pre-Telangana)
K.V. Reddy And Anr. vs Assistant Commissioner Of Income Tax, ... on 1 April, 1998
Equivalent citations: 1998(3)ALD543, [1998]93COMPCAS287(AP), [1998]232ITR306(AP)
Author: T.N.C. Rangarajan
Bench: T.N.C. Rangarajan
ORDER
S.V. Maruthi, J
1. The two petitioners were the Directors of M/s. Drill Rock Engineering Company (P) Ltd. Secundcrabad, from 15-9-1976 till 1-7-1984. On 1-7-1984 they have resigned from the Board of Directors of the said company. The Company was distributor for M/s. Consolidated Pneumatic Tools Company India Limited for their compressors and pneumatic tools. For the assessment years 1978-79 to 1988-89 theCompany was due income-tax to the Department of Income-Tax. There was also settlement before the Settlement Commission under the Income-Tax Act. The Board of Directors who assumed office after the resignation of the petitioners agreed before the Settlement Commission for total tax liability of Rs.64,27,371/- for the assessment years 1978-79to 1988-89. Pursuant to the agreement before the Settlement Commission proceedings were initiated for recovery of the said amount against the Company and the said proceedings are pending. However, by the impugned proceedings dated 10-2-1998 the Assistant Commissioner of Income-tax issued a notice under Section 179 of the Income-Tax Act proposing to recover the amount of Rs.64,27,371/- from the petitioners. Hence the writ petition.
2. The main argument of the learned Counsel for the petitioners is that under Section 179 of the Income-Tax Act the liability of the Directors arises only in cases where the tax cannot be recovered from the assets of the Company. It is only on a finding arrived at by the competent authority that the tax due from the Company cannot be recovered from the assets of the Company, the Assessing Officer can proceed against the Directors personally and individually. In the absence of such a finding the Assessing Officer does not get the jurisdiction to proceed against the Directors personally. While the Counsel for the Revenue in his counter though admitted that the recovery action is continuing in the case of the Company, contended that it is only after taking all possible steps for recovery, as a last resort, the provisions of Section 179 were invoked for making the Directors of the Company in the relevant previous years jointly and severally liable for the taxes of the Company. He further submitted that he has a right of revision under Section 264 of the Income-Tax Act and therefore, the writ petition cannot be entertained, hi addition he submitted that they have initiated action against the Company by issuing notice under Section 221 on 1st June, 1989 and notice under Section 226(3) notice to the Executive Engineer, Electricity Civil Construction Division-II, AnparaThermal Project, U.P.S.E.B., Anpara (Mirzapur), Uttar Pradesh, on 22-3-1990. He therefore submitted that it is not a case where this Court could interfere under Article 226 of the Constitution of India.
3. From the counter it is clear that the proceedings against the Company have not yet been concluded and they are pending. In this context it is necessary to refer to the language used in Section 179 of the Income-Tax Act.
"179. Liability of directors of private Company in liquidation:
(1) Notwithstanding anything contained in the Companies Act, 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."
4. It says where any tax due from a private Company in respect of any income of any previous year cannot be recovered, then every person who was a director of the Company during the relevant previous year shall be jointly and severally liable for the payment of tax. The language used in the Section is clear. It is only in cases where the tax cannot be recovered from the Company the liability of director arises. The liability of the directors is joint and several. It is not a joint and several liability with the Company. It is not a liability co-extensive with the liability of the Company unlike a principal debtor and the surety. In case of principal debtor and surety the liability of the surety is co-extensive with that of the principal debtor and therefore, both the principal debtor and the surety can be proceeded with simultaneously. Whereas under Section 179 of the Act it is only in case a tax cannot be recovered from the Company the liability of the Director arises or the liability itself arises for the Director. After that liability arises, the liability is joint and several amongst the Directors and it is not a liability joint and several with that of the Company,
5. Therefore before the Assessing Officer proceeds against the Directors personally he has to give a finding that the income-tax due for the previous year cannot be recovered from the Company. In the absence of giving a finding conferring jurisdiction on him to recover the income-tax from the Director personally, the Assessing Officer does not get the jurisdiction to initiate proceedings under Section 179 of the Act. In the absence of such a finding the Assessing Officer does not get jurisdiction to invoke the provisions of Section 179 of the Act.
6. In the light of the above discussion let us refer to the order of the Assistant Commissioner of Income-Tax. It reads as follows:
"For the Assistant Year(s) mentioned below a sum of Rs.64,27,371/- is determined to be payable by the assessee Company towards taxes/penalties the details are given hereunder:
Asst. Year Amount (Rs.) 1978-79 4,44,248 1978-79 10,90,086 1979-80 54,221 1982-83 7,47,290 1982-83 22,56,430 1984-85 6,77,948 1985-86 4,09,858 1988-89 7,47,290 _____________ Total payable Rs. 64,27,371 _____________ The amount has become long due and the assesses Company has not paid the taxes so far.
During the previous years relevant to the Asst years mentioned above, the following persons are the Directors as at the closing of the financial years.
(1) Smt. Kanwal Sahariwal.
(2) Smt. Pushpa Malkani.
(3) Smt. K. Malleswari Reddy.
(4) Sri H. Sabhariwal.
(5) Sri K.V. Reddy.
(6) Sri Dayal Malkani.
(7) Sri J.C. Minocha.
(8) Sri Ajay Minocha.
(9) Smt. Kamala Minocha.
Section 179 of the Income Tax Act, 1961 stated that 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 years 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 years shall be jointly and severally liable for the payment of such taxes unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance of breach of duty on his part in relation to the affairs of the Company.
In this connection, a notice under Section 179 was issued to the abovementioned directors fixing (he dates of hearing to 24-11-97 and 28-11-97 calling for the objections if any.
None of the Directors except Sri K. V. Reddy and Smt. K. Malleswari Reddy have filed their objections, if any for the proposed action under Section 179(1) of the I.T. Act, 1961.
The objections raised by the two Directors viz., Sri K.V. Reddy and Smt. K. Malleswari Reddy, vide their letter dated 8-12-97 are as under:
(1) that assessee has resigned from Directorship on and from 1-7-1984.
The objection raised by the Directors are/ is not tenable as Section 179 clearly refers to the previous year in which the person responsible was the Director and has not adduced any proof in support of their contentions.
I, therefore, proceed to pass the order under Section 179 and hold the above 9 persons jointly and severally liable for payment of taxes. I direct the directors to pay the entire demand of Rs.64,27,371/- along with interest under Section 220(2) of the Act."
7. A reading of the order discloses that he proceeded on the assumption that the petitioners have failed to prove that they have resigned from the Directorship with effect from 1 -7-1984. There is no finding by the Assessing Officer of the Income-tax that the amount cannot be recovered from the Company.
8. From the above it follows that the proceedings dated 10-2-1988 initiated under Section 179 of the Act is without jurisdiction and without the authority of law. Therefore the proceedings impugned are quashed. However, it does not preclude the Assistant Commissioner of Income-tax to initiate proceedings afresh in the event of a finding that they cannot recover the amount from the Company, as the liability of the Directors arise at that stage and the dues as pointed out in the notice are from 1978-79 to 1984-85 and their liability subsists till the date of their resignation i.e. 1-7-1984. It is open to the petitioners also to raise such objections which are available to them in law.
9. The writ petition is accordingly allowed. No costs.