Pendse, J.:— An interesting question as to whether directors of a private company are liable for payment of taxes due from the company from April 1, 1962 onwards in accordance with provisions of section 179 of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) falls for determination in this appeal preferred by the Revenue against judgment dated January 11, 1983 delivered by the learned single Judge in Miscellaneous Petition No. 1432 of 1978. The learned single Judge held that the liability of the directors is only in respect of taxes due from the private company after October 1, 1975 and not in respect of the earlier period. The facts which gave rise to filing of the Writ Petition before the learned single Judge are not in dispute and are required to be briefly stated to appreciate the grievance of the appellants against the impugned judgment.
2. Bhimjee & Company Private Limited was floated and incorporated under the Companies Act, in the year 1947, and the Company carried on business of import and export, mainly in hardware and spare-parts of watches. The respondent is one of the Directors of the Company from the year 1958 onwards. The Company was assessed income-tax and for the assessment years 1964-1965 and 1965-1966 the Company was assessed and the income assessed was Rs. 4,000/- and Rs. 7,000/- respectively. The Income-tax payable was Rs. 2,300/- and Rs. 4,200/- respectively. Subsequent to the assessment years 1964-1965 and 1965-1966 the business almost came to an end and the Company suffered losses and the Company was either assessed to ‘nil’ income or assessed to loss. The Income-tax liability of the Company was not discharged and thereupon the Tax Recovery Officer initiated proceedings for realisation of the tax dues. The tax could not be recovered and thereupon the Income-tax Officer served notice on July 5, 1976 calling upon the respondent to show cause why directors should not be held personally liable under provisions of section 179 of the Act. The respondent filed reply, but the Commissioner of Income-tax rejected the same and held that the respondent was liable under the provisions of section 179 of the Act. The respondent preferred a revision application, but the same ended in dismissal. The Tax Recovery Officer thereupon attached properties of the respondent and issued proclamation of sale and thereupon respondent filed Miscelleneous Petition No. 1432 of 1978 on the Original Side of this Court under Article 226 of the Constitution of India for setting aside the orders passed by the Income-tax authorities holding the respondent liable for payment of arrears of tax due from the Company. Before the learned single Judge, the only contention advanced was that the provisions of Section 179(1) of the Act came into operation on October 1, 1975 and the provisions being prospective in nature, it was not open for the Income-tax authorities to attract the provisions and make the respondent liable for payment of tax due from the company for the assessment years 1964-1965 and 1965-1966. The learned single Judge relied upon the observations of the Kerala High Court reported in 130 I.T.R 797, Ratanlal Murarka v. Income-tax Officer, ‘A’ Ward Companies Circle Ernakulam, and concluded that Section 179(1) of the Act is only prospective in operation and therefore the respondent cannot be saddled with tax liability in reapect of assessment years prior to October 1, 1975.
3. Shri Jetley, learned counsel appearing on behalf of the Revenue, submitte that the decision of the learned single Judge that the provisions of section 179 are merely prospective and cannot clothe the tax authorities with power for recovering arrears of taxes due from the company in respect of earlier assessment years by proceeding against the directors is not correct. The learned counsel urged that the Legislature by substitution of Section 179(1) and (2) has specifically provided for retrospective operation of the provisions with effect from April 1, 1962 onwards. It was also contended that provisions of section 179 are merely procedural in nature and deals with machinery to recover the taxes due from the Company. Shri Patil, learned counsel appearing on behalf of the respondent, on the other hand urged that Section 179(1) is not retrospective in its operation and the directors cannot be made liable for tax arrears of the Company in respect of assessment years prior to October 1, 1975. Shri Patil also urged that the directors cannot be made liable unless 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 and the director in the present case cannot be held liable in absence of charge of gross neglect, misfeasance or breach of duty. Shri Patil submitted that in any view of the matter, the liability of the director is limited only to the taxes due and cannot include penalty, interest or the recovery charges. In view of the rival submissions, the principal question which falls for determination is the true ambit and scope of provisions of section 179 of the Act.
4. Section 179(1) and (2) were substituted by the Taxation Laws (Amendment) Act, 1975 with effect from October 1, 1975 and reads as under:
“179. (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”.
5. Section 179 prior to its amendment read as under:
“179. 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”.
6. Section 179, prior to its amendment, for the first time provided that the directors of a private limited company in liquidation would be liable jointly and severally with the company for payment of arrears of tax and there was no corresponding provision in the Income-tax Act, 1922. This Section foisting liability on the directors of a private limited company operated only in the cases of a private company in liquidation prior to October 1, 1975 and subsequent to that date the provisions are extended to all private companies, whether in liquidation or not, and to companies converted into public companies in respect of period during which they were private companies. Section 179 is a departure from provisions of the Companies Act, where a director is not personally liable for the company's debts unless the company Court finds him guilty of misfeasance or any other wrong. Section 179 imposes a vicarious liability on the directors of private limited company, even though private limited company is a separate entity. The liability is co-extensive with the company and the director is liable only in respect of arrears of tax of the assessment year when he was functioning as a director.
7. It would be appropriate to make reference to the background in which Section 179(1) and (2) were substituted for the original Section 179 with effect from October 1, 1975. Taxation Laws (Amendment) Bill, 1973, that is Bill No. 34 of 1973, was introduced in the Lok Sabha on May 9, 1973 and Section 50 of this Bill provides for amendment of Section 179 and prescribes that in section 179 of the Income-tax Act, for the portion beginning with the word “Notwithstanding” and ending with the words “after its liquidation”, the following shall be substituted, namely:—
“Notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), where any tax assessed on a private company during its existence or in the course of or after its liquidation”.
8. The Statement of Objects and Reasons sets out that Section 179 is proposed to be amended so as to extend the liability for taxes due from a private company to the directors thereof, even though such company may not be in liquidation. The Amended Bill was forwarded to the Select Committee for its report and the Report was presented on March 20, 1975. As regards the amendment of Section 179, the Select Committee recommended that the provisions of the Clauses are also applied to a director of a private company which has been converted into a public company but in respect of which tax was due on the income of such private company. The Select Committee recommended that the liability should be restricted to tax due in respect of assessment years commencing on or after April 1, 1962. The report of the Select Committee was accepted and instead of proposed amendment of Section 179 sub-sections (1) and (2) were substituted.
9. The provisions of section 179 as it existed prior to October 1, 1975, came up for consideration before the Supreme Court in the case reported in (1979) 118 I.T.R 57, S. Hardip Singh v. Income-tax Officer, Amritsar, and in that case the private company went into liquidation on November 13, 1961. A huge amount of income-tax ending with the assessment year 1964-1965 remained due from the company and the tax authorities called upon the Directors to make payment. It was claimed on behalf of the directors that since the company had gone into liquidation before Income-tax Act, 1961 came into force, action under Section 179 could not be taken. The Supreme Court rejected the argument holding that the section would be attracted if any one or more of the three events occurred after the commencement of the Act and the three events are (1) the commencement of the winding-up of the company; (2) the continuation of the proceedings or the steps for winding-up; and (3) the final winding-up and dissolution of the company. The Supreme Court then observed:—
“The section was meant also to not 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….”
10. With this background it is necessary to examine the rival contention as to whether the directors would be liable for the tax arrears of the company due in respect of the assessment years from April 1962 onwards. The plain reading of Section 179(1) indicates that 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 at any time during the relevant previous year shall be jointly and severally liable for payment of such tax. The crucial words are “tax due in respect of any previous year”. The expression “previous year” has been defined under Section 3 of the Act, and inter alia, the financial year immediately preceding the assessment year. Shri Jetley submitted, and in our judgment with considerable merit, that the expression “any previous year” is a clear indicator that the Legislature desired to make the operation of provisions of Section 179(1) of the Act retrospective in nature. Shri Jetley submitted that the concept of making a director of a private company liable in respect of tax arrears of the company was first operated by the Act of 1961 and initially the directors of only those private companies which were in liquidation were brought within the net. Subsequently, the Legislature decided to extend the not to bring in its sweep directors of all private companies irrespective of the fact whether such companies are in liquidation or not, and also those companies which were converted into a public company in respect of the period when such company was a private company. The learned counsel urged that Section 179(1) and (2) are substituted for the original Section and the liability of the directors was not created for the first time. Shri Patil on the other hand submitted that Section 179(1) of the Act for the first time makes directors of the private company liable and the section is not only a machinery for the purpose of recovery but is also a charging section in the sense that a fresh liability is created against the directors. It was urged by the learned counsel that being a fiscal statute imposing liability the section should be construed strictly and in case two interpretations are possible, then one in favour of the tax payer should be adopted. There cannot be any debate as regards the accuracy of the submission of the learned counsel. It is now well settled that unless terms of a statute expressly so provide or necessarily require it, retrospective operation should not be given to a statute so as to take away or impair an existing right or create a new obligation or impose a new liability otherwise than as regards matters of procedure. If the enactment is expressly in language which is fairly capable of either interpretation, if ought to be construed as prospective only. Bearing this principle in mind and examining the provisions of Section 179(1) and (2) of the Act, in our judgment, the Legislature has clearly specified that the provisions of sub-section (1) of Section 179 would operate with retrospective effect from April 1, 1962. It is necessary to read sub-section (1) and sub-section (2) together and the two sub-sections should not be construed independently or as dealing with different situations. Sub-section (1) clearly brings in its sweep all the private companies and also those companies which are converted into public companies; while sub-section (2) specifically provides that when a private company is converted into a public company then the liability of a director under sub-section (1) in relation to tax due in respect of any income of such private company cannot extend to assessment year commencing prior to April 1, 1962. The Legislature by adopting negative phraseology has prescribed that liability of a director of a private company, which is subsequently convered into a public company, is only in respect of tax due for assessment year commencing subsequent to April 1, 1962. It is not in dispute and indeed cannot be debated that the director of a private company was not liable for the tax dues of the company prior to the enactment of 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, 1961 act 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 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 results, because sub-section (2) specifically provides that if private company is converted into public company, then the directors of such private company in relation to any tax due in respect of income of such private company, are liable for assessment year commencing subsequent to April 1, 1962. Therefore, the directors of a private company, either in liquidation or outside the liquidation, would be liable for tax dues after October 1, 1975, while directors of private limited company, if it is converted into a public company, would be liable for tax dues from assessment year April 1, 1962 onwards and surely the Legislature could have never contemplated such an anomalous situation. The Legislature desired to make the directors of the private company liable for the tax arrears of the company, and therefore, provided that private company, whether in liquidation or outside the liquidation, the directors would be liable. The Legislature also realised that a private company which is in arrears of payment of tax may convert it into a public limited, and the Legislature desired to ensure that the directors of such company would not be able to avoid the liability by mere conversion. It is undoubtedly true that it was open for the Legislature to merge the two sub-sections together and dearly provide that the liability of the directors would be for tax dues in respect of any assessment year commencing from April 1, 1962, but the mere fact that the Legislature chose to enact two sub-sections cannot lead to the conclusion that the areas covered by the two sub-sections are different and distinct and sub-section (1) should be construed by ignoring sub-section (2). In case the submission of Shri Patil on this aspect is accepted, it would make sub-section (2) wholly redundant and it is well settled that the court should not adopt such construction which would make the provisions of any statute redundant. In our judgment, the provisions of Section 179(1) and (2) make it clear that the directors of a private company are liable for payment of tax dues from the company in respect of assessment year commencing subsequent to April 1, 1962. Such construction would not make the expression “any previous year” redundant and the expression is not limited to the previous year immediately prior to October 1, 1975 but to any previous year upto April 1, 1962. Sub-section (1) makes it clear that the director would be responsible for the tax dues only during those relevant previous years when such person was director.
11. The reliance by the learned single Judge on the decision of the Division Bench of Kerala High Court in the case of Ratanlal Murarka (supra) is not very accurate. The Division Bench of the Kerala High Court did observe that Section 179 imposes a vicarious liability upon the directors and the liability is linked to the income of the previous year which has been assessed to tax and from very scheme of the section the provisions are prospective. In the case before the Kerala High Court the Company decided to be wound up voluntarily by a special resolution dated June 9, 1975. The company had committed defaults in payment of taxes for the assessment years 1959-1960 to 1963-1964, and the directors were made liable in accordance with the provisions of section 179 as it stood before substitution on October 1, 1975. The Division Bench of the Kerala High Court, therefore, was not concerned with the construction of amended section and observed so in clear terms. Thereafter the Division Bench made observations that the provisions of section 179 are prospective and there is nothing in the wording that would attract its provisions to the previous year before the commencement of the Act on April 1, 1962. It is clear that the observation of the Kerala High Court that Section 179 is prospective is in regard to the section as it existed prior to October 1, 1975. Indeed Section 179 making the directors liable was introduced by Income-tax Act, 1961 for the first time as there was no corresponding provision in the Income-tax Act, 1922. It was, therefore, obvious that liability foisted on the directors by the Act of 1961 cannot attract the provisions of section 179 to the previous year before the commencement of the act on April 1, 1962. The observation of Kerala High Court that Section 179 is prospective was in regard to the Section as it existed prior to October 1, 1975 and reliance cannot be placed on that observation to conclude that even after amendment the section is only prospective. In our judgment, the decision of the Kerala High Court is of no assistance to the respondent.
12. Shri Patil thus submitted that Section 179 provides that the Director of the private company shall be jointly and severally liable for the payment of tax dues from the private company, and therefore, the liability must be limited only to the amount of taxes and not to penalty, interest or recovery charges. The learned counsel referred to the definition of expression “tax” in Section 2(43) of the Act, which inter alia provides that “tax” in relation to the assessment year commencing before April 1, 1965 means income-tax and super-tax chargeable under the provisions of the Act. Relying on this definition of the expression “tax”, it was contended that Section 179, which creates vicarious liability, should be strictly construed and the penalty, interest or recovery charges should not be added to the tax while recovering from the directors. It is not possible to accept the submission of the learned counsel. The liability foisted on the directors of the private company is co-extensive with that of the company and the director is made jointly and severally liable for the tax arrears. In view of the provisions, the director comes within the expression “assessee” under Section 2(7) of the Act. The expression “assessee” means a person by whom any tax or any other sum of money is payable under this Act, and includes every person who is deemed to be assessee in default under the provisions of this Act. Once a director comes within the ambit of expression “assessee” under Section 2(7) of the Act, it is difficult to accept the submission that the director would not be liable for payment of penalty, interest and recovery charges. An identical contention was turned down by the Division Bench of the Kerala High Court in the case of Ratanlal Murarka (supra) and we are in respectful agreement with the conclusion of the Kerala High Court on this aspect.
13. Finally, Shri Patil submitted that the liability of the 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. The 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 to attend 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 1964-1965 and the assessment was ‘nil’. We fail to appreciate any merit in this submission. In the first instance, sub-section (1) of Section 179 cast 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 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 a director of a defunct private company and while holding the office of 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 for 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. Accordingly, appeal is allowed and the impugned judgment dated January 11, 1983 in Miscellaneous Petition No. 1432 of 1978 is set aside and the petition is dismissed. The respondent shall pay costs of the Revenue throughout.
Appeal allowed.
Income-tax Act, 1961