Ratanlall Murarka An... v. Income-Tax Officer, ...

Balagangadharan Nair, J.:— The issues raised by this original petition turns on the effect of s. 179, I.T Act, 1961—for brevity “the Act The relevant facts necessary for its disposal are the following: There was a public company by name the Shankar Paint and Oil Mills Ltd.— “the company” for short—which was incorporated in 1945. This company was converted into a private company in 1959, and then reconverted into a public company, ten years later in 1969. During the assessment years 1959–60 to 1963–64, of which the case is concerned only with 1959–60,1960–61 and 1963–64, the company's directors were the petitioner and two others. (The latter two resigned their offices in 1969). The petitioner died during the pendency of the original petition and is now represented by his legal representatives, additional petitioners Nos. 2 to 8. We will, however, confine our reference to the petitioner, who alone counts in these proceedings. The company was assessed to income-tax, surcharge and corporation tax for the assessment years 1959–60, 1960–61, 1961–62,1962–63 and 1963–64, and reassessments, to which no reference is called for. On June 9, 1975, by a special resolution of the members and that of the creditors it was decided to wind up the company voluntarily as a creditor's voluntary winding-up and to appoint a liquidator. Steps in the winding-up are in progress. While so, the first respondent, who is the ITO, “A” Ward, Companies Circle, Ernakulam, served a notice, Ex. P-5, dated June 14, 1976, upon the petitioner proposing to recover from him the arrears of tax shown therein which was due from the company, by invoking the provisions of s. 179 and asking him to file his objections, if any. The details of the tax given in Ex. P-5, are Rs. 19,192 (on account of income-tax, surcharge, corporation tax and interest under s. 220(2) of the Act), for the assessment year 1959–60, Rs. 4,416 under the same heads for 1960–61 and Rs. 6,735 (on account of income-tax and interest) for 1963–64. The sums aggregate to Rs. 30,343. In response to this action, the petitioner filed his objections, Ex. P-6, disputing his liability. By the order, Ex. P-7, dated August 31, 1976, the first respondent rejected the petitioner's objections and held that the petitioner was liable under s. 179 for the amounts due from the company. He followed it up by serving upon the petitioner three notices of demand under s. 156 of the Act, for each of the above years of assessment. Exs. P-8, P-9 and P-10 are the three notices dated August 31, 1976. The petitioner challenged the order, Ex. P-7, by filing a revision under s. 264 before the second respondent, the Commissioner, Ernakulam. Ex. P-11 is the memorandum of revision and Exs. P-12 and P-13 are the letters sent by the petitioner to the second respondent raising additional grounds in support of the revision. By the order, Ex. P-14, dated November 9, 1976, the second respondent dismissed the revision, confirming the order, Ex. P-7. In the wake of this order, the first respondent issued certificates of recovery and on the basis of the certificates, the TRO, Ernakulam, served on the petitioner the notices of demand, Exs. P-15, P-16 and P-17, dated January 3, 1979, for recovery of the arrears of tax mentioned above and the process fee of Rs. 1.50 in respect of each notice.

2. Section 179 as it stood before it was amended by the T.L (Amend.) Act, 1975, with effect from October 1, 1975, was in these terms:

“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.”

3. The amendment of 1975 is not material as the period concerned in the impugned orders and notices ends with 1963–64. As noticed above, what is sought to be recovered from the petitioner is the tax and interest for the assessment years 1959–60, 1960–61 and 1963–64. Of these years, the assessment year 1963–64 is subsequent to the commencement of the Act, on April 1, 1962, and obviously for this reason counsel for the petitioner did not dispute the liability for the arrears of tax for that year. He limited his attack to the entire liability for the years 1959–60 and 1960–61 and the liability for interest during the year 1963–64. That is the short question in the case.

4. Section 179 is a new provision introduced in the Act in the sense that there was no corresponding provision in the Indian I.T 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 s. 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 s. 179, is thus well founded and has to be sustained.

5. The only other question in the case relates to the petitioner's challenge of the levy of interest on the tax for the year 1963–64. Counsel for the petitioner maintained that the Act draws a distinction between tax and interest, as appears from s. 156, that tax does not take in interest and that as s. 179 is silent about interest, the demand for interest is unsustain- able. The contention overlooks the petitioner's position and the consequences of his default. It is admitted in the original petition that a notice had been served on the company demanding arrears of tax for the years 1959–60, 1960–61 and 1963–64, as early as April 1, 1969, long before the order, Ex. P-7. The company was thus liable for interest under s. 220(2). The liability of the petitioner is co-extensive with that of the company. His obligation to pay the tax for the assessment year 1963–64 is obvious and is undisputed. That makes him an assessee within s. 2(7) of the Act. That being the position, we do not see how he could escape liability for interest under s. 220(2) despite the distinction between tax and interest emphasised by counsel for the petitioner. The contention is, therefore, futile.

6. We hold that the petitioner is not liable for the income-tax, surcharge, corporation tax and interest for the assessment years 1959–60 and 1960–61, mentioned in Ex. P-7. We quash Exs. P-7, P-8 and P-10 and P-14 to P-17, in so far as they make the petitioner liable for these amounts. The original petition is allowed to the above extent and dismissed in other respects.

7. In the circumstances we direct the parties to bear their costs.

July 10, 1980

8. On the pronouncement of the judgment, counsel for the petitioner and standing counsel for the I.T Dept. orally prayed under art. 134A for certificate under art. 133(1) of the Constitution to prefer appeals in the Supreme Court. We are not satisfied that the case involves any substantial question of law of general importance which, in our opinion, needs to be decided by the Supreme Court. We decline the prayers.