TMI Blog1987 (11) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... Company Private Limited was floated and incorporated under the Indian Companies Act, 1913, 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 to income-tax and for the assessment years 1964-65 and 1965-66, 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 1964-65 and 1965-66, 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 the directors should not be held personally liable under the provisions of section 179 of the Act. The respondent filed a reply but the Commissioner of Income-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irectors cannot be made liable unless non-recovery can be attributed to any gross neglect, misfeasance or breach of duty on their part in relation to the affairs of the company and the director in the present case cannot be held liable in the 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 recovery charges. In view of the rival submissions, the principal question which falls for determination is the true ambit and scope of the provisions of section 179 of the Act. Section 179(1) and (2) was 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, ever person who was a director of the private company at any time during the relevant pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imited companies, even though a 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 for the assessment year when he was functioning as a director. It would be appropriate to make a reference to the background in which section 179( 1) and (2) was substituted for the original section 179 with effect from October 1, 1975. The 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." 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 private company to the directors thereof, even t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 1, 1962, onwards. A 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 means the financial year immediately preceding the assessment year. Shri Jetly 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 the provisions of section 179(1) of the Act retrospective in nature. Shri Jetly 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of any income of such private company cannot extend to assessment year commencing prior to April 1, 1962. The Legislature, by adopting a negative phraseology, has prescribed that liability of 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-sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 up to 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. The reliance by the learned single judge on the decision of the Division Bench of the Kerala High Court in the case of Ratanlal Murarka [1981] 130 ITR 797 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 the very scheme of the section, the provisions are prospective. In the case before the Kerala High Court, the company decided itself 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 1959-60 to 1963-64 and the directors were made liable in accordance with the provisions of section 179 as it stood before the substitution on October 1, 1975 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the Act and includes every person who is deemed to be an assessee in default under the provisions of this Act. Once a director comes within the ambit of the 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 Division Bench of the Kerala High Court in the case of Ratanlal Murarka [1981] 130 ITR 797 and we are in respectful agreement with the conclusion of the Kerala High Court on this aspect. 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 soc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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