N. Rajamoni Amma and K. Janardhanan Pillai vs Deputy Commissioner of Income Tax and Others

K.P. Balanarayana Marar, J.—petitioner in Original Petition No. 7470 of 1989 and the petitioner in Original Petition No. 7471 of 1989 are respectively, the appellants in these writ appeals. Original Petition No. 7470 of 1989 was treated as the main case. The said judgment was followed in Original Petition No. 7471 of 1989. Identical points arise for consideration in both the cases. The petitioners in the original petitions were directors of one Rajmohan Cashews (P.) Ltd., Quilon. There are four directors in the company. They are : (1) Smt. N. Rajamoni Amma (petitioner in Original Petition No. 7470 of 1989), (2) Sri K. Janardhanan Pillai (petitioner in Original Petition No. 7471 of 1989), (3) Sri R. Gopinathan Nair, and (4) Smt. R. Geetha Vasanth (wife of R. Gopinathan Nair). The petitioner in Original Petition No. 7470 of 1989 was a director in the said Rajmohan Cashews (P.) Ltd. from the very inception, that is from July 20, 1970, to February 14, 1981. Mr. K. Janardhanan Pillai (petitioner in Original Petition No. 7471 of 1989) and Mrs. Geetha Vasanth were directors till June 2, 1982. For the assessment years 1977-78 to 1982-83, large arrears of income tax and surtax were due. Along with the interest payable u/s 220(2) of the Act, the arrears swelled to Rs. 56,04,640. Notice was given to the petitioner in Original Petition No. 7470 of 1989, dated February 13, 1989, to pay the arrears. The petitioner sent a reply on March 20, 1989, The Deputy Commissioner of Income Tax (Assessment) initiated proceedings u/s 179 of the Act and issued a notice to the petitioner in Original Petition No. 7470 of 1989, dated March 14, 1989. The petitioner did not reply thereto, But the petitioner had filed a reply to the earlier notice asking her to pay the arrears. She pleaded that adverse trade conditions and fluctuations in the cashew market, labour problems, the loss incurred in the trade and the bank''s reluctance to extend accommodation, etc., disabled the company from paying the arrears. The Deputy Commissioner of Income Tax (first respondent) declined to accept the various pleas put forward by the petitioner and passed exhibit P-13 order, dated March 30, 1989, declaring that the petitioner, a director during the relevant time, is also jointly and severally liable for the tax arrears of the assessment years 1977-78 to 1982-83 in respect of the company, Rajmohan Cashews (P.) Ltd. The petitioner filed a revision before the second respondent who, by exhibit P-15 proceedings dated July 21, 1989, affirmed exhibit P-13 order. The petitioner initiated proceedings u/s 154 before the second respondent to rectify exhibit P-15 proceedings. The second respondent declined the request by exhibit P-19 order dated April 23, 1990. In the original petition, the prayer was to quash exhibit P-13 order passed by the first respondent, dated March 30, 1989, and exhibits P-15 and P-19 orders passed by the second respondent dated July 21, 1989, and April 23, 1990, respectively. The learned single judge, after adverting to the relevant facts, held that exhibits P-13, P-15 and P-19 proceedings are beyond challenge. The original petition was dismissed. The petitioner in the original petition has come up in Writ Appeal No. 612 of 1990. The said judgment was followed in Original Petition No 7471 of 1989, from which the petitioner in the said original petition has filed Writ Appeal No. 622 of 1990. Both the appeals were heard together.

We heard counsel for the appellants. It was argued that the second respondent totally erred in confirming exhibit P-13 order by exhibit P-15 proceedings dated July 21, 1989. It was argued that, at any rate, exhibit P-15 proceedings should have been rectified as prayed for and the refusal to do so, evidenced by exhibit P-19 proceedings dated April 23, 1990, is illegal and unreasonable. The main grievance voiced by counsel for the appellants was that Rajmohan Cashews (P.) Ltd. was a public company within the meaning of Section 43A(1A) of the Companies Act, as could be seen from exhibit P-l, dated February 26, 1977, and so proceedings u/s 179 of the Income Tax Act were totally ill-conceived. Section 179 of the Income Tax Act provides only for liabilities of directors of a private company in liquidation and the said provision is totally inapplicable in the case of Rajmohan Cashews (P.) Ltd., which had ceased to be a private company ever since exhibit P-l, dated February 26, 1977. It was further argued that even on merits, respondents Nos. 1 and 2 acted illegally in rendering exhibit P-I3 and exhibit P-15 proceedings and so the learned judge was in error in declining to interfere with exhibits P-13, P-15 and P-19 proceedings. We see no force in these appeals. Admittedly, the petitioners were directors of Rajmohan Cashews (P.) Ltd., Quilon. The petitioner in Original Petition No. 7470 of 1989 was a director from the date of incorporation--July 20, 1970 to February 14, 1981. The petitioner in Original Petition No. 7471 of 1989 was a director till June 2, 1982, on which date he resigned. The arrears amounting to Rs. 56,04,640 are admittedly due from Rajmohan Cashews (P.) Ltd. for the years 1977-78 to 1982-83. The first respondent (Deputy Commissioner of income tax), after adverting to the pleas raised by the petitioner, stated in exhibit P-13 dated March 30, 1989, as follows :

"It is well-settled that tax is to be paid while earning. There are many provisions in the Act to facilitate this principle, for example, tax payable in advance, tax on self-assessment, etc. Thus, the duty is cast upon the assessee to pay the tax in time. The assessment which is done at a later stage is only to test the accuracy of the tax paid by the assessee. In a company, the affairs of the company are managed by the director/directors. The question is how far the directors have discharged their duties in paying the tax while earning the income. Huge arrears were found to be payable after assessment, only because the assessee did not pay the tax due in time. Had the directors taken due care, this could have been paid during the financial year in which income was earned. Even granting that a portion of the demand arose after completion of the assessment, the demand being an undisputed liability, the directors were statutorily duty-bound to liquidate the arrears. This the directors have clearly failed to do. Thus, I have no hesitation in stating that the reasons advanced by the director are not relevant. The subsequent events do not absolve the director of his responsibility of paying the tax.

In view of the above, I declare that the then director, Smt. N. Rajmoni Amma, is also jointly and severally liable for the tax arrears stated above in respect of the company, Rajmohan Cashews (P.) Ltd. Quilon."

In the revision filed against exhibit P-13, the second respondent concurred with exhibit P-13 order by exhibit P-15, dated July 21, 1989. Amongst others, the Commissioner specified in exhibit P-15 order that the petitioner was a director of Rajmohan Cashews (P.) Ltd. during the relevant period, that there were undisputed tax arrears due from the company for the years 1977-78 to 1982-83, that there was a belated appeal for the year 1982-83, that no serious attempt was made by the company to clear the arrears after October, 1986, that the plea that the company incurred loss from 1983-84 was not relevant in failing to pay the arrears of the earlier years, that the company was doing large business even subsequently in spite of loss, that the assessee-company was getting refunds u/s 141A of the Act for the years 1978-79 to 1982-83, that there were pre-planned attempts to understate the total income and since there were large disallowances in the regular assessments, the company had to pay large amounts when regular assessments were made, that the conduct of the company has not been fair or proper in not paying the arrears, that there was no prompt payment of tax and so the first respondent was justified in passing exhibit P-13 order declaring that the appellants are jointly and severally liable for the tax arrears in respect of Rajmohan Cashews (P.) Ltd. The said order passed in revision is exhibit P-15 dated July 21, 1989. An attempt was made to assail exhibit P-15 stating that the revisional order suffers from a mistake apparent on the record. The plea was that Rajmohan Cashews (P.) Ltd. became a public company by virtue of Section 43A(1A) of the Companies Act with effect from July 1, 1975, and, in that view, the proceedings u/s 179 will be patently unsustainable. The plea for rectification did not meet with success. The second respondent dismissed the said motion by exhibit P-19 proceedings dated April 23, 1990, holding that the assessment itself was made against the company as a private limited company and that there was no claim before the Deputy Commissioner (first respondent) when proceedings were initiated u/s 179 of the Act that the company was a public limited company. The said plea was not even taken when the revision was filed against exhibit P-13 order and that no evidence was produced either before the Deputy Commissioner or before the Commissioner that the Registrar of Companies had treated Rajmohan Cashews (P.) Ltd. as a public limited company. The second respondent held that no valid explanation was offered by the assessee for not raising the claim before the Deputy Commissioner or before the Commissioner at the earlier stage and there is no rectifiable mistake apparent on the record. The motion for rectification of exhibit P-15 order failed. The order so passed is dated April 23, 1990 (exhibit P-19).

We also perused the detailed counter-affidavit filed in this case and it has been extracted by the learned single judge in his judgment. Exhibit P-1, in pursuance of which the appellants claimed that the Rajmohan Cashews (P.) Ltd. is a public limited company, is even suspected to be a "fabricated document" and an afterthought. We also find that the learned judge has adverted to the order sheet that no such document as exhibit P-l was issued by the Registrar of Companies. The circumstances showed that exhibit P-l may be a fabricated document. The learned single judge held, and rightly in our opinion, that no case was made out to rectify exhibit P-15 order, since the question mooted at the rectification stage was a debatable and a complicated one and so the learned single judge held that exhibit P-19 was passed validly and that it did not merit any interference. We are of the view that in so far as the plea that Rajmohan Cashews (P.) Ltd. was a public limited company ever since exhibit P-l, dated February 26, 1977, was not put forward either during assessment or during the Section 179 proceedings or in revision, it is not open to the appellants to assail exhibit P-19 proceedings. The appellants had failed to take the plea that the company had ceased to be a private limited company. We are, therefore, of the view that exhibit P-19 order passed by the second respondent does not merit interference as rightly held by the learned single judge.

Even on merits, the appellants have no case. The Commissioner of Income Tax concurred with the Deputy Commissioner and held that the tax arrears for the period from 1977-78 to 1982-83, during which time the appellants were the directors, are not in dispute, that the appeal filed by the company for the year 1982-83, though belated, is a different aspect of the matter, that the losses incurred by the company subsequent to 1983-84 are not relevant, that the assessee-company was getting refunds u/s 141A of the Act from 1978-79 to 1982-83, and the events show that there was a pre-planned attempt to understate the total income and, in this view, exhibits P-13 and P-15 are not open to any objection. We are satisfied that respondents Nos. 1 and 2 have, on a factual analysis, held that proceedings u/s 179 of the Income Tax Act were justified and the appellants, as directors, should be held jointly and severally liable for the tax arrears during the time they were the directors of the company, Rajmohan Cashews (P.) Ltd. The above finding was arrived at by respondents Nos. 1 and 2 on the basis of innumerable materials, which have been adverted to in the orders passed. Exhibits P-13 and P-15 were rightly held to be beyond challenge by the learned single judge.

We dismiss the writ appeals in limine.