S. BASANT SINGH (DECD.) THROUGH LRS vs TAX RECOVERY OFFICER and Others

K. K. SRIVASTAVA, J. :

This judgment will dispose of two Letters Patent Appeals (Nos. 809 and 810 of 1986) filed against the judgment dt. 5th September, 1986, passed by a learned Single Judge (D. S. Tewatia, J.) of this Court, as the facts and law involved in both the appeals are common.

The facts giving rise to the filing of these appeals may briefly be narrated as under :

M/s Sandhu Bus Service (P) Ltd., Amritsar (for short to be referred as "the Company") was a company incorporated under the Indian Companies Act. S. Hardip Singh and S. Basant Singh (deceased) were the Directors of the said Company. One of them was a managing director. The said company went into a voluntary liquidation under a resolution passed on 13th October, 1961. The company was assessed to Income Tax for the years 1955-56 to 1962-63 to a total tax liability of Rs. 1,34,705. The company was ordered to be wound up by this Court on 22nd March, 1968, in Civil Original No. 33 of 1966 and was dissolved by the order of this Court passed under s. 481 of the Companies Act in Company Petition No. 56 of 1974. Prior to the winding up of the company, proceedings under s. 179 of the IT Act, 1961 (hereinafter to be referred as "the Act") were commenced against the aforesaid directors by issuing notice thereunder by the concerned ITO, holding them liable to discharge the liability of the company for payment of the due arrears of Income Tax, mentioned above. The directors of the company filed reply to the notice issued to them under s. 179 of the Act. The ITO rejected the pleas of the directors by his order dt. 31st December, 1970. Thereafter the directors filed a revision before the CIT, which was also rejected on 30th January, 1972. After the revision was decided by the CIT, proceedings were initiated for realisation of the Income Tax arrears aforesaid against the directors of the company when the directors approached this Court by filing an application, praying for quashing of the proceedings pending against them under s. 179 of the Act. This Court rejected their application in limine. Consequent upon the grant of certificate to appeal to the Supreme Court, the directors filed an appeal before the apex Court, raising a contention that since the company went into liquidation prior to the coming into force of the Act of 1961, the provisions of s. 179 of the Act could not be invoked to realise and recover the arrears of Income Tax outstanding against the company, which went into liquidation. The apex Court held that where a private company went into voluntary liquidation prior to 1st April, 1962, i.e., the date of commencement of the IT Act, 1961, but the liquidation proceedings were still pending on the said date, the ITO had the jurisdiction to invoke s. 179 of the Act to take action against the directors of the company for realisation of the arrears of Income Tax due from the company and the appeal preferred by the directors against the order of this Court was dismissed. The apex Court decided the appeal on 26th April, 1979 (the judgment of the apex Court rendered in appeal preferred by the directors of the company has been reported as S. Hardip Singh and Another Vs. Income Tax Officer, Amritsar and Others,

The IT Authorities in the meantime attached the property of the directors for recovery of the arrears of Income Tax and proclamation of sale (copy Annexure P3) was issued by the TRO, Income Tax on 11th January, 1979. The directors approached the Recovery Officer for staying the proceedings for recovery of the arrears of Income Tax outstanding against the company, but the same was rejected by order dt. 7th December, 1978 (copy Annexure P2). Consequently, writ petition (No. 556 of 1979) was filed by S. Basant Singh, ex-director of the company against (i). The TRO, Range-I Amritsar, and (ii) the ITO, Distt. I(1), Amritsar, praying for issuance of a direction restraining the respondents from selling the property of the petitioner in the proclamation of sale in pursuance of certificate dt. 20th March, 1963, for recovery of the arrears of Income Tax. This writ petition was filed on 16th February, 1979. It was, inter alia, averred in the writ petition that the directors of the company could not be held to be defaulter-assessees until and unless a demand notice is issued to them under the provisions of s. 156 of the Act, as provided in sub-s. (4) of s. 220 of the Act. Since the petitioner was not an assessee-in-default, hence he could not be proceeded against, nor could his property be sold in pursuance of any recovery certificate which has been issued by the TRO, Income Tax. The petitioner prayed for quashing of proclamation of sale (Annexure P3) and order (Annexure P2) passed by the TRO, rejecting his prayer and to stay recovery proceedings till a demand notice is served on him.

The respondents filed written statement in the aforesaid writ petition (No. 556/1979), wherein they contended that the service of demand notice under s. 156 of the Act had been effected on M/s Sandhu Bus Service (P) Ltd., the company. The demand was not paid by the company and orders under s. 179 of the Act were passed by the ITO on 31st December, 1970, holding petitioner S. Basant Singh and S. Hardip Singh, ex-directors of the company jointly and severally liable to pay the tax demand outstanding against the company. It was further contended that since no fresh demand had been created and only liability for payment of tax had been shifted, there was no necessity of issuing demand notice under s. 156 of the Act afresh to the directors of the company, which had since been under voluntary liquidation. The respondents mentioned that the liability of the ex-directors of the company regarding payment of the arrears of Income Tax outstanding against the company under s. 179 of the Act was finally settled by the Supreme Court, which dismissed the appeal preferred by the ex-directors of the company.

Writ petition No. 553 of 1980 was filed by S. Hardip Singh Sandhu, ex-director against (i) The TRO, Range-I, M/C Green Avenue, Amritsar, and (ii) The ITO, District I(1), Amritsar, raising the same pleas as were raised in the connected writ petition (No. 556 of 1979) filed by the other director, S. Basant Singh (since deceased) of the company. The writ petitioner S. Hardip Singh also prayed for quashing of Annexures P1 and P2, filed along with the writ petition. Annexure P1 is the notice of attachment of property in Form 11 CP 7 under r. 27 of the Second Schedule of the Act and addressed to Shri Hardip Singh Sandhu, director, Navdeep Theatre (P) Ltd., Amritsar. This notice is dt. 31st October, 1979, wherein the share of S. Hardip Singh Sandhu in Navdeep Theatre (P) Ltd. was attached regarding the recovery of the aforesaid arrears of Income Tax outstanding against the company. Annexure P2 is the summons issued under r. 83 of the Second Schedule of the Act, which is dt. 18th September, 1979, issued to S. Hardip Singh Sandhu, requiring him to personally attend the office of the TRO, Range I, MIC Green Avenue, Amritsar, on 12th October, 1979, for producing books of accounts and other documents detailed in the summons.

The two writ petitions have been disposed of by the learned Single Judge by a common judgment delivered on 5th September, 1986 [reported as S. Hardip Singh Sandhu Vs. Tax Recovery Officer and Another, . The learned Single Judge held that there was no need for issuance of a demand notice under s. 156 of the Act after the liability is fastened on the directors of the company to pay the arrears of Income Tax outstanding against the company aforesaid under s. 179 of the Act. It was held that under s. 179 of the Act, the liability is fastened on a director of the company only if the company has become a defaulter and money cannot be recovered from it and the directors are held liable for that default. For the purpose of the provisions of s. 220(4) of the Act, the learned Single Judge held that the person held liable under s. 179 of the Act to pay the tax liability of the company would be deemed to be a defaulting assessee in terms of s. 220(4) of the Act. Consequently, both the writ petitions were held to be without any merit and were dismissed.

Appellant Basant Singh in the meantime died and his heirs and legal representatives, namely, Hardip Singh, Harbhajan Singh, Satnam Singh, Sarbjit Singh and Amritpal Singh were impleaded vide order dt. 13th September, 1986 by this Court in CM No. 3397 of 1986.

We have heard learned counsel for the appellant and learned counsel for the respondents. We have carefully perused the judgment under appeal.

The main contention of learned counsel for the appellants is that the directors of the company, since liquidated, cannot be held to be assessees-in-default within the meaning of s. 220(4) of the Act unless and until a notice of demand as envisaged under s. 156 of the Act is served on them and they fail to comply with the same. Learned counsel for the appellants urged that the demand notice issued under s. 156 of the Act to the company for recovery of the arrears of Income Tax due and outstanding against it cannot be treated as a compliance of the service of notice under s. 156 of the Act qua the directors of the company.

Learned counsel for the respondents while repelling the arguments of learned counsel for the appellants urged that since no new demand of Income Tax was being made from the directors of the company, hence they would be treated as defaulting assessees under s. 220(4) of the Act.

In order to appreciate the rival contentions of learned counsel for the parties, the provisions of ss. 156 and 220(4) of the Act may be referred to. Sec. 156 of the Act provides for issuance of notice on demand and reads as under :

"When any tax, interest, penalty, fine or any other sum is payable in consequence of any order passed under this Act, the ITO shall serve upon the assessee a notice of demand in the prescribed form specifying the sum so payable".

Sec. 220(4) of the Act lays down :

"If the amount is not paid within the time limited under sub-s. (1) or extended under sub-s. (3), as the case may be, at the place and to the person mentioned in the said notice the assessee shall be deemed to be in default".

Undisputedly, the company was to pay Income Tax for the years, referred to above, and the ITO had served a notice of demand under s. 156 of the Act. It is also not disputed that the amount of Income Tax which was in arrears was not paid by the company. In the meantime, the company went into voluntary liquidation. It is also not disputed that during the winding up process of the company, the IT Act, 1961, came into force w.e.f. 1st April, 1962. The appellants, who were directors of the company, were proceeded against under the provisions of s. 179 of the Act, which provides for liability of the directors of private-company in liquidation. The directors of the company filed their reply before the IT Authorities, wherein they contested the liability to pay the arrears of Income Tax on the ground that the company was already under liquidation and at that time the IT Act, 1961, had not come into force and as such, they were not liable jointly and severally for the amount of arrears of Income Tax under s. 179 of the Act. As mentioned above, the matter was contested upto the Supreme Court, which finally rejected the plea of the directors of the company. The decision of the case itself is reported in S. Hardip Singh and Another Vs. Income Tax Officer, Amritsar and Others, . This matter, thus stands finally decided between the parties that the directors of the company are jointly and severally liable for payment of the arrears of Income Tax outstanding against the company, which was not paid by the company. The Income Tax Recovery Officer commenced the recovery proceedings and issued order of attachment and summoned Hardip Singh with accounts to appear before the concerned authority in connection with the recovery of the arrears of Income Tax. The directors of the company filed their reply and raised a plea that the arrears of Income Tax outstanding against the company could not be recovered from them and they could not be treated as defaulting assessees within the meaning of s. 220(4) of the Act until and unless a demand notice is served upon them as required by s. 156 of the Act. The learned Single Judge held that the position of a person, on whom liability is fastened under s. 179 is equated with that of the defaulting assessee. He further held that once the order under s. 179 of the Act has attained finality, the directors of the company would be deemed to be defaulting assessees in terms of s. 220(4) of the Act and no fresh notice of demand, as required under s. 156 of the Act, was necessary to be issued. The IT authorities were not making any fresh demand of Income Tax from the directors of the company and as such, there was no need to issue a demand notice afresh on the directors of the company. Once the liability is fastened on the directors to pay the arrears of Income Tax outstanding against the company, which has since been wound up, under s. 179 of the Act, the directors would come in the place of the company and at the stage where the company became a defaulter assessee under s. 220(4) of the Act.

Learned counsel in support of his arguments cited the judgment of the Allahabad High Court in the case of Manohar Lal and Padam Prakash Vs. Commissioner of Income Tax and Another, wherein the High Court held that on dissolution of a partnership firm, though the partners are jointly and severally liable for the tax dues of the firm in view of the provisions of s. 189(3) of the IT Act, 1961, tax liability of the firm should be realised by proceedings against the properties of the firm. The properties of the partners in their individual capacity cannot be attached or sold nor can the partners be arrested for the tax dues of the firm unless they are deemed to be "assessees in default" within the meaning of the provisions of the IT Act, 1961. It was further held that for realising the tax dues of the firm, the Revenue should proceed against the partners of the firm in accordance with the provisions of ss. 182 and 183. In the absence of any proceedings under these sections against the partners, the partners cannot be deemed to be "assessees-in-default".

We are of the considered view that this authority has no application in the instant case. There are separate provisions made in the IT Act in respect of partnership firm and the private company and they have been dealt with separately. Apart from this, though for the purpose of assessment for payment of Income Tax, the partnership firm is recognised as an entity but the existence of partnership firm in the eyes of law in so far as it being a juristic person is concerned, is that it can neither sue nor be sued. The suit has to be filed by or against the partners of the partnership firm. On the other hand, the company incorporated under the Company Act has a juristic entity and it can sue and be sued. Once the partnership firm is dissolved, the partners of the firm are to be proceeded against. The partnership firm is no longer in existence and that is why before the partners of the firm can be treated as assessees-in-default, they are individually to be served with notice of demand under s. 156 of the Act. On the other hand, directors of the private company, incorporated under the Companies Act, can be proceeded for the tax due from the company under s. 179 of the Act, which specifically provides 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 each company was a private company cannot be recovered, then, nothing contained in sub-s. (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".

The learned counsel for the appellants laid great stress on the following observations of the learned Single Judge to support his contention that the directors of the company can be held to be assessees-in-default only when a demand notice under s. 156 of the Act has been served upon them :

"Now coming to the first contention, it may be mentioned that the primary purpose of serving a demand notice upon the assessee under s. 156 of the Act is to initiate the process of recovery of the amount of tax found due from the assessee. Unless a demand notice is served upon the assessee under s. 156, things would not move in that the assessment order passed either under s. 143 or 144 of the Act is made appealable by the provisions of s. 246. Time within which the appeal is to be filed is provided by s. 249 of the Act which provided that an appeal against the order of the ITO passed under s. 143 or 144 should be filed within 30 days from the date of the service of the demand notice under s. 156 of the Act. If, for instance the ITO, for whatever reasons, fails to serve the demand notice upon the assessee, then the assessee can wait to file the appeal with the result that the tax liability assessed by the ITO would remain in abeyance. That is why, the issuance of a demand notice under s. 156 assumes such a mandatory importance. Yet another reason that necessitates the issuance of a demand notice under s. 156 is that an assessee cannot be declared a defaulting assessee in terms of s. 220(4) of the Act unless a demand notice is served upon him under s. 156 and unless a demand notice is declared a defaulting assessee, the coercive process of recovering the tax liability from him by issuing a tax recovery certificate under s. 222 cannot be resorted to".

After going through the aforesaid observations of the learned Single Judge, it would be abundantly clear that he has dealt with the relevant provisions of the Act right from the service of a demand notice under s. 156 of the Act upto the assessees being declared defaulting assessees and necessitating issuance of coercive process for recovery of the tax liability from him by issuing a tax recovery certificate under s. 222 of the Act. This, however, is not a finding regarding facts of the instance case. The finding of the learned Single Judge regarding the facts of the instant case is contained in the subsequent para, which reads as under :

"So far as the order that is passed under s. 179 of the Act is concerned, the same is not appealable. Therefore, the first underlying necessity of issuance of the notice under s. 156 is not there. So far as the second underlying necessity of issuance of the notice under s. 156 is concerned, it may be observed that the position of a person on whom liability is fastened under s. 179 is equated with that of the defaulting assessee under s. 179 the liability is fastened on a director of the company only if the company has become defaulter, and the money cannot be recovered from it and the directors are held liable for that default. Hence, for the purpose of the provisions of s. 220(4) of the Act, the person held liable under s. 179 to pay the tax liability of the company would be deemed to be a defaulting assessee in terms of s. 220(4) of the Act".

We, therefore, find no merit in the arguments of the learned counsel for the appellants that before the directors of the company can be held to be assessees-in-default, the IT Authorities were bound to serve a notice of demand under s. 156 of the Act.

Lastly, learned counsel for the appellants tried to urge that the TRO had proceeded to attach the share of the appellant/Hardip Singh in Navdeep theatre, Amritsar, the value of which was far in excess than the amount of tax sought to be recovered. In our view, this is a matter within the jurisdiction of the TRO, which he was required to deal with and we do not propose to go into this matter particularly when we notice that no such argument was advanced before the learned Single Judge.

Resultantly, both these appeals are devoid of merit and are dismissed.