Yash Paul vs Income Tax Officer

R.P. Sethi, J.—The petitioners were the directors of Rashtriya Loan & Chit Fund (P.) Ltd., Purani Mandi, Jammu, have challenged the

assessment orders made for the years 1965-66, 1966-67, 1967-68 and 1968-69 and prayed for quashing of the notice issued to them u/s 179 of

the income tax Act, 1961, dated 28-2-1984, served upon them on 20-9-1984. They have also prayed for quashing of the notice issued u/s 226(3)

of the income tax Act directing the Manager, Vijaya Bank, Old Hospital Road, Jammu, calling upon him to remit the amount in deposit lying with

the bank in Account No. 110 to clear the arrears of the income tax. It is submitted that as in view of the judgment in S. Mubarik Shah Naqshbandi

Vs. Commissioner of Income Tax, , the company is not liable to pay the tax, no notice of demand could be issued to the directors of the company.

It is further submitted that prior to the Taxation Laws (Amendment) Act, 1975, section 179 operated only in case of private company in liquidation

and that the directors of the company were not personally liable prior to the amendment.

In the counter-affidavit filed on behalf of the respondent, it is submitted that the petition was liable to be dismissed on account of the unexplained

delay and laches and that the company, namely, Rashtriya Loan & Chit Fund Co., was rightly assessed to income tax. It is contended that the

petitioners are personally liable to pay the tax u/s 179 being directors of the company.

I have heard learned counsel for the parties and perused the record.

The principles regarding the plea of delay and laches have been dealt with in detail while passing judgment in WP No. 809/84 of the date.

However, in the instant case, the demand was made from the petitioners on 20-9-1984 and they filed the present petition on 27-10-1984 without

wasting any time. The petitioners in these petitions have been proved to be vigilant and their petition cannot be dismissed on the alleged ground of

delay and laches.

So far as the liability of Rashtriya Loan & Chit Fund Co. is concerned, the argument of the petitioners has no force in view of the judgment

delivered in writ petition No. 809 of 1984.

Prior to its amendment made in 1975, section 179 of the Act, provided:

Liability of directors of private company in liquidation. -Notwithstanding anything contained in the Companies Act, 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.

It is admitted position on facts that the company Rashtriya Loan & Chit Fund (P.) Ltd. has not gone into liquidation so far. The Supreme Court in

S. Hardip Singh and Another Vs. Income Tax Officer, Amritsar and Others, , held that section 179 was amended in 1979 making it more stringent

against the director of a company and that prior to it the provision applied only in a case where the company had gone into liquidation. Their

Lordships held that there were three stages when a company goes into liquidation, namely, (1) the commencement of the winding up of the

company; (2) continuation of the proceedings or the step of winding up; and (3) the final winding up and dissolution of the company.

The provisions of section 179, before amendment, were held not to be applicable if all these three stages were complete before the Act came

into force on 1-4-1962. If all the three stages happened after the commencement of the 1962 Act, section 179 was held to be attracted. The

Madras High Court also in N. Bella Gowder Vs. Tahsildar, Coonoor, and Another, , came to the conclusion that the provisions of section 179 will

not apply unless the company had gone into liquidation or was under the process of liquidation. The amendment of section 179 made in 1975 was

intended to provide a stringent measure of fiscal legislation which resulted in cutting at the root the doctrine of limitated liability of the companies.

After the amendment, a director of the company was made liable for the company's debt, notwithstanding that the company had gone into

liquidation or not and without ascertaining as to whether such director was guilty of misfeasance or other wrong. Prior to the amendment, the

director was presumed to be innocent till he was proved to be a wrong doer.

It is settled proposition of law that the tax legislations are not retrospective in operation unless specifically declared as such by the Legislature. It

was held by the Bombay High Court in Praveen D. Desai Vs. Income Tax Officer, Companies Circle-V(6), Bombay and others., , that the

amendment made in section 179 was not retrospective and not applicable to the assessment orders made prior to that date. In that case, the

assessment made for the years 1961-62 to 1968-69, was held not to be governed by the amendment. Similarly in another case, the Bombay High

Court in M.D. Lotlikar Vs. R.C. De Desouza, Commissioner of Income Tax, Bombay City-V, , held that the provisions of section 179 after its

amendment are prospective in operation. It was further held by the said Court that the directors could not be held liable for tax due from the

company relating to the years prior to the coming into force of the amended section 179. It was held in that case:

Prior to the amendment of section 179 in 1975 by the TLA Act, 1975, a director of a private limited company was liable jointly and severally for

the payment of his company's tax arrears only if the company had been wound up. After the amendment of section 179 in 1975, where any tax

was due from a private company which could not be recovered from the company, every person who was a director of the company is jointly and

severally liable for the payment of such tax unless he proves that the non-recovery could not be attributed to any gross neglect, misfeasance or

breach of duty on his part in relation to the affairs of the company. There is nothing in section 179, after its amendment in 1975, which makes its

operation retrospective. Therefore, where the tax sought to be collected from a director of a private limited company in respect of the tax arrears

of the company, related to the years prior to the coming into force of the amended section 179, the director cannot be saddled with the liability to

pay the tax arrears of the company. (p. 433)

The respondent has nowhere alleged that the petitioners were guilty of any negligence in the discharge of their duties as directors. As the liability of

payment of tax was imposed upon the petitioners on the presumed application of the amended section 179, the orders impugned in the instant

cases are, therefore, without jurisdiction.

Under the circumstances, the petitions are disposed of by upholding the assessment orders for the years 1965-66, 1966-67, 1967-68, 1968-69,

so far as Rashtriya Loan & Chit Fund Pvt. Ltd. is concerned but notices issued to the petitioners u/s 179 are quashed. It is held that the petitioners

who were the directors of Rashtriya Loan & Chit Fund Pvt. Ltd. are not personally liable to pay the tax in terms of the amended section 179.