1995 (1) TMI 26 - HC - Income Tax

1961 Act, Assessment Year, Attributable To, Private Company, Recovery Proceedings, The Constitution, Winding Up

Issues Involved:
1. Applicability of Section 179 of the Income-tax Act, 1961.
2. Retrospective application of Section 179.
3. Personal liability of the director for the company's tax arrears.
4. Violation of Article 19(1)(g) of the Constitution of India.
5. Exhaustion of remedies against the company before proceeding against the director.

Issue-wise Detailed Analysis:

1. Applicability of Section 179 of the Income-tax Act, 1961:
The primary contention was whether Section 179 of the Income-tax Act, 1961, applied to the petitioner, a former director of a company, for the tax arrears of the company. The court held that if Section 179 is applicable, the petitioner's argument that the refund amount payable to him personally cannot be appropriated towards the company's liability must fail. The court examined whether Section 179 was applicable and concluded that it was indeed applicable, making the petitioner personally liable.

2. Retrospective Application of Section 179:
The petitioner argued that Section 179, introduced in the 1961 Act, could not have retrospective operation to cover assessments made under the 1922 Act. The court examined various judgments, including Ratanlall Murarka v. ITO and Union of India v. Manik Dattatreya Lotlikar, and concluded that Section 179 does apply to tax liabilities arising prior to April 1, 1962. The court noted that the words "any previous year" in Section 179 include years before the commencement of the 1961 Act, thereby making directors liable for tax arrears of earlier years.

3. Personal Liability of the Director for the Company's Tax Arrears:
The petitioner contended that under the 1922 Act, a director was not personally liable for the company's tax arrears, and the 1961 Act could not introduce such liability retrospectively. The court disagreed, stating that Section 179 explicitly makes directors jointly and severally liable for the company's tax arrears, irrespective of when the liability arose. The court emphasized that the section's purpose is to ensure tax recovery from directors when the company is unable to pay its dues.

4. Violation of Article 19(1)(g) of the Constitution of India:
The petitioner argued that the provision in Section 179, which places the burden on the director to prove the absence of gross neglect, misfeasance, or breach of duty, violates Article 19(1)(g) of the Constitution. The court rejected this contention, explaining that the section merely establishes a statutory presumption and does not contravene the fundamental right to practice any profession or carry on any occupation, trade, or business.

5. Exhaustion of Remedies Against the Company Before Proceeding Against the Director:
The petitioner contended that the Department should first exhaust all remedies against the company and its assets before initiating action against him. The court found no merit in this argument, stating that Section 179(1) imposes joint and several liability on directors, allowing the Department to proceed against them without first exhausting remedies against the company.

Conclusion:
The court dismissed the writ petition, holding that Section 179 of the Income-tax Act, 1961, applies to the petitioner, making him personally liable for the company's tax arrears from the assessment years 1948-49 and 1949-50. The court found no violation of constitutional rights and affirmed the joint and several liability of directors under the section. The petitioner's contentions were rejected, and the writ petition was dismissed with no order as to costs.

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