1979 (4) TMI 1 - SC - Income Tax

When the company goes into liquidation it becomes difficult for the department to realise its dues from the assets of the company and more so when the company has been finally wound up and dissolved. The directors, therefore, have been made liable to pay such dues. Section 179 is meant to squarely cover such a case also and the appellants cannot escape their liability for the dues. The proceedings were rightly initiated against them for realisation of the dues

Summary

Issues:
- Jurisdiction of the Income Tax Officer under section 179 of the Income Tax Act, 1961 regarding the liability of directors of a private company in liquidation.

Analysis:

The case involved an appeal by two directors of a private limited company against the order of the High Court dismissing their writ application challenging the initiation of proceedings under section 179 of the Income Tax Act, 1961. The company had gone into voluntary liquidation, and substantial income tax arrears were due. The Income Tax Officer (ITO) issued notices to the directors under section 179 to recover the tax dues. The directors contended that since the company had gone into liquidation before the Act came into force, the action under section 179 could not be taken against them. However, the ITO rejected their pleas, and the CIT upheld the decision.

The central issue before the court was the interpretation of section 179 of the Income Tax Act, which holds directors of a private company liable for tax dues if the company goes into liquidation and taxes cannot be recovered. The court emphasized that the liability of directors is not dependent on the timing of the company's liquidation but on whether any of the three stages of liquidation occurred after the Act came into force. The court clarified that even if the commencement of winding-up began before the Act, as long as any stage of liquidation occurred post the Act's commencement, section 179 would apply.

The court highlighted that the purpose of section 179 is to ensure that directors cannot evade their responsibility for tax dues by allowing the company to go into liquidation without settling its liabilities. Directors are held liable to prevent the department from facing difficulties in recovering dues once the company is dissolved. The court affirmed that in cases where a company resolves to go into liquidation but fails to clear its tax arrears, directors can be held accountable under section 179.

Ultimately, the court concluded that the proceedings initiated against the directors for the recovery of tax dues were justified, and the High Court's decision to dismiss the writ petition was valid. The appeal was dismissed, and costs were awarded against the appellants. The judgment upheld the strict liability imposed on directors of private companies in liquidation under section 179 of the Income Tax Act, emphasizing the importance of directors fulfilling their financial obligations even in the event of company liquidation.