1992 (2) TMI 3 - SC - Income Tax

Liability of director for liabilities of company when company is deemed as Public Company - order passed under section 179 and revision order u/s 154 are quashed - proceedings against the present appellants for recovery of the tax due from the company should not be taken - any amounts which might have been paid either by the appellants or by the company in the course of the proceedings now under challenge will not be liable to be refunded to the appellants

Summary

Issues:
1. Liability of directors under section 179 of the Income-tax Act, 1961.
2. Recognition of the company as a public limited company under section 43A of the Companies Act.
3. Genuineness of the communication from the Registrar of Companies.
4. Constitutional prohibition on recovery of taxes without authority of law.

Analysis:

The Supreme Court dealt with the issue of the liability of directors under section 179 of the Income-tax Act, 1961. The appellants, who were directors of a company, were held liable to pay the tax due from the company. The assessments for the years 1977-78 to 1982-83 resulted in a demand of Rs. 56 lakhs, which was not paid. The Deputy Commissioner passed an order holding the directors responsible for the tax liability. The appellants challenged this decision through revision petitions, but the objections were rejected. The High Court also dismissed the writ petitions filed by the appellants, upholding the liability of the directors.

Another crucial issue was the recognition of the company as a public limited company under section 43A of the Companies Act. The appellants presented a letter from the Registrar of Companies, dated February 26, 1977, recognizing the company's status change to a public limited company from October 1, 1975. The Income-tax Department questioned the authenticity of this letter, alleging it to be fabricated. However, upon further examination, the Registrar of Companies confirmed the company's public limited status, which had implications on the applicability of section 179 of the Income-tax Act.

The genuineness of the communication from the Registrar of Companies was a key aspect of the case. The High Court had dismissed the writ petitions based on doubts regarding the authenticity of the letter recognizing the company as a public limited entity. The Supreme Court, after verifying the letter's authenticity through an affidavit from the Registrar of Companies, concluded that the company had indeed become a public limited company as per the provisions of the Companies Act.

Furthermore, the Supreme Court emphasized the constitutional prohibition on the recovery of taxes without the authority of law. Article 265 of the Constitution prohibits the recovery of taxes except under the authority of law. Given the company's public limited status, the proceedings against the directors under section 179 of the Income-tax Act were deemed unjustified. The Court quashed the previous orders, directing that no further proceedings against the directors for tax recovery should be pursued. However, the decision did not restrict the Department from recovering the amounts due from the company through other legal means. Additionally, any amounts paid by the appellants or the company during the challenged proceedings were not liable to be refunded to the appellants.