1974 (3) TMI 3 - HC - Income Tax

In this writ application, the petitioners have challenged the jurisdiction of the respondents to issue two notices both dated July 31, 1967, and to proceed against them under two notices - When a company is struck off from the registers or dissolved, whether the director is liable for the tax arrears - Eventhough Companies Act states that directors of a private company are not personally liable to pay taxes of the company - Section 179 stipulates that the directors would be personally liable provided certain conditions are satisfied. Also when the recovery proceedings against the company were still pending section 179 cannot be applied

Summary

Issues:
Challenge to jurisdiction of respondents to issue notices and proceed against petitioners under Income-tax Act.

Analysis:
The petitioners challenged the jurisdiction of the respondents to issue notices and proceed against them under the Income-tax Act. The company, an assessee under the Act, was liable to pay assessed taxes for specific years. The petitioners, a director and a shareholder of the company during the relevant period, argued that they were not the assessees and no notices under section 156 of the Income-tax Act were served on them. The main question was whether the impugned notices could be issued against the petitioners and if the respondents could proceed against them. The revenue authorities relied on section 179 of the Income-tax Act, which holds directors of a private company liable for unpaid taxes after winding up. However, the court noted that the legal entity of a company is not extinguished by liquidation, and section 179 does not apply to a dissolved private limited company. The court emphasized that the directors of a private limited company have no personal liability to pay the company's taxes under the Companies Act, but section 179 imposes personal liability under specific conditions. As recovery proceedings against the company were ongoing, section 179 could not be applied in this case. Consequently, the court held that the impugned notices issued against the petitioners were without jurisdiction, and the respondents were prohibited from proceeding against the petitioners under subsequent notices. The order did not affect the revenue authority's right to proceed against the assessee-company.

In conclusion, the court quashed the impugned notices issued against the petitioners and prohibited the respondents from proceeding against the petitioners under subsequent notices. The court clarified that the revenue authority could still pursue recovery proceedings against the assessee-company. The rule was made absolute to the extent specified, and each party was directed to bear their own costs. The operation of the order was stayed until a specified date.