Case: S. Hardip Singh and Another Vs. Income Tax Officer, Amritsar, and Others

UNTWALIA, J.1. This is an appeal by certificate from the order of the High Court of Punjab and Haryana dismissing the appellants writ application in limine. Sandak Transport Company (Private) Ltd. is a private limited company. The two appellants were its directors. One of them was a managing director. A resolution was passed on the 13th November, 1961, for a voluntary liquidation of the company at the instance of its creditors. In respect of some years ending with the assessment year 1964-65, a huge amount of income-tax to the tune of Rs. 1, 34, 319 remained due from the company. The ITO issued a notice on 7th of February, 1970, against appellant No. 2 under s. 179 of the I.T. Act, 1961, hereinafter called " the Act ", to show cause why action should not be taken against the directors of the company for realisation of the arrears of income-tax due from the company. A similar notice was issued to appellant No. 1 on the 11 th of November, 1970. Both the appellants filed their show cause before the ITO mainly taking the stand that since the company had gone into liquidation before the Act had come into force, action under s. 179 could not be taken against them. Some other points were also taken in the show cause filed by the appellants but it is not necessary to state them as the only point pressed in this court is in relation to the jurisdiction of the ITO under s. 179 of the Act The ITO rejected the appellants pleas by his order dated the 31st December, 1970. The appellants went in revision before the CIT. It was, rejected on 31st January, 1972. Thereafter, when proceedings were taken for realisation of the income-tax arrears aforesaid against the appellants they moved the High Court for the quashing of the proceedings and the orders under s. 179 of the Act. As already stated the High Court rejected their application in limine, but certificate to appeal to this court was granted only because of the rule of valuation then prevalentSection 179 of the Act as it stood at the relevant time reads as follows:" 179. Liability of directors of Private company in liquidation.--Not- withstanding anything contained in the Companies Act, 1956 (1 of 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."2. The section was amended in 1975 making it more stringent against the directors of a private company, but we are not concerned with the said amendment in this case.3. There are three stages when a company goes into liquidation, namely :(1) the commencement of the winding-up of the company ;(2) the continuation of the proceeding or the steps for winding-up ; and(3) the final winding-up and dissolution of the company.4. If all the three stages were complete before the Act came into force on and from the 1st April, 1962, obviously s. 179 will not be attracted. If all the three stages happened after the commencement of the Act, it is manifest that s. 179 would undoubtedly be attracted. But the difficulty presented before us by learned counsel for the appellants was because of some speciality of the facts of this case; the commencement of the winding-up of the company began on a date which was prior to the date of commencement of the Act. As it appears from the orders of the ITO and the Commissioner the company had not even till then been finally wound up and dissolved. The proceedings for its winding-up were pending. The submission, therefore, is that in such a case s. 179 will not be attracted. We have no difficulty in rejecting this argument. In our opinion, the section will be attracted if any one or more of the three events occurred after the commencement of the Act even though the first or the first and second events had happened earlier. The section was meant also to net a case like the instant one where it was resolved that the private company should be sent to liquidation and nobody cared to pay the huge arrears of income-tax due from it. The directors were sought to be caught exactly for this purpose. 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. The High Court was perfectly justified in dismissing the appellants writ petition in limine5.

Decision:
0[ds]There are three stages when a company goes into liquidation, namely :(1) the commencement of the winding-up of the company ;(2) the continuation of the proceeding or the steps for winding-up ; and(3) the final winding-up and dissolution of the company.If all the three stages were complete before the Act came into force on and from the 1st April, 1962, obviously s. 179 will not be attracted. If all the three stages happened after the commencement of the Act, it is manifest that s. 179 would undoubtedly be attracted. But the difficulty presented before us by learned counsel for the appellants was because of some speciality of the facts of this case; the commencement of the winding-up of the company began on a date which was prior to the date of commencement of the Act. As it appears from the orders of the ITO and the Commissioner the company had not even till then been finally wound up and dissolved. The proceedings for its winding-up wereour opinion, the section will be attracted if any one or more of the three events occurred after the commencement of the Act even though the first or the first and second events had happened earlier. The section was meant also to net a case like the instant one where it was resolved that the private company should be sent to liquidation and nobody cared to pay the huge arrears of income-tax due from it. The directors were sought to be caught exactly for this purpose. 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. The High Court was perfectly justified in dismissing the appellants writ petition in limine