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PETITIONER: HARDIP SINGH & ANR.

       Vs.

RESPONDENT: THE INCOME TAX OFFICER, AMRITSAR & ORS.

DATE OF JUDGMENT26/04/1979

BENCH: UNTWALIA, N.L. BENCH: UNTWALIA, N.L. PATHAK, R.S. VENKATARAMIAH, E.S. (J)

CITATION:  1979 AIR 1453            1979 SCR  (3) 781  1979 SCC  (3) 345

ACT:      Income Tax  Act  1961-S.  179-Scope  of-Resolution  for winding up of company passed before the coming into force of the  Act-I.T.O.   issued  notices  to  Managing  Director  & Director to  pay large  tax arrears  due from  the company - Notice if valid.      Section 179  of the Income-tax Act, 1961 (before it was amended in  1975) provided  that when any private company is wound up  after the  commencement of  the 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.

HEADNOTE:      The appellants  were the managing director and director of a  private  limited  company.  On  November  13,  1961  a resolution for  voluntary liquidation of the private company was passed.  In February  and November,  1970 the Income Tax Officer issued  notices to  the appellants calling upon them to pay  income tax which remained unpaid from the company to the tune of Rs. 1.34 lakhs.      The contention  of the  appellants that the company had gone into  liquidation before the Act came into force on 1st April, 1962  and, therefore,  s. 179  had no  application to this case  was  rejected  by  the  Income-tax  Officer.  The appellants’  revision   petition   was   rejected   by   the Commissioner; the  High Court  dismissed their writ petition in limine.      Dismissing the appeal, ^      HELD :  The appellants  could  not  escape  from  their liability to  pay the  tax dues.  Section 179  was meant  to cover cases of this nature also. [784A]      There  are  three  stages  when  a  company  goes  into liquidation, namely : (1) the commencement of the winding up of the  company; (2)  continuation of the proceedings or the steps  for   winding  up   and  (3)  final  winding  up  and dissolution of the company. Section 179 will be attracted if

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any one  or more  of the  three stages  occurred  after  the commencement of  the Act  even though the first or the first and second  events had  happened earlier. The directors were made liable  to pay  the tax dues because on its liquidation it becomes  difficult for  the department to realise the tax dues from the assets of the company.                                                     [783D-E]      In the  instant case,  although the commencement of the winding up  of the  company had begun on a date prior to the date of  commencement of  the Act,  at  the  time  when  the Income-tax  officer   issued  notice,  proceedings  for  its winding up were pending.

JUDGMENT:      CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2390 of 1972. From the Judgment and Order dated 7-3-72 of the Punjab and 782 Haryana High Court in Civil Writ No. 773/72.      Bhagirath Das,  B. P.  Maheshwari and  Suresh Sethi for the Appellants.      P.  A.   Francis  and   Miss  A.   Subhashini  for  the Respondents.      The Judgment of the Court was delivered by      UNTWALIA, J.  This is an appeal by certificate from the order of the High Court of Punjab and Haryana dismissing the appellants writ  application  in  limine.  Sandhu  Transport Company (Private)  Limited 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 Income  Tax officer issued a notice on 7th of February,  1970 against appellant No. 2 under Section 179 of the  Income Tax  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 11th of November, 1970. Both the appellants filed  their show  cause before  the  Income  Tax Officer mainly  taking the  stand that since the company had gone into  liquidation before  the Act  had come into force, action under  Section 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 Income Tax Officer under Section 179 of the Act.      The Income  Tax Officer  rejected the appellants’ pleas by his  order dated  the 31st December, 1970. The appellants went in  revision before  the Commissioner of Income Tax. 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 Section  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 prevalent.      Section 179 of the Act as it stood at the relevant time read as follows :-

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         179. Liability  of directors of private company in liquidation-Notwithstanding anything contained in the Com- 783      panies 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".      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.      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 Section 179 will not be attracted. If all of  the three  stages happened after the commencement of the Act,  it is  manifest that Section 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  Income  Tax  Officer  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  Section   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 would up and  dissolved. The  directors, therefore, have been made liable to 784 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.      We find  no merit  in this appeal and it is accordingly dismissed with costs. P.B.R.                                     Appeal dismissed. 785