Income-tax---

----Private company--Recovery of tax--Liability of Directors--Only where tax cannot be recovered from company, directors liable---Liability of Directors is joint and several among Directors---Not a joint and several liability with company---Before proceedings against Directors personally, Assessing Officer to give finding that tax due cannot be recovered from company---In the absence of such finding, Assessing Officer does not get jurisdiction to invoke S.179--Indian Income Tax Act, 1961, S.179.

Section 179 of the Income Tax Act, 1961, provides that where any tax due from a private company in respect of any income of, any previous year cannot be recovered, then, every person who was a director of the company during the relevant previous year shall be jointly and severally liable for the payment of tax. The language used in the section is clear. It is only in cases where the tax cannot be recovered from the company that the liability of the director arises. The liability of the directors is joint and several. It is not a joint and several liability with the company. It is not a liability co-extensive with the liability of the company, unlike a principal debtor and the surety. In the case of a principal debtor and surety, the liability of the surety is coextensive with that of the principal debtor and, therefore, both the principal debtor and the surety can be proceeded against simultaneously.

Before the Assessing Officer proceeds against the directors personally, he has to give a finding that the income-tax due for the previous year cannot be recovered from the company. In the absence of a finding conferring jurisdiction on him to recover the income-tax from the director personally, Assessing Officer does not get jurisdiction to initiate proceedings under section 179 of the Act.

P. Srinivas Reddy for Petitioners.

J. V. Prasad for Respondents.

JUDGMENT

MS. S. V. MARUTHI, J.---The two petitioners were the directors of Drill Rock Engineering Company (P.) Ltd., Secunderabad, from September 15, 1976, till July 1, 1984. On July 1, 1984, they have resigned from the board of directors of the said company. The company was a distributor for Consolidated Pneumatic Tools Company India Limited for their compressors and pneumatic tools. For the assessment years 1978-79 to 1988-89, the company was due income-tax to the Department of Income-tax. There was also a settlement before the Settlement Commissioner under the Income-tax Act. The board of directors who assumed office after the resignation of the petitioners agreed from the Settlement Commissioner for a total 'tax liability of Rs.64,27,371 for the assessment years 1978-79 to 1988-89. Pursuant to the agreement before the Settlement Commissioner proceedings were initiated for recovery of the said amount against the company and the said proceedings are pending, However, by the impugned proceedings, dated February 10, 1998, the Assistant Commissioner of Income-tax issued a notice under section 179 of the Income-tax Act proposing to recover the amount of Rs.64,27,371 from the petitioners. Hence, the writ petition.

The main argument of learned counsel for the petitioners is that under section 179 of the Income-tax Act the liability of the directors arises only in cases where the tax cannot be recovered from the assets of the company. It is only on a finding arrived at by the competent Authority that the tax due from the company cannot be recovered from the assets of the company that the Assessing Officer can proceed against the directors personally, and individually. In the absence of such a finding, the Assessing Officer does not get the jurisdiction to proceed against the directors personally. While counsel for the Revenue in his counter admitted that the recovery action is continuing in the case of the company, he contended that it is only after taking all possible steps for recovery, as a last resort that the provisions of section 179 were invoked for making the directors of the company in the relevant previous years jointly and severally liable for the taxes of the company. He further submitted that he has a right of revision under section 264 of she Income-tax Act and, therefore, the writ petition cannot be entertained. In addition he submitted that they have initiated action against the company by issuing notice under section 221 on June 1, 1989, and a notice under section 226(3) to the Executive Engineer. Electricity Civil Construction Division-II. Anpara Thermal Project, U. P. S. E. B., Anpara (Mirpur), Uttar Pradesh, on March 22, 1990. He, therefore, submitted that it is not a case where this Court could interfere under Article 226 of the Constitution of India.

From the counter it is clear that the proceedings against the company have not yet been concluded and they are pending. In this context, it is necessary to refer to the language used in section 179 of the Income-tax Act:

"179. Liability of directors of private company in liquidation.--(1) Notwithstanding, anything contained in the Companies Act, 1956 (1 of 1956), where any tax due from a private company in respect of any income of any previous year or from any other company in respect of any income of any previous year during which such other company was a private company 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) Where a private company is converted into a public company and the tax assessed in respect of any income of any previous year during which such company - was a private company cannot be recovered, then nothing contained in subsection (1) shall apply to any person who was a director of such private company in relation to any tax due in respect of any income of such private company assessable for any assessment year commencing before the 1st day of April, 1962."

It says where any tax due from a private company in respect of any income of any previous year cannot be recovered, then, every person who was a director of the company during the relevant previous year shall be jointly and severally liable for the payment of tax. The language used in the section is clear. It is only in cases where the tax cannot be recovered from the company the liability of the director arises. The liability of the directors is joint and several. It is not a joint and several liability with the company. It is not a liability co-extensive with the liability of the company unlike a principal debtor and surety. In the case of the principal debtor and surety, .the liability of the surety is co-extensive with that of the principal debtor and, therefore, both the principal debtor and the surety can be proceeded against simultaneously, Whereas under section 179 of the Act it is only in case the tax, cannot be recovered from the company that the liability of the director arises or the liability itself arises for the director. After the liability arises, the liability is joint and several amongst the directors and it is not a liability joint and several with that of the company.

Therefore, before the Assessing Officer proceeds against the directors personally he has to give a finding that the income-tax due for the previous year cannot be recovered from the company. In the absence of giving a finding conferring jurisdiction on him to recover the income-tax from the director personally, the Assessing Officer does not get the jurisdiction to initiate proceedings under section 179 of the Act. In the absence of such a finding, the Assessing Officer does not get jurisdiction to invoke the provisions of section 179 of the Act.

In the light of the above discussion, let us refer to the order of he Assistant Commissioner of Income-tax. It reads as follows:

"For the assessment year(s) mentioned below, a sum of Rs.64,27,371 is determined to be payable by the assessee-company towards taxes/penalties: the details are given hereunder:

The amount has become long due and the assessee-company has not paid the taxes so far.

During the previous years relevant to the assessment years mentioned above, the following persons are directors as at the close of the financial years.

(1) Smt. Kanwal Sahariwald

(2) Smt. Pushapa Malkani

(3) Smt. K. Malleswari Reddy

(4) Sri H. Sabhariwal

(5) Sri K. V. Reddy

(6) Sri Dayal Malkani

(7) Sri 1. C. Minocha.

(8) Sri Ajay Mincoha

(9) Smt. Kamala Minocha.

Section 179 of the Income Tax Act, 1961, stated that where any tax ,due from a private company in respect of any income of any previous year or from any other company in respect of any income of any previous year during which such other company was a private company cannot be recovered, then, every person who was a director of the private company at any time during the relevant previous years shall be jointly and severally liable for the payment of such taxes 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.

In this connection, a notice under section 179 was issued to the abovementioned directors fixing the dates of hearing to November 24, 1997, and November 28, 1997, calling for the objections if any.

None of the directors except Sri K. V. Reddy and Smt. K. Malleswari Reddy have filed their objections, if any, to the proposed action under section 179(1) of the Income Tax Act, 1961. The objections raised by the two directors, viz., Sri K. V. Reddy and Smt. K. Malleswari Reddy, vide their letter, dated December 8, 1997, are as under:

"(1) that the assessee has resigned from the directorship on and from July 1, 1984.

The objection raised by the directors are/is not tenable as section 179 clearly refers to the previous year in which the person responsible was the director and has not adduced any proof in support of their contentions.

I, therefore, proceed to pass the order under section 179 and hold the above nine persons jointly and severally liable for payment of taxes. I direct the directors to pay the entire demand of Rs.64,27,371 alongwith interest under section 220(2) of the Act."

A reading of the order discloses that he proceeded on the assumption that the petitioners have failed to prove that they have signed from the directorship with effect from July 1, 1984. There is no finding by the Assessing Officer of the Income-tax that the amount cannot be recovered from the company.

From the above, it follows that the proceedings, dated February 10, 1998, initiated under section 179 of the Act are without jurisdiction and without the authority of law. Therefore, the proceedings impugned are quashed. However, it does not preclude the Assistant Commissioner of

Income-tax to initiate proceedings afresh in the event of a finding that the cannot recover the amount from the company, as the liability of the directors arises at that stage and the dues as pointed out to the notice are from 1978-79 to 1984-85 and their liability subsists till the -date of their resignation, i.e., July 1, 1984. It is open to the petitioners also to raise such objections which are available to them in law.

The writ petition is accordingly allowed. No costs.

M.B.A./3233/FC Petition allowed.