Income-tax---

----Recovery of tax---Company---Director---Winding up of private company---Difference between partners of firm and directors---Resolution for winding up passed on 13-10-1961---Company dissolved by order of Court in Company Petition No. 56 of 1974---Notice issued under S.179 to Directors prior to 'winding up---Supreme Court holding Directors liable under. S.179---Notice of demand issued to company---Separate notice of demand to Directors was not necessary---Proceedings for recovery of tax from Directors was valid---Indian Income Tax Act, 1961, S.179.

There are separate provisions made in the Income-tax Act in respect of a partnership firm and private company and they have been dealt with separately. Though for the purposes of assessment for payment of income tax, the partnership firm is recognised as an entity; it can neither sue nor be sued. The suit has to be filed by, or against the partners of the partnership firm. On the other hand, the company incorporated under the Companies Act, has a juristic entity and it can sue and be sued. Once the partnership firm is dissolved, the partners of the firm are to be proceeded against. The partnership firm is no longer in existence and that is why, before the partners of the firm can be treated as assessee in default, they are individually to be served with notice of demand, under section 156 of the Income Tax Act, 1961. On the other hand, directors of a private company, incorporated under the Companies Act, can be proceeded against for the tax due from the company under section 179. Before the directors of the company can be held to be assessees in default, the income-tax authorities are not bound to serve a notice of demand under section 156.

The S company went into voluntary liquidation under a resolution passed on October 13, 1961. The company was assessed in income-tax for the years 1955-56 to 1962-63 to a total tax liability of Rs.1,34,705. The company was ordered to be wound up by the Court on March 22, 1968, and was dissolved by the order of the Court. Prior to the winding up of the company, proceedings under section 179 were commenced against H and B who were directors of the company. The directors appealed against the order raising a contention that since the company went into liquidation prior to the coming into force of the Act of 1961, the provision of section 179 of the Act, could not be invoked to realise and recover the arrears of income-tax outstanding against the company, which went into liquidation. The Supreme Court held that where a private company went into voluntary liquidation prior to April 1, 1962, i.e., the date. of commencement of the Income Tax Act, 1961, but the liquidation proceedings were still pending on the said date, the Income-tax Officer had the jurisdiction to invoke section 179 of the Act to take action against the directors of the company for realisation of the arrears of income-tax due from the company (see S, Hardip Singh v. ITO (1979) 118 ITR 57 (SC)). The Income-tax authorities in the meantime attached the property of the directors for recovery of arrears of income-tax and a proclamation of sale was issued by the Tax Recovery Officer. An application for stay of proceedings was rejected. On a writ petition against the recovery proceedings, the Single Judge upheld that recovery proceedings. On further appeal:

Held, dismissing the appeal, that the Supreme Court had decided (S. Hardip Singh v. ITO (1979) 118 ITR 57 (SC)) that the directors of the company were jointly and severally liable for payment of the arrears of income-tax outstanding against the company. The income-tax authorities were not making any fresh demand of income-tax from the directors of the company and, as such, there was no need to issue a demand notice afresh on the directors of the company. The contention that the Tax Recovery Officer had proceeded to attach the share of the appellant, the value of which was far in excess of the amount of tax sought to be recovered was a matter within the jurisdiction of the Tax Recovery Officer, which he was required to deal with. The High Court could not consider the matter, particularly, when no such argument was advanced before the Single Judge.

S. Hardip Singh v. ITO (1987) 166 ITR 759 (P&H) affirmed.

S. Hardip Singh v. ITO (1979) 118 ITR 57 (SC) and Manohar Lai v. CIT (1988) 471 ITR 241 (All.) ref.

Ramesh Kumar for Appellants.

B. S. Gupta and Sanjay Bansal for Respondents

JUDGMENT

K. K. SRIVASTAVA, J.----This judgment will dispose of two Letters Patent Appeals (Nos. 809 and 810 of 1986), filed against the judgment, dated September 5, 1986, S. Hardip Singh Sandhu v. TRO (1987) 166 ITR759 passed by a learned Single Judge (D. S. Tewatia, J.) of this Court, as the facts and law involved in both the appeals are common.

The facts giving rise to the filing of these appeals may briefly be narrated as under:

Sandhu Bus Service (Pvt.) Ltd., Amritsar (for short to be referred to as "the company"), was a company incorporated under the Indian Companies Act, S. Hardip Singh and S. Basant Singh (deceased) were the directors of the said company. One of them was a managing director. The said company went into voluntary liquidation under a resolution passed on October 13, 1961. The company was assessed to income-tax for the years 1955-56 to 1962-63 to a total tax liability of Rs.1,34,705. The company was ordered to be wound up by this Court on March 22, 1968, in Civil Original No. 33 of 1966 and was dissolved by the order of this Court passed under section 481 of the Companies Act in Company Petition No.56 of 1974. Prior to the winding up of the company, proceedings under section 179 of the Income Tax Act, 1961 (hereinafter to be referred as "the Act"), were commenced against the aforesaid directors by issuing notice there under by the concerned Income-tax Officer, holding them liable to discharge the liability of the company for payment of the due arrears of income-tax, mentioned above. The directors of the company filed reply to the notice issued to them under section 179 of the Act. The Income-tax Officer rejected the pleas of the directors by his order, dated December 31, 1970. Thereafter, the directors filed a revision before the Commissioner of Income-tax, which was also rejected on January 30, 1972. After the revision was decided by the Commissioner of Income-tax, proceedings were initiated for realisation of the income-tax arrears aforesaid against the directors of the company when the directors approached this Court by filing an application, praying for quashing of the proceedings pending against them under section 179 of the Act. This Court rejected their application in limine. Consequent upon the grant of certificate to appeal to the Supreme Court, the directors filed an appeal before the apex Court, raising a contention that since the company went into liquidation prior to the coming into force of the Act of 1961, the provisions of section 179 of the Act could not be invoked to realise and recover the arrears of income-tax outstanding against the company, which went into liquidation. The apex Court held that where a private company went into voluntary liquidation prior to April 1, 1962, i.e., the date of commencement of the Income Tax Act, 1961, but the liquidation proceedings were still pending on the said date, the Income-tax Officer had the jurisdiction to invoke section 179 of the Act to take action against the directors of the company for realisation of the arrears of income-tax due from the company and the appeal preferred by the directors against the order of this Court was dismissed. The apex Court decided the appeal on April 26, 1979 (the judgment of the apex Court rendered in appeal preferred by the directors of the company has been reported in S. Hardip Singh v. ITO (1979) 118 ITR 57 (SC)).

The income-tax authorities in the meantime attached the property of the directors for recovery of the arrears of income-tax and proclamation of sale (copy Annexure P-3) was issued by the Tax Recovery Officer, Income tax, on January 11, 1979. The directors approached the Recovery Officer for staying the proceedings for recovery of the arrears of income-tax outstanding against the company, but the same was rejected by order, dated December 7, 1978 (copy Annexure P-2). Consequently, Writ Petition No. 556 of 1979 was filed by S. Basant Singh, ex-director of the company against, (i) The Tax Recovery Officer, Range-I, Amritsar, (ii) the Income-tax Officer, District I (1), Amritsar, praying for issuance of a direction restraining the respondents from selling the property of the petitioner in the proclamation of sale in pursuance of a certificate, dated March 20, 1963, for recovery of the arrears of income-tax. The writ petition was filed on February 16, 1979. It was, inter alia, averred in the writ petition that, the directors of the company could not be held to be defaulter assessees until and unless a demand notice is issued to them under the provisions of section 156 of the Act, as provided in subsection (4) of section 220 of the Act. Since, the petitioner was not an assessee in default, hence he could not be proceeded against, nor could his property be sold in pursuance of any recovery certificate which has been issued by the Tax Recovery Officer, Income-tax. The petitioner prayed for quashing of proclamation of sale (Annexure P.3) and order (Annexure P-2) passed by the Tax Recovery Officer, rejecting his prayer and to stay recovery proceedings till a demand notice is served on him.

The respondents filed written statement in the aforesaid Writ Petition No. 556 of 1979, wherein they contended that the service of demand notice under section 156 of the Act had been effected on Sandhu Bus Service (Pvt.) Ltd., the company. The demand was not paid by the company and orders under section 179 of the Act were passed by the Income-tax Officer on December 31, 1970, holding the petitioner, S. Basant Singh and S. Hardip Singh, ex-directors of the company, jointly and severally liable to pay the tax demand outstanding against the company. It was further contended that since no fresh demand had been created and only liability for payment of tax had been shifted, there was no necessity of issuing demand notice under section 156 of the Act afresh to the directors of the company, which had since been under voluntary liquidation. The respondents, mentioned that the liability of the ex-directors of the company regarding payment of the arrears of income-tax outstanding against the company under section 179 of the Act was finally settled by the Supreme. Court, which dismissed the appeal preferred by the ex-directors of the company.

Writ Petition No. 553 of 1980 was filed by S. Hardip Singh Sandbu, ex-director, against, (i) The Tax Recovery Officer, Range-I, MIC Green Avenue, Amritsar, and (ii) the Income-tax Officer, District 1 (1), Amritsar, raising the same pleas as were raised in the connected Writ Petition No. 556 of 1979 filed by the other director, S. Basant Singh (since deceased) of the company. The writ petitioner, S. Hardip Singh, also prayed for quashing of Annexures P-1 and P-2, filed alongwith the writ petition. Annexure P-1 is the notice of attachment of property in Form No. 11 C. P.7 under rule 27 of the Second Schedule to the Act and addressed to Shri Hardip Singh Sandhu, Director, Navdeep Theatre (P.) Ltd., Amritsar. This notice is dated October 31, 1979, wherein the share of S. Hardip Singh Sandhu in Navdeep Theatre (Pvt.) Ltd., was attached regarding the recovery of the aforesaid arrears of income-tax outstanding against the company. Annexure P-2 is the summons issued under rule 83 of the Second Schedule to the Act, which is dated September 18, 1979, issued to S. Hardeep Singh Sandhu, requiring him to personally attend the office of the Tax Recovery Officer, Range-1, MIC Green Avenue, Amritsar, on October 12, 1979, for producing books of accounts and other documents detailed in the summons.

The two writ petitions have been disposed of by the learned Single Judge by a common judgment delivered on September 5, 1986 (see (1987) 166 ITR 759). The learned Single Judge held that there was no need for issuance of a demand notice under section 156 of the Act after the liability is fastened on the directors, of the company to pay the arrears of income-tax outstanding against the company aforesaid under section 179 of the Act. It was held that under section 179 of the Act, the liability is fastened on a director of the company only if the company has become a defaulter and the money cannot be recovered from it and the directors are held liable for that default. For the purpose of the provisions of section 220(4) of the Act, the learned Single Judge held that the person held liable under section 179 of the Act to pay the tax liability of the company would be deemed to be a defaulting assessee in terms of section 220(4) of the Act. Consequently both the writ petitions were held to be without any merit and were dismissed.

The appellant, Basant Singh in the meantime died and his heirs and legal representatives, namely, Hardip Singh, Harbhajan Singh, Satnam Singh, Sarbjit Singh and Amritpal Singh were impleaded, vide order dated September 13, 1986, by this Court in C.M. No. 3397 of 1986.

We have heard learned counsel for the appellants and learned counsel for the respondents. We have carefully perused the judgment under appeal. The main contention of learned counsel for the appellants is that the directors of the company, since lequidated, cannot be held to be assessees in default within the meaning of section 220(4) of the Act unless and until a notice of demand as envisaged under section 156 of the Act is served on them and they fail to comply with the same. Learned counsel for the appellants urged that the demand notice issued under section 156 of the Act to the company for recovery of the arrears of income-tax due and outstanding against it, cannot be treated as compliance with service of notice under section 156 of the Act qua the directors of the company.

Learned counsel for the respondents while repelling the arguments _ of learned counsel for the appellants urged that since no new demand of income-tax was being made from the directors of the company, hence they would be treated as defaulting assessees under section 220(4) of the Act.

In order to appreciate the rival contentions of learned counsel for the parties, the provisions of sections 156 and 220(4) of the Act may be referred to. Section 156 of the Act provides for issuance of notice of demand and reads as under:

"When any tax, interest, penalty, fine or any other sum is payable in consequence of any order passed under this Act, the Income-tax Officer shall serve upon the assessee a notice of demand in the prescribed form specifying the sum so payable."

Section 220(4) of the Act lays down:--

"If the amount is not paid within the time limited under sub?section (1) or extended under subsection (3), as the case may be, at the place and to the person mentioned in the said notice the assessee shall be deemed to be in default."

Undisputedly, the company was to pay income-tax for the years, referred to above, the Income-tax Officer had served a notice of demand under section 156 of the Act. It is also not disputed that the amount of income-tax which was in arrears was not paid by the company. In the meantime, the company went into voluntary liquidation. It is also not disputed that during the winking up process of the company, the Income Tax Act, 1961, came into force with effect from April 1, 1962. The appellants, who were directors of the company, were proceeded against under the provisions of section 179 of the Act, which provides for liability of the directors of a private company in liquidation. The directors of the company filed their reply before the income-tax authorities, wherein they contested the liability to pay the arrears of income-tax on the ground that the company was already under liquidation and at that time the Income Tax Act, 1961, had not come into force and, as such they were not liable jointly and severally for the amount of arrears of income-tax under section 179 of the Act. As mentioned above, the matter was contested up to the Supreme Court, which finally rejected the plea of the directors of the company. The decision of the case itself is in S. Hardip Singh v. ITO (1979) 118 ITR 57. This matter, thus, stands finally decided between the parties that the directors of the company are jointly and severally liable for payment of the arrears of income-tax outstanding against the company, which was not paid by the company. The Income-tax Recovery Officer commenced the recovery proceedings and issued order of attachment and summoned Hardip Singh with accounts to appear before the concerned authority in connection with the recovery of the arrears of income-tax. The directors of the company filed their reply and raised a plea that the arrears of income-tax outstanding against the company could not be recovered from them and they could not be treated as defaulting assessees within the meaning of section 220(4) of the Act until and unless a demand notice is served upon them as required by section 156 of the Act. The learned Single Judge held that the position of a person, on whom liability is fastened under section 179 is equated with that of the defaulting assessee. He further held that once the order under section 179 of the Act has attained finality, the directors of the company would be deemed to be defaulting assessees in terms of section 220(4) of the Act and no fresh notice of demand, as required under section 156 of the Act, was necessary to be issued. The Income-tax Authorities were not making any fresh demand of income-tax from the directors of the company and as such, there was no need to issue a demand notice afresh on the directors of the company. Once the liability is fastened on the directors to pay the arrears of income-tax outstanding against the company, which has since been wound up, under section 179 of the Act, the directors would come in the place of the company and at the stage where the company became a defaulter-assessee under section 220(4) of the Act.

Learned counsel in support of his arguments cited the judgment of the Allahabad High Court in the case of Manohar Lal v. CIT (1988) 171 ITR 241, wherein the High Court held that on the dissolution of a partnership firm, though the partners are jointly-and severally liable for the tax dues of the firm in view of the provisions of section 189(3) of the Income Tax Act, 1961, the tax liability of the firm should be realised by proceeding against the properties of the firm. The properties of the partners in their individual capacity cannot be attached or sold nor can the partners be arrested for the tax dues of the firm unless they are deemed to be "assessee in default", within the meaning of the provisions of the Income Tax Act, 1961. It was further held that for realising the tax dues of the firm the Revenue should proceed against the partners of the firm in accordance with the provisions of sections 182 and 183. In the absence of any proceedings under these sections against the partners, the partners cannot be deemed to be "assessees in default".

We are of the considered view that this authority has no application in the instant case. There are separate provisions made in the Income-tax Act in respect of partnership firms and the private company and they have been dealt with separately. Apart from this, though for the purposes of assessment for payment of income-tax, the partnership firm is recognised as an entity, the existence of partnership firm in the eyes of law in so far as it being a juristic person is concerned, is that it can neither sue nor be sued. The suit has to be filed by or against the partners of the partnership firm: On the other hand, the company incorporated under the Companies Act is a juristic entity and it can sue and be sued. Once the partnership firm is dissolved, the partners of the firm are to be proceeded against. The partnership firm is no longer in existence and that is why before the partners of the firm can be treated as assessees in default, they are individually to be served with 'notice of demand under section 156 of the Act. On the other hand, directors of the private company, incorporated under the Companies Act, can be proceeded against for the tax due from the company under section 179, of the Act, which specifically provides as under:

"179.---(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 lie 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. "

Learned counsel for the, appellants laid great stress on the following observations of the learned Single Judge (see (1987) 166 ITR 759), to support his contention that the directors of the company can be held to be assessees in default only when a demand notice under section 156 of the Act has been served upon them (page 761):

"Now, coming to the first contention, it may be mentioned that the primary purpose of serving a demand notice upon the assessee under section 156 of the Act is to initiate the process of recovery of the amount of tax found due from the assessee. Unless a demand notice is served upon the assessee under section 156, things would not move, in that the assessment, order passed either under section 143 or 144 of the Act is made appealable by the provisions of section 246. Time within which the appeal is to be filed is provided by section 249 of the Act which provides that an appeal against the order of the Income-tax Officer passed under section 143 or 144 should be filed within thirty days from the date of the service of the demand notice under section 156 of the Act. If, for instance, the Income-tax Officer, for whatever reasons, fails to serve the demand notice upon the assessee, then the assessee can wait to file the appeal with the result that the tax liability assessed by the Income-tax Officer would remain in abeyance. That is why, the issuance of a demand notice under section 156 assumes such a mandatory importance. Yet another reason that necessitates the issuance of a demand notice under section 156 is that an assessee cannot be declared a defaulting assessee in terms of section 220(4) of the Act unless a demand notice is served upon him under section 156; and unless a demand notice is served on a defaulting assessee, the coercive process of recovering the tax liability from him by issuing a tax recovery certificate under section 222 cannot be resorted to. "

After going through the aforesaid observations of the learned Single Judge, it would be abundantly clear that he has dealt with the relevant provisions of the Act right from the service of a demand notice under section 156 of the Act up to the assessees being declared defaulting assessees and necessitating issuance of coercive process for recovery of the tax liability from him by issuing a tax recovery certificate under section 222 of the Act. This, however, is not a finding regarding facts of the instant case. The finding of the learned Single Judge regarding the facts of the instant case is contained in the subsequent para., which reads as under (page 762):

"So far as the order that is passed under section 179 of the Act is concerned, the same is not appealable, therefore, the first underlying necessity of issuance of the notice under section 156 is not there. So far as the second underlying necessity of issuance of the notice under section 156 is concerned, it may be observed that the position of a person on whom liability is fastened under section 179 is equated to that of the defaulting assessee. Under section 179, the liability is fastened on a director of the company only if the company has become a, defaulter, and the money cannot be recovered from it and the directors are held liable for the default. Hence, for the purpose of the provisions of section 220(4) of the Act. the person held liable under section 179 to pay the tax liability of the company would be deemed to be a defaulting assessee in terms of section 220(41 off the "

We therefore, find no merit it the arguments of learned counsel, for the appellants that before the directors of the company can be held to be assessees in default, the income-tax authorities were bound to serve a notice of demand under section 156 of the Act.

?Lastly learned counsel for the appellant tried to urged that the Tax Recovery Officer had proceeded to attached the share of the appellant/Hardip Singh in Nandeep Treartre Amirtdar the of which was far in excess than the amount of tax sought to be recovered. In our view this is a matter within the jurisdiction of the tax Recovery Officer which he was required to deal with and we do not propose to go into this matter particularly when we notice that no such argument was advance before the learned Single Judge.?

Resultantly, both these appeals are devoid of merit and are dismissed.

M.B.A./3361/FC ??????????????????????????????????????????????????????????????????????????????? Appeals dismissed.