C RAJENDRAN Vs. INCOME TAX OFFICER

JUDGEMENT

(1.) THIS writ appeal is filed against the order of the learned single judge, who has refused to entertain the writ petition filed by the petitioners. A few facts would be necessary.

(2.) THE petitioners are the directors of a private limited company called Anaimugham Transport Private Limited. THEre was tax liability against this company for the assessment years 1974-75 and 1978-79. THE tax liability for the assessment year 1974-75 was Rs. 18,855 while the tax liability for the assessment year 1978-79 came to Rs. 3,58,174. A notice came to be served to the directors of the company, the petitioners in the writ petition, under Section 179(1) of the Income-tax Act, 1961. By that notice, it was informed to the company that the company was in tax arrears for the aforementioned two assessment years in the sum of Rs. 27,347 and Rs. 3,25,976, respectively. In addition to these amounts, the company was also liable to pay interest under Section 220(2) of the Income-tax Act as also penalty under Section 221. It was then pointed out that the tax arrears could not be collected from the company and the non-recovery of the tax was attributable to the gross negligence on the part of the directors, i.e., the noticees and, therefore, the noticees were directed to show cause as to why they could not be held jointly and severally liable for the payment of the tax arrears and this notice seems to have been answered by one Chandrasekara Mudaliar, managing director of the company, who pointed out that a waiver petition was pending in respect of the interest under Section 139(8) of the Income-tax Act as the arrears for the assessment year 1974-75 were only on account of the interest liability. As regards the assessment year 1978-79, it was pointed out by the petitioners that the company had preferred an appeal against that liability and the said appeal was already pending. It was, therefore, prayed that the proposed action under Section 179 of the Income-tax Act should be stayed during the pendency of the appeal.

(3.) THIS Section has been amended and it is the amended version which is reproduced above. The language of the Section is very clear to suggest that the action under the Section can be activated only when the tax due from a private limited company pertaining to the previous year cannot be recovered. The words "cannot be recovered" are most important. The phraseology suggests essentially that in spite of the efforts made as per the procedure followed in the Income-tax Act for recovery of the tax arrears when the said tax arrears cannot be recovered then alone the liability can be transferred under Section 179(1) of the Income-tax Act to the directors. Therefore, in order to activate this Section and the action thereunder, a finding would have to be recorded to the effect that in spite of the efforts to recover the tax arrears the said tax arrears could not be recovered from the assessee-company. The second part of the Section comes into effect only thereafter. Firstly, once there is a finding that such tax arrears cannot be recovered then the liability could be transferred to every person who was a director and it would be then for such a person to show 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 and when he discharges this burden, he would no more be required to discharge the tax liability so transferred to him. However, that stage would come only later on, after it is found that the tax arrears cannot be recovered from the assessee-company.