1. Issue for consideration :
1.1 S. 179 of the Income-tax Act
provides for liability of directors of a private company. It 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 private company
at any time during the relevant previous year is 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. It, therefore, provides for a joint and
several liability of the directors of a private company for its tax dues.
1.2 The question arises as to
whether the tax authorities can proceed against the directors of the company,
even where the company has certain assets, as they may find it easier to recover
money from the directors rather than from the company ? In other words, is
it essential for the tax authorities to first exhaust all avenues of recovery
against the company before proceeding against the directors ?
1.3 While the Bombay High Court,
Andhra Pradesh High Court and Gujarat High Court have held that the directors
can be made personally liable to pay arrears of tax of the company only if the
Income-tax Department was unable to realise the arrears from the company, the
Madras High Court has taken a contrary view and held that the recovery of
arrears of the company from the directors can be initiated before exhausting the
remedies against the company.
2. Praveen Desai’s case :
2.1 The issue recently came up
for consideration before the Gujarat High Court in the case of Indubhai T.
Vasa (HUF) v. ITO, 196 CTR 15. The Gujarat High Court followed its earlier
ratio in the case of Bhagwandas J. Patel v. Dy. CIT, 238 ITR 127, where
the issue had come up earlier before the Gujarat High Court for consideration.
The issue had however first come up for consideration before the Bombay High
Court in the case of Union of India v. Praveen D. Desai, 173 ITR 303.
2.2 This was an appeal to the
Division Bench against the single judge decision in the case of Praveen D.
Desai v. ITO, 149 ITR 187 (Bom.), where the single judge had set aside the
order of the Income-tax Officer holding that the director of a private company
in liquidation was liable to pay taxes due by the company under the provisions
of S. 179(1) of the Income-tax Act, 1961.
2.3 While conceding the main
issue about the liability of a director of a private company to pay taxes of a
private company u/s.179(1), on behalf of the assessee, it was argued that a sale
proclamation had been issued by the Tax Recovery Officer for sale of immovable
property of the company, and that the director could be made liable to
personally pay the arrears only if the Department was unable to realise the
arrears by the proposed auction sale.
2.4 The Bombay High Court agreed
with the assessee’s contention, that the liability of the director arose only
if the Department was unable to recover the arrears of tax from the assets of
2.5 A view similar to that taken
by the Bombay High Court was also taken by the Andhra Pradesh High Court in the
case of K. V. Reddy v. ACIT, 232 ITR 306.
3. Sundararaman’s case :
3.1 The issue also came up
before the Madras High Court in the case of M. R. Sundararaman v. CIT,
215 ITR 9.
3.2 In this case, the petitioner
was one of the directors of a private company till 1951, when he resigned from
his post as a director of the company. The company was wound up in January 1969.
In 1970, the tax authorities called upon the petitioner to pay the income-tax
arrears of the company for A.Ys. 1948-49 and 1949-50 u/s.179, and proposed to
adjust the tax refund due to him against such arrears.
3.3 The petitioner filed a writ
petition before the High Court challenging the proposed recovery of taxes of the
company from him. Among other contentions, it was argued on behalf of the
petitioner that the Department could initiate action against the petitioner only
after exhausting its remedies against the company and its assets.
3.4 The Madras High Court
dismissed this argument of the petitioner on the ground that S. 179(1) made the
liability of the company and the petitioner joint and several. The Court
accordingly dismissed the petition, holding that the tax could be recovered from
4. Observations :
4.1 The Madras High Court seems
to have misinterpreted the provisions of S. 179 of the Act. According to the
Court, the company and the directors had a joint and several liability to pay
the taxes. The language of the Section however seems to indicate that the
liability of the directors is joint and several inter se. As analysed by
the Andhra Pradesh High Court in Reddy’s case (supra), it is not a
joint and several liability of the directors with the company, but with each
other. As held by the Court in that case, 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
co-extensive with that of the principal debtor, and therefore both the principal
debtor and the surety can be proceeded against simultaneously.
4.2 The Madras High Court also
does not seem to have appreciated that the Section comes into application only
where any tax due from a private company cannot be recovered from the company.
It has no application in a situation where there is the possibility of recovery
of taxes from the company and recovery action is continuing in its case. The
Assessing Officer can, therefore, assume jurisdiction u/s.179 against the
directors only where he gives a finding that the income-tax dues cannot be
recovered from the company. This aspect has been rightly highlighted by the
Andhra Pradesh High Court in Reddy’s case (supra).
4.3 As rightly pointed out by
the Gujarat High Court in Bhagwandas Patel’s case (supra), before
recovery in respect of dues from the private company can be initiated against
the directors, to make them jointly and severally liable for such dues, it is
necessary for the Revenue to establish that such recovery cannot be made against
the company and then and then alone, it can reach the directors who were
responsible for the conduct of business in the previous year in relation to
which such liability exists.
4.4 It is also worth noting that
the Madras High Court’s decision is a decision of a single judge whereas the
decisions of the Bombay High Court, Andhra Pradesh High Court and Gujarat High
Court are all decisions of Division Benches of those Courts.
4.5 Therefore, it appears that
the decision of the Madras High Court needs reconsideration, as it does not
appear to lay down the correct interpretation of law as analysed by the other
High Courts. The better view is that the directors of a private company can be
made liable only after all recovery proceedings against the company and assets
of the company are exhausted, and not until then.