Directors of private company liable for tax dues from April 1, 1962 under Income-tax Act

The court held that directors of a private company are liable for tax dues from April 1, 1962, onwards under section 179 of the Income-tax Act, 1961. The liability extends to penalty, interest, and recovery charges. Directors are jointly and severally liable if the company cannot pay. The burden of proof lies on directors to show they are not grossly negligent. The respondent's failure to pay taxes constituted a breach of duty, making him liable. The appeal was allowed, and the respondent was ordered to pay costs.

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Issues Involved:
1. Retrospective application of section 179 of the Income-tax Act, 1961.
2. Scope of liability of directors for tax dues.
3. Inclusion of penalty, interest, and recovery charges in the liability.
4. Burden of proof on directors to escape liability.

Summary:

1. Retrospective Application of Section 179:
The primary issue was whether directors of a private company are liable for tax dues from April 1, 1962, onwards, under section 179 of the Income-tax Act, 1961. The court held that section 179(1) and (2) of the Act, substituted by the Taxation Laws (Amendment) Act, 1975, with effect from October 1, 1975, has retrospective effect from April 1, 1962. The court reasoned that the expression "any previous year" in section 179(1) indicates the Legislature's intent for retrospective application. The court rejected the argument that section 179(1) is prospective and concluded that directors are liable for tax dues from the assessment years commencing April 1, 1962, onwards.

2. Scope of Liability of Directors:
The court clarified that section 179 imposes a vicarious liability on directors of private companies, making them jointly and severally liable for tax dues if the company cannot pay. This liability extends to all private companies, whether in liquidation or not, and to companies converted into public companies for the period they were private companies. The court emphasized that the liability is co-extensive with the company and applies only for the years the individual was a director.

3. Inclusion of Penalty, Interest, and Recovery Charges:
The court rejected the argument that directors' liability under section 179 is limited only to the amount of tax and does not include penalty, interest, or recovery charges. The court held that once a director is deemed an "assessee" under section 2(7) of the Act, they are liable for all sums payable under the Act, including penalties and interest. The court agreed with the Kerala High Court's decision in Ratanlal Murarka v. ITO [1981] 130 ITR 797 on this point.

4. Burden of Proof on Directors:
The court held that the burden of proof lies on the directors to demonstrate that non-recovery of tax cannot be attributed to any gross neglect, misfeasance, or breach of duty on their part. The respondent failed to discharge this burden. The court noted that the respondent's claim of being involved in social work and legal battles did not absolve him of his duty as a director to ensure tax payments. The court concluded that the respondent's failure to pay taxes constituted a breach of duty, making him liable under section 179.

Conclusion:
The appeal was allowed, and the judgment dated January 11, 1983, in Miscellaneous Petition No. 1432 of 1978, was set aside. The petition was dismissed, and the respondent was ordered to pay the costs of the Revenue throughout.

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