Supreme Court on Dismissal of Income Tax Appeal due to Company Dissolution: Commissioner of Income Tax vs. M/s Gopal Shri Scrips Pvt. Ltd. (2019) INSC 197

Date of the Judgment: March 12, 2019
Citation: (2019) INSC 197
Judges: Abhay Manohar Sapre, J., Dinesh Maheshwari, J.

Can a High Court dismiss an appeal by the Income Tax Department simply because the respondent company has been struck off the register of companies and is dissolved? The Supreme Court of India addressed this question in a recent case, clarifying the legal position regarding the continuation of tax liabilities even after a company’s dissolution. This judgment underscores the importance of considering specific provisions of both the Companies Act, 1956 and the Income Tax Act, 1961, when dealing with dissolved companies.

Case Background

The case involves an appeal by the Commissioner of Income Tax, Jaipur, against M/s Gopal Shri Scrips Pvt. Ltd. The Income Tax Department had initially filed an appeal before the High Court of Judicature for Rajasthan at Jaipur, challenging an order by the Income Tax Appellate Tribunal (ITAT). However, the High Court dismissed the appeal, deeming it infructuous because the respondent company had been dissolved and its name struck off the register of companies.

Timeline

Course of Proceedings

The Income Tax Department initially filed an appeal before the High Court of Judicature for Rajasthan at Jaipur, challenging the order of the Income Tax Appellate Tribunal (ITAT). During the proceedings, the High Court was informed that the respondent company, M/s Gopal Shri Scrips Pvt. Ltd., had been dissolved and its name struck off the register of companies by the Registrar of Companies under Section 560(5) of the Companies Act, 1956. Consequently, the High Court dismissed the appeal, stating that it had become infructuous due to the company’s dissolution. The Income Tax Department then filed a special leave petition in the Supreme Court against this dismissal.

Legal Framework

The Supreme Court highlighted the importance of considering specific legal provisions in cases involving dissolved companies. The relevant provisions are:

• Section 560(5) of the Companies Act, 1956: This section deals with the striking off of a company’s name from the register of companies. The proviso (a) to this section states that the liability, if any, of every director, managing agent, secretary or manager or other officer who was exercising any power of management, and of every member of the company, shall continue and may be enforced as if the company had not been dissolved.
• Chapter XV of the Income Tax Act, 1961: This chapter deals with “liability in special cases.” Clause (L) of this chapter addresses “discontinuance of business or dissolution” and provides the mechanism to deal with tax liabilities of companies that have been dissolved.

The Court noted that these provisions specifically address how liabilities against a company, even after its dissolution, should be handled under both the Companies Act, 1956 and the Income Tax Act, 1961.

Arguments

Appellant (Income Tax Department):

• The High Court erred in dismissing the appeal as infructuous.
• The High Court failed to consider the proviso (a) to Section 560(5) of the Companies Act, 1956, which states that the liability of directors and members continues even after the company is dissolved.
• The High Court also failed to consider Chapter XV of the Income Tax Act, 1961, which deals with liabilities in special cases, including the discontinuance of business or dissolution of a company.

The Income Tax Department argued that the dissolution of the company does not automatically extinguish its tax liabilities and that the High Court should have considered the case on its merits.

Respondent (M/s Gopal Shri Scrips Pvt. Ltd.):

None appeared for the respondent, though served.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether the High Court was justified in dismissing the appeal filed by the Income Tax Department on the ground that it has rendered infructuous.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following legal provisions:

• Section 560(5) of the Companies Act, 1956: This section deals with the striking off of a company’s name from the register of companies.
• Chapter XV of the Income Tax Act, 1961: This chapter deals with “liability in special cases,” including the discontinuance of business or dissolution.

Judgment

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the fact that the High Court had overlooked critical legal provisions that specifically address the liabilities of dissolved companies. The Court emphasized that the dissolution of a company does not automatically extinguish its liabilities, particularly in the context of tax obligations. The Court’s reasoning was rooted in the need to ensure that legal obligations are not evaded through the dissolution of companies.

The Supreme Court held that the High Court was wrong in dismissing the appeal as infructuous. The Court emphasized that the High Court failed to consider the relevant provisions of the Companies Act, 1956 and the Income Tax Act, 1961. The court stated, “In our view, the High Court was wrong in dismissing the appeal as having rendered infructuous.” The Court further stated, “The High Court failed to notice Section 560(5) proviso (a) of the Companies Act and further failed to notice Chapter XV of the Income Tax Act which deals with “liability in special cases” and its clause (L) which deals with “discontinuance of business or dissolution”.” The Court also mentioned, “Since the High Court did not decide the appeal keeping in view the aforementioned two relevant provisions, the impugned order is not legally sustainable and has to be set aside.”

Key Takeaways

• The dissolution of a company does not automatically extinguish its tax liabilities.
• High Courts must consider the proviso (a) to Section 560(5) of the Companies Act, 1956, and Chapter XV of the Income Tax Act, 1961, when dealing with cases involving dissolved companies.
• Tax liabilities of a dissolved company can still be pursued by the Income Tax Department.

Directions

The Supreme Court set aside the impugned order and remanded the case to the High Court for deciding the appeal afresh on merits in accordance with law, keeping in view the relevant provisions of the Companies Act, 1956 and the Income Tax Act, 1961. The Supreme Court requested the High Court to decide the appeal preferably within six months.

Development of Law

The ratio decidendi of this case is that the dissolution of a company does not automatically extinguish its tax liabilities. The Supreme Court clarified that the High Court should not have dismissed the appeal as infructuous without considering the relevant provisions of the Companies Act, 1956 and the Income Tax Act, 1961, which specifically address the liabilities of dissolved companies. This judgment reinforces the principle that tax liabilities of a dissolved company can still be pursued by the Income Tax Department.

Conclusion

The Supreme Court’s decision in Commissioner of Income Tax vs. M/s Gopal Shri Scrips Pvt. Ltd. clarifies that the dissolution of a company does not automatically terminate its tax liabilities. The High Court was directed to reconsider the case on its merits, taking into account the relevant provisions of both the Companies Act, 1956 and the Income Tax Act, 1961. This judgment ensures that companies cannot evade their tax obligations by simply dissolving, and it reinforces the importance of considering all relevant legal provisions in such cases.