' SABIHUDDIN AHMED, J.---This appeal is directed against the order of the learned Single Judge, dated 9-8-1990 directing that an amount of Rs,370,882 recovered out of sale proceeds of property of respondent No,2 be paid to the respondent No,4 in satisfaction of income-tax liabilities of the respondent No, 1.
2. Briefly, the relevant facts appear to be that pursuant to and in consideration of loan/over draft facilities granted to respondent No,1 Company (hereinafter referred to as the Company by the appellant, the respondent No,2 who was a Director of the respondent No,1 created an equitable mortgage by deposit of title deeds of his House bearing No,D-184, K.D.A. Scheme No,1 on 23-5-1979, by way of security for re-payment of the aforesaid loan. On 20-5-1982 the appellant filed a mortgage suit against the Company as well as the respondent No,2/Director for recovery of the outstanding amount. The suit was accordingly decreed and the mortgaged property was directed to be sold by way of the preliminary decree, dated 23-1-1993. The respondent failed to make payment even after six months of the decree and thereafter the appellant filed an application for final decree. However, upon enactment of Ordinance H of 1993, the matter was transferred to the original side of this Court which eventually disposed of the aforesaid application on 20-11-1984 directing sale of the mortgaged property. Thereafter pursuant to a Court order the property in question was sold and sale proceeds deposited in Court.
3. It appears that an amount of Rs,509,761 was due and payable by the respondent No,1 as arrears of income tax liabilities for the years 1978-79, 1979-80, 1980-1982-83 and 1983-84. The respondent No,4 caused a public notice to be issued which appeared in the Press on 13-9-1987 stating that the assets belonging to the three Directors of the respondent No,1, including the respondent No,2 had been attached and objections to the aforesaid attachment may be filed within 7 days of the publication of the notice. The property forming part of the subject matter of mortgage was mentioned in the aforesaid notice. Upon becoming aware of such notice the appellant submitted C.M.A. 3059 of 1987 before the learned Single Judge in the above suit challenging the attachment whereupon status - quo was directed to be maintained by order, dated 28-9-1987.
4. On 18-10-1987 the respondent No,4 moved C.M.A. No,3285 of 1987 under section 73(3) read with section 92 of the Income Tax Ordinance read with section 151, C.P.C. Claiming that the aforesaid respondent had a prior claim over the mortgaged property under the Income Tax Ordinance and that sale proceeds may not be paid to the decree holder till the disposal of the application and disbursement of income-tax arrears. The appellant filed objections and the application was heard by the learned Single Judge on 8-8-1990 and disposed of vide impugned order. It was conceded by the learned counsel for the respondent No,4 that the tax demand relating to the last three years could not be recovered as related to the period of time after the creation of the equitable mortgage in favour of the appellant. The claim of the department was therefore, confined to Rs,370,882 relating to the years 1978-79 and 1979-80. It was argued on behalf of the appellant that the tax demand related to the respondent No,1 company, which was an independent legal entity from its share holders and the property of the respondent No,2, who as only one of its Directors could not be attached under the Income Tax Ordinance. The learned Single Judge, however, observed that under section 92 of the Ordinance, the respondent No,2 being a Director of the company held or controlled the receipt of money belonging to the company and therefore, was liable to pay the income-tax recoverable from the company. Accordingly the application was allowed and a sum of Rs,370,882 was directed to be paid to the respondent No,4 vide order, dated 9-8-1990. This appeal is directed against the aforesaid order.
5. In support of this appeal Syed Iqbal Ahmad, learned counsel for the appellant in the first instance argued that the claim of the respondent No,4 could only have priority over unsecured debts of the respondents Nos.1 and 2 but not against the claims of a secured creditor like the appellant in whose favour an equitable mortgage had been created through deposit of title deeds of the respondent No,1 on 23-5-1979 and a decree had been passed on the basis of such mortgage. In support of his contention learned counsel placed reliance upon Federation of Pakistan v. Pioneer Bank Limited PLD 1958 Dacca 535, Income-tax Officer v. K.A. Govindaswamy 1978 113 ITR Mad. 593, Sundaram Finance Limited v. The Regional Transport Authority (1979) 117 ITR Kerala 334, Industrial Development Bank Limited v. M/s. Maida Limited and 3 others 1989 CLC 143 and an unreported judgment of this Court in the case of Industrial Development Bank of Pakistan v. Commissioner of Income-tax (H.C.A. No,85 of 1987). We have gone through all these judgments and have found that the consistent principle of law laid down therein is only to the effect that Government liabilities arising subsequent to a charge on the properties cannot have preference over the claims of secured creditors. Indeed except for the case of Sundaram Finance Limited decided by the Kerala High Court claims of the Government had arisen after the charge on the property having been created. Nevertheless we are unable to follow the Kerala precedent in view of the clear enunciation of law in the unreported D.B. Judgment of this Court in H.C.A. No,85 of 1987, authored by Ajmal Mian, J, (as his Lordship then was) to the following effect:- "The legal position which has emerged is that if an Income-tax liability is created prior to a mortgage, the Income-tax Department, will have preferential right to the extent of the said Income-tax liability but in case income-tax liability is created subsequent to the mortgage, the secured creditor will have a preferential right in respect of his claim."
6. Mr. Shaikh Haider, learned counsel for the respondent No,4 candidly concedes to the above legal proposition and has pointed out that even before the learned Single Judge he had frankly conceded that no preference could be given to the claim of respondent No,4 for the years 1980-81 and onwards. Therefore, the real question to be determined is whether the respondent No,2 was liable to clear the income-tax liabilities of the respondent No,1 and if so from what date.
7. In the above context Syed Iqbal Ahmad, learned counsel for the appellant argued that admittedly the tax liability shown in the certificate annexed to the application of the respondent No,4 only related to the respondent No,1 and section 92 of the Income Tax Ordinance does not per se require the Director of a company to be treated as an assessee responsible for making all payments on behalf of the assessee company. According to the learned counsel the relevant provisions only provide for something similar to garnishment of a debt. To properly appraise the argument it may be convenient to reproduce the aforesaid section 92 which read as follows:- "92. Recovery of tax from persons holding money on behalf of an assessee.---(1) For the purpose of recovering any tax payable by an assessee, the Income-tax Officer may, by notice in writing, require any person,---
(a) from whom any money is due or may become due to the assessee; or
(b) who holds, or controls the receipt or disposal of, or may subsequently hold, or control the receipt or disposal of, any money belonging to the assessee or on account of the assessee; or
(c) who is responsible for payment of any sum to the assessee to which section 50 applies, to pay to the Income-tax Officer, in any case to which clause (a) or clause (b) applies, the sum specified in the notice on or before such date as may be so specified; or to deduct, in any case to which clause (c) applies, from any payment subsequent to the date of such notice any arrears of tax due from the assessee as specified in the said notice and the provisions of subsections (8) and (9) of section 50 and section 52 shall, so far as may be, apply as if the sum or the arrears of tax specified in the said notice, as the case may be, were a sum deductible under section 50.
(2) Any person who has paid any sum in compliance with a notice under subsection (1) shall be deemed to have paid such sum under the authority of the assessee and the receipt of the Income- tax Officer shall constitute a good and sufficient discharge of the liability of such person to the assessee to the extent of the sum referred to in such receipt, (2A) If any person on whom a notice under subsection (1) is served fails to pay, or to deduct, as the case may be, the amount specified in the said notice, such person shall be treated as an assessee in default and the amount specified in the said notice shall be recoverable from him by the Tax Recovery Officer or the Collector in accordance with the provisions of sections 93 and 9.
(3) For the purpose of this section, 'person' includes any Court tribunal or any other authority."
8. A plain reading of the above would show that Mr. Iqbal Ahmad is right to the extent that subsection (1) of section 92 does not provide that a debtor of the assessee or a person in control of moneys belonging to him is invariably liable to discharge the tax liabilities of the assessee. It only enables the Deputy Commissioner (Income-tax Officer prior to 1993 Amendment) to require such person by a notice in writing to pay any arrears of tax specified in such notice. In fact it is subsection (2A) of the aforesaid section, which was not part of the original Ordinance, but was inserted through an amendment made vide Finance Act, 1981, which provides that if such person on whom a notice is served under subsection (1) fails to pay the amount specified in the notice, he is required to be treated as an assessee in default.
9. The learned Single Judge, if we may say so with respect, proceeded to observe that since not only an assessee, but even a person holding or controlling the receipt or disposal of means of the assessee was also liable for payment of income-tax of the assessee and since the respondent No,2 was admittedly a Director of the respondent No,1 company, he was also liable to pay the Income- tax dues of the company. We regret our inability to subscribe to this broad formulation. No doubt the power to manage the affairs of a company generally vests, in its Board of Directors, but, as observed by the Honourable Supreme Court in Iftikhar Hussain Mamdot v. Ghulam Nabi Corporation PLD 1971 SC 550, the Board acts as a collective body and individual Directors cannot be treated as being vested with powers of the Board. Therefore, unless it can be shown, on the basis of the Articles of the Company or some other material that the respondent No,2 acting individually had control or dominion over the moneys belonging to the company, he could not be made personally liable to pay such income tax liability.
10. Moreover even if it we assume, that respondent No,2 had in-fact control or dominion over the money belonging to the respondent No,1 the liability could attach only from the date a notice in writing was served upon him. There is nothing on record to indicate that such notice was served nor does the application preferred by the respondent No,4 mention service of such notice. The only document attached to such application appears to be a certificate from the Income-tax Officer mentioning the arrears of tax liability of the respondent No,1 for the 5 years in question. Though the certificate does not carry a specific date, the Reference No, Cos. Cir. C-4/CZC of 1987-88, indicates that it was issued during the Financial Year 1987-88, i,e, somewhere in 1987. In any event its contents show that it could not be issued prior to the close of the financial year 1983-84. In view of the above we are clearly of the opinion that there is nothing to show that the respondent No,2 had been made liable to discharge the tax liabilities of the respondent No,1 prior to the creation of mortgage on 23-5-1979 in terms of section 92 of the Income Tax Ordinance.
11. Mr. Shaikh Haider, learned counsel for the respondent, however, argued that irrespective of section 92, under section 77 of the Ordinance the respondent No,2 being a Director of a private company was liable to pay the Income-tax payable by a private company. It may be proper to reproduce the relevant provisions of section 77, which read as under:- "77. Liability for payment of tax in the case of private companies, firm and associations of persons.- --(1) Notwithstanding anything contained in the Companies Act, 1913 (IV of 1913), where any tax payable by a private company (including a private company which is wound up or has gone into liquidation) in respect of any income year (whether ending before or after the date of commencement of the winding-up or liquidation proceedings) cannot be recovered, every person who is, or was at any time during the said income year, a Director of the company and every shareholder owning not less than ten per cent. Of its paid-up share capital at any time during the said income year shall be jointly and severally liable for the payment of such tax, and such person shall be entitled to recover the amount so paid by him from the company on whose behalf it is paid or any other Director or shareholder of the company in proportion to the shares owned by him.
(2). No proceedings under subsection (1) shall be commenced except with the prior approval in writing of the Commissioner."
12. Mr. Iqbal Ahmad attempted to argue that section 77 was only applicable to a wound up company or a company which had gone into liquidation. We regret that this plea cannot be sustained upon a plain reading of the above provision. Nevertheless, there is considerable force in the argument that proceedings for recovery of tax dues of a private company from its Directors or shareholders could only be initiated if the amount could not be recovered from the company itself and only after obtaining prior approval in writing from the Income-tax Commissioner. There is nothing on record to indicate that such approval was ever obtained. The argument founded upon section 77 must, therefore, also fail.
13. In view of the above we are constrained to allow this appeal and recall the order of the learned Single Judge. The amount retained in Court alongwith the profits be disbursed to the appellant to the extent of their claim and the excess amount, if any remains, may be paid to the respondent No,2.