GEETABEN SUDHIR DESAI V. ASST. COMMISSIONER OF INCOME TAX

SCA/16910/2004

AI Insights

The case involves Gaurav V. Shah, the petitioner, who was a director of M/s Asian Finstock Limited, a public limited company, and faced tax liabilities for the company under Section 179 of the Income Tax Act, 1961. The Income Tax Department issued a notice to the petitioner for recovery of unpaid tax dues amounting to Rs.3,61,84,806. The petitioner contested the notice, arguing that she was not a director at the time the liabilities were incurred and that the company was a public limited company, thus Section 179 was inapplicable. The court found that the company was indeed a public limited company and that the provisions of Section 179 could not be applied, leading to the quashing of the notice and orders against the petitioner.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 754445 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 19-02-2014
• Assessment Year: misc
• Other Referred Cases: Sandeep A Mehta vs. Income Tax Officer and another
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: MAUNA BHATT
• Assessee Lawyers: TUSHAR HEMANI
• Keywords: Director's Liability; Income Tax Liability; Public Limited Company; Section 179 of the Income Tax Act
• Section: 264; 226(3); 179

Judgement Text

"C/SCA/7759/2005 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION NO. 7759 of 2005 With SPECIAL CIVIL APPLICATION NO. 16910 of 2004 With SPECIAL CIVIL APPLICATION NO. 16909 of 2004 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MS JUSTICE SONIA GOKANI ================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ GAURAV V.SHAH....Petitioner(s) Versus ASSISTANT COMMISSIONER OF INCOME TAX....Respondent(s) ================================================================ Appearance: MR TUSHAR P HEMANI, ADVOCATE for the Petitioner(s) No. 1 MRS MAUNA M BHATT, ADVOCATE for the Respondent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MS JUSTICE SONIA GOKANI Page 1 of 10 C/SCA/7759/2005 JUDGMENT Date : 19/02/2014 ORAL JUDGMENT (PER : HONOURABLE MS.JUSTICE SONIA GOKANI) 1. All the three petitions raise identical question of facts and law and therefore, they are decided by way of this common judgment. Facts for the purpose of deciding these petitions are derived from Special Civil Application No.7759 of 2005. 1.1 The petitioner was a Director of the company M/s Asian Finstock Limited which incorporated on 05.12.1994 as a public limited company. The company was assessed to Income tax for the Assessment Year 1996 – 1997 and along with interest and penalty, the demand rose to Rs.3,61,84,806/­. Such income tax liability remained unpaid. 1.2 A notice was issued under Section 179 of the Income Tax Act, 1961 (hereinafter referred to as “Act”) calling upon the petitioner to show cause as to why the recovery of the tax liabilities of the company of Rs.3,61,84,806/­ be not made from the petitioner by holding her responsible being the Director on 18.09.2003. It contends that various efforts made for recovering the demand have failed. The petitioner in reply to the said show­ cause notice has contended that she was an employee of Indo American Optic Limited Company, a group company of M/s Asian Finstock Limited getting salaried income only. She also further contended that she resigned from the company on 19.08.1997 and therefore, there was no question of invoking such provisions of Act for default made by the company. She also contended that she was never the Director nor Managing Director of the company and her signature was once obtained on certain papers purportedly for the Page 2 of 10 C/SCA/7759/2005 JUDGMENT work of the company, of which she was unaware and therefore, this was a case of fraudulently obtaining her signature. 1.3 On 09.03.2004, she further supplemented her reply with copies of various documents obtained from the Assistant Registrar of Companies and raised the additional contention that on different dates and years, the signatures purportedly shown to be her signature were infact not hers and such manipulation was done of those papers where her signature was obtained. She consistently took the stand that she was a salaried employee of the company and had already resigned from the company. 1.4 On considering such replies, on 24.09.2004, the order of rejection came to be passed under Section 179 of the Act where the Assistant Commissioner of Income Tax held the petitioner responsible and treated her liable for default in payment of tax, interest and penalty for the arrears of the company under Section 179 of the Act. This order stated that various opportunities were made available to the petitioner to prove that the non recovery from the company could not be attributed to her however she pleaded the financial inability to pay such huge sum. However, in absence of nothing to indicate that she was not the Director at the relevant point of time of the said company, she was foisted with such liability of payment of Income tax as also interest and penalty. 2. A Revision Application was prepared under Section 264 of the Act on 18.10.2004, wherein, she had pleaded over and above various grounds raised earlier, the factum of M/s. Asian Finstock Limited not being a private company. A contention was raised that this being a public limited company, Section 179 of the Act would not be applicable. Page 3 of 10 C/SCA/7759/2005 JUDGMENT 3. Pending such revision, a notice under Section 226(3) of the Act had been issued attaching the bank accounts of the petitioner and therefore the petitioner approached this Court under Article 226 of the Constitution of India to set aside the orders of attachment and also of demand of Income tax and in this petition, following reliefs are sought : (a) Command the Respondent to quash and set aside the impugned order u/s 179 dated 24.09.2004 at Ann. 'A' to this Petition and quash and set aside the impugned notices u/s 226 (3) of the Act dated 17.12.2004 at Ann. 'B' to this Petition ; (b) Pending the admission, hearing and final disposal of this petition, stay operation and implementation of the impugned order u/s 179 dated 24.09.2004 at Ann. 'A' to this Petition and stay operation and implementation of the impugned notices u/s 226 (3) of the Act dated 17.12.2004 at Ann. 'B' to this Petition ; (c) any other and further relief deemed just and proper be granted in the interest of justice ; (d) to provide for the cost of this petition. 4. We have heard Mr.Tushar Hemani, learned counsel for the petitioner who has raised 3 contentions essentially before us in his challenge to the demand raised by the Revenue. Firstly, that the company is a public limited company and provisions of Section 179 of the Act would not be applicable. Secondly, that no attempts were made for recovery of income tax from the company, and therefore, the condition precedent required for raising any demand against the Director has not been fulfilled and thirdly, there was absence of any gross negligence, misfeasance or breach of duty etc. on the part of the Director. He has urged that all these contentions have not weighed with the Revenue Authority while passing the order under Section 179 of the Act and the said order therefore, Page 4 of 10 C/SCA/7759/2005 JUDGMENT deserves to be quashed with all consequential proceedings. 5. Learned counsel Mrs.Mauna Bhatt appearing for the respondent – Revenue has strongly urged that the demand is raised by the revenue against the defaulting company wherein the present petitioner was one of the Director. It is a company closely held company where public is not substantially interested. Various evidences go to suggest that the present petitioner was one of the directors and when the Revenue failed to recover the Income tax dues of the company, a show­cause notice under Section 179 of the Act had been issued. Despite sufficient opportunities availed to the petitioner, nothing was brought on record and the overwhelming evidences go to indicate that the provision invoked by the Revenue was rightly done and hence, the petition does not deserve to be entertained. 6. Upon thus hearing both the sides and on considering the material on record, the question that needs to be addressed to is as to whether the Directors of the company mainly incorporated in the year 1994 are liable for payment of tax dues from the company for the assessment year 1996 – 1997 in accordance with the provisions of Section 179 of the Income Tax Act (the 'Act' hereinafter). At the outset, the provisions of Section 179 of the Act requires reproduction, which reads as under : “Liability of directors of private company in liquidation. 179. [(1)] Notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), [where any tax due from a private company in respect of any income of any previous year during which such other company was a private company] cannot be recovered, then, every person who was a director of the private company at any time during the relevant previous year shall be jointly and recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company. Page 5 of 10 C/SCA/7759/2005 JUDGMENT [(2) Where a private company is converted into a public company and the tax assessed in respect of any income of any previous year during which such company was a private company cannot be recovered, then, nothing contained in sub­section (1) shall apply to any person who was a director of such private company in relation to any tax due in respect of any income of such private company assessable for any assessment year commencing before 1st day of April, 1962.]” 7. Sub­section (1) and Sub­Section (2), when read together, Sub­Section (1) brings within its sweep Directors of the private company and Sub­Section (2) confers power on the Revenue to recover tax arrears from the Directors of private company. 8. Thus, Section 179 of the Act applies to a case of private company. In the event of any tax due from a private company in respect of the income of any previous year or of other company in respect of any previous year during which such company was a private company, all those persons who were the Director of the company at the relevant point of time, are responsible for payment of such arrears of the tax unless the person concerned proves that the non recovery cannot be attributed to any gross negligence, misfeasance or breach of duty in his part in relation to the affairs of the company. 9. Sub­section (2) of Section 179 of the Act makes it amply clear that where a private company converts into public company and the tax assessed of any previous year or during which such company was a private company, cannot be recovered, the provisions of sub­section (1) of Section 179 of the Act would not apply to a person, who was a Director of such company in relation to such arrears of the tax before the 1st day of April, 1962. Page 6 of 10 C/SCA/7759/2005 JUDGMENT 10. We notice that the petitioner herein, while replying to the show cause notice dated 18.09.2003 under Section 179 of the Act had contended of her being a salaried employee, so also of her not having any role vis­a­vis financial transactions in the affairs of the company. However, at the time when the Revision Application was preferred by the petitioner, after impugned order under Section 179 of the Act was passed, a contention was raised of the provision of Section 179 of the Act not being applicable in the instant case for M/s Asian Finstock Limited not being a private company, but, a public limited company from 05.12.1994 undisputedly, this company has become a public limited company from Dec. 1994. 10.1 We notice that learned counsel for the Revenue had raised the contention that such company is closely held company where the public is not substantial interested. However, the revenue neither in show cause notice under Section 179 of the Act nor in the order passed under such provisions has laid any factual foundation thereby disputing the status of such company of that a public limited company. In absence of any such foundational facts and in wake of clear and eloquent evidences reflecting the status of company as that of a public limited company, the contention of the petitioner, though raised in the revision application, shall need to be regarded that in a case of Director of a public limited company, the provisions of Section 179 can not be made applicable. Such being a factual matrix in the instant case, we uphold the version of the petitioner that the issuance of show cause notice and the consequently proceedings under Section 179 in case and all the petitions must surely fail. 11. It could be noticed from the record that the demand of Page 7 of 10 C/SCA/7759/2005 JUDGMENT Rs.3.61 crores (rounded off) is for A.Y. 1996 – 1997 and whereas the company is converted into a public limited company from 09.12.1994 which is the date of registration, therefore, all the petitions deserve to be allowed on this count alone. 12. This Court in a similarly situated circumstances in case of Special Civil Application No.10686 of 2013 with Special Civil Application No.10688 of 2013 in case of Sandeep A Mehta versus Income Tax Officer and another (decided on 15.10.2013), has held thus : “23. From the ratio discussed hereinabove, it needs to be examined whether any of the two situations specified in the said decision exist on the record. Firstly, whether the statute itself so permits or provides for lifting of veil and secondly, whether the facts are so glaringly emerging on record whereby it can be found that with a view to defeat the interest of the Revenue, attempt is made by creating complexity of the facts. In the instant case, therefore, in other words, what needs to be examined is whether with a view to defeat the interest of the State some of the real beneficiaries have created complex design and web and have chosen to hide behind the corporate veil. Section 179 of the Act itself is a creation of the statute whereby the corporate veil can be pierced and original Directors of the Private Limited Company could be held liable for the outstanding tax dues of the Company. The statute, however, has created a situation whereby they can be jointly and severally held liable. In the instant case, the facts are apparently clear whereby conversion of the Amadhi Investment Limited from a Private Limited Company to a Public Limited Company was in the year 1995. The petitioners were appointed as Directors of Amadhi Investment Limited on 29.12.2005. They were not even shareholders of the Company from 5.6.1995 till 30.9.2006. Therefore, there would not be any requirement of establishing that non­recovery of the amount due to the Company could be attributed to any gross­negligence, misfeasance or breach of duty on the part of the petitioners in relation to the affairs of the Company. Therefore, the very action under section 179 against the petitioners would not lie. The petitioners since were not Directors of the Company until 28.12.2005, for the liability Page 8 of 10 C/SCA/7759/2005 JUDGMENT of the Company pertaining to the Assessment Year in question i.e. on 2005­06, they cannot be held liable under section 179 of the Act. 24. Thus, the statute permits the lifting of the corporate veil section 179 of the Act as one of the modes of the statutes permitting such piercing of the veil provided of course Directors of the Private Company behind the veil are the beneficiaries and who have created such a complex web for their personal interest so as to defraud the Revenue. 25. When the facts are eloquent enough in the instant case, where the petitioners were never concerned with the affairs of the Company until 28.12.2005 and the Company had already become Public Limited Company and by the time they became Directors, they were not even simple shareholders for the entire period till the year 2006, there does not arise any question of applying the ratio of decision of Pravinbhai M. Kheni vs. Assistant Commissioner of Income­Tax and others (supra) or for that matter upholding the action of the respondents of invoking the provisions of section 179 of the Act.” 13. Another ground raised by the learned counsel for the Revenue of not having made sufficient attempts to recover tax dues from company need not be gone into in wake of the upholding of challenge on the first ground itself. We note here that the challenge to the petitioner not being the Director, since is not pressed, we do not opine anything in this respect. 14. Resultantly, all the three petitions succeed. Impugned show cause notice and orders passed under Section 179 of the Act and all consequent orders are quashed and set aside. Rule is made absolute to the extent above in all the petitions with no order as to costs. (AKIL KURESHI, J.) Page 9 of 10 C/SCA/7759/2005 JUDGMENT (MS SONIA GOKANI, J.) Amar Page 10 of 10 "