KISHAN LAL & ORS V. UNION OF INDIA & ORS

CWP/1571/2016

AI Insights

The case involves a writ of certiorari sought by the petitioners, Kishan Lal and others, to quash an order holding them liable as directors of M/s Vikas WSP Limited for a tax demand of Rs.23.77 crores under Section 179 of the Income Tax Act, 1961. The petitioners challenged the order and the subsequent notices issued for attaching their properties and bank accounts. The primary legal contention was whether Section 179, which pertains to the liability of directors of a private company in liquidation, applies to public companies. The court considered arguments about the applicability of Section 179 to public companies and the potential lifting of the corporate veil, ultimately deciding that a detailed examination of various factors was necessary before such a decision could be made.

• Counselvise Citation: [2016] 140 COUNSELVISE.COM (IT) 722803 (HC-MISC)
• Appeal Type: Others
• Pronouncement Date: 19-09-2016
• Assessment Year: misc
• Laws Referred To: Income Tax Act, 1961, Companies Act, 1956
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: YOGESH PUTNEY
• Assessee Lawyers: ANAND CHHIBBAR; RIYA BANSAL; RINKU DAHIYA
• Keywords: Corporate Veil; Income Tax; Liability of directors; Self-assessment tax; Writ of Certiorari
• Section: 142(1); 221(1); 226(3); 179; 140A(3)

Judgement Text

"IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH CIVIL WRIT PETITION No.1571 of 2016 (O&M) DATE OF DECISION: 19.09.2016 Kishan Lal and others …..Petitioners versus Union of India, etc. .....Respondents CORAM:- HON'BLE MR. JUSTICE S.J. VAZIFDAR, CHIEF JUSTICE HON’BLE MR. JUSTICE DEEPAK SIBAL Present: Mr. Anand Chhibbar, Senior Advocate with Ms. Riya Bansal, Advocate and Ms. Rinku Dahiya, Advocate for the petitioners Mr. Yogesh Putney, Advocate for the respondents .. S.J. VAZIFDAR, CHIEF JUSTICE: The petitioners have sought a writ of certiorari to quash an order dated 08.01.2016 passed under Section 179 of the Income Tax Act, 1961 holding them liable as directors of the assessee, namely, M/s Vikas WSP Limited, in the sum of Rs.23.77 crores. The petitioners have also challenged the consequential acts of the second respondent-Assistant Commissioner of Income Tax, Hisar (Haryana), issuing notices under Section 226(3) to various authorities and banks to attach the petitioners’ properties and bank accounts. 2. M/s Vikas WSP Limited (hereinafter to be referred to as “the company”) was incorporated under the Companies Act, 1956 on 02.06.1988 as a private company limited by shares. Parkash Chand 2016.09.20 11:14 I attest to the accuracy and integrity of this document CWP-1571-2016 - 2 - With effect from 22.09.1992, the company became a public company under Section 43 of the Companies Act. 3. The company, admittedly, did not file its return of income for the Assessment Year 2013-14 within the period stipulated, namely, 30.11.2013. Respondent No.2 accordingly issued a notice under Section 221(1) read with Section 140A(3) requiring the company to show cause why penalty ought not to be imposed on it. Ultimately, by an order dated 10.12.2015, respondent No.2 imposed a penalty of about 23.77 crores. Several notices under Section 142(1) were issued, the first dated 03.12.2013 and the last dated 18.11.2015 for filing the return and payment of the self-assessment tax. The company filed its electronic return on 09.11.2015 declaring an income of about Rs.503 crores on which it was liable, after availing credit of MAT, to pay tax of Rs.183.51 crores including interest. The company paid Rs.42 crores as advance tax after availing certain other credits. The company was liable to pay about Rs.105 crores as self-assessment tax under Section 140A. The assessee, however, neither filed a return of income nor discharged its liability towards self-assessment tax and interest thereon. 4. Thereafter, respondent No.2 issued a notice dated 05.01.2016 calling upon the petitioners to show cause why the provisions of section 179 of the Income Tax Act ought not to be invoked to hold them jointly and severally liable to pay the demand of Rs.23.77 crores. 5. After setting out some of the above facts, the notice alleged that there was apparent gross neglect or Parkash Chand 2016.09.20 11:14 I attest to the accuracy and integrity of this document CWP-1571-2016 - 3 - misfeasance or breach of duties on the part of the directors in relation to the affairs of the company. The petitioners were called upon to file their reply by 08.01.2016. 6. The impugned order was passed on 08.01.2016 i.e. within three days of the show cause notice. The order records that replies to the show cause notice had been received from the directors in which it was inter alia contended that the company is a public limited company and, therefore, the provisions of Section 179 were not applicable. It was contended that section 179 applies only to private limited companies. The only reasoning in the entire impugned order is as follows:- “4. Further, since the company has neither furnished its return of income for AY 2013-14 nor paid its self assessment tax of Rs.105,04,96,130/-, there is apparent gross neglect or misfeasance or breach of duty on part of directors in relation to affairs of company.” 7. Section 179 of the Income Tax Act reads as under:- “179. Liability of directors of private company in liquidation.— (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 or from any other 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 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. (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 sub-section (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 the 1st day of April, 1962. Parkash Chand 2016.09.20 11:14 I attest to the accuracy and integrity of this document CWP-1571-2016 - 4 - Explanation.—For the purposes of this section, the expression “tax due” includes penalty, interest or any other sum payable under the Act.” 8. Ms. Riya Bansal, the learned counsel appearing on behalf of the petitioners, rightly pointed out that even as per the impugned order the directors’ holding is less than 25% of the entire issued, subscribed and paid up share capital. She stated that the balance shares are held by about 50,000 share-holders. Ms. Bansal contended that section 179 applies only to private companies and not to public companies. 9. Mr. Yogesh Putney, the learned counsel appearing on behalf of respondent No.2, on the other hand, submitted that the company is, in fact, a glorified partnership and that it is a fit case where the corporate veil ought to be lifted. He submitted that even in income tax cases it is permissible to lift the corporate veil. 10. We will assume, as submitted by Mr. Putney, that the corporate veil can in a given case, be lifted even for the purposes of the Income Tax Act. Ms. Riya Bansal, however, contended that there is no question of lifting the corporate veil, but even assuming that the corporate veil is liable to be lifted, there are several issues of fact and of law which ought to be considered before doing so. She submitted, for instance, that even as per the order the petitioners held less than 25% of the issued, subscribed and paid up equity capital of the company and that the remaining shares were held by about 50,000 share-holders. The company is listed on the stock exchange. Parkash Chand 2016.09.20 11:14 I attest to the accuracy and integrity of this document CWP-1571-2016 - 5 - 11. We do not wish to express any opinion as to whether the corporate veil ought to be lifted in the present case even assuming that it is permissible to do so in matters under the Income Tax Act. Suffice it to state that even assuming that it is permissible to do so, there are several issues which ought to be taken into account before deciding whether or not to lift corporate veil. Neither the show cause notice nor the impugned order refers to certain crucial facts including as to the extent of share holding of the directors, the extent of control exercised by them regarding the affairs of the company and the extent of their representation on the board of directors. It would also be necessary to consider the Articles of Association of the company and any other agreements that may exist between the share-holders inter se. There are several other factors also which must be taken into consideration including as to whether the company was converted into a public limited company for the purpose of avoiding statutory liability benefiting the petitioners alone and/or conferring any other benefits upon the petitioners or any one or more of them alone. Lifting the corporate veil in a case such as this has drastic consequences. The impugned order does not consider the same in any detail. 12. The impugned order is, therefore, set aside and the matter is remanded to respondent No.2 for taking a fresh decision in accordance with law. It will be open to respondent No.2 to issue a fresh show cause notice or to furnish further particulars in respect of the same show cause notice. It is also open to respondent No.2 to base its claim on any other Parkash Chand 2016.09.20 11:14 I attest to the accuracy and integrity of this document CWP-1571-2016 - 6 - cause of action including by way of a tracing action. All the contentions of the parties are kept open. 13. In the circumstances, the impugned order is quashed and set aside. Respondent No.2 shall pass a fresh order after affording the petitioners an opportunity of being heard and filing further replies to any further or supplementary notices that may be issued. (S.J. VAZIFDAR) CHIEF JUSTICE 19.09.2016 (DEEPAK SIBAL) parkash* JUDGE Note: Whether non-speaking/reasoned√ Whether reportable: YES/NO Parkash Chand 2016.09.20 11:14 I attest to the accuracy and integrity of this document "