SANJAY KANUBHAI PATEL V. COMMISSIONER OF INCOME TAX

SCA/11660/2004

AI Insights

The case involves Padmashi Devji Vithlani, the petitioner, who challenged the orders passed by the Income Tax Officer and the Commissioner of Income Tax, which held him liable for the tax dues of Allons Pharmaceuticals Limited, a public limited company of which he was a director. The primary legal issue was whether Section 179 of the Income-tax Act, which allows for recovery of tax dues from directors of private limited companies, applies to directors of public limited companies. The court examined the applicability of Section 179 in the context of the company's status as a public limited company and the timing of the petitioner's directorship.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 695939 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 19-02-2014
• Assessment Year: misc
• Other Referred Cases: Pravinbhai M. Kheni v. Assistant Commissioner of Income-tax, Central Circle 2 & Ors.
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: MAUNA BHATT
• Assessee Lawyers: B S SOPARKAR; SWATI SOPARKAR
• Keywords: Corporate Veil; Director liability; Income Tax; Tax Recovery
• Section: 179

Judgement Text

"C/SCA/11658/2004 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No. 11658 of 2004 With SPECIAL CIVIL APPLICATION No. 11659 of 2004 To SPECIAL CIVIL APPLICATION No. 11662 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 ? ================================================================ PADMASHI DEVJI VITHLANI....Petitioner(s) Versus COMMISSIONER OF INCOME TAX....Respondent(s) ================================================================ Appearance: Mr BS SOPARKAR for Mrs SWATI SOPARKAR, ADVOCATE for the Petitioner(s) No. 1 Mr MAUNA M BHATT, ADVOCATE for the Respondent(s) No. 1 ================================================================ CORAM: HONOURABLE Mr. JUSTICE AKIL KURESHI and HONOURABLE Ms. JUSTICE SONIA GOKANI 19 th February 2014 Page 1 of 8 C/SCA/11658/2004 JUDGMENT ORAL JUDGMENT (PER : HONOURABLE Mr. JUSTICE AKIL KURESHI) These petitions involve similar question of facts and law, therefore, are disposed of by this common judgment. Facts may be noted from Special Civil Application No. 11658 of 2004. The petitioner has challenged order dated 23 rd December 2003 passed by the Income Tax Officer under Section 179 of the Income­tax Act, 1961 {“Act” for short}, as confirmed by the Commissioner by an order dated 31 st August 2004 passed in Revision petition filed by the petitioner. One Allons Pharmaceuticals Limited [hereinafter to be referred to as, “the Company”] was incorporated as a private limited company on 25 th September 1991. This company was converted into a public limited company on 5 th April 1995. The petitioner became a Director of the said company on 9 th March 1996. The Income Tax Officer issued a notice dated 1 st August 2002 intimating to the petitioner that there are arrears of the said company long over due. The Company had not made payment thereto, despite notice given to it. The petitioner was thereupon called upon to show cause why such dues be not recovered from him under Section 179 of the Act. In reply to such notice, the petitioner responded under communication dated 9 th August 2002. He raised various contentions. The prime contention, however, was that he joined as a director of the company only on 9 th March Page 2 of 8 C/SCA/11658/2004 JUDGMENT 1996, and therefore (i) no demand pertaining to the period prior to the said date cannot be recovered from the petitioner under section 179; and (ii) that such recovery can be effected only from the director of the private company and not that of the public limited company. The Assessing Officer discarded such objections and passed a detailed speaking order holding the petitioner liable for recovery of tax, interest and penalty demands for the A.Ys 1996­97; 1997­98 and 1998­99. The petitioner unsuccessfully challenged the said order before the Commissioner. He, therefore, filed the present petition. Having heard learned counsel for the parties and having perused the documents on record, it emerges that the company was initially incorporated as a private company in September 1991. Such company was converted into a public limited company on 5 th April 1995. Only thereafter, the petitioner became its director on 9 th March 1996. Section 179 (1) of the Act permits recovery of taxes due from the director of a private limited company under certain circumstances, when it is found that such dues from the company cannot be recovered. The first and foremost requirement of applicability of Section 179 of the Act is that the Director from whom such recovery is sought to Page 3 of 8 C/SCA/11658/2004 JUDGMENT be made is the Director of a private company. Since the petitioner joined company as a director only after it was converted into a public limited company, this requirement would not be satisfied. Learned counsel for the Revenue, however, raised two fold contentions. He firstly contended that the concept of private company or a public limited company cannot be adopted from the Companies Act and must be seen in light of the provisions contained in the Income­tax Act, 1961 and in particular Section 179 thereof. He submitted that any company in which public at large is not interested should be treated as a private company for the purpose of Section 179 (1) of the Act. His second submission was that even if the company is a public company, in a given set of facts, the corporate veil can be lifted and recovery can be sought from the director of such a company as was held by this Court in case of Pravinbhai M. Kheni v. Assistant Commissioner of Income­ tax, Central Circle 2 & Ors., reported in 353 ITR 585. Counsel in this respect drew our attention to the detailed discussion made by the Income Tax Officer in the impugned order. Whether discarding the concept of private and public limited company contained in the Companies Act, 1956 recovery under section 179 (1) can be made from the director of a public company is a question we need not answer in this petition. This is so because even assuming for a moment that it was so, Page 4 of 8 C/SCA/11658/2004 JUDGMENT the Revenue had to lay a foundation of facts to come to the conclusion, as canvassed before us by the counsel that despite its lag of a public limited company, for the purpose of the Companies Act, in reality the said company was a closely held company with all its characters of a private limited company. Even for lifting of the corporate veil as within the narrow confines permitted in the case of Pravinbhai M. Kheni [Supra], the foundational facts must be found in the notice giving sufficient opportunity to the assessee to deal with the allegations and present his own material to convince the Assessing Officer to hold otherwise. In the present case, the show cause notice is bereft of any such details. It merely calls upon the petitioner to show cause why tax recovery, which could not be made from the company be not made from him under Section 179 (1) of the Act. We would therefore hold that even otherwise, in absence of any previous material indicating that the show cause notice and any bipartite hearing on such issues by the Income Tax Officer, such question need not be gone into. Even from the order under section 179, we do not find that the Assessing Officer had based his case of lifting the corporate veil, as was referred to by this Court in case of Pravinbhai M. Kheni [Supra] in which, we had observed as under :­ “15. From the above judicial pronouncements, it can be seen Page 5 of 8 C/SCA/11658/2004 JUDGMENT that concept of lifting or piercing the corporate veil as some times referred to as cracking the corporate shell, is applied by Courts sparingly and cautiously. It is however, recognized that boundaries of such principle have not yet been defined and areas where such principle may have to be applied may expand. Principally, the concept of corporate body being an independent entity enjoying existence independent of its directors, is a well known principle. Its assets are distinct and separate and distinct from those of its members. Its creditors cannot obtain satisfaction from the assets of its members. However, with ever developing world and expanding economic complexities, the Courts have refused to limit the scope and parameters or areas where corporate veil may have to be lifted. 16. Howsoever cautiously, the concept of piercing of corporate veil is applied by the Courts in various situations. Two situations where such principle is consistently applied are, one where the statute itself so permits or provides for and second where due to glaring facts established on record it is found that a complex web has been created only with a view to defraud the revenue interest of the State. If it is found that incorporation of an entity is only to create a smoke screen to defraud the revenue and shield the individuals who behind the corporate veil are the real operators of the company and beneficiaries of the fraud, the Courts have not hesitated in ignoring the corporate status and striking at the real beneficiaries of such complex design. 17. Section 179 of the Act itself is a statutory creation of piercing of corporate veil. Ordinarily, directors of a company even that of a private company would not be answerable for the tax dues of the company. Under sub­section(1) of section 179 of Page 6 of 8 C/SCA/11658/2004 JUDGMENT the Act, however, subject to satisfaction of certain conditions, the directors can be held jointly and severally liable to pay the dues of the company. 18.In the present case, however, the Revenue desired to apply the principle of lifting the corporate veil in case of a public company and seeking to resort to provisions contained in section 179 of the Act. In our view if the factors noted by the Assistant Commissioner are duly established, there is no reason why such double application of lifting the corporate veil one statutorily provided and other due to emergent need of the situation, cannot be applied. As noted above, the factors recounted by the Assistant Commissioner in the impugned order are glaring. The company had defaulted in tax for more than Rs.155 crores. Same was unearthed during search operations carried out by the Revenue Authority. The attachment of the assets of the company could lead to recovery of not more than Rs. 5 crores from such huge outstanding dues. The company was formed for taking over business of the partnership. The members of the partnership firm and other family members of the same family became the directors of the company. Shares of the company were held by them and not by any members of the public. The directors had amassed huge wealth in the form of immovable property. The Assistant Commissioner therefore, was of the opinion that the company was only a conduit for creation of unaccounted money and appropriating in directors. 19. If these facts are duly established, we have no hesitation in holding that principle of lifting the corporate veil should be applied. By application of section 179 of the Act, the recovery of the tax dues of the company can be sought from the directors.” Page 7 of 8 C/SCA/11658/2004 JUDGMENT In the result, subject to above observations, writ petitions are allowed. Impugned orders under Section 179 of the Income­tax Act, 1961 and the further revision orders are quashed. Rule made absolute. {Akil Kureshi, J.} {Ms. Sonia Gokani, J.} Prakash* Page 8 of 8 "