Sandeep A Mehta V. Income Tax Officer & 1

SCA/10686/2013

AI Insights

The case involves Sandeep A Mehta, a director of M/s. Amadhi Investments Ltd., challenging the orders issued by the Income Tax Officer and the Commissioner of Income Tax under sections 179 and 264 of the Income Tax Act, 1961. These orders sought to hold the directors personally liable for the company's unpaid tax dues for the assessment years 2005-06 and 2006-07. The primary legal issue was whether section 179, which allows for the recovery of a company's tax dues from its directors, applies to public limited companies and whether the directors could be held liable given their appointment dates and the company's status as a public limited company.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 672230 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 15-10-2013
• Assessment Year: misc
• Other Referred Cases: Pravinbhai M. Kheni vs. Assistant Commissioner of Income-Tax, Bhagwandas J. Patel vs. Deputy Commissioner of Income-Tax, Alchemist Ltd. And another vs. State of Bank of Sikkim, Union of India v. Adani Exports Ltd., Kusum Ingots and Alloys Ltd. v. Union of India, National Textile Corpn. Ltd. vs. Haribox Swalram, Modern Food Industries (India) Ltd. v. M.D. Juvekar, Damomal Kausomal Raisinghani v. Union of India, L.V. Veeri Chettiar and Anr. v. Sales Tax Officer, Bombay
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: M R SHAH; MAUNA BHATT
• Assessee Lawyers: TEJ SHAH
• Keywords: Directors' Liability; Income Tax; Private limited company; Public Limited Company; Quashment of orders; Corporate veil lifting
• Section: 143(3); 271(1)(c); 264; 179

Judgement Text

"C/SCA/10686/2013 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION NO. 10686 of 2013 WITH SPECIAL CIVIL APPLICATION NO. 10688 of 2013 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE M.R. SHAH 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 ? ================================================= SANDEEP A MEHTA....Petitioner(s) Versus INCOME TAX OFFICER & 1....Respondent(s) ================================================= Appearance: MR TEJ SHAH, ADVOCATE for the Petitioner(s) No. 1 MR MR SHAH, SR. ADV. with MRS MAUNA M BHATT, ADVOCATE for the Respondent(s) No. 1 - 2 ================================================= CORAM: HONOURABLE MR.JUSTICE M.R. SHAH and HONOURABLE MS JUSTICE SONIA GOKANI Date : 15/10/2013 ORAL JUDGMENT (PER : HONOURABLE MS JUSTICE SONIA GOKANI) 1. These Special Civil Applications preferred under Article 226/227 of the Constitution of India seek quashment of the orders dated 31.10.2011 and Page 1 of 33 C/SCA/10686/2013 JUDGMENT 14.11.2011 respectively in Special Civil Application No. 10686 of 2013 and Special Civil Application No. 10688 of 2013 passed by respondent No.1 Income Tax Officer under section 179 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) directing the petitioners to pay amount of tax, interest and penalty as also for seeking direction in the nature of certiorari, quashing the respective orders passed under section 264 of the Act by the Commissioner of Income Tax, respondent No.2 herein. Brief facts necessary for understanding the controversy recorded from Special Civil Application No. 10686 of 2013 are as follows:- 1.1 The petitioners are Directors of M/s.Amadhi Investments Ltd. (hereinafter referred to as “the Company”). For the Assessment Years 2005-06 and 2006- 07, in case of the Company, when tax returns came to be filed, respondent No.1 passed orders after scrutiny assessment under section 143(3) of the Act as also for penalty under section 271(1)(c) of the Act and certain demands were raised by way of the tax and the penalty. Page 2 of 33 C/SCA/10686/2013 JUDGMENT 1.2 Aggrieved by such demands, the assessee Company challenged the same before CIT(Appeals) and Income Tax Appellate Tribunal (hereinafter referred to as “the Tribunal”) and both the appeals resulted in favour of the Revenue and against the Company as far as the order of scrutiny under section 143(3) of the Act is concerned. However, the order of penalty under section 271(1)(c) is yet pending before CIT(Appeals). 1.3 In the meantime, for both the Assessment Years, a show cause notice was issued on 14.10.2011 by respondent No.1 for the recovery of the demand from the petitioners under section 179 of the Act in their capacity as the Directors of the Company. Subsequently, the impugned orders came to be passed holding the petitioners jointly and severally liable for payment of the outstanding dues of the Company. 1.4 This was challenged under section 264 of the Act before the respondent No.2. A show cause notice was issued on 27.12.2012, which was replied to with all substantial documents emphasizing therein that the Page 3 of 33 C/SCA/10686/2013 JUDGMENT Company is a Public Limited Company since 1995. However, respondent No.2 had rejected the plea of the petitioners and dismissed the appeal, upholding the version of the Assessing Officer. 2. It is the say of the petitioners that they were appointed as the Directors of the Company only on 29.12.2005. The Company filed annual return before the ROC. Convincingly, the date of appointment was also produced before the authorities. It was also their say that they were never shareholders at the time of conversion of the Company from the Private Limited Company to a Public Limited Company (from 5.6.1995 till 30.9.2006). It is only on 27.3.2006 that they became the shareholders. It is also averred that respondent No.2 incorrectly observed that the share holding of the Company for the Assessment Years 2005-06 is 65.20%, whereas in fact the record indicates that the petitioners acquired shares of the Company only on 27.3.2006. It is further averred that in respect of the share holding of Masat Text. & Twist Pvt. Limited, the petitioners had no shareholding in the Company. Page 4 of 33 C/SCA/10686/2013 JUDGMENT 3. On issuance of the notice respondents appeared through learned Senior Counsel Mr. Bhatt, who filed affidavit-in-reply,inter alia, contending that both the petitioners are Directors of the Company. It is contended that the Company had not paid the outstanding demands. The petitions filed by both the Directors on 16.8.2011 on behalf of the Company also was rejected with the direction to the Company to pay entire outstanding dues with the applicable interest under section 20(2) of the Act. Although the notice under section 226(3) of the Act was issued, it was informed by the Bank authorities that the Bank accounts of the assessees were either closed or had become dormant. It is further contended that summons under section 31 of the Act was issued so as to find out the assets and the financial position of the assessee Company and both the Directors were duly served on 4.8.2011. Hearing was fixed on 17.8.2011. However, they chose not to attend on a specified date vide their letter dated 16.8.2011. It was urged that there was no deliberate intention attributed for committing any mistake nor was there any case of wrong filing of return Page 5 of 33 C/SCA/10686/2013 JUDGMENT of income. The Company preferred the appeal before CIT(Appeals) and the Tribunal and the Directors had admitted that the Company does not have any assets or sufficient funds to make the payment. 4. It is contended by the respondents that in such a background, notice under section 179 of the Act has been issued on 14.10.2011 for recovering the outstanding demands from the petitioners. It is contended that the Company M/s. Amadhi Investment Limited is a Private Limited Company and dues of the Income Tax are outstanding and recoverable from the Company and, as the outstanding amount cannot be recovered from the Company, Directors of the Company are liable and onus is upon them to prove that the non-recovery cannot be attributed to any gross-negligence, misfeasance or breach of duty on their part in relation to the affairs of the Company, otherwise, all the Directors would be jointly and severally liable to pay the outstanding dues. It is further contended that the petitioners, therefore, are liable. Again, it is contended that the scope of the appeal being limited and beyond the scope of the provisions of Page 6 of 33 C/SCA/10686/2013 JUDGMENT section 253(1) and, therefore, the same is not maintainable against the order passed under section 264 by the CIT(Appeals). 5. Learned Advocate Mr. Shah appearing for the petitioners has urged fervently that section 179 of the Act can be invoked in case of Private Limited Company and not in relation to the Public Limited Company. From the year 1995 when Amadhi Investment Limited is a Public Limited Company and the certificate of incorporation also in terms so states, on erroneous footing, Revenue has held that that the Company was changed to Public Limited Company to avoid payment of taxes of the Company without establishing that the non-recovery can be attributed to negligence, misfeasance or breach of duty on the part of the petitioners in relation to the affairs of the Company and hence, the action under section 179 is bad in law. He further urged that the Assessing Officer has to come to the conclusion that the tax dues from the Company cannot be recovered in absence of any such proof furnished. No action can be straight away taken against the petitioners without first Page 7 of 33 C/SCA/10686/2013 JUDGMENT exhausting the remedy available against their Company, and therefore, also notice must be quashed. It is further held that the action of respondent No.2 of lifting Corporate veil and holding that the petitioners are liable under section 179, is bad in law, as the tests laid down by this Court in case of Pravinbhai M. Kheni vs. Assistant Commissioner of Income-Tax and others reported in 353 ITR 585(Guj) are not satisfied. He further urged that word “Private Company” has not been defined under the Income Tax Act. However, section 2(35) of the Companies Act and 2(37) of the Companies Act define the Private Company and the Public Company as defined in section 3 of the said Act. He further urged that when Private Limited Company is converted to the Public Limited Company, Section 179 of the Income Tax Act would not have any applicability at all. He sought to rely upon the decision rendered in case Pravinbhai M. Kheni vs. Assistant Commissioner of Income-Tax and others (supra) and Bhagwandas J. Patel vs. Deputy Commissioner of Page 8 of 33 C/SCA/10686/2013 JUDGMENT Income-Tax reported in [1999] 238 ITR 127. 6. Per contra, Mr.M.R.Bhatt, learned Senior Advocate appearing for the respondents has urged that Company has been established at Mumbai and the recovery application against the Company has been filed. Therefore, as held by the Apex Court in the case of Alchemist Ltd. And another vs. State of Bank of Sikkim, and others reported in (2007)11 SC 335, this Court would have no jurisdiction at all. He further urged that the petitioners are the Directors of the said Company and the Court needs to lift the Corporate veil. He heavily relied on the decision of Pravinbhai M. Kheni vs. Assistant Commissioner of Income-Tax and others (supra) and urged that ordinarily in case of a Public Company, provisions of section 179(1) could not be applied. However, if the Department establishes that it was not possible to recover tax dues from the Company and the Directors of the Company neither plead nor succeed in establishing that such non-recovery was not attributable to any gross-negligence, misfeasance or failure in the discharge of duty on their part in connection Page 9 of 33 C/SCA/10686/2013 JUDGMENT with affairs of the Company, it would be a fit case where invocation of principles of lifting of veil would be justified. 7. In rejoinder, learned counsel Mr. Shah has urged that there is no sufficient details made available by the Department for lifting the corporate veil and when it is apparent on the record that the present petitioners were nowhere on the horizon when the Company was converted from the Private Limited Company to the Public Limited Company, they cannot be held liable under section 179(1) of the Act. 8. On having given thoughtful consideration to the extensive submissions made by both the sides, three aspects emerge before us in the present petition, which require careful consideration. First issue is of jurisdiction of this Court under Article 226 of the Constitution of India. Secondly, whether this is a fit case where invocation of principle of lifting of corporate veil would be necessitated and, consequently, whether section 179 could be made applicable to the case of Public Limited Company, which has been converted from Private Limited Page 10 of 33 C/SCA/10686/2013 JUDGMENT Company. 9. At the outset, the issue of jurisdiction is required to be decided and before entering into the controversy in the present petitions, the legal position requires examination. Article 226 was amended by the Constitution (15th Amendment) Act, 1963. Clause 1A is inserted which reads as under:- “ (1A) The power conferred by clause (1) to issue directions, orders or writs to any Government, authority or person may also be exercised by any High Court exercising jurisdiction in relation to the territories within which the cause of action, wholly or in part, arises for the exercise of such power, notwithstanding that the seat of such Government or authority or the residence of such person is not within those territories.” 10. Under this Article for issuances of directions, orders or writs to any Government Authority or person, the High Court can exercise jurisdiction in relation to territory in which the cause of action wholly or in part, arises. Irregardless of the seat of such Government or authority or residence of such person is not within those territories, such powers can be exercised. Thus, for conferring the jurisdiction on the High Court under Article 226 of the Page 11 of 33 C/SCA/10686/2013 JUDGMENT Constitution, the cause of action is made an additional ground. 11. Expression “cause of action” is not defined under the Constitution, but time and again the same is held to be bundle of essential facts necessary to be proved by the plaintiff for his success. The Supreme Court in the case of Alchemist Ltd. And another vs. State of Bank of Sikkim, and others (supra), discussed the law on the subject and concluded thus:- “31. In Union of India v. Adani Exports Ltd., a question of territorial jurisdiction came up for consideration. A filed a petition under Article 226 of the Constitution in the High Court of Gujarat claiming benefit of the Passport Scheme under the EXIM policy. Passport was issued by Chennai Office. Entries in the Passport were made by authorities at Chennai. None of the respondents was stationed within the State of Gujarat. It was, therefore, contended that Gujarat High Court had no territorial jurisdiction to entertain the petition. The contention, however, was negatived and the petition was allowed. The respondents approached the Supreme Court. 32. The judgment of the High Court was sought to be supported inter alia on the grounds; that (i) A was carrying on business at Ahmedabad; (ii) orders were placed from and executed at Ahmedabad; (iii) documents were sent and payment was made at Ahmedabad; (iv) credit of duty was claimed for export handled from Ahmedabad; (v) denial of benefit adversely affected the petitioner at Ahmedabad; (vi) A had furnished bank guarantee and executed a bond at Ahmedabad, etc. Page 12 of 33 C/SCA/10686/2013 JUDGMENT 33. Allowing the appeal and setting aside the order of the High Court, the Supreme Court held that none of the facts pleaded by A constituted a cause of action. \"Facts which have no bearing with the lis or dispute involved in the case, do not give rise to a cause of action so as to confer territorial jurisdiction on the court concerned\" (Adani Exports Ltd. case, SCC pp.573-74, para 17.). 34. In Kusum Ingots and Alloys Ltd. v. Union of India , the appellant was a Company registered under the Indian Companies Act having its Head Office at Mumbai. It obtained a loan from the Bhopal Branch of the State Bank of India. The Bank issued a notice for repayment of loan from Bhopal under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. The appellant Company filed a writ petition in the High Court of Delhi which was dismissed on the ground of lack of territorial jurisdiction. The Company approached this Court and contended that as the constitutionality of a Parliamentary legislation was questioned, the High Court of Delhi had the requisite jurisdiction to entertain the writ petition. 35. Negativing the contention and upholding the order passed by the High Court, this Court ruled that passing of a legislation by itself does not confer any such right to file a writ petition in any Court unless a cause of action arises therefor. The Court stated: (Kusum Ingots case, SCC p.261, para 20) \"20. A distinction between a legislation and executive action should be borne in mind while determining the said question\". Referring to ONGC, it was held that all necessary facts must form an “integral part” of the cause of action. The fact which is neither material nor essential nor integral part of the cause of action would not constitute a part of cause of action within the meaning of Clause (2) of Article 226 of the Constitution. 36. In National Textile Corpn. Ltd. vs. Haribox Swalram and Ors, (2004) 9 SCC 786 : JT 2004 (4) SC Page 13 of 33 C/SCA/10686/2013 JUDGMENT 508, referring to earlier cases, this Court stated that : (SCC p.797, para 12.1) \"12.1 ...the mere fact that the writ petitioner carries on business at Calcutta or that the reply to the correspondence made by it was received at Calcutta is not an integral part of the cause of action and, therefore, the Calcutta High Court had no jurisdiction to entertain the writ petition and the view to the contrary taken by the Division Bench cannot be sustained.\" 37. From the aforesaid discussion and keeping in view the ratio laid down in catena of decisions by this Court, it is clear that for the purpose of deciding whether facts averred by the petitioner-appellant, would or would not constitute a part of cause of action, one has to consider whether such fact constitutes a material, essential, or integral part of the cause of action. It is no doubt true that even if a small fraction of the cause of action arises within the jurisdiction of the Court, the Court would have territorial jurisdiction to entertain the suit/petition. Nevertheless it must be a “part of cause of action”, nothing less than that. ” 12. Question that, therefore, needs to be examined is as to whether the essential, integral and material facts, which constitute part of the cause of action within the meaning of Article 226(2) of the Constitution of India, could confer jurisdiction on this Court. 13. As can be seen from the material on record the factum of the Company operating at Mumbai is not in dispute. It is also not under challenge that the Page 14 of 33 C/SCA/10686/2013 JUDGMENT outstanding amount which is due on account of the Company failing to make payment, was due and payable at Mumbai. On the Company, failing to make good the payment, notice under section 179 of the Act was issued as the amount in respect of the Company could not be recovered and, therefore, the petitioners who are said to be the Directors of the said Company are asked to make the payment. Thus, the liability of the Directors is sought to be invoked by these proceedings under section 179 and admittedly, both the petitioners reside at Ahmedabad. It is not in dispute that the notice has been issued to both the petitioners at Ahmedabad. It would not be out of place to refer to the judgment of this Court rendered in the case of Alka Synthetics Ltd vs. Securities and Exchange Board of India (SEBI) in the case of Special Civil Application No. 2224 of 1996 with Special Civil Application No. 5483 of 1996. These petitions were filed raising the issue about the authority of SEBI to order impounding and confiscation of whole or part of consideration of completed transactions. 14. It would be apt to reproduce some of the relevant Page 15 of 33 C/SCA/10686/2013 JUDGMENT findings rendered in the case of Bhagwandas J. Patel vs. Deputy Commissioner of Income-Tax (supra) where the preliminary question of territorial jurisdiction of the Court was raised. It was challenged therein that the petition was not maintainable under Article 226 in the High Court of Gujarat. This Court observed thus:- “ A bare perusal of the provision shows that before recovery in respect of dues from the private company can be initiated against the director, to make them jointly and severally liable for such dues, it is necessary for the Revenue to establish that such recovery cannot be made against the company and then and then alone it can reach the directors who were responsible for the conduct of business during the previous year in relation to which liability exists.” 15. This Court in the case of Alka Synthetics Ltd vs. Securities and Exchange Board of India (SEBI) (supra) extensively dealt with the issue of territorial jurisdiction as follows:- “17. On a close scrutiny, I find no substance in this submission. The order dated 4.7.1996 in no unmistakable terms state that aggrieved persons may be given opportunity of hearing. For this purpose, the order was required to be served on affected parties to enable the aggrieved person to file objections. Instead of SEBI effecting service itself, it directed concerned Stock Exchange to intimate the affected parties. Stock Exchange had the necessary details about the persons whose shares were offered at auction and were thus affected by the order and were entitled to receive intimation. It cannot be said Page 16 of 33 C/SCA/10686/2013 JUDGMENT that intimation was required to be given to aggrieved parties by calling them to Stock Exchange only. It may further be noticed that in its written submission also this much has been stated on behalf of SEBI that the order was served on the Bombay Stock Exchange for suitable intimation to its members and other parties. That is clear indication that the impugned order was required to be served not only on members of Stock Exchange but also on other affected parties. Undoubtedly the petitioner is one of the affected parties, which fact is not seriously disputed nor could it be. Even otherwise, without this direction, if the order in terms affected a person's right and was meant to furnish a post decisional hearing to affected parties, without requiring serving of the copy of order, it would have been meaningless. It is not the case of the respondent that the order was not required to be served on the petitioner at all. What is argued is that since SEBI itself was not to serve the order but it was to be served by Stock Exchange its furnishing copy in the court will not furnish cause of action. 18. Once it is held that, as it must be, that the order was required to be served on petitioner, the fact whether author of the order itself effects the service or someone else is directed to discharge the ministerial duty of service will not affect the position. What is required to be seen is where the order was required to be served on person whose rights are affected by it. If the order was required to be served within the territory, where this court exercises jurisdiction, it will not alter the situation if the order has been served in court during proceedings at Ahmedabad. Position may be otherwise, if but for court proceedings the order on the affected party would not be served at a place within the court's territorial jurisdiction. 19. In the present case, it is not disputed that petitioner's registered office is at Ahmedabad within the territorial jurisdiction of this Court. The notice of investigation were served at Page 17 of 33 C/SCA/10686/2013 JUDGMENT Ahmedabad. Statements in pursuance of that were recorded at Ahmedabad. As a result of said investigation impugned order came into existence affecting petitioner will also be required to be served at Ahmedabad, and in fact the same has been served at Ahmedabad. 20. In this connection, learned counsel for the respondent placed reliance on decision of Supreme Court in State of Rajasthan vs. Swaika Proprietors reported in AIR 1985 SC 1289. A close reading of the decision makes it clear that whether in a given set of circumstances service of notice is a part of cause of action or not is not to be determined on any absolute rule in abstract but depends on entirety of facts, nature of order, nature of right affected etc. The court had laid down the ratio that: \"The answer to question whether service of notice is an integral part of the cause, of action within the meaning of Article 226(2) of the Constitution must depend upon the nature of impugned order giving rise to cause of action.\" 21. Applying the above test to the facts of the case before Supreme Court, which had arisen in the matter of land acquisition proceedings under Rajasthan Urban Improvement Trust Act the court found that notice under section 52(2) of the said Act was published in Rajasthan proposing the acquisition of land situated in Rajasthan at Jaipur, service of notice inviting objection against proposed acquisition which was to take place in Rajasthan was served on the petitioner in Calcutta, where he was residing. Thereafter, all proceedings took place in Rajasthan, viz., enquiry and hearing. Thereafter notification under Section 52(1) was published in Rajasthan which resulted in vesting of property in State of Rajasthan. The petitioner challenged the notification under Section 52(1) of the Act. In those circumstances, where citus of property affected, enquiry into objections about it, its rejection, and final order vesting of property in Rajasthan had all taken place in Rajasthan. In these circumstances, obviously, Page 18 of 33 C/SCA/10686/2013 JUDGMENT mere service of notice of proposal to acquire property under Section 52(2) was held to be not part of cause of action at all. 22. Here, we are not concerned with a case where mere notice of proposed auction is served at one place, but proceedings itself has been completed at other place including the situation of property affected was situated in the other place. Here we are concerned about a case which is not of service of mere notice of enquiry at Ahmedabad, but where order itself has been served at Ahmedabad. Swaika Property's case was not a case of service of final order. Nor it was a case where final order was required to be served, nor was it a case of quasi judicial order, which unlike a statutory order of acquiring land does not depend on its efficacy on service. The court found as a matter of law that order under Section 52(1) of the Act became effective as soon as it was published inasmuch as the property affected by it vests in State on its publication. A judicial order pronounced in open court becomes effective as soon as it is pronounced. Where the order made by quasi judicial authority, and is not made in the presence of parties ordinarily becomes effective, when served on affected parties. 23. Moreover in the present case, the order has been made as a result of enquiry. It had been made without hearing of affected parties. It envisaged post decisional hearing to affected parties. Therefore service of the order, in the very nature of things, was an essential part of whole gamut. To save it from being void for want of fair procedure, in fact, the order itself made it requisite for its effectiveness, that it be served on all members of Stock Exchange and other affected parties. Therefore, in the circumstances of the present case service of order, as distinguished from service of notice prior to enquiry as was the case before, the Supreme Court in Swaika Property's case is an integral part of cause of action. Rather service of it itself furnished cause of action to seek remedy against it. As discussed, the order was required to be Page 19 of 33 C/SCA/10686/2013 JUDGMENT served at Ahmedabad and was in fact served at Ahmedabad, the decision in Swaika's case does not further the case of objections. 24 In Modern Food Industries (India) Ltd., Ahmedabad & Ors. v. M.D. Juvekar reported in (1988(1)) 29(1) GLR 481 a Division Bench of this Court speaking through A.M. Ahmadi,J, as he then was, in a case where the order of termination was made at New Delhi but was served on the affected party at Ahmedabad where he was at the relevant point of time on leave and the question as to territorial jurisdiction was raised said : \"Be that as it may, the fact remains that the order of termination of service, though passed at New Delhi, was communicated to the respondent-employee at Ahmedabad since he was at the relevant time on leave. Whether it was for the convenience of the respondent- employee or for any other reason is not material, what is material is the fact that it was communicated to him at Ahmedabad. In our view, therefore the decision on which Mr. Bhatt places reliance cannot come to the rescue of the appellants since it in terms states that the cause of action would arise not only at the place where the order of termination of service was made but also at the place where its consequences fell on the employee. We cannot subscribe to the submission that the consequence of the termination order fell on the respondent-employee at Calcutta, the fact that it was communicated about had notwithstanding merely because the employee was posted at Calcutta Unit. It may be that on the receipt of the order by the Calcutta Unit, a part of the cause of action can be said to have arisen at Calcutta also but that cannot nullify the fact that the consequences of the order fell on the respondent-employee when he was informed about the same at Ahmedabad. We are therefore, of the opinion that the aforesaid decision in fact is an authority for the proposition that a part of the cause of action arose at the place where the order of termination of service was communicated to the concerned employee.\" Page 20 of 33 C/SCA/10686/2013 JUDGMENT 25. The petitioner company has its registered office at Ahmedabad. Citus of its movable property is at Ahmedabad. By impugned order the right of the petitioner company arising out of transaction of that movable property are affected. Thus applying the test in Modern Food Industries case it can well be said that consequence of the impugned order fell on the petitioner at Ahmedabad where the order was served, where the citus of petitioner's property in share was situated. The principle applicable to determine the jurisdiction of court in a suit for recovery of movable property cannot be applicable, obviously because this lis is not for recovery of movable property. The petition is to protect petitioners' right in movable property which has been impaired not by a person possessed of such property but by an act of statutory authority in purported exercise of its powers under the Act. The citus where such right is affected or where the effect of such order to affect the right becomes the relevant consideration. 26. In Damomal Kausomal Raisinghani v. Union of India and others reported in AIR 1967 Bombay 355, the issue was raised about territorial jurisdiction of Bombay High Court, in respect of a petition challenging the order made under the Displaced Persons (Claims) Supplementary Act verifying the claim of displaced persons at Delhi, Preliminary objection as to the jurisdiction of the Bombay High Court to entertain the petition was negatived by Their Lordships of Bombay High Court. The Court held : \"The question that arises is whether the cause of action for the exercise of the power invoked by the petitioner arose wholly or in part within the territories in relation to which this Court exercises jurisdiction. The petitioner, as it appears, was a resident of Ullasnagar, a place situated in the District of Thana of Maharashtra State. The impugned order itself shows that the case was heard in Bombay. It is indeed true that the order on the face of it Page 21 of 33 C/SCA/10686/2013 JUDGMENT does not show the place where it was made. Even assuming that this order was made by the third respondent in New Delhi, there can hardly be any doubt that the effect of this order fell on the petitioner at Ullasnagar where he resides.\" This decision had been followed by this Court in Modern Food Industries Limited (supra) referred to above. 27 In L.V. Veeri Chettiar and Anr. v. Sales Tax Officer, Bombay reported in AIR 1971 Madras 155, Their Lordships considered the impact of notice issued by authority under fiscal statutes for the purpose of considering the cause of action giving territorial jurisdiction to a Court, while authority issuing notice is situated outside the jurisdiction of the Court. It held: \"The person primarily affected by the respondent issuing the notices from time to time to the petitioners and calling upon them to produce the accounts of their business carried on in the State of Tamil Nadu and again by proposing to assess them to the best of his judgement on the assumption of certain jurisdictional facts, is the addressee of such notice and such affection relates to the bundle of facts in the totality of the lis or proceeding concerned, and such impact necessarily gives rise to a cause of action, though it may be in part. It is established that in fiscal laws a proposal to assess forms part and parcel of the machinery of assessment and thus understood, the service of notice to assess and calling upon the petitioner to explain has given rise to a cause of action as is popularly and legally understood and the machinery of assessment has been set in motion and the impact of that motion is felt by the petitioners within the territorial limits of this State. We have therefore no hesitation in holding that a part of the cause of action has arisen in the State of Tamil Nadu.\" 28. This decision gives a clear indication that wherever issuance of a notice is necessary part Page 22 of 33 C/SCA/10686/2013 JUDGMENT of setting a machinery in motion for the purpose of affecting the rights of the person against whom the machinery is to be mobilized and the service of the ultimate order affecting the rights of the person concerned, forms part of cause of action, in relation to a dispute challenging the final order affecting the rights affected by that order. Mere issuance of a notice to a person concerned may not be a necessary part of cause of action but where issuance of such notice is a pre condition for setting the machinery in motion and not the conditions subsequent for the purpose of furthering the cause which has already been set in motion, the service of notice itself becomes part of cause of action. It has also been noticed that the place ultimately where the order is served affecting the rights of the person affected, whether such service be for the convenience of the authority or for some other reason furnishes as a ground for the courts within whose territorial jurisdiction such place is situated, to exercise jurisdiction to entertain such disputes. 29. The above decisions fortify the conclusions to which I have reached that the place where the order is served on the person affected affecting his rights at that place is a part of cause of action, and gives territorial jurisdiction to the courts within whose territory the place at which service of the order has been effected affecting the rights of the person concerned is situated or to say the court within whose territorial jurisdiction lies citus of right which is affected by the impugned order and that right is actually affected by service of impugned order within that territory has the jurisdiction to entertain challenge as to the validity of such orders.” 16. The Apex Court in the case of Union of India & others vs. Adani Exports Ltd. and another reported in (2002) 1 SCC 567 dealt with the very issue of territorial Page 23 of 33 C/SCA/10686/2013 JUDGMENT jurisdiction under Article 226(2) of the Constitution to hold that those facts which give rise to part of cause of action within the territorial jurisdiction of a High Court are those having a nexus and relevance with the lis involved in the case and none else. In the words of the Apex Court:- “17. It is seen from the above that in order to confer jurisdiction on a High Court to entertain a writ petition or a special civil application as in this case, the High Court must be satisfied from the entire facts pleaded in support of the cause of action that those facts do constitute a cause so as to empower the court to decide a dispute which has, at least in-part, arisen within its jurisdiction. It is clear from the above judgment that each and every fact pleaded by the respondents in their application does not ipso facto lead to the conclusion that those facts give rise to a cause of action within the court's territorial jurisdiction unless those facts pleaded are such which have a nexus or relevance with the lis that is involved in the case. Facts which have no bearing with the lis or the dispute involved in the case, do not give rise to a cause of action so as to confer territorial jurisdiction on the court concerned.” 17. Thus, what essentially requires to be considered from the aforementioned constitutional provision is whether this Court can exercise the jurisdiction in the instant case and whether in relation to the territories the cause of action, wholly or in part, has arisen which bear nexus and relevance with the lis involved in this case. Page 24 of 33 C/SCA/10686/2013 JUDGMENT 18. In the instant case, admittedly the petitioners are Directors of the Company, who are asked to make the payment, which is outstanding and due from the Company. On conclusion of scrutiny assessment under section 143(3), the petition was preferred by both these Directors, which came to be rejected with a direction to the Company to pay the demand along with the applicable interest under section 2(2) of the Act. However, since the Company could not make the payment as demanded by the Revenue, the recovery of such outstanding demand had been initiated. On having realized pursuant to the notice issued under section 226(3) of the Act that most of the Bank accounts of the Company had either been closed or became dormant and the tax recovery became difficult, the summons had been issued to the Directors under section 131 of the Act. 19. In a written reply given by a letter, it was communicated that the Company did not have any asset nor sufficient funds to make the payments. A request was made to the Revenue to wait till the appeals preferred before the CIT(Appeals) and the Tribunal get decided. Page 25 of 33 C/SCA/10686/2013 JUDGMENT 20. In the aforesaid background, it is to be noted that a show cause notices under section 179 of the Act had been issued on the Directors of assessee Company asking them to show cause as to why the order be not passed against them to recover the outstanding demand from the Company concerning with Assessment Years 2005-06 and 2006-07. Admittedly, the petitioners reside at Ahmedabad and the alleged demand for the recovery is either from the movable property or immovable property situated at Ahmedabad. The order impugned though has been passed in Mumbai, the same is served in the State of Gujarat where the petitioners reside. Recovery on behalf of the Company has effected in the State of Gujarat. In such circumstances, when the part of cause of action has arisen within the jurisdiction of this Court, we unhesitatingly hold that this Court would surely have jurisdiction to entertain the present petition as held in the case of Alka Synthetics Ltd vs. Securities and Exchange Board of India (SEBI) (supra). As ruled in the said judgment, the issuance of notice is a pre- condition of setting the machinery in motion and not the Page 26 of 33 C/SCA/10686/2013 JUDGMENT condition to be fulfilled subsequently. Service of notice in such a premise would become part of the cause of action and, therefore, since the notice has been served upon the petitioners affecting their rights at Ahmedabad, the part of action has arisen at Ahmedabad and that confers territorial jurisdiction to this Court within whose territory the service of the notice has been effected. 21. It clearly thus establishes that the service of show cause notice has a nexus or relevance with the lis in question and therefore also, such service itself furnishes the part of cause of action and therefore confers jurisdiction on this Court as held in the decision of the Apex Court in the case of Union of India & others vs. Adani Exports Ltd. and another (supra). The part of the cause of action can be said to have arisen, if such facts consisted essential, material and integral part of the cause of action and even if the small fraction of the cause of action arise within the jurisdiction of this Court, the Court would have territorial jurisdiction to entertain such petition. It is sine quo non for initiating the proceedings under section 179 to issue the show cause notice, which Page 27 of 33 C/SCA/10686/2013 JUDGMENT has been served upon the petitioners within the territorial jurisdiction of this Court and this being material and essential part of cause of action, the preliminary issue raised with regard to the lack of territorial jurisdiction by the Revenue needs no entertainment. 22. That brings this Court to the second and the vital issue of whether there exists the circumstances of the Court to invoke the principle of lifting of corporate veil in the instant case and consequently apply the provisions of section 179 to the Directors of Public Limited Company which has been converted from the Private Limited Company. The decision on this issue, which requires reproduction is given in case of Pravinbhai M. Kheni vs. Assistant Commissioner of Income-Tax and others (supra), where this Court on extensively discussing the principle of lifting of corporate veil and discussing the entire case laws on the subject, held thus:- “15. From the above judicial pronouncements, it can be seen 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, recognised 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 Page 28 of 33 C/SCA/10686/2013 JUDGMENT 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 sub-section(1) of section 179 of 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 Page 29 of 33 C/SCA/10686/2013 JUDGMENT 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.” 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 Page 30 of 33 C/SCA/10686/2013 JUDGMENT 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 non-recovery of the amount due to the Company could be attributed to any gross-negligence, 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 Page 31 of 33 C/SCA/10686/2013 JUDGMENT since were not Directors of the Company until 28.12.2005, for the liability of the Company pertaining to the Assessment Year in question i.e. on 2005-06, 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 Income-Tax and others Page 32 of 33 C/SCA/10686/2013 JUDGMENT (supra) or for that matter upholding the action of the respondents of invoking the provisions of section 179 of the Act. 26. In our opinion, the very action of the respondents of invocation of powers under section 179 of the Act qua the petitioners is bad in law and requires quashment, and therefore, impugned notice dated 14.10.2011 and all consequential orders are hereby quashed and set aside. (M.R.SHAH, J.) (MS SONIA GOKANI, J.) SUDHIR Page 33 of 33 "