Gujarat H.C : the respondents have instead of confronting the petitioner with necessary material why the corporate veil should be lifted and Section 179

High Court Of Gujarat

Paras S. Savla vs. ACIT, Circle-8

Section 179, 158BC

Block Period 1996-2000

Akil Kureshi And A.J. Shastri, JJ.

Special Civil Application Nos. 2647 To 2650 Of 2009

October 3, 2016

JUDGMENT

Akil Kureshi, J. – These petitions arise in a common background. They are heard together and would be disposed of by this common judgment. For convenience the facts may be recorded from Special Civil Application No. 2647/2009.

2. The petitioner, an individual was the Director of a Public Limited Company called Yash Organics. He held such a position till 26.08.2000. Yash Organics faced income tax unpaid demand of Rs. 12.32 Crores (rounded off) for the block period from 02.08.1996 to 11.02.2000, pursuant to the order of assessment dated 22.02.2002 passed by the Assessing Officer under Section 158BC of the Income Tax Act, 1961 (‘the Act’ for short).

3. Against such an order of assessment, the company had preferred an appeal before the Appellate Commissioner which came to be dismissed on 04.03.2004. The company preferred further appeal before the Income Tax Appellate Tribunal which we are informed at one stage was dismissed for non-prosecution. At that stage, the respondent – Tax Recovery Officer issued a notice dated 03.09.2008 to the petitioner why as a Director of the company in default, in terms of Section 179 of the Act, the recovery of Rs. 13.45 crores (rounded off) with interest should not be made against him. The petitioner replied to the said show-cause notice under a letter dated 10.10.2008 raising multiple defences. The tax recovery officer under letter dated 18.11.2008 referred to the petitioner’s defences that the company was not a private limited company and called upon the petitioner to furnish evidences to substantiate such a claim. Further pleas of the petitioner were ignored and the Assessing Commissioner passed the impugned order dated 05.03.2009 ordering recovery of such unpaid taxes of Rs. 13.45 Crores with interest from the petitioner. It is this order that the petitioner has challenged in this petition. The facts are similar in all the petitions.

4. Learned Counsel Mr. Manish J. Shah for the petitioner contended that after the Assistant Commissioner issued the said notice dated 13.09.2008, the company had moved restoration application before the Tribunal. The Appeals were restored and the assessment was ordered to be done afresh by the assessing officer for which the proceedings were remanded. The assessing officer once again raised the same demand in the order of assessment against which the company preferred an appeal before the Commissioner who substantially allowed the appeal of the company reducing the tax demand to Rs. 3.55 Crores (rounded off). Against such an order, both the Company as well as the Department have approached the Tribunal and the Appeals are pending.

5. The facts are not seriously in dispute. The stage of the assessment proceedings is not disputed by the revenue. It is also not in dispute that Yash Organics is a public limited company. Ordinarily, therefore in terms of Section 179 of the Act, the Director of such a company would not be answerable to unpaid taxes of the company. Section 179 of the Act pertains to a Director of a Private Limited Company and permits the revenue to recover unpaid taxes from the Director of such a company, subject to fulfillment of certain conditions. It is true that the Division Bench of this Court in the case of Pravinbhai M. Kheni v. Asstt. CIT [2013] 353 ITR 585/213 Taxman 81/[2012] 28 taxmann.com 111 (Guj.) had recognised limited exceptions under which it may be possible for the revenue to apply Section 179 to the Directors of a public limited company by lifting the corporate veil. However, in the judgment itself, certain safeguards have been provided to avoid any possible misuse of such powers. The Court observed as under :—

“15. From the above judicial pronouncements, it can be seen that the 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 being an independent entity enjoying existence independent of its directors, is a well know 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. However 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 the 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 the satisfaction of certain conditions, the directions can be held jointly and severally liable to pay the dues of the company.”

6. In the present case, the respondents have instead of confronting the petitioner with necessary material why the corporate veil should be lifted and Section 179 of the Act be applied to him, issued the notice dated 18.11.2008 and called upon the petitioner to substantiate the claim that the company is a public limited company. This fact is not even seriously in dispute. The revenue ought not to have questioned such a basic fact. If the revenue wanted to apply the principle of lifting the corporate veil in the context of Section 179 of the Act, it ought to have prima-facie sufficient material to confront the assessee on the issue and should have so confronted the assessee – petitioner calling upon him to show cause why such powers should not be invoked. Further as noted, the demand of Rs. 13.45 Crores with interest referred to in the notice has currently come down to Rs. 3.55 Crores.

7. Under the circumstances, the impugned order is set aside leaving it open for the revenue, if it so desires, to take out fresh proceedings by issuing appropriate notice and taking further steps in accordance with law; bearing in mind observations made hereinabove. The petitions stand disposed of accordingly. It is clarified that all contentions and objections of the petitioners are kept open.

[Citation : 389 ITR 336]

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