Public Limited Company Corporate Veil lifting us 179 of Income Tax Act is possible with prima-facie sufficient material and confronting assessee with show cause-Gujarat High Court.
ABCAUS Case Law Citation:
1046 (2016) (10) HC
Important Case Law Cited:
Pravinbhai M. Kheni v. Assistant Commissioner of Income-tax
Brief Facts of the Case:
The petitioner was the Director of a Public Limited Company till 26.08.2000. The company had an income tax unpaid demand of approx Rs.12 Crores for the block period ending 11.02.2000, pursuant to the order of assessment passed under Section 158BC of the Income Tax Act, 1961.
Against the said assessment order, the company had preferred an appeal before the CIT(A) which was dismissed. The company preferred further appeal before the Income Tax Appellate Tribunal (ITAT) which was dismissed for non-prosecution. At that stage, the respondent – Tax Recovery Officer issued a notice dated to the petitioner why as a Director of the company in default, in terms of Section 179 of the Act, the recovery of approx Rs. 13 crores with interest should not be made against him.
The petitioner replying to the show-cause notice raised multiple defences. Regarding the contention of the petitioner that the company was private limited company and the provisions of section 179 were not applicable, the tax recovery officer called upon the petitioner to furnish evidences to substantiate such a claim. Eventually, Assessing Commissioner passed the order for recovery of unpaid taxes with interest from the petitioner.
The above order of the petitioner was challenged in the present petition.
Meantime, after the Assistant Commissioner issued the said order, the Tribunal had remanded the proceedings and the assessment was ordered to be done afresh by the AO. In the remand proceedings the AO once again raised the same demand against which the company preferred an appeal before the CIT(A) who substantially allowed the appeal by reducing the demand to Rs. 3.55 Crores. Against such an order, both the Company as well as the Income Tax Department approached the Tribunal and the Appeals were pending.
Observations made by the Bombay High Court:
The High Court observed that the fact that company was public limited company was not disputed by the revenue. Ordinarily, therefore in terms of Section 179 of the Income Tax Act, the Director of such a company would not be answerable to unpaid taxes of the company. Section 179 pertained to a Director of a Private Limited Company which permits the revenue to recover unpaid taxes from the Director of such a company, subject to fulfillment of certain conditions.
The Court, further observed that the its Division Bench in Pravinbhai case had recognised limited exceptions under which it might be possible for the revenue to apply Section 179 to the Directors of a public limited company by lifting the corporate veil. The Division Bench had 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.”
The Court noted that in the instant case, the respondent Revenue, instead of confronting the petitioner with necessary material why the corporate veil should be lifted and Section 179 be applied to him, issued the notice and called upon the petitioner to substantiate the claim that the company is a public limited company. This fact was 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.
The demand order was set aside leaving it to Revenue, if so desires, to take out fresh proceedings by issuing appropriate notice and taking further steps in accordance with law; bearing in mind observations made.