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[Cites 7, Cited by 1]

Gujarat High Court

Dhaval N Patel vs Commissioner Of Income Tax on 26 February, 2014

Author: Sonia Gokani

Bench: Akil Kureshi, Sonia Gokani

         C/SCA/14422/2008                                   JUDGMENT




           IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

              SPECIAL CIVIL APPLICATION NO. 14422 of 2008
                                    With
              SPECIAL CIVIL APPLICATION NO. 14423 of 2008


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 ?

================================================================
                DHAVAL N PATEL....Petitioner(s)
                          Versus
COMMISSIONER OF INCOME TAX, AHMEDABAD - IV & 1....Respondent(s)
================================================================
Appearance:
MR TUSHAR P HEMANI, ADVOCATE for the Petitioner(s) No. 1
MR NITIN K MEHTA, ADVOCATE for the Respondent(s) No. 1 - 2
================================================================

          CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI
                 and
                 HONOURABLE MS JUSTICE SONIA GOKANI




                                  Page 1 of 14
       C/SCA/14422/2008                                       JUDGMENT



                            Date : 26/02/2014


                           ORAL JUDGMENT

(PER : HONOURABLE MS JUSTICE SONIA GOKANI)

 1. Facts   are   common   in  both  the   petitions.     Therefore  both  the petitions are heard together and are being disposed of  by   this   common   judgment.   For   the   purpose   of   this  judgment,  we  may   notice  the  facts     as  arising  in  Special  Civil Application No.14422/2008.

 2. Challenge   in   this   petition   preferred   under   Article   226   is  made   to   the   issuance   of   order   under   section   179   of   the  Income Tax Act ("the Act" here­in­after) dated 11.1.2005 as  also   to   order   passed   under   section   264   of   the   Act   dated  19.3.2008. 

 3. The   factual   background   necessary   for   adjudication   is   as  follows :

 3.1. The   petitioner   was   a   promoter/director   of   a   public  limited   company   named   Lanzorate   Finance   (India)  Limited   which   was   originally   incorporated   as   Ravit  Vinimay   Limited   with   Registrar   of     Companies   on  19.8.1992   and   obtained   the   certificate   of  commencement   of   business   as   on   17.9.1992.   The  company   was   engaged   in   the   business   of   secondary  market   operations   and   project   consultancy   and,  thereafter, started its activity of equipment leasing. The  company came out with its public issue of equity shares  on   18.6.1996.   It   is   averred   that   the   prospectus   of   the  company provides details of the company. The petitioner  Page 2 of 14 C/SCA/14422/2008 JUDGMENT resigned from the company on 31.5.2000 due to change  in the management.
3.2. For   the  assessment  year  1996­1997,  amount  of  tax  demanded   from   the   company   was   to   the   tune   of  Rs.53,18,694/­.   In   view   of   the   petitioner   being   the  director   of   the   said   company   at   the   relevant   point   of  time, a show cause notice was issued under section 179  on 17.11.2004 proposing to recover such arrears of tax  from the petitioner.
 3.3. Vide its reply dated 26.11.2004, it was contended by  the   petitioner   that   such   notice   is   not   maintainable   as  the   company   was   a   public   limited   company   and  provisions  of section  179 would not be applicable.  The  Assessing   Officer   however,   passed   an   order   on  11.1.2005   holding   the   petitioner   jointly   and   severally  liable for such tax demand and a consequent notice was  issued   on   31.1.2005     to   recover   said   amount.   The  petitioner   preferred   Special   Civil   Application  No.11542/2006  challenging the validity of such notice. 

The Court vide its order dated 18.7.2006 dismissed the  petition on the ground that no evidence was adduced to  show  that  the  company  was  a public  limited  company  and  therefore,   in   the  petition  under   Article  226   of  the  Constitution of India, Court cannot go into those factual  details.

3.4. The   petitioner   thereafter,   preferred   a   revision  application under section 264 of the Act challenging the  notice impugned. The Commissioner of Income­tax in its  Page 3 of 14 C/SCA/14422/2008 JUDGMENT order   dated   19.3.2008   dismissed   the   revision  application   on   the   ground   that   the   assessee's   Special  Civil Application  before  this Court  was not entertained  and   was   dismissed,   therefore,   his   application   for  rectification   of   order   under   section   179   also  consequently  deserved  to be rejected.    Resultantly,  the  present  petition  challenging  both  the   impugned  orders  made under section 179 and order under section 264 in  the revision petition, seeking the following prayers :

"a. Direct   the   respondents   to   quash   and   set   aside   the  impugned   order   u/s.179   dated   11.01.2005   at   Annexure   'A'   to  this petition  and quash  and set aside  the impugned  order u/s  264 of the Act dated 19.03.2008 at Annexure B to this petition.
b. pending  the admission,  hearing  and final disposal  of this  petition,   stay   operation   and   implementation   of   the   impugned  order u/s 179 dated 11.01.2005 at Annexure­A to this petition.
c. any   other   and   further   relief   deemed   just   and   proper   be  granted in the interest of justice.
d. to provide for the cost of this petition."
 4. We have heard learned counsel Shri Tushar Himani for the  petitioner who has fervently contended that company is a  public limited company and, therefore, the very provision is  not applicable. He has also pointed out various documents  to   substantiate   his   contention   that   the   petitioner   was   a  director   of   the   public   limited   company   which   was  incorporated   from   the   very   beginning   as   a   public   limited  company   and   even   for   the   year   under   consideration,   i.e.  1996­1997,   the   same   was   a   public   limited   company.   He  therefore,  urged that the act of issuance of notice so also  Page 4 of 14 C/SCA/14422/2008 JUDGMENT the   order   of   rejection   of   his   revision,   both   deserve   to   be  quashed.
 5. Learned   counsel   Shri   Nithin   Mehta   appearing   for   the  respondent Revenue has urged that in the return of income  filed for the assessment year 1996­1997 on 5.1.1997, the  status  code  in  column  No.8    was  shown  as  13.  Code  13  stands for a domestic company which is not a company in  which   the   public   are   substantially   interested   and   during  the period relevant to the assessment year concerned, the  assessee   company   had   not   raised   any   public   issue.   He  therefore,   urged   that   the   Court   may   not   interfere   as  requested for.
 6. On   thus   hearing   both   the   sides,   as   also   considering   the  pronouncements on the subject we are of the opinion that  the petition deserves to be allowed for the reasons to follow  here­in­after.
 7. As   could   be   noticed   from   the   materials   on   record,   the  petitioner   herein   was   the   director   of   the   company   which  was   originally   incorporated   as   Ravit   Vinimay     with   the  Registrar of Companies, Gujarat on 19.8.1992. It obtained  certificate of commencement of business on 17.9.1992. The  company   changed   its   name   from   Ravit   Vinimay   to  Lanzorate Finance (India) Limited and was registered with  Registrar  of  Companies  vide  certificate  dated  14.12.1995.  The  petitioner  also  brought  on record  a certificate  issued  by the ROC,  being the certificate  of incorporation  as also  the   certificate   of   commencement   of   business   and   further  changed the name to Lanzorate Finance (India) Limited. It  Page 5 of 14 C/SCA/14422/2008 JUDGMENT appears that the company thus from the very incorporation  was   a   public   limited   company   and   its   public   issue   also  were   out   on   18.6.1996.   The   petitioner   was   the  promoter/director  and continued  to be with the company  till he resigned from the post on 31.5.2000.
 8. The arrears of tax demand raised  on the petitioner in his  capacity   of   Director   by   issuance   of   the   impugned   notice  under section 179   is for the assessment year 1996­1997.  The provision of section 179 permits recovery of such tax  arrears   of   a   company   from   the   director   of   the   company  which is a private company or a private limited company.  The provision makes it amply clear that when the company  is   a   public   company   or   a   public   limited   company,   such  provision would not be applicable. Relevant here would be  to   refer   to   the   provisions   of   law   and   some   of   the   well  pronounced judgements on the subject.
 9. Section 179 of the Income Tax Act reads as under :
"Liability of directors of private company in liquidation :
179.(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   non­recovery   cannot   be  attributed  to any gross neglect,  misfeasance  or breach  of  duty on his part in relation to the affairs of the company.
Page 6 of 14
C/SCA/14422/2008 JUDGMENT 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 subsection (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."

10. As contained in the said provision, where any tax  is  due from a private company in respect of any income from  the said company or any other company in respect of any  income of the company of the previous year during which  year such company was a private company, if the Revenue  is   not   in   a   position   to   recover,   every   person   who   was   a  director   of   the   private   company,   during   such   relevant  previous  year would be jointly and severally liable for the  payment  of such tax,  unless  he proves  that non­recovery  could not be attributed to any gross neglect,  misfeasance  or breach of duty on his part in relation to the affairs of the  company.   Subsection   (2)   of   section   179   of   the   Act   also  provides   the   situation   that   where   the   private   company  converted   into   public   company   and   the   tax   in   respect   of  private company could not be recovered, nothing contained  in  subsection  (1)  would  be  applicable  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  Page 7 of 14 C/SCA/14422/2008 JUDGMENT 1st day of April, 1962.

 11. This Court in Special Civil Application NO.1921/2005  referred to some of the decisions and held thus :

"4.  This Court in the case of Pravinbhai M. Kheni v. Assistant  Commissioner   of   Incometax,   Central   Circle   2   and   others,  reported   in   353   ITR   585,   had   an   occasion   to   deal   with   the  liability of the directors of a public limited company, where the  proceedings   under   section   179   were   initiated   against   the  petitioner   Director   of   such   company.   Pursuant   to   search  proceedings against the public limited company, the tax liability  determined was more than Rs.155 crore. The Revenue was of the  opinion that such company was formed for taking over business  of the partnership and the Directors had amassed huge wealth  in the form of immovable property and disclosed the income had  not been on members of the partnership and other had become  Directors of the company. Such   conclusion of the Revenue that  the   unaccounted   income   of   the   company   had   been  misappropriately utilized by the directors and shareholders and  company was only a conduit for creation of unaccounted money.  The request is made for lifting the corporation  veil and recover  tax dues of public company. In such a situation, the proceedings  were   laid   down   under   section   179   of   the   Act   for   lifting   the  corporate  veil.  It would  be  profitable  to  reproduce  the  relevant  findings of this Court on this aspect as under :
"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 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  Page 8 of 14 C/SCA/14422/2008 JUDGMENT 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   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  Page 9 of 14 C/SCA/14422/2008 JUDGMENT 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."

5. The  Courts  have  been,  thus,  categorical  in these  judgments  that  essentially   under  two  conditions   the   piercing   of  corporate  veil would be applied by the Courts one where the statute itself  would permit and secondly, where the glaring facts from record  emerge.   In   the   case   before   this   Court   in  Pravinbhai   Kheni  (supra), the Revenue had put forth sufficient material and when  both   the   conditions   of   meeting   with   the   emergent   need   of   the  situation   were   held   to   be   duly   satisfied,   double   application   of  lifting of veil was permitted by the Court.

6. This Court in the case of Special Civil Application No.10686 of  2013 with Special Civil Application No.10688 of 2013 in the case  of  Sandeep A. Mehta v. Income Tax Officer and another, decided  on   October   15,   2013,   also   had   an   occasion   to   refer   to   the  decision   in   the   case   of  Pravinbhai   Kheni   (supra).   The   facts  somewhat  similar  to the  present  case  were  presented,  wherein  the   petitioners   were   the   directors   of   the   Company,   where   the  notice was issued to the Directors for recovery of demand under  section   179   of   the   Act   in   their   capacity   as   Directors.   The  Company   admittedly   was   a   public   limited   company   since   the  year 1995 and the petitioners were appointed as directors of the  Company in December, 2005. They were not even share holders  at   the   time   of   conversion   of   the   company   from   private   limited  company to public limited company. The request was also made  by the Revenue to lift the corporate veil. On duly considering the  judicial pronouncements on the said aspect and on considering  the material on record, the Court did not find any need to permit  the said request of lifting the corporate veil by holding thus :

Page 10 of 14

C/SCA/14422/2008 JUDGMENT "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  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   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 200506, 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  Page 11 of 14 C/SCA/14422/2008 JUDGMENT 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 (supra) or for  that matter upholding the action of the respondents of invoking  the provisions of section 179 of the Act."

7. In the present case, as we can notice, the company M/s.Blue  Information   Technology   is   a   Public   Limited   Company.   It   was  incorporated   as   a   Public   Limited   Company   vide   certificate   of  incorporation   dated   May   25,   1992.   It   came   out   with   a   public  issue in June, 1996. The petitioner director of the said Company  resigned on September 06, 1997. Admittedly, the dues are of the  years 1995­96, 1996­97 and 1997­98. The notice was issued on  October   14,   2001   under   section   221(1)   of   the   Act   seeking   to  recover penalty for not having paid the dues of the company for  the   aforesaid   years   to   the   tune   of   Rs.297   lakh.   It   is   not   in  dispute   that   the   petitioner   ceased   to   act   as   a   director   of   the  Company from September, 1997.

8. With regard to the outstanding dues of the company for the  assessment years 1995­96, 1996­97 and 1997­98, the Company  being   a   Public   Limited   Company   from   May   25,   1992   the  certificate of incorporation having come, the very issuance of the  notice cannot be sustained unless, of course, as provided in the  case of  Pravinbhai Kheni (supra) and followed thereafter, in the  case of  Sandeep A. Mehta (supra) there are glaring facts which  would permit the lifting of the corporate veil. In the present case,  as   could   be   noticed,   those   foundational   facts   are   completely  missing. It is not even the case of the Revenue that such claim  exist   warranting   lifting   of   veil.   Except   non­fulfillment   of   the  obligation by the Company of the tax demands that had arisen  Page 12 of 14 C/SCA/14422/2008 JUDGMENT as a result of the assessment of all these years, nothing comes  on record for the Court to permit the piercing of corporate veil.  The petitioner being the director of the public limited company,  this provision is non­applicable.

9. Section 179 of the Act chooses to impose a vicarious liability  on   the   director   of   a   private   company   making   his   liability  coextensive   with   the   company   in   respect   of   arrears   of   tax   of  assessment year when he functions as a director. However, the  income tax authority in relation to the liability of the Company  shall need to insist upon its recovery and when the Company is  unable  to discharge  such  liability  and  the  attempts  of the  Tax  Authorities to realise such tax dues do not materialise, director  needs to be issued the notice of recovery. These provisions  are  made   in   respect   of   private   companies   and   subsection   (2)   of  section 179 of the Act makes it abundantly clear that in the case  of   a   public   company   or   public   limited   company,   the   very  provision  is not  applicable.  As  noted  above,  in  absence  of  any  contrary   facts   which   either   require   this   Court   to   pierce   the  corporate veil or anything to indicate that the Company is other  than a public company, the invocation of section 179 of the Act  itself shall have to be held bad. It would be, of course, the onus  of the petitioner to establish  that nonrecovery of the amount of  tax   due   to   the   Company   could   not   be   attributed   to   any   gross  negligence,   misfeasance   or   breach   of   duty   on   the   part   of   the  petitioner in relation to the affairs of the private Company, but,  the very action  against  the petitioner  under section  179 of the  Act,  when  would  not lie,  the petition,  therefore,  deserves  to be  succeeded."

 12. In   wake   of   such   legal   position,   the   only   factual  contention that requires to be dealt with is the reference of  code no. 13 in the return of income filed by the company as  it is the code applicable to a domestic company which is a  company   in   which   the   public   is   substantially   not  interested.   This   solitary   circumstance   can   never   be   the  Page 13 of 14 C/SCA/14422/2008 JUDGMENT ground for the Revenue to not recognise other substantive  and cogent evidences which are far more pronounced and  for which no disputes have been raised at any stage. Mere  mentioning of the code as contended by the Revenue could  be   hardly   a   ground   to   allow   it   to   pursue   the   notice  impugned. It is also necessary to note at this stage that the  earlier   petition   preferred   before   this     Court   was   not  entertained   on   the   ground   that   necessary   documents   for  the Court to arrive at a decision, whether the company was  a   public   limited   company   or   not,   were   absent.   That   ipso  facto   itself   cannot   be   the   ground   for   the   concerned  authority not to examine   the subject matter on merits in  the   revision   petition.   Therefore,   both,     the   order   under  section 179 and the consequential order under section 264  in the revision application, in light of the above discussion,  must fail. 

 13. Petitions are allowed. Impugned orders under section 179  dated   11.1.2005   and   under   section   264   dated   19.3.2008   are  quashed   with   all   consequential   proceedings.   Petitions   are  disposed of.  Rule is made absolute to above extent with no order  as to costs.

(AKIL KURESHI, J.) (MS SONIA GOKANI, J.) raghu Page 14 of 14