TMI Blog2014 (4) TMI 1007X X X X Extracts X X X X X X X X Extracts X X X X ..... itioner in relation to the affairs of the private Company, but the action against the assessee u/s 179 of the Act would not lie - Decided in favour of Assessee. - SPECIAL CIVIL APPLICATION NO. 1921 of 2005 - - - Dated:- 12-2-2014 - MR. AKIL KURESHI AND MS SONIA GOKANI, JJ. J.P. Shah and Manish J. Shah, Advocate for the Petitioner Mrs. Mauna M. Bhatt, Advocate for the Respondent ORAL JUDGMENT (PER : HONOURABLE MS JUSTICE SONIA GOKANI) 1. In the present petition, the challenge is made by the petitioner to the order dated November 03, 2004 of the Revenue passed under section 179 of the Income-tax Act, 1961 (hereinafter referred to as 'the Act') in the following factual background: 1.1 M/s. Blue Information Technology Ltd. is a Public Limited Company vide certificate of incorporation dated May 25, 1992. On June 12, 1996 the company came out with a public issue and the petitioner was the director of the said Company till he resigned on June 9, 1997. It is averred in the petition that the petitioner was an ordinary Director, not connected with the day-to-day activities of the company nor was he an executive Director. 1.2 The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment dues, which were to arise during the course of operation, to be duly paid and this outstanding demand is essentially on account of breach of duty by all the directors, including the present petitioner and, therefore, the action to initiate proceedings under section 179 of the Act may not be interfered with. 2. We have heard the learned counsel for the parties and also examined the material on record. At the outset, the law on the subject requires to be considered. It would be profitable to reproduce section 179 of the Act, which 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 non-recovery cannot be attributed to any gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artnership 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 defied 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 canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 M. 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 decided on October 15, 2013, also had an occasion to refer to the decision in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easance 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 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issued the notice of recovery. These provisions are made in respect of private companies and sub-section (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 non-recovery 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. 10. For the foregoing reasons, the present petition is allowed. The very action of the respondents of invocation of powers under section 179 of the Act qua the petitioner is bad in law and requires quashment and, therefore, the impugned order dated ..... X X X X Extracts X X X X X X X X Extracts X X X X
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