2013 (10) TMI 1450 - HC - Income Tax

Invoking the provisions of section 179 - Held that - 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. 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 V/s. Assistant Commissioner of Income -Tax and others 2012 (12) TMI 494 - GUJARAT HIGH COURT for that matter upholding the action of the respondents of invoking the provisions of section 179 of the Act. 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.

Summary

Issues Involved:
1. Jurisdiction of the High Court under Article 226 of the Constitution of India.
2. Applicability of Section 179 of the Income Tax Act, 1961 to Directors of a Public Limited Company converted from a Private Limited Company.
3. Principle of lifting the corporate veil.

Issue-wise Detailed Analysis:

1. Jurisdiction of the High Court under Article 226 of the Constitution of India:
The Court examined whether it had jurisdiction to entertain the petitions under Article 226. The petitioners, Directors of the Company, resided in Ahmedabad, and the impugned notices were served in Ahmedabad. The Court relied on precedents such as *Alchemist Ltd. v. State of Bank of Sikkim* and *Union of India v. Adani Exports Ltd.*, which emphasized that the cause of action must have a nexus and relevance with the dispute involved. The Court concluded that since the notices were served in Ahmedabad, part of the cause of action arose within its jurisdiction, thus conferring territorial jurisdiction on the High Court.

2. Applicability of Section 179 of the Income Tax Act, 1961 to Directors of a Public Limited Company converted from a Private Limited Company:
The petitioners argued that Section 179, which holds Directors of Private Limited Companies liable for tax dues, should not apply to Public Limited Companies. The Court noted that the Company had been converted to a Public Limited Company in 1995, and the petitioners were appointed as Directors only on 29.12.2005. The Court found that the petitioners were not Directors during the relevant assessment years and were not shareholders until 2006. Therefore, the Court held that invoking Section 179 against the petitioners was not justified as they could not be held liable for the Company's tax dues for the assessment years in question.

3. Principle of lifting the corporate veil:
The Court discussed the principle of lifting the corporate veil, which allows courts to look beyond the corporate structure to hold individuals accountable. This principle is applied sparingly and usually in cases of fraud or statutory provisions. The Court referred to the case of *Pravinbhai M. Kheni v. Assistant Commissioner of Income-Tax*, which highlighted that lifting the corporate veil is justified when the Company is used to defraud revenue. In the present case, the Court found no evidence that the petitioners were involved in any fraudulent activities or that they were beneficiaries of any complex design to defeat revenue interests. The Court concluded that the principle of lifting the corporate veil was not applicable as the petitioners were not responsible for the Company's affairs during the relevant period.

Conclusion:
The Court held that it had jurisdiction to entertain the petitions under Article 226. It found that the invocation of Section 179 of the Income Tax Act against the petitioners was unjustified as they were not Directors during the relevant assessment years and had no involvement in the Company's affairs. The Court also concluded that the principle of lifting the corporate veil did not apply in this case. Consequently, the impugned notices and orders were quashed and set aside.