2014 (4) TMI 1007 - HC - Income Tax

Liability to pay tax dues u/s 179 of the Act - Liability of directors of private company in liquidation - Held that - Assessee rightly contended that the provision of Section 179 of the Act not being applicable for M/s. Blue Information Technology being a public limited company - the revenue neither in show cause notice u/s 179 of the Act nor in the order passed under the provisions has laid any factual foundation thereby disputing the status of such company of that a public limited company. Relying upon Pravinbhai M. Kheni v. Asstt.CIT Assistant Commissioner of Income tax, Central Circle 2 and others 2012 (12) TMI 494 - GUJARAT HIGH COURT - The 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 - the onus of the assessee 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 action against the assessee u/s 179 of the Act would not lie - Decided in favour of Assessee.

Summary

Issues Involved:
1. Applicability of Section 179 of the Income-tax Act, 1961.
2. Liability of directors of a public limited company for tax dues.
3. Conditions for piercing the corporate veil.

Issue-wise Detailed Analysis:

1. Applicability of Section 179 of the Income-tax Act, 1961:
The petitioner challenged the order passed by the Revenue under Section 179 of the Income-tax Act, 1961, which imposes vicarious liability on the directors of a private limited company for tax dues. The petitioner argued that he was no longer associated with the company and could not be held liable for any tax demand raised against the company. The Revenue contended that Section 179 imposes vicarious liability on the director of the private limited company, and since the petitioner was a director during the relevant period, he was liable for the tax dues.

2. Liability of directors of a public limited company for tax dues:
The company in question, M/s. Blue Information Technology Ltd., was a public limited company. The petitioner was a director of the company until he resigned on June 9, 1997. The company was assessed for the assessment years 1995-96, 1996-97, and 1997-98, and substantial tax demands were raised against it. The petitioner argued that he was an ordinary director and not involved in the day-to-day activities of the company. The Revenue issued a notice under Section 221(1) of the Act for non-payment of dues amounting to Rs. 297 lakh, holding the petitioner liable as a director.

3. Conditions for piercing the corporate veil:
The court referred to previous judgments, including the case of Pravinbhai M. Kheni v. Asstt. CIT, which dealt with the liability of directors under Section 179. The court noted that the concept of piercing the corporate veil is applied sparingly and cautiously, primarily in two situations: when the statute permits it or when glaring facts establish that a complex web was created to defraud the revenue. In the present case, the company was a public limited company, and the foundational facts for piercing the corporate veil were missing. The court held that Section 179 of the Act, which imposes vicarious liability on directors of private companies, was not applicable to the petitioner, as the company was a public limited company.

Conclusion:
The court concluded that the invocation of Section 179 of the Act against the petitioner was not sustainable. The petitioner, being a director of a public limited company, could not be held liable under Section 179. The court quashed the impugned order dated November 3, 2004, and all consequential orders arising therefrom. The petition was allowed, and the rule was made absolute to the extent stated, with no order as to costs.