2015 (2) TMI 857 - HC - Income Tax

Lifting of the corporate veil - Liability of directors - notice to concerned person - Held that - The person concerned is required to be put to notice by formulation of the tentative ground as to why the concept of lifting of the corporate veil should not be invoked. The Director of the company may show justifiable ground to satisfy the authority that no case is made out for lifting of the corporate veil and thereafter, the competent officer may form an opinion whether to lift the corporate veil or not. But, in any case, as neither has happened in the present case, it can be said that the order passed based on the lifting of the corporate veil even if it is, would be in breach of the principles of natural justice and hence, cannot be sustained. Thus the impugned order dated 19.11.2013 at Exhibit 1 is quashed and set aside, but with the observations that it would be open to the respondent - competent officer to formulate the ground and thereafter, to give a notice for treating the company as private limited company by lifting of the corporate veil and thereafter, to take steps, if any, available in accordance with law under section 179 of the Act. At that stage, the petitioner may show cause by resisting the ground for contending that it is genuinely a public limited company and the corporate veil should not be lifted. - Decided partly in favour of assessee.

Summary

Issues:
1. Interpretation of section 179 of the Income Tax Act, 1961 regarding recovery of outstanding tax from company directors.
2. Application of the principle of lifting the corporate veil in the context of public limited companies.
3. Compliance with principles of natural justice in issuing orders related to lifting the corporate veil.

Issue 1: Interpretation of section 179 of the Income Tax Act, 1961

The case involved a company where a show cause notice was issued to a director under section 179 of the Income Tax Act, 1961, for recovery of outstanding tax dues. The petitioner challenged the notice, claiming lack of service and challenging the subsequent order dated 19.11.2013. The court noted the need for compliance with the provisions of section 179 for recovery from directors when it is not possible to recover from the company itself.

Issue 2: Application of the principle of lifting the corporate veil

The respondent argued that the corporate veil could be lifted for public limited companies under certain conditions, citing a previous court decision. The petitioner contended that the order did not mention lifting the corporate veil, and the respondent failed to establish grounds for such action. The court referred to a previous case where lifting the corporate veil was considered permissible if specific conditions were met, emphasizing the need for the concerned person to be given notice and an opportunity to respond before such action is taken.

Issue 3: Compliance with principles of natural justice

The court highlighted the importance of following principles of natural justice in cases involving lifting the corporate veil. It noted that the impugned order lacked mention of lifting the corporate veil and that the petitioner was not given an opportunity to respond to such grounds. Consequently, the court quashed the order dated 19.11.2013, allowing the competent officer to formulate grounds for treating the company as a private limited one by lifting the corporate veil. The petitioner was granted the opportunity to contest this decision, ensuring both sides have a chance to present their arguments.

In conclusion, the judgment clarified the interpretation of section 179 of the Income Tax Act, discussed the application of lifting the corporate veil in public limited companies, and emphasized the necessity of adhering to principles of natural justice in such matters. The court's decision to quash the order while allowing further proceedings with proper notice and opportunity for response upheld the principles of fairness and due process in legal proceedings.