2016 (9) TMI 911 - HC - Income Tax

Liability of directors of private company in liquidation - whether the company was converted into a public limited company for the purpose of avoiding statutory liability benefiting the petitioners - Held that - We do not wish to express any opinion as to whether the corporate veil ought to be lifted in the present case even assuming that it is permissible to do so in matters under the Income Tax Act. Suffice it to state that even assuming that it is permissible to do so, there are several issues which ought to be taken into account before deciding whether or not to lift corporate veil. Neither the show cause notice nor the impugned order refers to certain crucial facts including as to the extent of share holding of the directors, the extent of control exercised by them regarding the affairs of the company and the extent of their representation on the board of directors. It would also be necessary to consider the Articles of Association of the company and any other agreements that may exist between the share-holders inter se. There are several other factors also which must be taken into consideration including as to whether the company was converted into a public limited company for the purpose of avoiding statutory liability benefiting the petitioners alone and/or conferring any other benefits upon the petitioners or any one or more of them alone. Lifting the corporate veil in a case such as this has drastic consequences. The impugned order does not consider the same in any detail. 12. The impugned order is, therefore, set aside and the matter is remanded to respondent No.2 for taking a fresh decision in accordance with law. It will be open to respondent No.2 to issue a fresh show cause notice or to furnish further particulars in respect of the same show cause notice. It is also open to respondent No.2 to base its claim on any other cause of action including by way of a tracing action. All the contentions of the parties are kept open.

Summary

Issues:
1. Quashing of order under Section 179 of the Income Tax Act, 1961 holding directors liable.
2. Challenge to consequential acts of Assistant Commissioner of Income Tax attaching properties and bank accounts.
3. Interpretation of Section 179 regarding liability of directors of private companies.
4. Consideration of lifting the corporate veil in income tax cases.

Analysis:
1. The petitioners sought a writ of certiorari to quash an order under Section 179 of the Income Tax Act holding them liable as directors of the company for a sum of ?23.77 crores. They also challenged subsequent actions of the Assistant Commissioner issuing notices to attach their properties and bank accounts. The company failed to file its return of income for the Assessment Year 2013-14 and did not pay self-assessment tax and interest. The penalty imposed led to the directors being held liable.

2. The company's status changed from a private to a public company under the Companies Act. The failure to file returns and pay taxes resulted in the imposition of a substantial penalty. Subsequently, a notice was issued to the petitioners invoking Section 179 of the Income Tax Act to hold them jointly and severally liable for the outstanding amount.

3. Section 179 of the Income Tax Act holds directors of private companies liable for unpaid taxes unless they prove non-recovery is not due to neglect, misfeasance, or breach of duty. The petitioners argued that as the company was public, Section 179 did not apply. The court deliberated on the applicability of Section 179 to public companies and the necessity to consider various factors before holding directors personally liable.

4. The court considered the argument of lifting the corporate veil in income tax cases. The petitioners contended that even if the corporate veil could be lifted, multiple factual and legal aspects needed evaluation before doing so. The court emphasized the need to assess shareholding, control, agreements among shareholders, and the purpose behind converting the company to a public entity before deciding on lifting the corporate veil.

5. The judgment set aside the impugned order and remanded the matter for a fresh decision, emphasizing the importance of considering all relevant factors before holding directors personally liable. The court highlighted the need for a detailed examination before making a decision with significant consequences, ensuring fairness and due process in the proceedings.