2016 (10) TMI 367 - HC - Income Tax

Liability of directors of private company in liquidation - statutory creation of piercing of corporate veil - Held that - In the present case, the respondents have instead of confronting the petitioner with necessary material why the corporate veil should be lifted and Section 179 of the Act be applied to him, issued the notice dated 18.11.2008 and called upon the petitioner to substantiate the claim that the company is a public limited company. This fact is not even seriously in dispute. The revenue ought not to have questioned such a basic fact. If the revenue wanted to apply the principle of lifting the corporate veil in the context of Section 179 of the Act, it ought to have prima-facie sufficient material to confront the assessee on the issue and should have so confronted the assessee petitioner calling upon him to show cause why such powers should not be invoked. Further as noted, the demand of ₹ 13.45 Crores with interest referred to in the notice has currently come down to ₹ 3.55 Crores. Under the circumstances, the impugned order is set aside leaving it open for the revenue, if it so desires, to take out fresh proceedings by issuing appropriate notice and taking further steps in accordance with law; bearing in mind observations made hereinabove. The petitions stand disposed of accordingly. It is clarified that all contentions and objections of the petitioners are kept open.

Summary

Issues:
1. Application of Section 179 of the Income Tax Act, 1961 to a Director of a Public Limited Company.
2. Validity of the order for recovery of unpaid taxes against the petitioner.

Analysis:

1. The petitions involved a challenge to an order for the recovery of unpaid taxes against the petitioner, who was a Director of a Public Limited Company. The company faced an income tax demand for a block period, leading to a notice issued to the petitioner under Section 179 of the Income Tax Act, 1961. The petitioner raised defenses against the notice, highlighting that the company was a public limited company and not a private limited one, which is crucial for the application of Section 179. The petitioner contended that the revenue failed to provide sufficient material to lift the corporate veil and apply Section 179 to him. The court acknowledged the limited exceptions recognized in case law for applying Section 179 to Directors of public limited companies, emphasizing the cautious approach required in piercing the corporate veil. The court noted the need for the revenue to establish grounds for lifting the corporate veil before invoking Section 179 against a Director of a public limited company.

2. The court considered the facts presented, including the status of the company as a public limited company and the reduction of the tax demand to &8377; 3.55 Crores from the initial amount. It observed that the revenue should have confronted the petitioner with necessary material if intending to lift the corporate veil and apply Section 179. As the revenue failed to provide sufficient grounds for such action and considering the reduced tax demand, the court set aside the impugned order for recovery of unpaid taxes against the petitioner. The court allowed the revenue to initiate fresh proceedings with proper notice and adherence to legal procedures, while keeping all contentions and objections of the petitioners open for future consideration.

In conclusion, the judgment addressed the application of Section 179 to a Director of a Public Limited Company, emphasizing the need for the revenue to establish grounds for lifting the corporate veil. The court set aside the order for recovery of unpaid taxes against the petitioner due to insufficient grounds provided by the revenue, allowing for the possibility of fresh proceedings in accordance with the law.