2014 (3) TMI 391 - HC - Income Tax

Lifting up of corporate veil - Recovery of amount u/s 179 of the Act from the director Held that - The show cause notice is bereft of any details - It merely calls upon the petitioner to show cause why tax recovery, which could not be made from the company be not made from him under Section 179 (1) of the Act - in absence of any previous material indicating that the show cause notice and any bipartite hearing on such issues by the Income Tax Officer, such question need not be gone into. Even from the order under section 179, we do not find that the Assessing Officer had based his case of lifting the corporate veil, as was referred to by this Court in case of Pravinbhai M. Kheni 2012 (12) TMI 494 - GUJARAT HIGH COURT The order u/s 179 of the Act set aside Decided in favour of Assessee.

Summary

Issues:
Recovery under section 179 (1) from a director of a public limited company, Lifting of corporate veil in case of a public company for tax recovery, Sufficiency of facts for lifting corporate veil

Analysis:
The judgment by the Gujarat High Court dealt with petitions involving similar questions of facts and law, thus disposed of by a common judgment. The petitioner challenged an order passed by the Income Tax Officer under Section 179 of the Income Tax Act, 1961, which was confirmed by the Commissioner. The key issue was whether the petitioner, who became a director of a company after its conversion into a public limited company, could be held liable for tax recovery under Section 179. The petitioner argued that recovery could only be made from the director of a private limited company.

The Court examined the applicability of Section 179, which permits recovery from the director of a private limited company when dues from the company cannot be recovered. The Revenue contended that the distinction between private and public limited companies should be based on the Income Tax Act, not the Companies Act. They argued that recovery could be sought from a director of a public company under certain circumstances, citing a previous judgment. However, the Court emphasized the need for foundational facts to lift the corporate veil, which were lacking in the present case.

The Court highlighted the importance of sufficient details in the show cause notice for lifting the corporate veil. It referenced a previous judgment on the principles of piercing the corporate veil, emphasizing that such a concept should be applied sparingly and with caution. The judgment discussed situations where the corporate veil could be lifted, particularly in cases of fraudulent activities or tax evasion. The Court concluded that in the absence of necessary facts and evidence, the principle of lifting the corporate veil could not be applied in the petitioner's case.

Ultimately, the Court held that the Revenue failed to establish the grounds for lifting the corporate veil in the case of the public company. As a result, the writ petitions were allowed, and the impugned orders under Section 179 of the Income Tax Act were quashed, with the rule made absolute.