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TMI Blog2012 (12) TMI 494X X X X Extracts X X X X X X X X Extracts X X X X ..... noted above, the factors recounted by the Assistant Commissioner in the impugned order are glaring. With respect to the finding of the Assistant Commissioner however, we have two reservations. Firstly, it is nowhere pointed out from where or on basis of which material such findings have been arrived at. There are some far reaching observations and conclusions which would require thorough investigation and support from materials on record. Second dispute that we have with the Assistant Commissioner's order is that same suffers from gross violation of principles of natural justice. In his notice under section 179(1) of the Act, he only put the petitioner to notice that he proposed to hold him liable for recovery of the tax dues of the company. He neither mentioned nor disclosed any tentative reasons why he may also invoke the principle of lifting of corporate veil. Matter remanded back to Assistant Commissioner for fresh decision in accordance with law. - SPECIAL CIVIL APPLICATION NO. 12254 OF 2002 - - - Dated:- 6-11-2012 - AKIL KURESHI AND ms. HARSHA DEVANI, JJ. J.P. Shah for the Petitioner. M.B. Purabia, Tanvish U. Bhatt and Sudhir M. Mehta for the Res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se to such notice, the petitioner replied under communication dated 20.9.2001. The petitioner opposed any recovery from him on the ground that the said company was a public limited company duly incorporated under the Companies Act, 1956. Provisions of section 179 of the Act would be applicable only where tax is due from a private company and, therefore, no recovery against the petitioner under section 179 of the Act can be made for dues of the said company. 2.4 The Assistant Commissioner of Income-tax however, passed the impugned order Annexure-G on 15.4.2002 and disregarded the petitioner's objections. He noted that the company was subjected to search operation pursuant to which by the appellate order for the block assessment under section 158BC of the Act, tax liability of the company was determined at more than ₹ 155 crores. He outlined the efforts made for recovery of such tax dues from the company by issuance of several notices, by issuing attachment orders and by proceeding under section 281 of the Act, despite which, no recovery could be made from the company. He therefore, concluded that from the above actions taken it is apparent that recovery of tax cannot b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atinum or any other precious metal and alloy thereof, including ornaments and jewelleries studded with precious or semi-precious stones. To carry on the business of manufacturing trading, dealing, importing and exporting in and of, all forms of precious and semi-precious stones including Diamonds, Gems, Rubies, Sapphires, Emeralds, Pearls. A perusal of the main object of Memorandum of Association revels that the company was formed with the main object to takeover the business of out going concern i.e. M/s M Kantilal Co., a firm where most of the Directors were the partners. Thereafter, from the inception of the company, the objectives of M/s M Kantilal Co Ltd was to run a family business of M Kantilal family. Huge undisclosed income is computed U/s 158 BC in the name of M/s M Kantilal Co, firm for the block period taking over of the firm by M/s M Kantilal Co Ltd. The total undisclosed income was computed for ₹ 884354291/- and the said assessment has been set-aside by CIT(A) and the assessment is in progress. Further, the Directors of the company have created huge assets in their own name in the form of immovable property. Therefore, it is evident that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amily if it is found that these corporate bodies are merely cloaks behind which lurks that individual and/or members of his family and that the devise of incorporation was really a ploy adopted for committing illegalities and/or to defraud people. In the instant case M/s M Kantiulal Co Ltd, the word Pvt. Ltd is not mentioned in incorporation certificate. The fact remains that all shareholders and directors belong to a single family and these family members have earned huge unaccounted income of ₹ 259 crores as assessed in the hands of company after taking into account the evidences gathered as a result of search seizure operation. Evidence gathered during the search seizure operation further fortifies the idea that this company has been used as a conduit for generating unaccounted wealth. Further, the assessee company has not offered to general public any share for subscription. All the shares are held by directors only. 2.5 The petitioner thereupon made a representation to the Assistant Commissioner on 6.5.2002. In such representation, he reiterated his contention that section 179 of the Act would not be applicable in case of a public company. He also tried t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness of partnership firm known as M/s M Kantilal Co., whose partners (four in member) became director of the company alongwith three other members of the family. These family members had earned huge unaccounted income which was evidenced on the basis of the material found during the course of the search seizure operation. He further held that the aforesaid company was being used as a conduit for generating unaccounted wealth. This view was fortified by analysing the balance-sheet of the company which showed that there was not even a single immovable property in the name of the company. The Assessing Officer stated that the said company had not offered to the general public any shares for subscription and that all the shares of the company were held by its directors only. Thus, the management and control over the affairs of the company were with the aforesaid seven persons who belonged to a family. He thus lifted the veil of public company and held that M/s M Kantilal Co. Ltd was in essence, a private company. For the reasons given by the Assessing Officer in the order u/s 179 of the Act, I agree with the conclusion reached by him with regards to the real character of M/s M. K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he contention of the assessee mentioned at point no. (iv) of para 1 is not in order. Under section 179 of the Act, there is no bar on the Assessing Officer to pass an order thereunder where a statement has been drawn by the T.R.O under section 222. It is only in respect of the modes of recovery specified in section 226 of the Act that after a certificate is drawn under section 222, T.R.O. Alone has the powers to make use of them. The mode of recovery of tax due from a private company specified in section 179 of the Act is distinct from the modes of recovery specified in section 226. Therefore, the aforesaid contention of the assessee is rejected. (v) As for the contention of the assessee that the action to lift the corporate veil could be taken by a court and not by the Assessing Officer, the Hon'ble Supreme Court, in the case of C.I.T. v. Meenakshi Mills Ltd. Others, [1967], 63 ITR, 609, has held that the income-tax authorities are entitled to pierce the veil of corporate entity and to look at the reality of the transaction to examine whether the corporate entity was being used for tax evasion. In the aforesaid case, a separate corporate entity was brought into existence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provisions of section 179 of the Act when admittedly the company was a public company. He further submitted that in any case the company should be treated to be a deemed public company in terms of section 43A of the Companies Act. 3.1 Counsel relied on the decision of the Apex Court in case of M.Rajamoni Amma and another v. Deputy Commissioner of Income-tax (assessment) and others reported in 195 ITR 873 in which it was held that where the liability of a company had arisen after the company had become deemed public company, the directors of such company would not be liable to be proceeded against any recovery of tax dues of company under section 179 of the Act. 3.2 Counsel submitted that the principle of lifting the corporate veil would be inapplicable in the present case. He further submitted that there was no material on record in any case to apply such a principle. 3.3 Counsel also contended that even otherwise the requirements of section 179 of the Act were not fulfilled. The Assistant Commissioner had not held that non recovery of dues of the company could be attributed to any gross negligence, misfeasance or breach of duty on part of the petitioner. 3.4 Counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect of any income of any previous year or from any other company in respect of any income of any previous year during which such other company was a private company cannot be recovered, then, every person who was a director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company. (2) Where a private company is converted into a public company and the tax assessed in respect of any income of any previous year during which such company was a private company cannot be recovered, then, nothing contained in sub-section (1) shall apply to any person who was a director of such private company in relation to any tax due in respect of any income of such private company assessable for any assessment year commencing before the 1st day of April, 1962. 7. Sub-section(1) of section 179 as can be noticed provides that notwithstanding anything contained in the Companies Act, 1956, where any tax due from a private company or other company during the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overy measures undertaken Outcome of the measures 1 30.03.01 Applied to CIT., Surat for cash adjustment Rs.3,75,000 is adjusted 2 31.03.01 Adjustment of refund of A.Y 1998-99 Rs.15.49 lacs is adjusted 3 31.03.01 Adjustment of refund of A.Y 2000-01 Rs.33,240/- is adjusted 4 26.06.01 Attachment notice u/s.226(3) of the Act issued to the State Bank of Saurashtra, Surat. The bank informed on 2.7.99 that there is no remaining positive balance on 30.3.01 5 27.06.01 Notice issued before resorting to coercive actions No reply received;Coercive actions started as per law. 6 27.06.01 Notice u/s221(1) of the Act issued for imposing penalty Co reply received; However, penalty was not imposed as this will further add in the existing very high demand 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssued to one concern at Mumbai who has purchased polished diamond from assessee in Sept.01 M/s. Rough Stone M/s Rough Stone, has replied that payment has already been made through Andhra Bank to the assessee. The assessee has not given the details of the said bank. After correspondence with the banker of Rough Stone the address of Andhra bank has been traced and the account where such amount has been deposited appropriated would be analyzed after obtaining the said account where money is credited. 17 06.11.01 Another notice u/s.226(3) was issued to the Oriental Insurance Co. ltd at Mumbai where the assessee had lodged a claim of ₹ 1.85 crores on 21.11.97 for theft of demand. Insurance co. has replied that there is not claim as decided by Insurance co. This decision was communicated to the assessee co. Proceedings for giving false information would be initiated. 18 09.11.01 Show cause notice u/s281 was issued to the assessee for treating the sale of car laser machine as void No reply received from the assessee. TRO has addre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount exists in its office. 27 -do- Letter for attachment of drugs and polished diamond and calling for valuation report for the said diamond issued Reply received on 25.1.02. The defaulter company has requested for one week time for valuation report 28 23.01.02 The defaulter company was asked to confirm the ownership of offices No. 1204/A and 1407/B of Panchratna building, Opera house, Mumbai on telephone Reply received on 25.1.02 that the 1205/A premises is in the name of director Shri Manjibhai Mavjibhai Patel and 1407/B is on rent.The same fact is confirmed by the TRO-16(3), Mumbai. 29 -do- Notice u/s 226(3) was issued to the State bank of Saurashtra, Dena Bank, Varachha road and Dena Bank Galemandi Br. Surat SBS-2 A/c. Current attached. SBS-3 A/c. No. Current/savings account Dena Bank, V.road, No. A/c. Dena Bank, Galemandi-No.A/c. 30 30.01.02 A letter issued to M/s. M Kantilal co. ltd for valuation of diamond stocks ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility would arise. It would be upto him then to establish that such liability should not arise since the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to affairs of the company. In the present case, the petitioner never putforth any such defence, did not urge any grounds or bring any material before the respondents to contend that his case should fall within exclusion clause of sub-section(1) of section 179. The contention that onus was on the Revenue to establish that such non recovery was attributable to gross negligence, misfeasance or breach of duty on his part, is not borne out from the plain language used in sub-section(1) of section 179 of the Act. In a recent decision dated 25,26/09/2012 passed in Special Civil Application No.3910/2012 and allied matters in case of Maganbhai Hansrajbhai Patel v. Asst. Commissioner of Income Tax and others, Division Bench of this Court had observed as under : 21. To our mind, the authority completely failed to appreciate in proper perspective the requirement of section 179(1) of the Act. We may recall that said provision provides for a vicarious liability of the director of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of M/s. M. Kantilal Company, along with all the belonging, funds, assets, rights, privileges, etc. To carry on in India and elsewhere the business of manufacturing, dealing, buying, selling, importing and exporting of gems, diamonds, pearls, rubies, etc. Thus the company was formed with the main object of taking over the business of the outgoing concern i.e. M/s. M Kantilal Co. where most of the Directors were partners. (iv) From the inception the company was to run as a family business of M. Kantilal and family. (v) Huge undisclosed income was computed under section 158BC of the Act in the name of the firm for the block period during which takeover of the firm of M/s. Kantilal Co. Ltd. had taken place. (vi) Directors of the company had created huge assets in their own name in the form of immovable properties. It was therefore, evident that unaccounted income of the company was utilised for acquiring such properties by the directors. (vii) The Assistant Commissioner therefore, concluded that the evidence shows that the company was used as a conduit for generating unaccounted wealth. Shares of the company were not offered to general public for subscription. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as no physical existence ; it is a mere 'abstraction of law' as Lord Selborne described it in G.E. Rly. Co. v. Turner [1872] 8 Ch A 149 at p.152 or as Lord Macnaghten said in the well-known case of Salomon v. Salomon Co. ltd. 1897 AC 22 at page .51. it is at law a different person altogether from the subscribers to the memorandum of association. This distinction is brought home if one remembers that a company cannot commit crimes like perjury, bigamy or capital murder'. This persona dicta being a creature of a fiction, is protected by natural limitations as pointed out by Palmer in his Company Law (20th edn.) p. 130 and which were tersely summed up by counsel in R. v. City of London, [1632] 8 SV Tr. 1087 at p.1138 when he asked Can you hang its common seal? . It is true that sometimes the law permits the corporate veil to be lifted, but of that later. In the later portion of the judgement, learned Judge dealt with the question of lifting of corporate veil in that case, for benefit of the company and observed as under : 65. The next question is whether the State Trading Corporation is a department or organ of Government notwithstanding the formality of incor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orporation or a company which owes its incorporation to a statutory authority, is not in doubt or dispute. The corporation in law is equal to a natural person and has a legal entity of its own. The entity of the corporation is entirely separate from that of its shareholders; it bears its own name and has a seal of its own; its assets are separate and distinct from those of its members; it can sue and be sued exclusively for its own purpose; its creditors cannot obtain satisfaction from the assets of its members; the liability of the members or shareholders is limited to the capital invested by them; similarly, the creditors of the members have no right to the assets of the corporation. This position has been well-established ever since the decision in the case of Salomon v. Salomon Co, 1897 AC 22 was pronounced in 1897; and indeed, it has always been the well-recognised principle of common law. However, in the course of time, the doctrine that the corporation or a company has a legal and separate entity of its own has been subjected to certain exceptions by the application of the fiction that the veil of the corporation can be lifted and its face examined in substance. The doctri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way to avoid this construction whenever possible. Thus, at present, the judicial approach in cracking open the corporate shell is somewhat cautious and circumspect. It is only where the legislative provision justifies the adoption of such a course that the veil has been lifted. In exceptional cases where courts have felt themselves able to ignore the corporate entity and to treat the individual shareholders as liable for its acts ,(2) the same course has been adopted. Summarising his conclusions, Gower has classified seven categories of cases where the veil of a corporate body has been lifted. But it would not be possible to evolve a rational, consistent and inflexible principle which can be invoked in determining the question as to whether the veil of the corporation should be lifted or not. Broadly stated, where fraud is intended to be prevented, or trading with an enemy is sought to be defeated, the veil of a corporation is lifted by judicial decisions and the shareholders are held to be the persons who actually work for the corporation. (3) In case of the Commissioner of Income tax, Madras v. Sri Meenakshi Mills Ltd., Madurai reported in AIR 1967 Supreme Court 819, the Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well-established that the Income-tax authorities are entitled to pierce the veil of corporate entity and look at the reality of the transaction. It is true that from juristic point of view the company is a legal personality entirely distinct from its members and the company is capable of enjoying rights and being subjected to duties which are not the same as those enjoyed or borne by its members. But in certain exceptional cases the Court is entitled to lift the veil of corporate entity and to pay regard to the economic realities behind the legal facade. For example, the Court has power to disregard the corporate entity if it is used for tax evasion or to circumvent tax obligation or to perpetrate fraud. For instance, in Apthorpe v. Peter Schoenhofen Brewing Co. [1901] 4 Tax Cas 41, the Income Tax Commissioners had found as a fact that all the property of the New York company, except its land, had been transferred to an English company, and that the New York company had only been kept in being to hold the land, since aliens were not allowed to do so under New York law. All but three of the New York company's shares were held by the English company, and as the Commissioners also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aj Paul lurking behind. It was submitted that thirteen applications were made on behalf of thirteen companies in order to circumvent the scheme which prescribed a ceiling of one per cent on behalf of each non-resident of Indian nationality or origin of each company 60 per cent of whose shares were owned by non-residents of Indian nationality/origin. Our attention was drawn to the picturesque pronouncement of Lord Denning M.R. in Wallersteiner v. Moir 1974 3 All E.R. 217, and the decisions of this court in Tata Engineering and Locomotive Company Ltd. v. State of Bihar [1964] 6 S.C.R. 885 : (AIR 1965 SC 40), the Commissioner of Income Tax v. Meenakshi Mills AIR 1967 SC 819 and Workmen v. Associated Rubber Ltd. 1985 2 Scale 321. While it is firmly established ever since Salomon v. A. Saloman Co. Limited 1897 A.C. 22, was decided that a company has an independent and legal personality distinct from the individuals who are its members, it has since been held that the corporate veil may be lifted, the corporate personality may be ignored and the individual members recognised for who they are in certain exceptional circumstances. Pennington in his Company Law (Fourth Edition) states : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t devices to avoid welfare legislation. It was emphasised that regard must be had to substance and not the form of a transaction. Generally and broadly speaking, we may say that the corporate veil may be lifted where a statute itself contemplates lifting the veil, or fraud or improper conduct is intended to be prevented, or a taxing statute or a beneficent statute is sought to be evaded or where associated companies are inextricably connected as to be, in reality, part of one concern. It is neither necessary nor desirable to enumerate the classes of cases where lifting the veil is permissible, since that must necessarily depend on the relevant statutory or other provisions, the object sought to be achieved, the impugned conduct, the involvement of the element of the public interest, the effect on parties who may be affected etc. (6) In case of Delhi Development Authority v. Skipper Construction Company (P) ltd. and another reported in AIR 1996 Supreme Court 2005, the Apex Court applied this concept making following observations : 28. The concept of corporate entity was evolved to encourage and promote trade and commerce : but not to commit illegalities or to defraud people. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssioners had found as a fact that all the property of the New York company, except its land, had been transferred to an English company, and that the New York company had only been kept in being to hold the land, since aliens were not allowed to do so under New York law. All but three of the New York Company's shares were held by the English company, and as the Commissioner also found, if the business was technically that of the New York company, the latter was merely the agent of the English company. In the light of these findings the Court of Appeal, despite the argument based on Salomon's case. [1897] A.C. 22 held that the New York business was that of the English company which was liable for English income tax accordingly. In another case-Fire stone Tyre and Rubber Co. v. Llewellin [1957] 1 W.L.R. 464- an American company had an arrangement with its distributors on the Continent of Europe whereby they obtained supplies from the English manufacturers, its wholly owned subsidiary. The English company credited the American with the price received after deducting the costs plus 5 per cent. It was conceded that the subsidiary was a separate legal entity and not a mere emanat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by Hindalco to avoid complications in case of takeover of the power station by the State or the Electricity Board. As the facts make it abundantly clear that all the steps for establishing and expanding the power station were taken by Hindalco, Renusagar is wholly-owned subsidiary of Hindalco and is completely controlled by Hindalco. Even the day-to-day affairs of Renusagar are controlled by Hindalco. Renusagar has at no point of time indicated any independent volition. Whenever felt necessary, the State or the Board have themselves lifted the corporate veil and have treated Renusagar and Hindalco as one concern and the generation in Renusagar as the own source of generation of Hindalco. In the impugned order of the profits of Renusagar have been treated as the profits of Hindalco. ** ** ** 65. The veil on corporate personality even though not lifted sometimes, is becoming more and more transparent in modern company jurisprudence. The ghost of Salomon's case (1897 AC 22) still visits frequently the hounds of Company Law but the veil has been pierced in many cases. Some of these have been noted by Justice P.B. Mukharji in the New Juris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncern. Contemporary trend shows that the lifting of the corporate veil is permissible whenever public interest so demands. Courts have been pragmatic in their approach in unveiling companies, especially the subsidiary companies to see their real face in the interests of justice. 15. From the above judicial pronouncements, it can be seen that concept of lifting or piercing the corporate veil as sometimes referred to as cracking the corporate shell, is applied by Courts sparingly and cautiously. It is however, recognised that boundaries of such principle have not yet been defined and areas where such principle may have to be applied may expand. Principally, the concept of corporate body being an independent entity enjoying existence independent of its directors, is a well-known principle. Its assets are distinct and separate and distinct from those of its members. Its creditors cannot obtain satisfaction from the assets of its members. However, with ever developing world and expanding economic complexities, the Courts have refused to limit the scope and parameters or areas where corporate veil may have to be lifted. 16. Howsoever cautiously, the concept of piercing of corporat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of unaccounted money and appropriating in directors. 19. If these facts are duly established, we have no hesitation in holding that principle of lifting the corporate veil should be applied. By application of section 179 of the Act, the recovery of the tax dues of the company can be sought from the directors. 20. With respect to the finding of the Assistant Commissioner however, we have two reservations. Firstly, it is nowhere pointed out from where or on basis of which material such findings have been arrived at. There are some far reaching observations and conclusions which would require thorough investigation and support from materials on record. For example, the Assistant Commissioner has recorded that the directors of the company have amassed substantial wealth in the form of immovable property. Full details of such properties, when they were acquired and whether there was any known source out of which the same were acquired is not known. This and many other observations of the Assistant Commissioner require further scrutiny and investigation. 21. Second dispute that we have with the Assistant Commissioner's order is that same suffers from gross violation of pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rse decision and for not insisting on such requirement rigidly when no prejudice is caused by non hearing, the Apex Court in case of Canara bank and others v. Shri Debasis Das and others reported in AIR 2003 Supreme Court 2041, referred to Lord Ackner who had stated that 'useless formality theory' is a dangerous one and, however inconvenient, natural justice must be followed because, convenience and justice are often not on speaking terms . As held by series of decisions including in case of Canara bank and others (supra), in a case where breach of natural justice is noticed, the proceedings cannot be terminated for all times to come, but would have to be revived from the stage where the defect is noticed. 23. Our conclusions therefore, are as follows : (1) The respondent authorities did establish that it was not possible to recover the tax dues from the company. (2) The petitioner neither pleaded nor succeeded in establishing that such non recovery was not attributable to any gross neglect, misfeasance or failure in discharging duty on his part in connection with the affairs of the company. (3) Being a public company, ordinarily, provisions of section ..... X X X X Extracts X X X X X X X X Extracts X X X X
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