9911796707
TMI Blog2012 (12) TMI 494X X X X Extracts X X X X X X X X Extracts X X X X ..... The company preferred an appeal before the Commissioner(Appeals) who by his order dated 18.9.2002 reduced the computation of total income to Rs. 130,54,95,443/-. 2.2 On the ground that the tax could not be recovered from the company, the respondents initiated proceedings under section 179 of the Act against the petitioner. On 13.9.2001, the Deputy Commissioner of Income-tax issued a notice to the petitioner stating as under : "2. As a result of passing block search assessment order of M/s. M. Kantilal & Co. Ltd., on 23.3.2001, a demand of Rs. 155.33 crores is outstanding as on today. After giving proper opportunity to this company, coercive measures as per I.T. Act has been initiated. The company has defaulted in making the payment. From the records it is ascertained that you are one of the Directors of this Pvt. Ltd. Company for the block period. Therefore as per the section 179 of the I.T. Act, you will be jointly and severally liable for the payment of the outstanding demand of M/s. M. Kantilal & Co. Ltd. 3. Please explain as to why recovery proceedings should not be initiated against you in the light of section 179 of the I.T. Act for the outstanding demand of the Company M/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounted income might have been invested. Therefore, it is apparent that the unaccounted income of the company has been misappropriately utilised by the Directors and Shareholders of M/s M Kantilal & Co. Ltd. A Memorandum of Association of M/s M Kantilal & Co. Ltd. Has been analyzed. The following are the directors/shareholders of M/s M Kantilal & Co. Ltd :- [1] Shri Manjibhai Mavjibhai Patel [2] Shri Pravinbhai Mohanbhai Kheni [3] Shri Kantibhai Mohanbhai Kheni [4] Shri Himmatbhai Mohanbhai Kheni [5] Shri Mukeshbhai Mavjibhai Patel [6] Shri Kanjibhai Mavjibhai Patel & [7] Shri Vipulkbhai Manjibhai Patel It may be mentioned that all the above persons are the family members and relate to M. Kantilal family. Further, the Memorandum of Association shows that the main object of the company are as under :- "To takeover business, and undertaking carried on under the name and style of M/s M Kantilal & Company, having its registered office at 1205, Panchratna, Opera House, Bombay - 400 004 alongwith all the belonging, funds, assets, rights, privileges, liabilities, obligations, and contracts of M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the dues of tax from the Directors. In this connection, the decision of the Supreme Court reported in 1996 All India Reporter 2005 in the case of DDA Vs Skipper Construction Co Pvt. Ltd is directly applicable where the Hon'ble Supreme Court is of the view that if the members and directors of any company commits illegality and defrauding people by the formation of corporate body then the theory "Lifting the corporate veil" may be applied. Gist of the decision is as under : "The Hon'ble Supreme Court of India reported in 1996 AIR 2005 in the case of DDA Vs Skipper Construction Co Pvt. ltd has given verdict on the theory of "Lifting the corporate veil". The Hon'ble Supreme Court has held that in case of corporate bodies created by the individual and his family members for committing illegality and defrauding people, the Court can treat them one entity. The Hon'ble Supreme Court has further held that the concept of corporate entity was evolved to encourage and promote trade and commerce but not to commit illegalities or to defraud people. Where, therefore the corporate character is employed for the purpose of the committing illegality or for defrauding others, the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .4.2003 however, was pleased to reject the petitioner's revision application under section 264 of the Act. He concurred with the view of the Assistant Commissioner regarding requirement of lifting the veil. In this respect his conclusions were as under : "(ii) In the order made u/s. 179 of the Act, the Assessing Officer has lifted the corporate veil in the case of M/s M Kantilal & Co. Ltd by relying on the decision of the Hon'ble Supreme Court in the case of Delhi Development Authorities v. Skipper Construction Co. Pvt. Ltd., AIR 1996 Supreme Court 2005. In the aforesaid case, the Hon'ble Supreme Court has held that the concept of corporate entity was evolved to encourage and promote trade and commerce but not to commit illegality or to defraud people. It had further held that the fact that an individual and members of his family have created several corporate bodies would not prevent the Court from treating all of them as one entity belonging to and controlled by that individual and family if it was found that these corporate bodies were merely cloaks behind which lurked that individual and/or members of his family and that the devise of incorporation was really a plo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose of committing an illegality or for defrauding others, the court could ignore the corporate character and look at the reality behind the corporate veil. It is clear from the facts discussed by the Assessing Officer in the order made by him u/s. 179 of the Act that the purpose behind the assumed entity of a public company in the case of M/s M Kantilal & Co. Ltd was to facilitate avoidance of recovery of tax due from it. The aforesaid company has been formed with the main object to take over the business of partnership firm known as M/s M.Kantilal & Co. The search and seizure operation had revealed unaccounted production and unaccounted transactions during the period prior to the date of incorporation when the firm was in existence. The same pattern of unaccounted transactions continued after the formation of the company. Through the entity of M.s M.Kantilal & Co. Ltd., huge undisclosed income had been earned which was eventually brought to tax in the order of block assessment made in its case. However, there was not even a single immovable property in the name of the company which could have been attached for recovery of its tax dues. The apparent status of a public company would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity of the facts in the case of M/s. M Kantilal & Co. ltd revealed that it was, in reality, a private company only. (vii) As for the contention of the assessee at point no.(iii) of para.3, it is seen that the company M/s. M Kantilal & Co. ltd was assessed to tax on undisclosed income of Rs. 259.23 crores for the block period. In the appellate order passed by the CIT(A) against the order of aforesaid assessment, he confirmed assessment of undisclosed income to the extent of Rs. 130.55 crores. A perusal of the balance- sheet of the company as on 31.3.2000 and on 31.3.2001 shows that the company does not have worthwhile liquid assets of its own. As mentioned earlier, it also does not have any immovable property of its own. On the other hand, the assessee and the other directors of the company have acquired a large number of immovable properties in their own name. It is well known that apart from the stated purchase consideration 'on money' is paid for acquiring such assets. The management and control of the affairs of the company is with the assessee and six other directors who are the members of the same family. They are privy to the unaccounted transactions of the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the corporate veil was required to be lifted. In support of his contentions, counsel relied on the following decisions : (1) In case of U.K. Mehra v. Union of India and others reported in 88 Company Cases 213, wherein Division Bench of Delhi High Court had invoked the principal of lifting or piercing the corporate veil. (2) In case of State of U.P. and others v. Renusagar Power Co. and others reported in AIR 1988 Supreme Court 1737, wherein the Apex Court invoked such principle. (3) In case of Tata Engineering and Locomotive Co. Ltd. v. The State of Bihar and others reported in AIR 1965 Supreme Court 40, wherein the Apex Court had the occasion to discuss similar issue. (4) In case of Life Insurance Corporation of India v. Escorts Ltd. and others reported in AIR 1986 Supreme Court 1370. 5. Having thus heard learned counsel for the parties and having perused the documents on record, we may first deal with the contention of the petitioner regarding non recovery of the tax dues from the company and that such non recovery being not attributable to any negligence, misfeasance or breach of duty on part of the petitioner. 6. Section 179 as is well known perm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke them jointly and severally liable for such dues, it is necessary for the revenue to establish that such recovery cannot be made against the company and then and then alone it can reach the directors who were responsible for the conduct of business during the previous year in relation to which liability exists." In case of Indubhai T. Vasa (HUF) v. Income-tax Officer reported in [2006] 282 ITR 120 (Guj.), this Court reiterated such proposition following the decision in case of Bhagwandas J. Patel (supra) observing : "In these circumstances, it is not possible to accept the stand of the respondent that despite best efforts the taxes due from the Company cannot be recovered. As laid down by this Court the phrase "cannot be recovered" requires the Revenue to establish that such recovery cannot be made against the Company and then and then alone would it be permissible for the Revenue to initiate action against the director or directors responsible for conducting the affairs of the Company during the relevant accounting period. Hence, the prerequisite condition stipulated by Section 179 of the Act remains unfulfilled in context of the facts available on record by virtue of the impu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of attachment in ITCP-3 for attachment of four current debtors as under :- - Golden Soft Link Ltd. Mumbai - Sh Annasaheb M. patel, A'nagar Rs. 9.00 lacs - Smt. Sushila M. Patil, A'nagar Rs. 1.00 lac - Smt Chandanben M Shah, Mumbai Address given was old new address has been traced out These two persons have confirmed the due. Necessary further proceedings are being taken to recover the amt. No amt. is outstanding as per replied filed by the assessee. 16 06.11.01 Further notice u/s 226(3) was issued 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 Rs. 1.85 crores on 21.11.97 for theft of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Not replied 31 -do- A notice u/s 226(3) issued by RPAD to two current depositors of M/s. M Kantilal & co. for remitting the amount of Rs. 10.00 lacs to the undersigned -do- 32 31.01.02 Another letter is also issued along with the above notices to both the current depositors directing them to submit a copy of books of account of ledger account to the undersigned -do- 33 -do- Another notice u/s 226(3) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 a public company for payment of tax dues which cannot be recovered from the company. However, such liability could be avoided if the director proves that the non-recovery cannot be attributed to any gross negligence, misfeasance or breach of duty on his part in relation to the affairs of the company. It is of-course true that the responsibility of establishing such facts is cast upon the director. Therefore, once it is shown that there is a private company whose tax dues have remained outstanding and same cannot be recovered, any person who was a director of such a company at the relevant time would be liable to pay such dues. However, such liability can be avoided if he proves that the non-recovery cannot be attributed to the three factors mentioned above. Thus the res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ken 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. All shares were held by the directors only. 13. Question is if these facts are established should the corporate veil be lifted? 14. The principle of lifting or piercing the corporate veil is neither new nor unknown. It is however, not possible of any precise definition or application in a straitjacket formula. We may notice some of the authorities dealing with such a concept. (1) In case of State Trading Corporation of India Ltd. v. The Commercial Tax Officer and others reported in AIR 1963 Supreme Court 1811, nine Judge Bench of the Supreme Court considered the question whether a company can be considered a citizen and be permitted to approach Supreme Court under Article 32 of the Constitution of Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 incorporation. On behalf of the Corporation it is contended that if the corporate veil is pierced one sees that the right to invoke Art. 19(1)(f) and (g) is being claimed by three persons who are admittedly citizens of India namely the President of India and the two secretaries. The contention on the other side is that the corporate veil cannot be pierced at all and that if it is, then behind that veil there is the Government of India. 68. In my judgment it is not possible to pierce the veil of incorporation in our country to determine the citizenship of the members and then to give the corporation the benefit of Art. 19. If we did pierce the veil and saw that the corporation was identical with Government there would b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shed 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 doctrine of the lifting of the veil thus marks a change in the attitude that law had originally adopted towards the concept of the separate entity or personality of the corporation. As a result of the impact of the complexity of economic factors, juidical decisions have sometimes recognised exceptions to the rule about the juristic personality of the corporation. It may be that in course of time these exceptions may grow in number and to meet the requirements of different economic problems, the theory about the personality of the corporation may be confined more and more. ** ** &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate 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 Apex Court was considering a situation where it was found that entire transaction of lending and borrowing of money and bringing it into British India from non-taxable territory formed part of basic arrangement between Bank and assessee companies. It was so done that money was brought to British India after it was taken by the assessee company outside the taxable territory. It was in this context the Apex Court observed that "it is well established that in a matter of this description the Income- tax authorities are entitled to pierce the veil of corporate entity and to loo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 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 ([1897] A.C. 22) case held that the New York business was that of the English company which was liable for English income tax accordingly. In another case Firestone 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 manufact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 : "Four inroads have been made by the law on the principle of the separate legal personality of companies. By far the most extensive of these has been made by legislation imposing taxation. The Government, naturally enough, does not willingly suffer schemes for the avoidance of taxation which depend for their success on the employment of the principle of separate legal personality, and in fact legislation has gone so far that in certain circumstances taxation can be heavier if companies are employed by the tax-payer in an attempt to minimise his tax liability than if he uses other mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble, 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. Where, therefore, the corporate character is employed for the purpose of committing illegality or for defrauding others, the court would ignore the corporate character and will look at the reality behind the corporate veil so as to enable it to pass appropriate orders to do justice between the parties concerned. The fact that Tejwant Singh and members of his family have created several corporate bodies does not prevent this Court from treating all of them as one entity belonging to and controlled by Tejwant Singh and family if it is found that these corporate bodies are merely cloaks behind w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 emanation of the American parent, and that it was selling its own goods as principal and not its parent's goods as agent. Nevertheless, these sales were a means whereby the American company carried on its European business, and it was held that the substance of the arrangement was that the American company traded in England through the agency of its subsidiary. We therefore, reject the argument of Mr. Venkataraman on this aspect of the case. More recently we have pointed out in Mc Dowell and Company Limited v. Commercial Tax Officer [1985] 3 SCC 230. "It is up to the Court to take stock to determine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ern 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 Jurisprudence. (Tagore Law Lecture 183). 66. It appears to us, however, that as mentioned the concept of lifting the corporate veil is a changing concept and is of expanding horizons. We think that the appellant was in error in not treating Renusagar's power plant as the power plant of Hindalco and not treating it as the own source of energy. The respondent is liable to duty on the same and on that footing alone; this is evident in view of the principles enu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 corporate veil is applied by the Courts in various situations. Two situations where such principle is consistently applied are, one where the statute itself so permits or provides for and second where due to glaring facts established on record it is found that a complex web has been created only with a view to defraud the revenue interest of the State. If it is found that incorporation of an entity is only to create a smoke screen to defraud the revenue and shield the individ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial 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 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. When the petitioner replied to such a show cause notice and contended that the company being a public company, section 179 of the Act would not apply, the Assistant Commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uding 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 179(1) of the Act cannot be applied. However, if the factors noted by the Assistant Commissioner in his impugned order dated 15.4.2002 and highlighted by us in this judgement are duly established, it would certainly be a fit case where invocation of principle of lifting of corporate veil would be justified. (4) We however, hold that the Assistant Commissioner proceeded to record such findings without giving sufficient opportunity of hearing to the petitioner and without discl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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