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TMI Blog2013 (10) TMI 1450X X X X Extracts X X X X X X X X Extracts X X X X ..... -06 and 2006 - 07, n case of the Company, when tax returns came to be filed, respondent No.1 passed orders after scrutiny assessment under section 143(3) of the Act as also for penalty under section 271(1)(c) of the Act and certain demands were raised by way of the tax and the penalty. 1.2 Aggrieved by such demands, the assessee Company challenged the same before CIT(Appeals) and Income Tax Appellate Tribunal (hereinafter referred to as "the Tribunal") and both the appeals resulted in favour of the Revenue and against the Company as far as the order of scrutiny under section 143(3) of the Act is concerned. However, the order of penalty under section 271(1)(c) is yet pending before CIT(Appeals). 1.3 In the meantime, for both the Assessment Years, a show cause notice was issued on 14.10.2011 by respondent No.1 for the recovery of the demand from the petitioners under section 179 of the Act in their capacity as the Directors of the Company. Subsequently, the impugned orders came to be passed holding the petitioners jointly and severally liable for payment of the outstanding dues of the Company. 1.4 This was challenged under section 264 of the Act before the respondent No.2. A s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l before CIT(Appeals) and the Tribunal and the Directors had admitted that the Company does not have any assets or sufficient funds to make the payment. It is contended by the respondents that in such a background, notice under section 179 of the Act has been issued on 14.10.2011 for recovering the outstanding demands from the petitioners. It is contended that the Company M/s. Amadhi Investment Limited is a Private Limited Company and dues of the Income Tax are outstanding and recoverable from the Company and, as the outstanding amount cannot be recovered from the Company, Directors of the Company are liable and onus is upon them to prove that the non -recovery cannot be attributed to any gross -negligence, misfeasance or breach of duty on their part in relation to the affairs of the Company, otherwise, all the Directors would be jointly and severally liable to pay the outstanding dues. It is further contended that the petitioners, therefore, are liable. Again, it is contended that the scope of the appeal being limited and beyond the scope of the provisions of section 253(1) and, therefore, the same is not maintainable against the order passed under section 264 by the CIT(Appeals) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion at all. He further urged that the petitioners are the Directors of the said Company and the Court needs to lift the Corporate veil. He heavily relied on the decision of Pravinbhai M. Kheni V/s. Assistant Commissioner of Income -Tax and others and urged that ordinarily in case of a Public Company, provisions of section 179(1) could not be applied. However, if the Department establishes that it was not possible to recover tax dues from the Company and the Directors of the Company neither plead nor succeed in establishing that such non -recovery was not attributable to any gross -negligence, misfeasance or failure in the discharge of duty on their part in connection with affairs of the Company, it would be a fit case where invocation of principles of lifting of veil would be justified. 6. In rejoinder, learned counsel Mr. Shah has urged that there is no sufficient details made available by the Department for lifting the corporate veil and when it is apparent on the record that the present petitioners were nowhere on the horizon when the Company was converted from the Private Limited Company to the Public Limited Company, they cannot be held liable under section 179(1) of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt Scheme under the EXIM policy. Passport was issued by Chennai Office. Entries in the Passport were made by authorities at Chennai. None of the respondents was stationed within the State of Gujarat. It was, therefore, contended that Gujarat High Court had no territorial jurisdiction to entertain the petition. The contention, however, was negatived and the petition was allowed. The respondents approached the Supreme Court. 32. The judgment of the High Court was sought to be supported inter alia on the grounds; that (i) A was carrying on business at Ahmedabad; (ii) orders were placed from and executed at Ahmedabad; (iii) documents were sent and payment was made at Ahmedabad; (iv) credit of duty was claimed for export handled from Ahmedabad; (v) denial of benefit adversely affected the petitioner at Ahmedabad; (vi) A had furnished bank guarantee and executed a bond at Ahmedabad, etc. 33. Allowing the appeal and setting aside the order of the High Court, the Supreme Court held that none of the facts pleaded by A constituted a cause of action. "Facts which have no bearing with the lis or dispute involved in the case, do not give rise to a cause of action so as to confer territor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, one has to consider whether such fact constitutes a material, essential, or integral part of the cause of action. It is no doubt true that even if a small fraction of the cause of action arises within the jurisdiction of the Court, the Court would have territorial jurisdiction to entertain the suit/petition. Nevertheless it must be a "part of cause of action", nothing less than that. " 11. Question that, therefore, needs to be examined is as to whether the essential, integral and material facts, which constitute part of the cause of action within the meaning of Article 226(2) of the Constitution of India, could confer jurisdiction on this Court. 12. As can be seen from the material on record the factum of the Company operating at Mumbai is not in dispute. It is also not under challenge that the outstanding amount which is due on account of the Company failing to make payment, was due and payable at Mumbai. On the Company, failing to make good the payment, notice under section 179 of the Act was issued as the amount in respect of the Company could not be recovered and, therefore, the petitioners who are said to be the Directors of the said Company are asked to make the paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Stock Exchange only. It may further be noticed that in its written submission also this much has been stated on behalf of SEBI that the order was served on the Bombay Stock Exchange for suitable intimation to its members and other parties. That is clear indication that the impugned order was required to be served not only on members of Stock Exchange but also on other affected parties. Undoubtedly the petitioner is one of the affected parties, which fact is not seriously disputed nor could it be. Even otherwise, without this direction, if the order in terms affected a person's right and was meant to furnish a post decisional hearing to affected parties, without requiring serving of the copy of order, it would have been meaningless. It is not the case of the respondent that the order was not required to be served on the petitioner at all. What is argued is that since SEBI itself was not to serve the order but it was to be served by Stock Exchange its furnishing copy in the court will not furnish cause of action. 18. Once it is held that, as it must be, that the order was required to be served on petitioner, the fact whether author of the order itself effects the service or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 52(1) was published in Rajasthan which resulted in vesting of property in State of Rajasthan. The petitioner challenged the notification under Section 52(1) of the Act. In those circumstances, where citus of property affected, enquiry into objections about it, its rejection, and final order vesting of property in Rajasthan had all taken place in Rajasthan. In these circumstances, obviously, mere service of notice of proposal to acquire property under Section 52(2) was held to be not part of cause of action at all. 22. Here, we are not concerned with a case where mere notice of proposed auction is served at one place, but proceedings itself has been completed at other place including the situation of property affected was situated in the other place. Here we are concerned about a case which is not of service of mere notice of enquiry at Ahmedabad, but where order itself has been served at Ahmedabad. Swaika Property's case was not a case of service of final order. Nor it was a case where final order was required to be served, nor was it a case of quasi judicial order, which unlike a statutory order of acquiring land does not depend on its efficacy on service. The court found ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y at the place where the order of termination of service was made but also at the place where its consequences fell on the employee. We cannot subscribe to the submission that the consequence of the termination order fell on the respondent -employee at Calcutta, the fact that it was communicated about had notwithstanding merely because the employee was posted at Calcutta Unit. It may be that on the receipt of the order by the Calcutta Unit, a part of the cause of action can be said to have arisen at Calcutta also but that cannot nullify the fact that the consequences of the order fell on the respondent -employee when he was informed about the same at Ahmedabad. We are therefore, of the opinion that the aforesaid decision in fact is an authority for the proposition that a part of the cause of action arose at the place where the order of termination of service was communicated to the concerned employee." 25. The petitioner company has its registered office at Ahmedabad. Citus of its movable property is at Ahmedabad. By impugned order the right of the petitioner company arising out of transaction of that movable property are affected. Thus applying the test in Modern Food Industries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... person primarily affected by the respondent issuing the notices from time to time to the petitioners and calling upon them to produce the accounts of their business carried on in the State of Tamil Nadu and again by proposing to assess them to the best of his judgement on the assumption of certain jurisdictional facts, is the addressee of such notice and such affection relates to the bundle of facts in the totality of the lis or proceeding concerned, and such impact necessarily gives rise to a cause of action, though it may be in part. It is established that in fiscal laws a proposal to assess forms part and parcel of the machinery of assessment and thus understood, the service of notice to assess and calling upon the petitioner to explain has given rise to a cause of action as is popularly and legally understood and the machinery of assessment has been set in motion and the impact of that motion is felt by the petitioners within the territorial limits of this State. We have therefore no hesitation in holding that a part of the cause of action has arisen in the State of Tamil Nadu." 28. This decision gives a clear indication that wherever issuance of a notice is necessary part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts pleaded in support of the cause of action that those facts do constitute a cause so as to empower the court to decide a dispute which has, at least in -part, arisen within its jurisdiction. It is clear from the above judgment that each and every fact pleaded by the respondents in their application does not ipso facto lead to the conclusion that those facts give rise to a cause of action within the court's territorial jurisdiction unless those facts pleaded are such which have a nexus or relevance with the lis that is involved in the case. Facts which have no bearing with the lis or the dispute involved in the case, do not give rise to a cause of action so as to confer territorial jurisdiction on the court concerned." 16. Thus, what essentially requires to be considered from the aforementioned constitutional provision is whether this Court can exercise the jurisdiction in the instant case and whether in relation to the territories the cause of action, wholly or in part, has arisen which bear nexus and relevance with the lis involved in this case. 17. In the instant case, admittedly the petitioners are Directors of the Company, who are asked to make the payment, which is o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... territorial jurisdiction to this Court within whose territory the service of the notice has been effected. 20. It clearly thus establishes that the service of show cause notice has a nexus or relevance with the lis in question and therefore also, such service itself furnishes the part of cause of action and therefore confers jurisdiction on this Court as held in the decision of the Apex Court in the case of Union of India and others V/s. Adani Exports Ltd. and another. The part of the cause of action can be said to have arisen, if such facts consisted essential, material and integral part of the cause of action and even if the small fraction of the cause of action arise within the jurisdiction of this Court, the Court would have territorial jurisdiction to entertain such petition. It is sine quo non for initiating the proceedings under section 179 to issue the show cause notice, which has been served upon the petitioners within the territorial jurisdiction of this Court and this being material and essential part of cause of action, the preliminary issue raised with regard to the lack of territorial jurisdiction by the Revenue needs no entertainment. 21. That brings this Court to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be answerable for the tax dues of the company. Under sub -section (1) of section 179 of the Act, however, subject to satisfaction of certain conditions, the directors can be held jointly and severally liable to pay the dues of the company. 18. In the present case, however, the Revenue desired to apply the principle of lifting the corporate veil in case of a public company and seeking to resort to provisions contained in section 179 of the Act. In our view if the factors noted by the Assistant Commissioner are duly established, there is no reason why such double application of lifting the corporate veil one statutorily provided and other due to emergent need of the situation, cannot be applied. As noted above, the factors recounted by the Assistant Commissioner in the impugned order are glaring. The company had defaulted in tax for more than Rs. 155 crores. Same was unearthed during search operations carried out by the Revenue Authority. The attachment of the assets of the company could lead to recovery of not more than Rs. 5 crores from such huge outstanding dues. The company was formed for taking over business of the partnership. The members of the partnership firm and othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany until 28.12.2005, for the liability of the Company pertaining to the Assessment Year in question i.e. on 2005 -06, they cannot be held liable under section 179 of the Act. 23. Thus, the statute permits the lifting of the corporate veil section 179 of the Act as one of the modes of the statutes permitting such piercing of the veil provided of course Directors of the Private Company behind the veil are the beneficiaries and who have created such a complex web for their personal interest so as to defraud the Revenue. When the facts are eloquent enough in the instant case, where the petitioners were never concerned with the affairs of the Company until 28.12.2005 and the Company had already become Public Limited Company and by the time they became Directors, they were not even simple shareholders for the entire period till the year 2006, there does not arise any question of applying the ratio of decision of Pravinbhai M. Kheni V/s. Assistant Commissioner of Income -Tax and others or for that matter upholding the action of the respondents of invoking the provisions of section 179 of the Act. 24. In our opinion, the very action of the respondents of invocation of powers under sect ..... X X X X Extracts X X X X X X X X Extracts X X X X
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