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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 ..... 79 of the Act qua the petitioners is bad in law and requires quashment, and therefore, impugned notice dated 14.10.2011 and all consequential orders are hereby quashed and set aside. - Special Civil Application No. 10686 of 2013, 10688 of 2013 - - - Dated:- 15-10-2013 - M. R. Shah And Sonia Gokani, JJ. ORDER 1. These Special Civil Applications preferred under Article 226/227 of the Constitution of India seek quashment of the orders dated 31.10.2011 and 14.11.2011 respectively in Special Civil Application No. 10686 of 2013 and Special Civil Application No. 10688 of 2013 passed by respondent No.1 Income Tax Officer under section 179 of the Income Tax Act, 1961 (hereinafter referred to as the Act ) directing the petitioners to pay amount of tax, interest and penalty as also for seeking direction in the nature of certiorari, quashing the respective orders passed under section 264 of the Act by the Commissioner of Income Tax, respondent No.2 herein. Brief facts necessary for understanding the controversy recorded from Special Civil Application No. 10686 of 2013 are as follows: - 1.1 The petitioners are Directors of M/s.Amadh Investments Ltd. (hereinafter referred to as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the petitioners had no shareholding in the Company. 3. On issuance of the notice respondents appeared through learned Senior Counsel Mr. Bhatt, who filed affidavit -in -reply,inter alia, contending that both the petitioners are Directors of the Company. It is contended that the Company had not paid the outstanding demands. The petitions filed by both the Directors on 16.8.2011 on behalf of the Company also was rejected with the direction to the Company to pay entire outstanding dues with the applicable interest under section 20(2) of the Act. Although the notice under section 226(3) of the Act was issued, it was informed by the Bank authorities that the Bank accounts of the assessees were either closed or had become dormant. It is further contended that summons under section 31 of the Act was issued so as to find out the assets and the financial position of the assessee Company and both the Directors were duly served on 4.8.2011. Hearing was fixed on 17.8.2011. However, they chose not to attend on a specified date vide their letter dated 16.8.2011. It was urged that there was no deliberate intention attributed for committing any mistake nor was there any case of wrong filing o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eil and holding that the petitioners are liable under section 179, is bad in law, as the tests laid down by this Court in case of Pravinbhai M. Kheni V/s. Assistant Commissioner of Income -Tax and others, 2013 353 ITR 585 are not satisfied. He further urged that word Private Company has not been defined under the Income Tax Act. However, section 2(35) of the Companies Act and 2(37) of the Companies Act define the Private Company and the Public Company as defined in section 3 of the said Act. He further urged that when Private Limited Company is converted to the Public Limited Company, Section 179 of the Income Tax Act would not have any applicability at all. He sought to rely upon the decision rendered in case Pravinbhai M. Kheni V/s. Assistant Commissioner of Income -Tax and others and Bhagwandas J. Patel V/s. Deputy Commissioner of Income -Tax, 1999 238 ITR 127. 5. Per contra, Mr.M.R.Bhatt, learned Senior Advocate appearing for the respondents has urged that Company has been established at Mumba i and the recovery application against the Company has been filed. Therefore, as held by the Apex Court in the case of Alchemist Ltd. And another V/s. State of Bank of Sikkim, and ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the exercise of such power, notwithstanding that the seat of such Government or authority or the residence of such person is not within those territories. 9. Under this Article for issuances of directions, orders or writs to any Government Authority or person, the High Court can exercise jurisdiction in relation to territory in which the cause of action wholly or in part, arises. Irregardless of the seat of such Government or authority or residence of such person is not within those territories, such powers can be exercised. Thus, for conferring the jurisdiction on the High Court under Article 226 of the Constitution, the cause of action is made an additional ground. 10. Expression cause of action is not defined under the Constitution, but time and again the same is held to be bundle of essential facts necessary to be proved by the plaintiff for his success. The Supreme Court in the case of Alchemist Ltd. And another V/s. State of Bank of Sikkim, and others , discussed the law on the subject and concluded thus: - 31. In Union of India v. Adan i Exports Ltd., a question of territorial jurisdiction came up for consideration. A filed a petition under Article 226 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted: (Kusum Ingots case, SCC p.261, para 20) 20. A distinction between a legislation and executive action should be borne in mind while determining the said question . Referring to ONGC, it was held that all necessary facts must form an integral part of the cause of action. The fact which is neither material nor essential nor integral part of the cause of action would not constitute a part of cause of action within the meaning of Clause (2) of Article 226 of the Constitution. 36. In National Textile Corpn. Ltd. V/s. Haribox Swalram and Ors, 2004 9 SCC 786, referring to earlier cases, this Court stated that : (SCC p.797, para 12.1) 12.1 ...the mere fact that the writ petitioner carries on business at Calcutta or that the reply to the correspondence made by it was received at Calcutta is not an integral part of the cause of action and, therefore, the Calcutta High Court had no jurisdiction to entertain the writ petition and the view to the contrary taken by the Division Bench cannot be sustained. 37. From the aforesaid discussion and keeping in view the ratio laid down in catena of decisions by this Court, it is clear that for the purpose of deciding wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provision shows that before recovery in respect of dues from the private company can be initiated against the director, to make 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. 14. This Court in the case of Alka Synthetics Ltd V/s. Securities and Exchange Board of India (SEBI) extensively dealt with the issue of territorial jurisdiction as follows: - 17. On a close scrutiny, I find no substance in this submission. The order dated 4.7.1996 in no unmistakable terms state that aggrieved persons may be given opportunity of hearing. For this purpose, the order was required to be served on affected parties to enable the aggrieved person to file objections. Instead of SEBI effecting service itself, it directed concerned Stock Exchange to intimate the affected parties. Stock Exchange had the necessary details about the persons whose shares were offered at auction and were thus affected by the order and were entitled to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned counsel for the respondent placed reliance on decision of Supreme Court in State of Rajasthan V/s. Swaika Proprietors, 1985 AIR(SC) 1289 A close reading of the decision makes it clear that whether in a given set of circumstances service of notice is a part of cause of action or not is not to be determined on any absolute rule in abstract but depends on entirety of facts, nature of order, nature of right affected etc. The court had laid down the ratio that: The answer to question whether service of notice is an integral part of the cause, of action within the meaning of Article 226(2) of the Constitution must depend upon the nature of impugned order giving rise to cause of action. 21. Applying the above test to the facts of the case before Supreme Court, which had arisen in the matter of land acquisition proceedings under Rajasthan Urban Improvement Trust Act the court found that notice under section 52(2) of the said Act was published in Rajasthan proposing the acquisition of land situated in Rajasthan at Jaipur, service of notice inviting objection against proposed acquisition which was to take place in Rajasthan was served on the petitioner in Calcutta, where he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e before, the Supreme Court in Swaika Property's case is an integral part of cause of action. Rather service of it itself furnished cause of action to seek remedy against it. As discussed, the order was required to be served at Ahmedabad and was in fact served at Ahmedabad, the decision in Swaika's case does not further the case of objections. 24 In Modern Food Industries (India) Ltd., Ahmedabad and Ors. v. M.D. Juvekar, 1988 1 GLR 481 a Division Bench of this Court speaking through A.M. Ahmadi,J, as he then was, in a case where the order of termination was made at New Delh i but was served on the affected party at Ahmedabad where he was at the relevant point of time on leave and the question as to territorial jurisdiction was raised said : Be that as it may, the fact remains that the order of termination of service, though passed at New Delhi, was communicated to the respondent -employee at Ahmedabad since he was at the relevant time on leave. Whether it was for the convenience of the respondent - employee or for any other reason is not material, what is material is the fact that it was communicated to him at Ahmedabad. In our view, therefore the decision on wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sons at Delhi, Preliminary objection as to the jurisdiction of the Bombay High Court to entertain the petition was negatived by Their Lordships of Bombay High Court. The Court held : The question that arises is whether the cause of action for the exercise of the power invoked by the petitioner arose wholly or in part within the territories in relation to which this Court exercises jurisdiction. The petitioner, as it appears, was a resident of Ullasnagar, a place situated in the District of Thana of Maharashtra State. The impugned order itself shows that the case was heard in Bombay. It is indeed true that the order on the face of it does not show the place where it was made. Even assuming that this order was made by the third respondent in New Delhi, there can hardly be any doubt that the effect of this order fell on the petitioner at Ullasnagar where he resides. This decision had been followed by this Court in Modern Food Industries Limited referred to above. 27 In L.V. Veeri Chettiar and Anr. v. Sales Tax Officer, Bombay, 1971 AIR(Mad) 155 Their Lordships considered the impact of notice issued by authority under fiscal statutes for the purpose of considering the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entertain such disputes. 29. The above decisions fortify the conclusions to which I have reached that the place where the order is served on the person affected affecting his rights at that place is a part of cause of action, and gives territorial jurisdiction to the courts within whose territory the place at which service of the order has been effected affecting the rights of the person concerned is situated or to say the court within whose territorial jurisdiction lies citus of right which is affected by the impugned order and that right is actually affected by service of impugned order within that territory has the jurisdiction to entertain challenge as to the validity of such orders. 15. The Apex Court in the case of Union of India and others V/s. Adani Exports Ltd. and another, 2002 1 SCC 567 dealt with the very issue of territorial jurisdiction under Article 226(2) of the Constitution to hold that those facts which give rise to part of cause of action within the territorial jurisdiction of a High Court are those having a nexus and relevance with the lis involved in the case and none else. In the words of the Apex Court: - 17. It is seen from the above that in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is to be noted that a show cause notices under section 179 of the Act had been issued on the Directors of assessee Company asking them to show cause as to why the order be not passed against them to recover the outstanding demand from the Company concerning with Assessment Years 2005 -06 and 2006 -07. Admittedly, the petitioners reside at Ahmedabad and the alleged demand for the recovery is either from the movable property or immovable property situated at Ahmedabad. The order impugned though has been passed in Mumbai, the same is served in the State of Gujarat where the petitioners reside. Recovery on behalf of the Company has effected in the State of Gujarat. In such circumstances, when the part of cause of action has arisen within the jurisdiction of this Court, we unhesitatingly hold that this Court would surely have jurisdiction to entertain the present petition as held in the case of Alka Synthetics Ltd V/s. Securities and Exchange Board of India (SEBI). As ruled in the said judgment, the issuance of notice is a pre - condition of setting the machinery in motion and not the condition to be fulfilled subsequently. Service of notice in such a premise would become part of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pt 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 individuals who behind the corporate veil are the real operators of the company and beneficiaries of the fraud, the Courts have not hesitated in ignoring the corporate status and striking at the real beneficiar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... feat the interest of the Revenue, attempt is made by creating complexity of the facts. In the instant case, therefore, in other words, what needs to be examined is whether with a view to defeat the interest of the State some of the real beneficiaries have created complex design and web and have chosen to hide behind the corporate veil. Section 179 of the Act itself is a creation of the statute whereby the corporate veil can be pierced and original Directors of the Private Limited Company could be held liable for the outstanding tax dues of the Company. The statute, however, has created a situation whereby they can be jointly and severally held liable. In the instant case, the facts are apparently clear whereby conversion of the Amadh i Investment Limited from a Private Limited Company to a Public Limited Company was in the year 1995. The petitioners were appointed as Directors of Amadhi Investment Limited on 29.12.2005. They were not even shareholders of the Company from 5.6.1995 till 30.9.2006. Therefore, there would not be any requirement of establishing that non -recovery of the amount due to the Company could be attributed to any gross -negligence, misfeasance or breach of duty ..... X X X X Extracts X X X X X X X X Extracts X X X X
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