Director of public company not vicariously liable for tax under Income-tax Act

The court held that Section 179 of the Income-tax Act, 1961, imposing vicarious liability on directors of private companies, was not applicable to the petitioner, a director of a public limited company. The court quashed the order holding the petitioner liable for tax dues and allowed the petition, with no costs awarded.

---

---

Issues Involved:
1. Applicability of Section 179 of the Income-tax Act, 1961.
2. Liability of directors of a public limited company for tax dues.
3. Conditions for piercing the corporate veil.

Issue-wise Detailed Analysis:

1. Applicability of Section 179 of the Income-tax Act, 1961:
The petitioner challenged the order passed by the Revenue under Section 179 of the Income-tax Act, 1961, which imposes vicarious liability on the directors of a private limited company for tax dues. The petitioner argued that he was no longer associated with the company and could not be held liable for any tax demand raised against the company. The Revenue contended that Section 179 imposes vicarious liability on the director of the private limited company, and since the petitioner was a director during the relevant period, he was liable for the tax dues.

2. Liability of directors of a public limited company for tax dues:
The company in question, M/s. Blue Information Technology Ltd., was a public limited company. The petitioner was a director of the company until he resigned on June 9, 1997. The company was assessed for the assessment years 1995-96, 1996-97, and 1997-98, and substantial tax demands were raised against it. The petitioner argued that he was an ordinary director and not involved in the day-to-day activities of the company. The Revenue issued a notice under Section 221(1) of the Act for non-payment of dues amounting to Rs. 297 lakh, holding the petitioner liable as a director.

3. Conditions for piercing the corporate veil:
The court referred to previous judgments, including the case of Pravinbhai M. Kheni v. Asstt. CIT, which dealt with the liability of directors under Section 179. The court noted that the concept of piercing the corporate veil is applied sparingly and cautiously, primarily in two situations: when the statute permits it or when glaring facts establish that a complex web was created to defraud the revenue. In the present case, the company was a public limited company, and the foundational facts for piercing the corporate veil were missing. The court held that Section 179 of the Act, which imposes vicarious liability on directors of private companies, was not applicable to the petitioner, as the company was a public limited company.

Conclusion:
The court concluded that the invocation of Section 179 of the Act against the petitioner was not sustainable. The petitioner, being a director of a public limited company, could not be held liable under Section 179. The court quashed the impugned order dated November 3, 2004, and all consequential orders arising therefrom. The petition was allowed, and the rule was made absolute to the extent stated, with no order as to costs.

---