TaxTMI 
TaxTMI 
2012 (12) TMI 494
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....ncome of the company at Rs. 259,22,64,020/-. 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.....
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....ble property is not in the name of the company where the unaccounted 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, ....
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.... Directors have enjoyed unaccounted income of the assessee. Therefore, it is proper to recover 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 char....
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....tended that section 179 of the Act had no applicability. 2.6 The Commissioner by his order dated 9.4.2003 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 lu....
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....Supreme Court has held in the aforesaid case that where the corporate character was employed for the purpose 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 w....
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....that the aforesaid company was, in essence, a private company. I agree with the Assessing Officer that the totality 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....
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....He contended that in view of the fraud perpetrated by the petitioner and other directors of the company, it was a fit case where 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....
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....r : "A bare perusal of the provision shows that before recovery in respect of dues from the private company can be initiated against 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." 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. H....
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....s return of income and Balance Sheet as on 31.3.01 was filed and it was closely scrutinized. 14 02.11.01 Director of the assessee co. is called and he is directed to submit list of current assets, deposits & debtors 15 06.11.01 The TRO issued notice 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 ac....
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.... A letter issued to Andhra bank, Mumbai by RPAD calling for bank account details and statement of M/s M Kanitlal & co. ltd., Mumbai. The Andhra Bank replied vide its letter dated 4.2.02(received on 7.2.02) that no such account 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 diamo....
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....ch 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 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 compan....
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....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. 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 nei....
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....ase 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 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 admitted....
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....ntity 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 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 impa....
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....r 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 Apex Court was considering a situation wh....
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....ities 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 found, if the business was technically tha....
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....at 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 : "Four inroads have been made by the law o....
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....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. Where, therefore, the corporate character ....
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....roperty 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 emanation of the American parent, and that it was....
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....e 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....
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....an instrumentality, rather a part, of the principal company. The two in that event would have to be treated as one concern. 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 ....
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....erty. The Assistant Commissioner therefore, was of the opinion that the company was only a conduit for creation 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 dis....
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....nd dealing with the same. In the context of conflicting theories of requirement of hearing before taking adverse 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....