TaxTMI 
TaxTMI 
2026 (9) TMI 1080
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.... of 2017, the said judgement was recalled vide CAV IA order dated 28.09.2018, which was assailed by the Respondent authority by filing Special Leave Petition (Civil) No.9107 of 2019, which was dismissed by the Supreme Court vide order dated 05.04.2019 with clarification that any observations made in the judgment and order dated 23.02.2017 shall not be treated as expression of any opinion and this Court shall decide the petition on merits. BRIEF FACTS OF THE CASE : 3. Hirak Biotech Limited ("the Company") was incorporated as a public limited company on 25.01.2005. At the time of its incorporation, the Company had three Directors, namely, Shri Pranav Amratlal Shah, Shri Pratik P. Shah and Mrs. Niketa B. Dave. The petitioner was subsequently appointed as a director of the Company on 20.03.2005 and continued to hold the said office until 05.09.2005, when he resigned from the directorship. 4. Subsequently, the Company was assessed to income tax for A.Y. 2006-07, pursuant to which additional tax liability of Rs.240.08 lakh was determined and a demand was raised against the Company. As the Company failed to discharge the said tax liability, proceedings under Section 179 of the IT....
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....ntending, inter alia, that he had never been a shareholder of the Company, that he was neither an authorised signatory nor was he involved in the affairs or management of the Company, and that he had ceased to be a director thereof w.e.f. 05.09.2005. 11. During the course of the proceedings, the respondent authority called for various particulars and documents from the petitioner from time to time. The petitioner duly cooperated with the proceedings and furnished the information and documents sought by the respondent authority. 12. Ultimately, the respondent authority passed the impugned order dated 31.03.2016 under Section 179 of the IT Act, holding the petitioner liable for the outstanding tax dues of the Company. The petitioner has challenged the said order, inter alia, on the ground that the respondent authority failed to appreciate that the Company's default in discharging its tax liability could not, in the facts and circumstances of the case, be attributed to any gross neglect, misfeasance or breach of duty on the part of the petitioner. SUBMISSIONS ON BEHALF OF THE PETITIONER: 13. Learned Senior Advocate Mr. S.N. Soparkar, appearing for the petitioner has su....
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....arded except in well-recognised and exceptional circumstances. Such circumstances may arise, inter alia, where the statute expressly permits the corporate veil to be lifted or where the material on record establishes that the corporate structure has been deliberately employed as a device to perpetrate fraud or defeat the interests of the Revenue. 17. In the facts of the present case, learned Senior Advocate submitted that none of the circumstances warranting lifting of the corporate veil is either pleaded or established on record. It was submitted that the IT Act contains no express provision authorising the respondent authority to disregard the corporate personality of the Company for the purpose of determining whether a public limited company is, in substance, a private company. The respondent authority, therefore, could not have assumed jurisdiction under Section 179 by disregarding the Company's admitted status as a public limited company. 18. Without prejudice to the aforesaid contention, learned Senior Advocate submitted that even on the second jurisdictional requirement under Section 179 of the IT Act, the impugned order cannot be sustained. It was submitted that t....
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....d no involvement therein. 23. It was further submitted that the aforesaid material was not duly considered by the respondent authority. The respondent authority appears to have discarded the affidavit merely on the ground that Shri Pratik P. Shah had not remained present at the time of hearing. Learned Senior Advocate submitted that such an approach was wholly erroneous, particularly when the affidavit constituted relevant material bearing directly upon the question whether the petitioner had any role in the management or conduct of the Company's affairs. 24. As regards the petitioner's alleged shareholding, learned Senior Advocate submitted that the petitioner could not have been held liable under Section 179 of the IT Act merely because a substantial percentage of shareholding was attributed to him during a brief period. It was submitted that the Company was incorporated on 25.01.2005 with three directors, namely, Shri Pranav Amratlal Shah, Shri Pratik P. Shah and Mrs. Niketa B. Dave. The petitioner was subsequently appointed as a director on 20.03.2005. Thereafter, 29,50,000 shares of the Company were subscribed by Fortune Gilt Private Limited, through the petition....
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....ons, learned Senior Advocate Mr. S.N. Soparkar, has placed reliance on the decision of the Supreme Court in the case of M. Rajamoni Amma and Another vs. Deputy Commissioner of Income-tax (Assessment) and Others, [1992] 195 ITR 873 (SC). 30. While referring to the decision of this Court in the case of Radhey Mohan Sharma vs. Deputy Commissioner of Income Tax (OSD) [passed in Special Civil Application No.1921 of 2005, dated 12.02.2014]. It is contended that it is not mandatory or compulsory to lift the corporate veil in each and every case involving the directors of a private limited company or a public limited company in order to invoke the provisions of Section 179 of the IT Act. 31. While referring to the decision of this Court in the case of Ram Prakash Singeshwar Rungta vs. Income Tax Officer, [2015] 59 taxmann.com 174 (Gujarat), which has been followed in subsequent decisions, learned Senior Advocate Mr. Soparkar has submitted that this Court, while construing the provisions of Section 179(1) of the IT Act, has held that the provisions of this section can only be invoked against the directors if it is proved that there was gross neglect, misfeasance, or breach of duty on ....
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.... was submitted that, though Hirak Biotech Limited was incorporated and registered as a public limited company, the factual circumstances surrounding its incorporation, shareholding and management warranted lifting of the corporate veil for the purpose of determining the petitioner's liability under Section 179 of the IT Act. 37. With regard to the shareholding pattern, it was submitted that, upon the petitioner being inducted as a director of the Company on 20.03.2005, he subscribed to 29,50,000 equity shares out of the total 30,00,000 shares of the Company. The remaining 50,000 shares were held by the other promoters/directors, namely, Shri Pratik P. Shah, who held 44,000 shares, and Ms. Niketa B. Dave, who held 1,000 shares, along with the remaining shareholders. Thus, according to the respondent authority, there was a period during the relevant financial year when the petitioner held approximately 98.33% of the total shareholding of the Company. 38. It was further submitted that, upon lifting the corporate veil, the actual nature and functioning of the Company became apparent. According to the respondent authority, as on 31.03.2005, the share capital of the Company in ....
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....airs. According to the respondent authority, the appointment of another person as an authorised signatory, despite the petitioner's alleged substantial control over the Company, was itself indicative of an arrangement intended to conceal the petitioner's actual role and thereby constituted a circumstance warranting lifting of the corporate veil. 43. It was further submitted that the aforesaid arrangement constituted a device adopted by the major stakeholder, namely, the petitioner, to defeat the legitimate interests of the Revenue. On that basis, the respondent authority contended that the petitioner's conduct, as a director during the relevant period, amounted to gross negligence in relation to the discharge of the Company's tax liability. 44. Learned Senior Standing Counsel for the respondent authority also submitted that the petitioner could not seek to avoid liability by contending that Shri Pratik P. Shah was exclusively looking after the affairs of the Company. According to the respondent authority, if the petitioner was in fact holding approximately 98% of the shareholding, he could not have remained completely oblivious to the manner in which the Compa....
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....ublic limited company. (B) Initially, three directors, namely Shri Pranav Amratlal Shah, Shri Pratik P. Shah and Mrs. Niketa B. Dave, were the Directors. (C) On 20.03.2005, the petitioner herein was introduced as a Director of Hirak Biotech Limited and he continued to remain as a Director of the said company till 05.09.2005, the day on which he resigned. (D) For the A.Y. 2006-07, the assessment of the company was undertaken and it appears that under the assessment proceedings, additional income tax of Rs.240.08 lakhs was assessed in the hands of the company and demand was raised. (E) A show cause notice under Section 179 of the IT Act dated 11.10.2013 was served upon the petitioner, to which he replied vide letter dated 17.10.2013. On 04.09.2014, he was called upon to pay the outstanding tax dues of the company. The petitioner replied to the same. 50. On 15.09.2014, the petitioner preferred a writ petition, being Special Civil Application No.12861 of 2014, challenging the notice dated 04.09.2014. 51. During the pendency of the petition, the respondent passed an order dated 19.11.2013 passed under Section 179 of the IT Act, which was also ch....
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....aking honest and sincere efforts to realize the demand, since none of the Directors cooperated, it was necessary to invoke the provisions of Section 179 of the IT Act against the Directors including the present petitioner, as there has been gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company in payment of taxes. 60. While passing the impugned order, the respondent has relied upon the statement of one of the directors - Shri Pratik P. Shah, which was recorded on 01.05.2013, wherein he has explained the modus operandi to provide accommodation entries. The entire reply has been incorporated in the impugned order, and ultimately, it has been concluded by the respondent authority that the company was formed only to provide accommodation entries in the form of bogus share capital and share premium, which satisfies the directions issued by this Court vide judgment dated 12.02.2015. 61. It is not in dispute that the petitioner was never called upon in the show cause notice to deal with the statement of Shri Pratik P. Shah, on which the reliance is placed by the respondent to conclude that the company was formed only to provide accommodat....
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.... be recovered, then, nothing contained in sub-section (1) shall apply to any person who was a director of such private company in relation to any tax due in respect of any income of such private company assessable for any assessment year commencing before the 1st day of April, 1962,]" 64. It is the case of the respondent that the petitioner, when he was a Director and for the year under consideration, was holding a shareholding capacity of 98.33%, and after his induction as a Director in the company, the share capital increased from Rs.5 lakhs to Rs.7 crores. On this count, the status of the company as a public limited company has been doubted, and it has been recorded that in fact, since it was a one-man show by the petitioner, the company can be said to be a private limited company. 65. In our considered opinion, the status of public limited company cannot be doubted and held to be a private limited company by mere holding of substantial numbers of equity shares by a director. Neither can it be held that since the shares were not offered to the public the company becomes a private limited company. The Company - Hirak Biotech Limited was an unlisted public company, which is ....
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....lling, etc., of gems and diamonds and right from the inception of the company, it was run as a family business and huge undisclosed income and the creation of huge assets were done by the Directors of the company, and the unaccounted income of the company was utilized for acquiring such properties by the Directors. A categorical finding was recorded that the company was used as a conduit for generating unaccounted wealth, the shares of the company were not offered to the general public for subscription and all shares were held by the directors only. These combined factors had impressed the Court to apply the principles of lifting the corporate veil. In the present case, the impugned order does not reflect that the income of the company was siphoned and utilized for acquiring properties by the petitioner, and no finding has been recorded by the respondent in the impugned order. 67. Thus, the legal precedent set by this Court in the case of Pravinbhai M. Kheni (supra) cannot be thoughtlessly applied to each and every case wherein the status of a company has been questioned by applying the principles of lifting the corporate veil in an exercise undertaken under the provisions of Se....
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....nt Commissioner in the impugned order is with respect to the petitioner's neglect in functioning of the company when the company was functional. Nothing came to be stated by him regarding the gross negligence on part of the petitioner due to which the tax dues from the company could not be recovered. In absence of any such consideration, the Assistant Commissioner could not have ordered recovery of dues of the company from the director. We would clarify that in the present case the petitioner had put forth a strong representation to the proposal of recovery of tax from him under section 179 of the Act. In such representation, he had detailed the steps taken by him and the circumstances due to which non recovery of tax cannot be attributed to his gross neglect. It was this representation and the factors which the petitioner had put forth before the Assistant Commissioner which had to be taken into account before the order could be passed. It is not even the case of the department that the petitioner paid the dues of other creditors of the company in preference to the tax dues of the department. It is not the case of the department that the petitioner negligently fritter....