THE issues before the Bench are - Whether the provisions of Sec 179(1) can be applied even in the case of a public limited company; Whether such provisions are required to be applied only in very extraordinary cases; Whether when assessee is a public limited company and also attracts the provisions of Sec 179, it is a fit case for the AO to invoke principle of lifing of corporate veil and Whether provisions of Sec 179 can be invoked only after it is established that the taxes due were attributable to negligence of Directors. And the verdict partly goes in favour of Revenue.
Facts of case
The petitioner is a director of a private limited company M/s. M. Kantilal & Co. ltd. (“the company”). On 7.1.1999 there were search proceedings on the company u/s 132 of the Act. Pursuant to such operations, block assessment u/s 158BC of the Act was framed on 23.3.2001 computing total income 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/-. On the ground that the tax could not be recovered from the company, the respondents initiated proceedings u/s 179 of the Act against the petitioner. In response to notice issued by the respondent, the petitioner opposed any recovery from him on the ground that the said company was a public limited company duly incorporated under the Companies Act, 1956. Provisions of section 179 of the Act would be applicable only where tax is due from a private company and, therefore, no recovery against the petitioner u/s 179 of the Act can be made for dues of the said company.
The Assistant Commissioner of Income-tax however, passed the impugned order Annexure-G on 15.4.2002 and disregarded the petitioner's objections. He noted that the company was subjected to search operation pursuant to which by the appellate order for the block assessment u/s 158BC of the Act, tax liability of the company was determined at more than Rs.155 crores. He outlined the efforts made for recovery of such tax dues from the company by issuance of several notices, by issuing attachment orders and by proceeding u/s 281 of the Act, despite which, no recovery could be made from the company. He therefore, concluded that “from the above actions taken it is apparent that recovery of tax cannot be made from the company.” He thereupon proceeded to examine the petitioner's objection with respect to non applicability of section 179 of the Act. He overruled such objections.
The petitioner thereupon made a representation to the Assistant Commissioner on 6.5.2002. In such representation, he reiterated his contention that section 179 of the Act would not be applicable in case of a public company. He also tried to dislodge the Assistant Commissioner's findings with respect to share holdings of the petitioner and his family members as directors of the company and other grounds on which the Assistant Commissioner had ordered recovery from the petitioner. He strongly opposed the action of the Assistant Commissioner in applying the principle of lifting or piercing the corporate veil. He also tried to demonstrate through different figures that the investments made by the directors of the said company including himself were from their own sources. The petitioner thereafter, filed a revision application before the Commissioner against the order of the Assistant Commissioner dated 15.4.2002 in which he mainly contended that section 179 of the Act had no applicability.
The Commissioner by his order dated 9.4.2003 however, was pleased to reject the petitioner's revision application u/s 264 of the Act. He concurred with the view of the Assistant Commissioner regarding requirement of lifting the veil. The petitioner at this stage approached this Court by filing the present petition.
Having heard the matter, the High Court held that,
++ the first contention of the petitioner is regarding non recovery of the tax dues from the company and that such non recovery being not attributable to any negligence, misfeasance or breach of duty on part of the petitioner;
++ section 179 as is well known permits recovery of the tax due of a private company from its directors under certain circumstances. Sub-section(1) of section 179 provides that notwithstanding anything contained in the Companies Act, 1956, where any tax due from a private company or other company during the period when such company was a private company cannot be recovered, then, every person who was a director of the said company at the relevant time shall be jointly and severally liable for the payment of such tax. Such recovery however can be avoided, if such a person proves that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company;
++ fundamental requirement for applicability of section 179 of the Act, of-course is that tax dues cannot be recovered from the company. It is not in dispute that despite such efforts no recovery could be made. It can thus be straightway seen that despite several attempts made by the respondents, no recovery could be made from the company. Counsel for the petitioner therefore, would be wholly incorrect in suggesting that revenue did not establish that tax could not be recovered from the company;
++ with respect to the finding that such recovery cannot be attributed to any gross negligence, misfeasance or breach of duty on part of the petitioner also we are afraid such a contention cannot be accepted. This is so because such condition is expressed in the negative terms namely, that unless the Director proves that non recovery cannot be attributed to any of the above-noted causes. In other words, once it is established that tax dues could not be recovered from the company and that a certain person was a director of the said private company at the relevant time, his joint and several liability would arise. It would be upto him then to establish that such liability should not arise since the non recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to affairs of the company. In the present case, the petitioner never put forth any such 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;
++ this brings us to the central and most hotly contested issue of piercing corporate veil. The fact that the company is a public company is not in dispute. The Revenue authorities while applying principle of lifting corporate veil have principally pressed in service certain factors which emerge from the impugned order of the Assistant Commissioner dated 15.4.2002;
++ the principle of lifting or piercing the corporate veil is neither new nor unknown. It is however, not possible of any precise definition or application in a straitjacket formula. From the judicial pronouncements, it can be seen that concept of lifting or piercing the corporate veil as some times 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 or areas where corporate veil may have to be lifted;
++ 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 beneficiaries of such complex design;
++ Section 179 of the Act itself is a statutory creation of piercing of corporate veil. Ordinarily, directors of a company even that of a private company would 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;
++ 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. 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, 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 other family members of the same family became the directors of the company. Shares of the company were held by them and not by any members of the public. The directors had amassed huge wealth in the form of immovable property. The Assistant Commissioner therefore, was of the opinion that the company was only a conduit for creation of unaccounted money and appropriating in directors;
++ 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;
++ 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;
++ second dispute that we have with the Assistant Commissioner's order is that same suffers from gross violation of principles of natural justice. In his notice u/s 179(1) of the Act, he only put the petitioner to notice that he proposed to hold him liable for recovery of the tax dues of the company. He neither mentioned nor disclosed any tentative reasons why he may also invoke the principle of lifting of corporate veil. When the petitioner replied to such a show cause notice and contended that the company being a public company, section 179 of the Act would not apply, the Assistant Commissioner while passing his final order, rejected such a contention by making detailed observations on the grounds on which principle of lifting the corporate veil should be applied;
++ the entire procedure was defective. Large number of observations have been made by the Assistant Commissioner in the said order without even putting the petitioner to alert that because of certain prima facie materials at his command, he proposed to hold that the situation was such where the principle of lifting of corporate veil should be applied. It is true that after the Assistant Commissioner passed the said order on 15.4.2002, the petitioner made a detailed representation to the Assistant Commissioner raising several contentions why such principle could not be invoked. This would not cure the defect committed by the Assistant Commissioner. Firstly, the concept of post decisional hearing is not always accepted by the Courts and found to be rather unsatisfactory manner in which requirement of natural justice can be stated to have been fulfilled. Secondly even the Assistant Commissioner did not take into account such objections after passing his order and such objections thus remained pending. The petitioner did file revision against the order of the Assistant Commissioner and the Commissioner did examine his objections, however, there was no opportunity whatsoever to the petitioner to demonstrate before the authorities that the factors which have weighed with the Assistant Commissioner to invoke the principles of lifting the corporate veil do not arise at all. Thirdly, in the matter of this nature where due to its extreme complexity of the transactions and law required to be applied, it would be highly unsatisfactory manner of eliciting the response from a citizen and 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 a series of decisions, 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;
++ 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 part in connection with the affairs of the company;
3) Being a public company, ordinarily, provisions of section 179(1) of the Act cannot be applied. However, if the factors noted by the Assistant Commissioner in his impugned order dated 15.4.2002 and highlighted by us in this judgement are duly established, it would certainly be a fit case where invocation of principle of lifting of corporate veil would be justified;
4) We however, hold that the Assistant Commissioner proceeded to record such findings without giving sufficient opportunity of hearing to the petitioner and without disclosing the necessary materials for coming to such a conclusion;
5) The impugned orders dated 15.4.2002 and revisional order dated 9.4.2003 are quashed;
6) The proceedings are however, placed back before the Assistant Commissioner for proceeding further in accordance with law after giving a notice to the petitioner indicating his tentative grounds why he desires to invoke the concept of lifting of corporate veil, giving sufficient opportunity to the petitioner to meet with such allegations. After giving opportunity of hearing to the petitioner and following the principles of natural justice it would be open for the Assistant Commissioner to pass fresh orders in accordance with law as may be found appropriate on the basis of material on record.
The Assistant Commissioner of Income-tax however, passed the impugned order Annexure-G on 15.4.2002 and disregarded the petitioner's objections. He noted that the company was subjected to search operation pursuant to which by the appellate order for the block assessment u/s 158BC of the Act, tax liability of the company was determined at more than Rs.155 crores. He outlined the efforts made for recovery of such tax dues from the company by issuance of several notices, by issuing attachment orders and by proceeding u/s 281 of the Act, despite which, no recovery could be made from the company. He therefore, concluded that “from the above actions taken it is apparent that recovery of tax cannot be made from the company.” He thereupon proceeded to examine the petitioner's objection with respect to non applicability of section 179 of the Act. He overruled such objections.
The petitioner thereupon made a representation to the Assistant Commissioner on 6.5.2002. In such representation, he reiterated his contention that section 179 of the Act would not be applicable in case of a public company. He also tried to dislodge the Assistant Commissioner's findings with respect to share holdings of the petitioner and his family members as directors of the company and other grounds on which the Assistant Commissioner had ordered recovery from the petitioner. He strongly opposed the action of the Assistant Commissioner in applying the principle of lifting or piercing the corporate veil. He also tried to demonstrate through different figures that the investments made by the directors of the said company including himself were from their own sources. The petitioner thereafter, filed a revision application before the Commissioner against the order of the Assistant Commissioner dated 15.4.2002 in which he mainly contended that section 179 of the Act had no applicability.
The Commissioner by his order dated 9.4.2003 however, was pleased to reject the petitioner's revision application u/s 264 of the Act. He concurred with the view of the Assistant Commissioner regarding requirement of lifting the veil. The petitioner at this stage approached this Court by filing the present petition.
Having heard the matter, the High Court held that,
++ the first contention of the petitioner is regarding non recovery of the tax dues from the company and that such non recovery being not attributable to any negligence, misfeasance or breach of duty on part of the petitioner;
++ section 179 as is well known permits recovery of the tax due of a private company from its directors under certain circumstances. Sub-section(1) of section 179 provides that notwithstanding anything contained in the Companies Act, 1956, where any tax due from a private company or other company during the period when such company was a private company cannot be recovered, then, every person who was a director of the said company at the relevant time shall be jointly and severally liable for the payment of such tax. Such recovery however can be avoided, if such a person proves that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company;
++ fundamental requirement for applicability of section 179 of the Act, of-course is that tax dues cannot be recovered from the company. It is not in dispute that despite such efforts no recovery could be made. It can thus be straightway seen that despite several attempts made by the respondents, no recovery could be made from the company. Counsel for the petitioner therefore, would be wholly incorrect in suggesting that revenue did not establish that tax could not be recovered from the company;
++ with respect to the finding that such recovery cannot be attributed to any gross negligence, misfeasance or breach of duty on part of the petitioner also we are afraid such a contention cannot be accepted. This is so because such condition is expressed in the negative terms namely, that unless the Director proves that non recovery cannot be attributed to any of the above-noted causes. In other words, once it is established that tax dues could not be recovered from the company and that a certain person was a director of the said private company at the relevant time, his joint and several liability would arise. It would be upto him then to establish that such liability should not arise since the non recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to affairs of the company. In the present case, the petitioner never put forth any such 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;
++ this brings us to the central and most hotly contested issue of piercing corporate veil. The fact that the company is a public company is not in dispute. The Revenue authorities while applying principle of lifting corporate veil have principally pressed in service certain factors which emerge from the impugned order of the Assistant Commissioner dated 15.4.2002;
++ the principle of lifting or piercing the corporate veil is neither new nor unknown. It is however, not possible of any precise definition or application in a straitjacket formula. From the judicial pronouncements, it can be seen that concept of lifting or piercing the corporate veil as some times 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 or areas where corporate veil may have to be lifted;
++ 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 beneficiaries of such complex design;
++ Section 179 of the Act itself is a statutory creation of piercing of corporate veil. Ordinarily, directors of a company even that of a private company would 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;
++ 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. 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, 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 other family members of the same family became the directors of the company. Shares of the company were held by them and not by any members of the public. The directors had amassed huge wealth in the form of immovable property. The Assistant Commissioner therefore, was of the opinion that the company was only a conduit for creation of unaccounted money and appropriating in directors;
++ 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;
++ 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;
++ second dispute that we have with the Assistant Commissioner's order is that same suffers from gross violation of principles of natural justice. In his notice u/s 179(1) of the Act, he only put the petitioner to notice that he proposed to hold him liable for recovery of the tax dues of the company. He neither mentioned nor disclosed any tentative reasons why he may also invoke the principle of lifting of corporate veil. When the petitioner replied to such a show cause notice and contended that the company being a public company, section 179 of the Act would not apply, the Assistant Commissioner while passing his final order, rejected such a contention by making detailed observations on the grounds on which principle of lifting the corporate veil should be applied;
++ the entire procedure was defective. Large number of observations have been made by the Assistant Commissioner in the said order without even putting the petitioner to alert that because of certain prima facie materials at his command, he proposed to hold that the situation was such where the principle of lifting of corporate veil should be applied. It is true that after the Assistant Commissioner passed the said order on 15.4.2002, the petitioner made a detailed representation to the Assistant Commissioner raising several contentions why such principle could not be invoked. This would not cure the defect committed by the Assistant Commissioner. Firstly, the concept of post decisional hearing is not always accepted by the Courts and found to be rather unsatisfactory manner in which requirement of natural justice can be stated to have been fulfilled. Secondly even the Assistant Commissioner did not take into account such objections after passing his order and such objections thus remained pending. The petitioner did file revision against the order of the Assistant Commissioner and the Commissioner did examine his objections, however, there was no opportunity whatsoever to the petitioner to demonstrate before the authorities that the factors which have weighed with the Assistant Commissioner to invoke the principles of lifting the corporate veil do not arise at all. Thirdly, in the matter of this nature where due to its extreme complexity of the transactions and law required to be applied, it would be highly unsatisfactory manner of eliciting the response from a citizen and 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 a series of decisions, 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;
++ 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 part in connection with the affairs of the company;
3) Being a public company, ordinarily, provisions of section 179(1) of the Act cannot be applied. However, if the factors noted by the Assistant Commissioner in his impugned order dated 15.4.2002 and highlighted by us in this judgement are duly established, it would certainly be a fit case where invocation of principle of lifting of corporate veil would be justified;
4) We however, hold that the Assistant Commissioner proceeded to record such findings without giving sufficient opportunity of hearing to the petitioner and without disclosing the necessary materials for coming to such a conclusion;
5) The impugned orders dated 15.4.2002 and revisional order dated 9.4.2003 are quashed;
6) The proceedings are however, placed back before the Assistant Commissioner for proceeding further in accordance with law after giving a notice to the petitioner indicating his tentative grounds why he desires to invoke the concept of lifting of corporate veil, giving sufficient opportunity to the petitioner to meet with such allegations. After giving opportunity of hearing to the petitioner and following the principles of natural justice it would be open for the Assistant Commissioner to pass fresh orders in accordance with law as may be found appropriate on the basis of material on record.
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