RAM MANKAR vs. COMMISSIONER OF INCOME TAX, AHMEDABAD - IV

ORAL JUDGMENT (PER : HONOURABLE MS JUSTICE SONIA GOKANI) 1.Facts are common in both the petitions.   Therefore both the petitions are heard together and are being disposed of by   this   common   judgment.   For   the   purpose   of   this judgment, we may notice the facts   as arising in Special Civil Application No.14422/2008. 2.Challenge in this petition preferred under  Article 226 is made to the issuance of order under section 179 of the Income Tax Act (“the Act” here­in­after) dated 11.1.2005 as also to order passed under section 264 of the Act dated 19.3.2008. 3.The factual background necessary  for adjudication  is as follows : 3. 1. The petitioner  was a promoter/director  of a public limited   company   named   Lanzorate   Finance   (India) Limited   which   was   originally   incorporated   as   Ravit Vinimay   Limited   with   Registrar   of     Companies   on 19.8.1992 and   obtained the   certificate of commencement   of   business   as   on   17.9.1992. The company   was   engaged   in   the   business   of   secondary market   operations   and   project   consultancy   and, thereafter, started its activity of equipment leasing. The company came out with its public issue of equity shares on 18.6.1996. It is averred that the prospectus of the company provides details of the company. The petitioner resigned from the company on 31.5.2000 due to change in the management. 3. 2. For the assessment year 1996­1997, amount of tax demanded   from   the   company   was   to   the   tune   of Rs.53,18,694/­.   In   view   of   the   petitioner   being   the director  of the said company  at the relevant  point  of time, a show cause notice was issued under section 179 on 17.11.2004 proposing to recover such arrears of tax from the petitioner. 3. 3. Vide its reply dated 26.11.2004, it was contended by the petitioner that such notice is not maintainable as the   company   was   a   public   limited   company   and provisions of section 179 would not be applicable. The Assessing   Officer   however,   passed   an   order   on 11.1.2005   holding   the   petitioner   jointly   and   severally liable for such tax demand and a consequent notice was issued   on   31.1.2005     to   recover   said   amount.   The petitioner preferred   Special Civil   Application No.11542/2006 challenging the validity of such notice. The Court vide its order dated 18.7.2006 dismissed the petition on the ground that no evidence was adduced to show that the company was a public limited company and therefore, in the petition under Article 226 of the Constitution of India, Court cannot go into those factual details. 3. 4. The   petitioner   thereafter,   preferred   a   revision application under section 264 of the Act challenging the notice impugned. The Commissioner of Income­tax in its order   dated   19.3.2008   dismissed   the   revision application  on the ground that  the assessee’s Special Civil Application before this Court was not entertained and   was   dismissed,   therefore,   his   application   for rectification   of   order   under   section   179   also consequently deserved to be rejected.   Resultantly, the present petition challenging both the impugned orders made under section 179 and order under section 264 in the revision petition, seeking the following prayers : “a. Direct   the   respondents   to   quash   and   set   aside   the impugned order u/s.179 dated 11.01.2005 at Annexure ’A’ to this petition and quash and set aside the impugned order u/s 264 of the Act dated 19.03.2008 at Annexure B to this petition. b. pending the admission, hearing and final disposal of this petition,   stay   operation   and   implementation   of   the   impugned order u/s 179 dated 11.01.2005 at Annexure­A to this petition. c. any other  and further  relief deemed  just  and proper  be granted in the interest of justice. d. to provide for the cost of this petition.” 4.We have heard learned counsel Shri Tushar Himani for the petitioner who has fervently contended that company is a public limited company and, therefore, the very provision is not applicable. He has also pointed out various documents to substantiate  his contention  that  the petitioner  was a director   of   the   public   limited   company   which   was incorporated from the very beginning as a public limited company and even for the year under consideration, i.e. 1996­1997, the same was a public limited company. He therefore, urged that the act of issuance of notice so also the order of rejection of his revision, both deserve to be quashed. 5.Learned   counsel   Shri   Nithin   Mehta   appearing   for   the respondent Revenue has urged that in the return of income filed for the assessment year 1996­1997 on 5.1.1997, the status code in column No.8   was shown as 13. Code 13 stands for a domestic company which is not a company in which the public are substantially interested and during the period relevant to the assessment year concerned, the assessee   company   had   not   raised   any   public   issue.   He therefore,   urged   that   the   Court   may   not   interfere   as requested for. 6.On thus hearing both the sides, as also considering the pronouncements on the subject we are of the opinion that the petition deserves to be allowed for the reasons to follow here­in­after. 7.As   could   be   noticed   from   the   materials   on   record,   the petitioner herein was the director of the company which was   originally   incorporated   as   Ravit   Vinimay     with   the Registrar of Companies, Gujarat on 19.8.1992. It obtained certificate of commencement of business on 17.9.1992. The company   changed   its   name   from   Ravit   Vinimay   to Lanzorate Finance (India) Limited and was registered with Registrar of Companies vide certificate dated 14.12.1995. The petitioner also brought on record a certificate issued by the ROC, being the certificate of incorporation as also the certificate of commencement of business and further changed the name to Lanzorate Finance (India) Limited. It appears that the company thus from the very incorporation was a public limited  company  and its public issue  also were   out   on   18.6.1996. The   petitioner   was   the promoter/director and continued to be with the company till he resigned from the post on 31.5.2000. 8.The arrears of tax demand raised  on the petitioner in his capacity of Director  by issuance of the impugned notice under section 179  is for the assessment year 1996­1997. The provision of section 179 permits recovery of such tax arrears  of a company  from  the director  of the company which is a private company or a private limited company. The provision makes it amply clear that when the company is a public company  or a public limited company,  such provision would not be applicable. Relevant here would be to   refer   to   the   provisions   of   law   and   some   of   the   well pronounced judgements on the subject. 9.Section 179 of the Income Tax Act reads as under : “Liability of directors of private company in liquidation : 179.(1)   Notwithstanding   anything   contained   in   the Companies Act, 1956 (1 of 1956), where any tax due from a   private   company   in   respect   of   any   income   of   any previous year or from any other company in respect of any income   of   any   previous   year   during   which   such   other company   was   a   private   company   cannot   be   recovered, then,   every   person   who   was   a   director   of   the   private company  at any time  during  the relevant  previous  year shall be jointly and severally liable for the payment of such tax   unless   he   proves   that   the   non­recovery   cannot   be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company. Where   a   private   company   is   converted   into   a   public company and the tax assessed in respect of any income of any   previous   year   during   which   such   company   was   a private   company   cannot   be   recovered,   then,   nothing contained in subsection (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.”

“4. This Court in the case of Pravinbhai M. Kheni v. Assistant Commissioner   of   Incometax,   Central   Circle   2   and   others, reported   in   353   ITR   585,   had   an   occasion   to   deal   with   the liability of the directors of a public limited company, where the proceedings   under   section   179   were   initiated   against   the petitioner   Director   of   such   company.   Pursuant   to   search proceedings against the public limited company, the tax liability determined was more than Rs.155 crore. The Revenue was of the opinion that such company was formed for taking over business of the partnership and the Directors had amassed huge wealth in the form of immovable property and disclosed the income had not been on members of the partnership and other had become Directors of the company. Such  conclusion of the Revenue that the   unaccounted   income   of   the   company   had   been misappropriately utilized by the directors and shareholders and company was only a conduit for creation of unaccounted money. The request is made for lifting the corporation veil and recover tax dues of public company. In such a situation, the proceedings were   laid   down   under   section   179   of   the   Act   for   lifting   the corporate veil. It would be profitable to reproduce the relevant findings of this Court on this aspect as under :

“15. From the above 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.

“23. From   the   ratio   discussed   hereinabove,   it   needs   to   be the provisions of section 179 of the Act.”