Case Law Details

Case Name : Ajay Surendra Patel Vs DCIT (Gujarat High Court)
Appeal Number : Special Civil Application No. 6580 of 2016
Date of Judgement/Order : 23/02/2017
Related Assessment Year :
Courts : All High Courts (3456) Gujarat High Court (289)

Hc held that opinion that such a huge tax evasion cannot be so lightly permitted on account of any hyper-technicality. The concept of lift or piercing of corporate veil, as sometimes referred to as cracking the corporate shell, is applied by the Courts sparingly.  However, it is recognized that boundaries of such principle have not yet been defined and areas where such principle may have to be applied may expand. However, principally, the concept of corporate body being an independent entity enjoying existence independent of its directors, is a well known principle. 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. Two situations where such principle is consistently applied are one, where the Statute itself so permits 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 and if it is found that incorporation of an entity is only to create a smoke screen to defraud the revenue and shield the individual who behind the corporate veil is the real operator of the company and beneficiary of the fraud, the Courts cannot hesitate in ignoring the corporate status and strike at a real beneficiary of such complex design. The background of present fact is such that we are not hesitant in any way to apply this principle and are also in conformity with the decision of revenue in applying such a principle and pass a justified order.

JUDGMENT

1. The petitioner, by way of present petition, has challenged the legality, validity and propriety of an order dated 31.3.2016 issued under Section 179 of the Income-tax Act,1961 (for short ‘the Act’) whereby, the corporate veil of a company is lifted and the directors are held to be defaulters within the meaning of Section 179 of the Act and it is this order which is made the subject matter of present petition.

Brief facts are as under :

2.1 The company named as Hirak Biotech Limited was incorporated under the provisions of the Companies Act,1956 on 25.1.2005 initially with main directors, namely, Mr.Pranav Amratlal, Mr.Pratik P. Shah and Mrs.Niketa B. Bhatt. Within a short span, on 20.3.2005 the petitioner was introduced as director of this company and the petitioner continued as such upto 5.9.2005. The petitioner presented the petition on the premise that though he was appointed as a director, in reality had not acted as such; neither he had made any signature in any affairs of the company nor on any financial statements, banks, income tax documents and except remaining as a director he was not in charge of the affairs of the company. He asserted in the petition that one Mr.Pratik R. Shah was managing the affairs of the company and he merely brought the capital in the form of shares. Except remaining as a director on the board of the company, he in reality had not acted as such and also contended that he had put the resignation on 5.9.2005.

2.2 The petitioner further contended that though the petitioner had resigned from the company, he served with a notice on 11.10.20 13 issued under Section 179 of the Act whereby, an attempt was made to saddle with liability of the company. To the said notice, the petitioner gave reply on 17.10.2013 and thereafter, for a pretty long time for almost a period of one year, no response in that regard was received by the petitioner. Later on, on 4.9.20 14 he received a communication in the form of show cause notice to explain as to why he should not be held responsible to pay the dues of the company and against that show cause notice, through consultant the petitioner requested the authority on 10.9.2014 to grant some time to enable him to take some steps and as such, upto 15.9.20 14 time was granted. However, by that time, the petitioner instead of responding to notice has filed the petition before this Court being SCA No.12861 of 2014 challenging the legality and validity of the said notice dated 4.9.2014. This Court, while taking up the plea of the petitioner, found that while initiating such action, no adequate opportunity was given to the petitioner nor any proper procedure was followed and therefore, the action in purported exercise of power under Section 179 of the Act came to be quashed and the petition was partly allowed by an order dated 12.2.20 15 and consequently, directed to take steps in accordance with the provisions of law by keeping the rights and contentions of both the sides open and the petition came to be disposed of.

2.3 Subsequently, the respondent authority observed the order of this Court and thereafter, after observing the statutory provisions, issued a fresh show cause notice on 19.6.20 15 in detailed by giving all particulars and called upon the petitioner to explain as to why steps should not be taken as contemplated under Section 179 of the Act. To this notice, the petitioner appears to have replied on 24.7.2015 trying to explain his position as narrated above in brief and to this reply, an affidavit of Mr.Pratik R. Shah, one of the directors also came to be attached. An attempt is made by the petitioner to indicate that said Mr.Pratik R. Shah is the responsible person to the affairs of the company and not the petitioner. Along with the said reply to the show cause notice, a statement also came to be given with respect to allotment of shares, holding of the shares of each of the directors and also given the particulars with respect to Form No.32 in which an indication is given that the petitioner has resigned as a director w.e.f. 5.9.2005. In furtherance of this, in the meantime on 10.7.2015 and also on 10.10.2015, specific replies have been given that he is not the sole responsible person for conduct of a company. After such explanation, it appears from the record that on 14.12.2015 as well as on 18.12.2015, correspondence took place between the petitioner and the department and on 21.12.2015, last reply appears to have been given through tax consultant by the petitioner and clarified his position that there is no question of liability of the petitioner with respect to affairs of the company.

2.4 Said documents appear to have been examined by the authority and the authority on 31.3.2016, was pleased to pass an order in exercise of power under Section 179 of the Act and came to the conclusion that petitioner has failed to prove his gross negligence, misfeasance or breach of duty in relation to the affairs of the company and by lifting the corporate veil of the public limited company in question, all the three directors including the petitioner are held to be defaulters within the meaning of Section 179 of the Act.

2.5 It is against this order which has been passed finally on 31.3.2016 by the authority, the petitioner has filed the petition by invoking extraordinary jurisdiction of this Court.

3. Learned Senior Counsel, Mr.Saurabh Soparkar with learned advocate, Mr.J.R.Parikh for the petitioner has contended that the action initiated by the respondent authority is not just and proper, without authority of law and on this count alone, same be quashed and set aside. It was also contended by the learned counsel for the petitioner that Section 179 of the Act ex-facie is not applicable to a public limited company and undisputedly, the petitioner company is a public limited company and therefore, from the initial step itself, invocation of  Section 179 of the Act is impermissible and therefore, the action tantamount to be without authority of law. It was also contended by learned counsel that though the petitioner came to be appointed as a director on 20.3.2005, he has not acted as such as the director and has not participated in transaction related to the company, has not signed any documents related to financial transactions, has also not signed any paper related to income-tax department and has not taken any decision nor has participated in the affairs of the company. It was further contended by the learned counsel that on 5.9.2005, the petitioner has resigned from the company and therefore, no liability can be fastened upon the petitioner. It was also contended by the learned counsel that the petitioner is not guilty of any misuse of power nor any allegation pertaining to any misuse of his position as a director nor has grossly neglected nor has committed any breach of duty in any manner is alleged and since the affairs of the company were not looked after by the petitioner, the authority ought not to have saddled the petitioner with liability of company. Learned counsel for the petitioner has further contended that simply because at the relevant point of time, the petitioner was holding a maximum share capital to the extent of 98% would not sufficient enough to attract the provisions of Section 179 of the Act. It was also contended that none of the conditions which are to be established for invoking the provisions of Section 179 of the Act are establishing in case of the petitioner and therefore, in absence of any such condition precedent having been satisfied, it is not open for the respondent authority to impose upon any liability of the company. Learned counsel has further contended that there was adequate material available on the file of the authority to indicate that it was Mr.Pratik R. Shah, who was one of the directors, who was dealing with the company and not the petitioner. It was contended that though adequate material qua that is produced even by the petitioner, the authority has assumed the jurisdiction to fix the liability of petitioner which action is bad in law, not permissible and therefore, same is required to be set aside. Learned counsel has further contended that though the lifting of corporate veil principle is vogue but, at the same time, the situation for that must be appearing on the record which is completely missing in the present case and therefore, it was not open for the authority to lift the corporate veil and pass an order. It was also contended that though the company was registered and incorporated as a public limited company, the authority has erroneously assumed as if it is akin to a private limited company and thereby, applied Section 179 of the Act. Ex-facie a bare reading of this statutory provision is meant for the private limited company and therefore, the action itself is beyond the scope of authority and therefore, deserves to be quashed and set aside.

3.1 Learned counsel for the petitioner has further contended that concept of vicarious liability cannot be inferred by the authority more particularly when the petitioner has never participated as a director. Unless a fraud is practiced or the petitioner is beneficiary out of it then only, it can be said that corporate veil deserves to be lifted or pierced. On the case on hand, according to learned counsel for the petitioner, no such circumstances appearing qua the petitioner and therefore, in absence of any contingency, resort to Section 179 of the Act is impermissible. Learned counsel further contended that even on facts also, the authority has not established even remotely that the petitioner is responsible for the affairs of the company. It was pointed out by the learned counsel that corporate veil can be lifted or pierced if either statute permits the same or any extraordinary circumstances prevailing and compelling the authority to lift the veil. By referring to the averments contained in the petition, learned counsel has submitted that no such situation is reflecting which would permit the authority to pass such kind of order insofar as petitioner is concerned and therefore, learned counsel has submitted that in the absence of any guilt on the part of petitioner in relation to affairs of the company, no action can be initiated against the petitioner and thereby, learned counsel submitted that no such step could have been taken. Learned counsel further submitted that even in case of Pravinbhai M. Khemi V/s. Assistant Commissioner of Income-tax Central Circle-2 and Ors., reported in 353 ITR 585, the principle of lifting of corporate veil is analyzed but, the same was in altogether different set of circumstance in which there was a huge demand of more than 150 crores which was the subject matter of controversy and the Court found that the company was as such structurally akin to private limited company but intentionally not registered as such with a view to escape the responsibility under Section 179 of the Act and therefore, learned counsel submitted that said decision can never be applied by the authority as a straitjacket formula and therefore, learned counsel submitted that action qua the petitioner be quashed and set aside. Learned counsel for the petitioner by resorting to some of the documents attached to the petition compilation ultimately contended that the petitioner is not responsible for affairs of the company and therefore, by taking aid to the provision of Section 179 of the Act, no liability can be fastened upon the petitioner and thereby, has requested the Court to grant the relief as prayed for in the petition.

4. To oppose this stand of the petitioner, learned Senior Counsel, Mr.M.R.Bhatt for the revenue has contended that there is a systematic design adopted by the petitioner and the company’s name has been utilized which is for the purpose of seeking accommodation entries. Learned counsel for the revenue has submitted that simply because the petitioner is not a signatory to the documents of the company, is not sufficient enough to absolve him from responsibility and therefore, the order passed by the authority is just and proper. Learned counsel further submitted that the petitioner has joined the company in March,2005 and has remained upto September,2005 and in between, the holding of the share capital of the company in the hands of the petitioner was to the extent of 98.33% during the relevant year. It was submitted by the learned counsel that the record has sufficiently established that Hirak Biotech Company was formed with a view to provide accommodation entries in the form of bogus share capital and share premium and therefore, when such a situation of extraordinary nature is prevailing or emerging from the record, the authority is thoroughly justified in passing the order. Learned counsel has further drawn the attention of the Court that as on 30.3.2005, the share capital of the Hirak Biotech Ltd. was only Rs.5 lacs and thereafter, upon induction of petitioner as a director, the share capital strength has increased to Rs.7 crores and mostly the equity shares were held by him. It was also pointed out that total equity shares of the company was of Rs.30 lacs at the relevant time, out of which in the hands of the petitioner such shares to the extent of Rs.29.50 lacs and therefore, the petitioner’s holding at the relevant point of time was to the extent of more than 98%. Learned counsel for the revenue has further drawn the attention of the Court that though the company in question is incorporated as public limited company, the company has not involved public in any substantive form and the characteristic of the affairs of the company are found to be akin to the private limited company and therefore, the authority has rightly come to the conclusion that company in question was treated as defacto private limited company and therefore, the petitioner is rightly held to be responsible. Learned counsel for the revenue has submitted that normally when such kind of huge share capital is in the hands of the petitioner, as a natural consequence he would be active in the affairs of the company. But unnatural conduct shown by the petitioner that though he was major shareholder, had never raised any voice against functioning of either company or of Mr.Pratik R. Shah in any manner as contended and rather provided full support to Mr.Pratik R. Shah and therefore also, there appears to be a serious dereliction of duty on the part of petitioner being the director holding a major share capital. Learned counsel for the revenue has further submitted that ample opportunities were given and all possible efforts were made by the department to realize the huge tax demand of the company but have failed to realize any money. It was also pointed out that for the Assessment Year 2006-07 relevant to FY 2005-06, the company had fixed asset of Rs.3,14,19,402/-, sundry debtors of Rs.46,72,380/- and cash and bank balances to the extent of Rs.1,06,02,103/- and loans and advances were Rs.6,23,56,433/-. But upon attachment through proceedings under Section 226(3) of the Act, it has been reported that balances of the company with respect to debtors or bank had zero balance and during the course of time, the property in question have been sold in the month of February,2009. There was a huge demand of other financial institutions as well and therefore, learned counsel for the revenue has submitted that entire affairs of the company was allowed by the petitioner in such a manner to be operated which may ultimately lead to huge scam and out of that affairs of the company, the total liability accrued to tax dues only of the company upon regular assessment to the extent of Rs.240.08 lacs including penalty and subject to chargeability of interest under Section 220(2) of the Act and therefore, when such a huge claim of the department has remained outstanding for the relevant year in which the petitioner was a director, though silent is equally responsible for the ultimate outcome of the company and therefore, the authority has rightly passed an order under Section 179 of the Act and therefore, in this view of the matter, learned counsel for the revenue contended that no extraordinary jurisdiction be exercised in favour of the petitioner.

4.1 It was also contended by the learned counsel that conduct on the part of the petitioner is such which smacks a clear doubt about the version which has been projected and also pointed out that maximum number of cash flow which has come in the bank accounts of the company has been during the tenure of the petitioner and therefore, huge accommodation entries have been executed during the course of time when the petitioner was director and therefore, simply because the petitioner has walked away from the company in September,2005, he cannot be absolved from responsibilities which accrued to the company over the period of time and therefore, the learned counsel for the revenue has submitted to dismiss the petition. Learned counsel further submitted that series of decisions have taken the view that if such kind of extraordinary circumstances are prevailing, it is always open for the authority as well as to this Court to lift the corporate veil of the company and therefore, the authority has rightly passed the order which is impugned in the petition. Learned counsel has further pointed out that none of the directors, though steps have been taken against them, have responded. However, it is the petitioner, who is bringing the affidavit of Mr.Pratik R. Shah, who is trying to take entire burden upon him just with a view to accommodate the petitioner as it seems and therefore, such kind of attempt inter-se between the directors and the person of close nexus, cannot be allowed to be encouraged any further and therefore, requested the Court that authority has rightly exercised the jurisdiction and such detailed order with cogent reasons passed in exercise of statutory powers may not be interfered with in extraordinary equitable jurisdiction of this Court and therefore, ultimately learned counsel submitted to dismiss the petition by granting no relief in favour of the petitioner.

5. Having heard the learned counsel appearing for the respective parties and having gone through the materials on record, following facts, which are prevailing on record, cannot be unnoticed which led us to think about lifting the corporate veil:

(1) The Company i.e. Hirak Biotech Ltd. is faced with evasion of tax demand against regular assessment and penalties to the extent of Rs.240.08 lakhs and that too, subject to chargeability of interest under section 220(2) of Income Tax Act.

(2) When the Company came to be incorporated, shareholding was only to the extent of Rs.5.00 lakhs i.e. 50,000 shares of Rs.10/- each as on 31/3/2005. Suddenly in the meantime, within 2 and 1/2 months, one of the Directors, Mr. Ajay S. Patel, came to be introduced in the Company who brought sizable amount of shareholding. The Company had three Directors namely, Mr. Pratik R. Shah with a shareholding of 44,000 shares, Mr. Niketa Dave with only 1000 shares and Mr. Ajay Patel with a shareholding of 29,50,000 shares in the Company, which practically comes to 98.33%.

(3) It is further emerging from the record that within a short span only, the petitioner came to be introduced as an additional director of the company and upon his induction, the share capital of the company shoot-up to 7 crores and out of said share capital holding, the petitioner has been inducted with a substantial holding to the extent of 98.3 3% and to that extent, the petitioner is the sole holder of this substantial chunk of capital of the company.

(4) Another feature also appearing is that no public issue was advertised and no shares were issued to the public and there was no remote involvement of public in the Company though the Company appeared to be a Limited Company.

(5) It is also emerging from the record that during the FY 2005-06, the company had a fixed asset of Rs.3,14,19,402/-, sundry debtors of Rs.46,72,380/- and the bank balance to the extent of Rs.1,06,02,103/- and the loans and advances were Rs.6,23,56,433/-. This is the affairs of the company at the relevant point of time when the petitioner was additional director. However, in a gradual process of time when the attachment proceedings were initiated, it has been found by the department that the value of aforesaid assets and structure of the company has become practically zero. So practically everything was vanished.

(6) The record indicates that though there is a plea of petitioner that he has nothing to do with the company except remaining as an additional director, he is not party to the transaction, he is not connected with affairs of the company internally but, record reveals that though the company is incorporated on 20.3.2005, the actual business and the commencement appears to have taken place from 13.4.2005. Meaning thereby that the commencement of business has taken place only after the petitioner came to be introduced as an additional director on 20.3.2005. The certificate of commencement of business issued under Section 149(3) of the Companies Act which reflects this position which is a part of petition compilation on Page-29 and therefore, substantially appears that it is the petitioner, who upon holding capital to the extent of 98% shares in the company, has engineered the business, though it is claimed by the petitioner that other directors were looking after the affairs of the company. It appears from the record further that this huge demand which has been crystallized by the department is for the relevant financial year during which the petitioner was the director.

(7) It is further emerged from the record that upon taking steps against the Company for recovery by the department in a gradual process, the land held by the Company came to be sold on 25/2/2009, balance came to be withdrawn from the bank accounts and thereafter, the bank accounts have also been closed down and surprising feature is that on 5/9/2005, said Mr. Ajay Patel resigned from the Company as Director. So, everything appeared to be substantially during the period of one of the Directors, Mr. Ajay Patel from 20/3/2005 to 5/9/2005.

(8) Practically, the Company though named as Hirak Biotech Limited has acted practically as a Private Limited Company altogether and the Directors appeared to have acted in such a detrimental way which falls within the purview of section 179 of the Income Tax Act. There were huge financial transactions, serious default, total non-cooperation in the Company and the Company appears to have been spearheaded by one of the Directors only. There were serious defaults in financial transactions with Jammu and Kashmir Bank as also with Ahmedabad People’s Co-Op. Bank of huge amounts and therefore, all these combination of circumstances led us to believe that this is a fit case to resort to a principle of lifting of corporate veil.

(9) Another surprising feature is that though persistently summons came to be issued to Directors, none of the Directors of the Company appeared on the date of hearing and another Director, Mr. Pratik R. Shah, who is said to have acted on behalf of the Company has also neither appeared nor filed any submissions and it appeared that by filing an affidavit, he appears to have shielded one of the Directors, Mr. Ajay S.Patel. All these circumstances cannot be said to be normal circumstances and therefore, it appears that the Income Tax Authorities have rightly exercised the powers by way of detailed order which came to be passed on 31/3/2006 which is sought to be challenged in the present proceedings.

(10) Further it appears that the case of the department is that substantial accommodation entries have been made during the course of time when the petitioner was a director. There is a sizable amount of entries which reveal that substantial cash deposit took place in Kalupur Commercial Bank account to the extent of Rs.48 lacs which is reflecting from the assessment order dated 20.12.2008 with respect to Assessment Year 2006-07.  The assessment order during the course of hearing of the petition is presented for perusal by the learned counsel for the petitioner.

(11) Further it appears from the record that though the petitioner claimed to have not participated in the affairs of the company, a reasonable contrary inference which has been drawn appears to be sound to some extent as the commencement certificate of the company is after the induction of the petitioner as additional director.

(12) Further it also appears that Memorandum of Association of the company is the vital key to get the knowhow about the company’s affairs. In law, Memorandum of Association is charter which contains the fundamental conditions upon which alone a company can be incorporated and any action outside the scope of Memorandum of Association will be ultra vires, beyond the powers of the company and hence, void. Now in the context of this position, if a bare look to the Memorandum of Association is to be viewed, it would reflect that the main object of the company is to carry on the business of floriculture, agriculture, horticulture etc. and for immediate perusal, same is reproduced hereinafter :

“To carry on the business of floriculture, agriculture, horticulture, sericulture, tissue culture, apiculture, and to deal in all type of foretellers, plant food pesticides, insecticides, fungicides and all type of plant protection chemicals, micro nutrients and as nursery owners, cultivation and farming on land, water or in special chambers and to plant, grow, cultivate, produce rise, develop, purchase, sell, import, export, protect, store and commercialize.”

Now, in the context of this main object of the company for which it has been set up, what is reflecting from the record is that the company has executed its business that of trading and distribution of ice-cream quite de-hors from the main object for which the company appears to have been set up and this trading and distribution business of ice-cream is the case of company itself as is reflecting from the assessment order as referred to above. Therefore, under the circumstances it appears that the company is set up for different purpose than which is posed before the authority at the time of incorporation. Therefore, the inference which has been raised by the department that company is set up essentially for the purpose of accommodation entries might not be ignored, though attempt is made to establish contrary.

6. The Memorandum of Association contains various clauses. Clause 13 thereof deals with the issue of debentures or debenture-stock etc. But correspondingly if we look at the Articles of Association which governs the affairs of the company and its working. Some of the clauses contained in Articles of Association are worth to be considered which are also very relevant incidentally to the finding arrived at by the authority. Clause (4) onwards of Articles of Association deals with share capital affair of the company which indicates that the increase or decrease and the shares being consolidated or sub-divided in accordance with the regulation of the company and the legislative provisions for time being in that behalf. Clause (5) of the said Articles of Association deals with power to increase capital. Now, this if to be looked into, initial share capital structure of the company was only Rs.5 lacs as on 31.3.2005. But the moment the petitioner came to be inducted as director, it has rocketed capital to the extent of Rs.7 crores and therefore, that substantial increase in the share capital requires certain procedure which has been stipulated in clause (5) which reads as under :

Power to increase Capital

5(a) The Company in general meeting may, from time to time increase the capital by the creation of new shares, such increase to be of such aggregate amount and of such classes and to be divided into shares of such respective amounts as the resolution shall prescribe.

(b) Subject to the provisions of the Act, the new shares shall be issued upon such terms and conditions and with such rights and privileges annexed thereto as the Company in general meeting shall prescribe, and in particular such shares may be issued with a preferential or qualified right to dividends and in the distribution of assets of the Company, and with a right of voting at general meeting of the Company in conformity with Sections 87 and 88 of the Act. Whenever the capital of the Company is increased under the provisions of this Article, the Directors shall comply with the provisions of Section 97 of the Act.”

7. Clause 5(b) of the Articles of Association indicates that when share capital is to be increased which shall be in general meeting after properly considering the relevant provisions of the Act and subject to compliance of Section 97 of the Act. Now, though the case is tried to be made out that the petitioner was a dormant director in the company had nothing to do with the affairs of the company but, the commencement of business initiated after the induction of the petitioner as director and that increased share capital is brought by the petitioner.

8. Further, in this context if we peruse clause (13) of the Articles of Association which governs the working of the company which relates to further issue of share wherein, it has been mentioned that where at the time after the expiry of two years from formation of the company or at any time after expiry of one year from allotment of shares in the company made for the first time after its formation, whichever is earlier, it is proposed to increase the subscribed capital of the company by allotment of further shares whether out of the unissued capital or out of the increases share capital then, certain steps to be contemplated which reads as under :

Further issue of shares

13.1) Where at the time after the expiry of two years from the formation of the company or at any time after the expiry of one year from the allotment of shares in the company made for the first time after its formation, whichever is earlier, it is proposed to increase the subscribed capital of the company by allotment of further shares whether out of the unissued capital or out of the increased share capital then :

(a) Such further shares shall be offered to the persons who at the date of the offer, the holders of the equity shares of the company, in proportion, as near as circumstances admit, to the capital paid up on those shares at the date.

(b) Such offer shall be made by a notice specifying the number of shares offered and limiting a time not less than thirty days from the date of the offer and the offer if not accepted, will be deemed to have been declined.

(c) The offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to them in favour of any other person and the notice referred to in sub clause (b) hereof shall contain a statement of this right. PROVIDED THAT the Directors may decline, without assigning any reason to allot any shares to any person in whose favour any member may renounce the shares offered to him.

(d) After expiry of the time specified in the aforesaid notice or on receipt of earlier intimation from the person to whom such notice is give that he declines to accept the shares offered, the Board of Directors may dispose off them in such manner and to such person(s) as they may think, in their sole discretion, fit.

(2) Notwithstanding anything contained in sub-clause (1) thereof, the further shares, aforesaid may be offered to any persons (whether or not those persons include the persons referred to in clause (a) of sub-clause 91) hereof in any manner whatsoever.

(a) If a special resolution to that effect is passed by the company in General Meeting, or

(b) Where no such special resolution is passed, if the votes cast (whether on a show of hands or on a poll as the case may be ) in favour of the proposal contained in the resolution moved in the general meeting (including the casting vote, if any,of the Chairman) by the members who, being entitled to do so, vote in person,or where proxies are allowed, by proxy, exceed the votes, if any, cast against the proposal by members so entitled and voting and the Central Government is satisfied, on an application made by the Board of Directors in this behalf, that the proposal is most beneficial to the company.

(3) Nothing in sub-clause (c) of (1) hereof shall be deemed:

(a) To extend the time within which the offer should be accepted; or

(b) To authorized any person to exercise the right of remuneration for a second time on the ground that the person in whose favour the remuneration was first made has declined to take the shares comprised in the renunciation.

(4) Nothing in this Article shall apply to the increase of the subscribed capital of the company caused by the exercise of an option attached to the debenture issued or loans raised by the company;

(i) To convert such debentures or loans into shares in the company; or

(ii) To subscribe for shares in the company (whether such option is conferred in these Articles or otherwise).

PROVIDED THAT the terms of issue of such debentures or the terms of such loans include a term providing for such option and such term :

(a) Either has been approved by the Central Government before the issue of the debentures or the raising of the loans or is in conformity with the Rules, if any, made by the Government in this behalf; and

(b) In the case of debentures or loans or other than debentures issued to or loans obtained from Government or any institution specified by the Central Government in this behalf, has also been approved by a special resolution passed by the company in General Meeting before the issue of the debentures or raising of the ”

And this clause if we peruse would indicate that facts on hand have not clarified whether the same is complied with or not because the company has with the aid and assistance of petitioner has increased its share capital within two and half months only. This issue appears to have not been dealt with by the authority which circumstances is appearing from the record itself.

9. Further, while taking step against the petitioner vigorously, it appears that the department has initiated action and made all possible efforts to recover huge revenue demand as crystallized from the company but, all efforts have been in vain and most surprising factor which is revealing from the record is that none of the Directors have cooperated with the department nor have presented themselves in the course of this recovery proceedings. It further reveals that this demand substantially is related to the period in which the petitioner may for a short time but was a Director. These steps are very much reflected from the order which has been considered by the authority and this sequence of steps for realizing demand deserves reproduction hereinafter:

Sr. No Date Recovery measures  undertaken Outcome of the measures
1. 20.3.2009 226(3) issued to the ICICI Bank Limited, Ashram
Road, Branch, 2/1, Popular House, near Income tax Circle, Ashram Road, Ahmedabad.
Bank vide letter dated 21.3.2009 reported that in the a/c no.018905500065, the balance is Zero.
2. 226(3) issued to
Ahmedabad People’sCooperative bank
limited,Ahmedabad
Bank vide letter dated 23.03.2009 reported that the FDR in the form security had been adjusted against bank dues. Hence no balance available.
3. 226(3) issued to Kalupur Commercial Cooperative bank limited, Ahmedabad The bank vide letter dated 21.03.2009 has reported that the said account has since been closed on 12.01.2005.
4. 20.03.2009 226(3) issued to Shree Vinayak Sahakari Bank Limited, Kalupur Branch, Ahmedabad No reply received.
5. 20.03.2009 226(3) issued to APC Bank, Paldi branch, Ahmedabad No reply received.
6. 20.03.2009 226(3) issued to DC Bank, CG Road branch, Ahmedabad No reply received.
7. 20.03.2009 226(3) issued to Kalupur Co. op. Bank, Income tax  Branch, Ahmedabad Zero balance
8. 20.03.2009 226(3) issued to Shree Vinayak Sahakari Bank Limited, Kalupur Branch, Ahmedabad No reply received.
9. 20.03.2009 226(3) issued to the ICICI Bank Limited, Ashram
Road, Branch, 2/1, Popular House,near Income tax Circle, Ashram Road, Ahmedabad.
Zero balance
10. 25.03.2009 131 issued to M/s. Sarang Chemicals Limited Sought 15 days
time.
11. 14.04.2009 Against RC drawn by the TRO u/s 222 of the act, The company reported that the rectification is pending and as such RC is bad in law
12. 24.03.2003 Application of stay of demand to be kept in abeyance field by the  assessee before the AO. The assessee stated that it is high demand and appeal is pending before the CIT(A)
13. 16.4.2009 Filed letter dated 16.04.2009 to the CIT-II, Ahmedabad

 

Assessee requested to direct the AO not to take coercive action and demand may be stayed till disposal of appeal.
14. 24.04.2009 Report submitted to the CIT, Ahmedabad.

 

Against stay of demand the assessee took plea of harassment stating that RC  draw u/s 222 is unjust.
15. 07.05.2009 Letter dated 7.5.09 was written to the assessee

 

In compliance to stay application dated 24.03.2009 referred to above, it was intimated to file reply on point wise additions made in the order u/s 143(3). An order u/s 220(6) of the Act was passed intimating to the company that stay application is not acceptable and it was requested to pay the demands
16. 13.05.2009 Vide Letter dated 13.05.09 written to the CIT Allahabad.

 

It was intimated that the rectification application u/s 154 has been disposed on 17.04.2009 and order u/s 220 (6) has also been passed.
17. 14.05.2009 Letter dated 14.05.09 by CIT to the company. It was intimated that the application u/s 154 has been disposed off. The letter was served through affixture as the assessee has been non cooperative  in receiving the notices.
18. 27.08.10 ITO written letter to the Registrar of companies, ROC Bhavan, opposite Rupal Park Society, Ahmedabad.

 

It was requested to supply the detail of name and address of all directors during the FY 2005-06 as an order u/s 179 has been passed against some of the directors. As per annual return filed by him vide letter dated 1.9.2010, Shri Ajay Surendrabhai Patel was one of the directors of the company and the date of appointment in the company has been shown as 20.03.2005. In share holders list as on 20.09.2005 he held share of 29,50,000.
19. 22.11.10 Letter to the company. The company has sold its property Survey No.208, 65155 sq. meter, Survey No.209 5139 sq. meter and survey no.211 35724 sq. meter to Vadgas Realty  Pvt. Limited vide transfer deed dated 25.2.2009 and the company was intimated why proceedings u/s 281 may not be initiated against it.
20. 22.11.10 Letter to Nikita Baldevbhai Dave, one of the directors.

 

The company has sold its property Survey No.208, 65155 sq. meter, Survey  No.209 5139 sq. meter and survey no.211 35724  sq. meter to Vadgas Realty Pvt. Limited vide transfer deed dated 25.2.2009 and the company was intimated why  proceedings u/s 281 may not be initiated against it.
21. 21.11.10 Letter to Pratik R. hah, one of the directors

 

The company has sold its property Survey No.208, 65155 sq. meter, Survey No.209 5139 sq. meter and survey no.211 35724 sq. meter to Vadgas Realty Pvt. Limited vide transfer deed dated 25.2.2009 and the company was intimated why proceedings u/s 281 may not be initiated against it.
22. 17.01.11 Order u/s. 281 of the Act. Order was issued and served on purchaser Vadgas realty Pvt. Limited declaring transfer deed as void.
23. 17.02.11 Letter written to the Sub Registrar, Sanand

 

The Sub Registrar was served with the copy of order u/s 281 to take necessary action in the matter.

9.1 From the aforesaid situation which is prevailing, it appears that all the directors of the company have systematically evaded the liability of the department.

10. Further, it is found from the record that petitioner has resigned from the company in September,2005 within a short span but, thereafter it appears that there is no substantial business of the company and after that only which is left there is huge accrual of debts of the company and for recovery of that, even the properties have been auctioned and sold away under the steps of Securitization Act and therefore, it appears that after resignation of the petitioner what has been left with the company is huge liabilities only. However, be that as it may, fact remains that huge demand to the extent of Rs.240.82 lacs of the tax revenue remained outstanding and despite aforesaid vigorous steps, nothing is recovered from the company which has compelled the department to initiate action under Section 179 of the Act against all the responsible directors.

11. This factual background stated above which is reflecting from the record compels the Court to examine minutely the affairs of the company, the responsibility and role of the directors and the statutory provision which is resorted to by the department. The factual background is already narrated above and hence, no further analysis is required to be made in that context. However, in relation to that affair if we look at the position of some of the issues in law, it appears that something untoward has definitely taken place after induction of the present petition as the director.

11.1 This entire factual matrix would clearly indicate that this position of the company in a gradual process to a virtual closure is on account of gross neglect, misfeasance or beach of duty on the part of directors in relation to the affairs of the company and therefore, the conditions which are contained in Section 179 of the Act before its invocation are appearing on the face of it which rightly visualized by the department for passing the order which is impugned in the petition.

12.As stated above, though the company has been incorporated with a strength of initial directors but, within a very short span of almost two and half months only, contrary to norms the petitioner came to be inducted as the director in March,2005 and certificate of commencement of business came to be obtained by the company only after the petitioner being inducted as additional director. Therefore, it appears to this Court that though in front the directors’ names have been projected but, behind those directors the petitioner appears to be a key person looking to the stiff rise in the share capital only after induction of petitioner. It further appears that Mr.Pratik R. Shah is projected as a key person, who is substantially looking after the affairs of the company as the main director appears to be a person who took on his shoulder all the responsibilities, though having negligible contribution in the company and most suspicious part is that those directors have not cooperated with the proceedings or have not faced the steps taken by the department. But it is the petitioner only who secured the affidavit of Mr.Pratik R. Shah and has placed before the department to save himself from the proceedings. This solitary circumstance itself raises serious doubt about the explanation which has been tendered by the petitioner.  The relevant clauses contained under Memorandum of Association as well as Articles of Association lead to a conclusion that the company has not done or executed any core business for which it has been set up. The main object of the company’s formation which is reflected in the Memorandum of Association is quite de-hors than what has been dealt with by the company and therefore, the theory of department that company is essentially set up for accommodation entries appears to be significant.

12.1 Now, referring to the strenuous contention raised by learned counsel for the petitioner that except bringing share capital, the petitioner was not concerned with the affairs of the company and everything has been done by other directors. Now, to deal with this contention if we peruse the statutory provisions contained under Section 166 of the Companies Act, certain duties are spelt out with respect to the obligation of directors of the company. Perusal of this statutory provision would indicate that director of a company shall exercise his duties with due and reasonable care, skill and diligence, and shall exercise independent judgment and further, a director of a company shall not assign his office or any assignment so made, shall be void. Now, this statutory provision dealing with duty of the director has indicated that other director is supposed to take his office with due diligence on account of fiduciary obligation with the company. There are series of cases in which it has been held that the position of a director of a company is fiduciary relationship with the company and director is supposed to or under a legal obligation to observe the utmost good faith towards the company in any transaction with it or in its behalf and therefore, looking to this obligation of the petitioner towards the company, he cannot plead ignorance completely about the affairs of the company which has practically led virtually a company to a closure. This fiduciary obligation does not cease with the resignation. As said earlier, sub-section (3) of Section 166 of the Companies Act which spelled out that director shall exercise his duties with due and reasonable care and based upon which the Supreme Court in case of N. Narayanan V/s. Adjudicating Officer, SEBI, reported in AIR 2013 SC 3191 has held that, ‘failure of a corporate governance on the part of directors if they failed to exercised due care and diligence and thereby, allowing fabrication of figures and false disclosure, they would be liable for such omissions and commissions.’ Relevant observations of the said decision are reproduced hereinafter :

“32. Responsibility is cast on the Directors to prepare the annual records and reports and those accounts should reflect ‘a true and fair view’. The over-riding obligation of the Directors is to approve the accounts only if they are satisfied that they give true and fair view of the profits or loss for the relevant period and the correct financial position of the company.

33. Company though a legal entity cannot act by itself, it can act only through its Directors. They are expected to exercise their power on behalf of the company with utmost care, skill and diligence. This Court while describing what is the duty of a Director of a company held in Official Liquidator v. P.A. Tendolkar (1973) 1 SCC 602 that a Director may be shown to be placed and to have been so closely and so long associated personally with the management of the company that he will be deemed to be not merely cognizant of but liable for fraud in the conduct of business of the company even though no specific act of dishonesty is provide against him personally. He cannot shut his eyes to what must be obvious to everyone who examines the affairs of the company even superficially.

40.The appellant has taken the stand, as already stated, that even though he was a whole time Director he was not conversant with the accounts and finance and was only dealing with the human resource management of the company, hence, he had no fraudulent intention to deceive the investors. We find it difficult to accept the contention. The appellant, admittedly, was a whole time Director of the company, as regards the preparation of the annual accounts, the balance-sheet and financial statement and laying of the same before the company at the Annual General Meeting and filing the same before the Registrar of the Companies as well as before SEBI, the Directors of the company have greater responsibility, especially when the company is a registered company. Directors of the companies, especially of the listed companies, have access to inside knowledge, such as, financial position of the company, dividend rates, annual accounts etc. Directors are expected to exercise the powers for the purposes for which they are conferred. Sometimes they may misuse their powers for their personal gain and makes false representations to the public for unlawful gain.”

12.2 So, even in cases where director is leaving the matter to the discretion of other directors without supervision and also for making loans without inquiry for what purpose the loans were made and consequently, when the company suffered a loss in transaction the directors were held to be responsible as held in case of Dorchester Finance Co. Ltd. V/s. Stebbings, reported in 1 Co Lawyers 38 (USA) and therefore, looking to this proposition of law, the stand which has been taken that petitioner was completely unaware about the fact and everything was done by Mr.Pratik R. Shah is not an excuse available to the petitioner from absolving from the crystallized liability. The statute does not permit a director of a company to assign his office to be left to others and therefore, consequences he must suffer on account of such negligence. Such assignment shall be void as impermissible in the statute and therefore, defence which has been tried to be projected that everything is done by the others is not available to the petitioner. The fiduciary position of a director in a company does not permit the directors to throw always up their hands and say that we knew nothing as did not take part and therefore, considering this position of petitioner in the company we do not propose to allow such defence to be  accepted. On the contrary, we feel that a director with a sizable amount of holding structure of the company can never be allowed to take such plea to keep himself away from the responsibilities under the guise of resignation.

12.3 Now, in the context of this situation if we examine the principle of lifting of corporate veil, it seems that the authority has rightly applied this principle. The principle of separate legal entity has been dealt with by a well recognized case of Saloman V/s. Saloman & Co. Ltd. wherein, it is accepted that when a company is incorporated, all dealings are with the company and all persons behind the company are disregarded, however important they may be. This means that there is veil drawn between the company and its members. It has been held that normally, this principle of corporate personality of a company is to be respected to. Howsoever, when the people start misusing this veil of corporate personality then it becomes necessary for the courts to pierced the corporate veil and look to the persons who are in fact the real beneficiaries and this well recognized principle of lifting of corporate veil or piercing the corporate veil is held to be well accepted in extraordinary circumstances which are reflecting from the  background of case on hand. Though a defence is set up by the petitioner that everything has been done after his resignation but, upon examiation it appears that in a relevant year when substantial transactions and the huge cash deposits have come, can be said to be during the tenure of the directorship of the petitioner.

13. This well recognized principle of corporate veil can be lifted if the company is used as a means to evade tax or to circumvent the tax obligation and in that case, an individual shareholder may also be liable to pay the income-tax. The Supreme Court in case of Juggilal Kamlapat V/s. Commissioner of Income Tax, U.P., reported in 1964 (52) ITR 811 has held that the Court is entitled to lift the mask of corporate entity if it is used for tax evasion or to circumvent the tax obligations and therefore, in such a situation, the person concerned can be held to be liable for income-tax. In case of Commissioner of Income-tax V/s. Sri Meenakshi Mills, Madurai, reported in AIR 1967 SC 819, has also spelt out the proposition that the Court is empowered to lift the corporate veil if the company is used as a means to circumvent the obligation.

13.1 There are series of cases in which for the purpose of protection of revenue, the authority as well as the Court is entitled to lift the corporate veil and see behind it and fix the liability of person concerned, howsoever he may be.

14. The law on the issue is aptly clear that section which is applicable is related to section 179 of the Act. By now judicial pronouncements have made it clear that concept of lifting or piercing the corporate veil to crack the corporate shell can be resorted to even in case of Public Limited Company. No doubt, the Courts have to cautiously deal with the said issue but, at the same time, there is no embargo not to lift the corporate veil. Some of the pronouncements on the issue are profitably to be referred to. A Division Bench of this Court in the case of Dhaval N. Patel Vs. Commissioner of Income Tax reported in 2014(184) ComCas 367 after considering the law on the issue has observed in paragraph No.6 as under:

“10. This Court in Special Civil Application NO.1921/2005 referred to some of the decisions and held thus (page 362):

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 (618):

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.

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 subsection(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. In our view 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 above, 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.

The Courts have been, thus, categorical in these judgments that essentially under two conditions the piercing of corporate veil would be applied by the Courts one where the statute itself would permit and secondly, where the glaring facts from record emerge. In the case before this Court in Pravinbhai Kheni (supra), the Revenue had put forth sufficient material and when both the conditions of meeting with the emergent need of the situation were held to be duly satisfied, double application of lifting of veil was permitted by the Court.

This Court in the case of Special Civil Application No.10686 of 2013 with Special Civil Application No.10688 of 2013 in the case of Sandeep A.Mehta v. Income Tax Officer and another, decided on October 15, 2013, also had an occasion to refer to the decision in the case of Pravinbhai Kheni (supra). The facts somewhat similar to the present case were presented, wherein the petitioners were the directors of the Company, where the notice was issued to the Directors for recovery of demand under section 179 of the Act in their capacity as Directors. The Company admittedly was a public limited company since the year 1995 and the petitioners were appointed as directors of the Company in December, 2005. They were not even share holders at the time of conversion of the company from private limited company to public limited company. The request was also made by the Revenue to lift the corporate veil. On duly considering the judicial pronouncements on the said aspect and on considering the material on record, the Court did not find any need to permit the said request of lifting the corporate veil by holding thus :

23. From the ratio discussed hereinabove, it needs to be examined whether any of the two situations specified in the said decision exist on the record. Firstly, whether the statute itself so permits or provides for lifting of veil and secondly, whether the facts are so glaringly emerging on record whereby it can be found that with a view to defeat the interest of the Revenue, attempt is made by creating complexity of the facts. In the instant case, therefore, in other words, what needs to be examined is whether with a view to defeat the interest of the State some of the real beneficiaries have created complex design and web and have chosen to hide behind the corporate veil. Section 179 of the Act itself is a creation of the statute whereby the corporate veil can be pierced and original Directors of the Private Limited Company could be held liable for the outstanding tax dues of the Company. The statute, however, has created a situation whereby they can be jointly and severally held liable. In the instant case, the facts are apparently clear whereby conversion of the Amadhi Investment Limited from a Private Limited Company to a Public Limited Company was in the year 1995. The petitioners were appointed as Directors of Amadhi Investment Limited on 29.12.2005. They were not even shareholders of the Company from 5.6.1995 till 30.9.2006. Therefore, there would not be any requirement of establishing that non recovery of the amount due to the Company could be attributed to any gross negligence, misfeasance or breach of duty on the part of the petitioners  in relation to the affairs of the Company. Therefore, the very action under section 179 against the petitioners would not lie. The petitioners since were not Directors of the Company until 28.12.2005, for the liability of the Company pertaining to the Assessment Year in question i.e. on 200506, they cannot be held liable under section 179 of the Act.

24. Thus, the statute permits the lifting of the corporate veil section 179 of the Act as one of the modes of the statutes permitting such piercing of the veil provided of course Directors of the Private Company behind the veil are the beneficiaries and who have created such a complex web for their personal interest so as to defraud the Revenue.

25. When the facts are eloquent enough in the instant case, where the petitioners were never concerned with the affairs of the Company until 12.2005 and the Company had already become Public Limited Company and by the time they became Directors, they were not even simple shareholders for the entire period till the year 2006, there does not arise any question of applying the ratio of decision of Pravinbhai M. Kheni vs. Assistant Commissioner of Income Tax and others (supra) or for that matter upholding the action of the respondents of invoking the provisions of section 179 of the Act.

In the present case, as we can notice, the company M/s.Blue Information Technology is a Public Limited Company. It was incorporated as a Public Limited Company vide certificate of incorporation dated May 25, 1992. It came out with a public issue in June, 1996. The petitioner director of the said Company resigned on September 06, 1997. Admittedly, the dues are of the years 1995-96, 1996-97 and 1997-98. The notice was issued on October 14, 2001 under section 221(1) of the Act seeking to recover penalty for not having paid the dues of the company for the aforesaid years to the tune of Rs.297 lakh. It is not in dispute that the petitioner ceased to act as a director of the Company from September, 1997.

With regard to the outstanding dues of the company for the assessment years 1995-96, 1996-97 and 1997-98, the Company being a Public Limited Company from May 25, 1992 the certificate of incorporation having come, the very issuance of the notice cannot be sustained unless, of course, as provided in the case of Pravinbhai Kheni (supra) and followed thereafter, in the case of Sandeep A. Mehta (supra) there are glaring facts which would permit the lifting of the corporate veil. In the present case, as could be noticed, those foundational facts are completely missing. It is not even the case of the Revenue that such claim exist warranting lifting of veil. Except nonfulfillment of the obligation by the Company of the tax demands that had arisen as a result of the assessment of all these years, nothing comes on record for the Court to permit the piercing of corporate veil. The petitioner being the director of the public limited company, this provision is nonapplicable.

Section 179 of the Act chooses to impose a vicarious liability on the director of a private company making his liability coextensive with the company in respect of arrears of tax of assessment year when he functions as a director. However, the income tax authority in relation to the liability of the Company shall need to insist upon its recovery and when the Company is unable to discharge such liability and the attempts of the Tax Authorities to realise such tax dues do not materialise, director needs to be issued the notice of recovery. These provisions are made in respect of private companies and subsection (2) of section 179 of the Act makes it abundantly clear that in the case of a public company or public limited company, the very provision is not applicable. As noted above, in absence of any contrary facts which either require this Court to pierce the corporate veil or anything to indicate that the Company is other than a public company, the invocation of section 179 of the Act itself shall have to be held bad. It would be, of course, the onus of the petitioner to establish that non-recovery of the amount of tax due to the Company could not be attributed to any gross negligence, misfeasance or breach of duty on the part of the petitioner in relation to the affairs of the private Company, but, the very action against the petitioner under section 179 of the Act, when would not lie, the petition, therefore, deserves to be succeeded.”

15. Yet in another decision, observations were made by the Division Bench of this Court in case of this very Ajay S. Patel Vs. Income Tax Officer-Ward 4(3) reported in 2015(375) ITR 72 and some of the observations are worth to be taken into consideration and therefore, relevant extract of said decision incorporated in paragraph No.6 is reproduced hereinafter:

“6. We may record that in the above referred decision of this Court in case of Pravinbhai M. Kheni (supra), while considering the case under section 179 of the Act itself, this Court at page 23 had concluded thus:

“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.””

15.1 In view of the aforesaid scenario which is prevailing on record related to the present Company, we are of considered opinion that such a huge tax evasion cannot be so lightly permitted on account of any hyper-technicality. The concept of lift or piercing of corporate veil, as sometimes referred to as cracking the corporate shell, is applied by the Courts sparingly. However, it is recognized that boundaries of such principle have not yet been defined and areas where such principle may have to be applied may expand. However, principally, the concept of corporate body being an independent entity enjoying existence independent of its directors, is a well known principle. 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. Two situations where such principle is consistently applied are one, where the Statute itself so permits 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 and if it is found that incorporation of an entity is only to create a smoke screen to defraud the revenue and shield the individual who behind the corporate veil is the real operator of the company and beneficiary of the fraud, the Courts cannot hesitate in ignoring the corporate status and strike at a real beneficiary of such complex design. The background of present fact is such that we are not hesitant in any way to apply this principle and are also in conformity with the decision of revenue in applying such a principle and pass a justified order.

16. A further proposition of law is also not possible to be ignored by the Court is that even in case of Tata Engineering & Locomotive Co. Ltd. as also in Life Insurance Corporation V/s. Hari Das Mundhra, reported in 1962 LawSuit (All) 30 as well as in PNB Finance Ltd. V/s. Shital Prasad Jain, reported in 1983 54 Company Cases 66 (Delhi), it has been held by all the Courts consistently that in a given case the Court may lift the corporate veil of a company where it appears that the company was formed only for some fraudulent purpose and to defraud the creditors or to avoid legal obligations. Now in the context of this proposition, if we look at and correlate the clauses contained in Memorandum of Association as well as Articles of Association and correspondingly, to the stand taken by the department, it appears that the company is engaged in altogether other business than the main object for which the company was set up and therefore, in view of settled position of law, if the company has travelled beyond the scope of the object of Memorandum of Association then such transaction has no legal sanctity and can be said to be void and therefore, this improper conduction of business de-hors the main object tantamount to be improper conduct of the company and for that very purpose, it is always open for the Court as well as for the authority to lift the corporate veil.

17. Similarly, the corporate veil can be lifted if it is found that the company is acting as an agent of shareholders though it has got legal entity. In a well known case of Re F.G.Filims Ltd., a British company which was formed with 90% of shares held by American director. The said British company and an American company arranged to produce a films in the name of the British company. The Board of Trade of Great Britain refused to register the firm as British firm by upholding that English company acted as the nominee or agent of the American company and this has taken place upon lifting of corporate veil. Therefore, this is also relevant case law for the subject on hand as the petitioner upon induction has brought share capital to the extent of 98.33% and the certificate of commencement of business was obtained after induction of the petitioner. Therefore, practically the company was to be used as lever to transact a business which is de-hors the Memorandum of Association. Therefore, these are the relevant circumstances in which it can safely be stated that authority has rightly exercised statutory powers to lift the corporate veil to examine behind it and fix the liability for protection of revenue of the department.

18. There is another well known principle which indicates that corporate veil can be lifted if the act of the company found to be ultra vires and as stated above, the Memorandum of Association is the yardstick for which only the company is incorporated or formulated and therefore, any act de-hors the object stipulated in Memorandum of Association can be said to be ultra vires and for that purpose, the directors of the company shall be personally liable for all such acts which are beyond the scope for which the company was set up. The corporate veil under the circumstance necessarily to be pierced and the members cannot be allowed to take shelter behind the corporate veil of the company. This proposition is fortified by a decision of the Supreme Court in case of Dr. A. Lakshmanaswami Mudaliar & Ors. V/s. Life Insurance Corporation of India & Anr., reported in AIR 1963 SC 1185. Relevant observations of the said decision are reproduced hereinafter :

“15. The trust has numerous objects one of which is undoubtedly to promote art, science, industrial, technical or business knowledge including knowledge in banking, insurance, commerce and industry. There is no obligation upon the trustees to utilise the fund or any part thereof for promoting education in insurance and even if the trustees utilised the fund for that purpose, it was problematic whether any such persons trained in insurance business and practice were likely to take up employment with the Company. Thus the ultimate benefit which may result to the Company from the availability of personnel trained in insurance, if the trust utilises the fund for promoting education, insurance, practice and business, is too indirect, to be regarded as incidental or naturally conducive to the objects of the Company. We are, therefore, of the view that the resolution donating the funds of the Company was not within the objects mentioned in the Memorandum of Association and on that account it was ultra vires .

16. Where a Company does an act which is ultra vires, no legal relationship or effect ensues therefrom. Such an act is absolutely void and cannot be ratified even if all the shareholders agree. Re. Birkbeck Permanent Benefit Building Society, (1912) 2 Ch 183. The payment made pursuant to the resolution was therefore unauthorised and the trustees acquired no right to the amount paid by the Directors to the trust.

17. The only question which remains to be considered is whether the appellants were personally liable to refund the amount paid to them. Appellants 2 and 4 were at the material time Directors of the Company and they took part in the meeting held under the Chairmanship of the fourth appellant in which the resolution, which we have held ultra vires, was passed. As office bearers of the Company responsible for passing the resolution ultra vires, the Company, they will be personally liable to make good the amount belonging to the Company which was unlawfully disbursed in pursuance of the resolution. Again by S. 15 of the Life Insurance Corporation Act, 1956 the Life Insurance Corporation is entitled to demand that any amount paid over to any person without consideration, and not reasonably necessary for the purposes of the controlled business of the insurer be ordered to be refunded, and by sub-sec. (2) authority is conferred upon the Tribunal to make such order against any of the parties to the application as it thinks just having regard to the extent to which those parties were respectively responsible for transaction or benefited from it and all the circumstances of the case. The trustees as representing the trust have benefited from the payment. The amount was, it is common ground, not disposed of before the Corporation demanded it from the appellants, and if with notice of the infirmity in the resolution, the trustees proceeded to deal with the fund to which the trust was not legitimately entitled, in our judgment, it would be open to the Tribunal to direct the trustees personally to repay the amount received by them and to which they were not lawfully entitled.”

19. The aforesaid position prevailing on record takes us to another vital and important issue as to whether the authority was justified to treat the company akin to a private limited company while passing the order. Though it appears from the certificate of incorporation, the words ‘private limited’ are not used and therefore, it is to be treated as public limited company and therefore, contended to be treated beyond the scope of Section 179 of the Act. But on close look at the affairs of the company, the manner in which the affairs proceeded with, all indicate that in actual terms the company has not acted as a public limited company in true sense and for that purpose, if we analyze the record which indicates that the company was formed with a share capital of Rs.5 lacs only and within a short span of two and half months only, sizable amount has been brought by the petitioner alone and that too, to the extent of 98.33% and then, chronologically if we see the record the substratum of the company disappeared after the resignation of the petitioner. It is also revealing from the record that during the tenure of the petitioner, huge cash flow is deposited and practically use of cash flow deposit to be looked into substantially the company is used for object for which it has not been set up and most material aspect which is reflecting from the record is that there is no involvement of the public either in the share capital or in any form of asset and there is no share subscription issued from the public by the company in question. Therefore, practically the company appears to have systematically operated as if it is a private concern. On the contrary, a public limited company has to act more in responsible manner than private limited company.

20. Now in this context if we look at the distinction between private and the public limited company, some of the stinking points of distinction deserve to be considered and the main distinct feature is analyzed hereinafter looking to the definition of ‘private limited company’ as defined under Section 3(1)(iii) as also Section 3(1)(iv), it appears that authority has rightly examined the background of the company in question.

20.1 The difference between private and public company mainly is that a private company is a very suitable device for carrying on the business at a small scale level and can start with a minimum number of members with a minimum paid up capital of Rs. 1 lac only. Being a private company, it has an element of some restrictions of transferability of shares as well as of number of members. It cannot issue prospectus and therefore, in view of the position being private company, can be exempted from certain operation of law and the term private limited is defined under Section 3(1)(b) as stated above and therefore, when in respect of privileges and exemptions when the private company is making a default in complying with those relevant provisions and the company then ceases to be entitled to privileges and exemption, the whole of the Act then apply as if it were not a private company and therefore, on the contrary being a public limited company, it has to stringently obey the relevant provisions of the law applicable and has to act with full diligence and therefore, simply because a word ‘private’ is missing from the certificate of incorporation but when it realizes that in fact, the company has been engineered and processed as if it is not a public limited company, the principle of lifting of corporate veil with more vigour would apply.

21. From the aforesaid circumstance it appears from the record that though the company is set up with a minimum paid up capital of Rs.5 lacs just to brand it as public limited as defined under Section 3(1)(iv) of the Act. But eventually, immediately after incorporation and commencement of the business, it has partake the character of a private limited company as public at all has not been invited to subscribe the capital of the company and there appears to be no transaction which can safely be said to be of a public limited company and therefore, the entire scenario which is reflecting from the record indicates that may be that company is set up as a public limited company, may be that every trouble has started after resignation of petitioner, further may be that Mr.Pratik R. Shah has taken all responsibilities on his shoulder by way of mere affidavit but, in reality these suspicious circumstances have rightly compelled the authority to lift the corporate veil to fix the liability and therefore, in a given circumstance, may be that to arrive at a conclusion the authority has not been able to assign cogent and accurate reasons but, substantially if the reasons are substantiating the ultimate conclusion then, simply because the authority has not accepted the stand of the petitioner, it cannot be said that order suffers from any illegality.

22. In this context if we see the object for which Section 179 is provided in the act that case on hand rightly dealt with by department in consonance with the objection of Section 179 of the Act.

23. All these eventualities which are reflected hereinabove further takes us to the position of a director in the company. The directors of the company have got a specific legal position in the company. The legal position of the directors may be that definitely it cannot be crystallized but, these directors are akin to trustees. In case of VS Ramaswamy Iyer V/s. Brahmayya and Anr., reported in 1965 LawSuit (Mad) 121 the Madras High Court, while examining the position of Director in the legal sphere, has held that, ‘the directors of a company are trustees for the company, and with reference to their power of applying funds of the company and for misuse of the power they could be rendered liable as trustees and on their death the cause of action survives even against their legal representatives and besides almost all the powers of directors, e.g., of allotting shares, making calls, forfeiting shares, accepting or rejecting transfers etc. are powers exercised in trust and they have been made liable to make good money which they have misapplied, upon the same footing as if they were trustees of the company and therefore, simply because the petitioner has projected that he has not put up any signature on any of the papers of the company, he is not the signatory of banking transaction, he is not the signatory of income-tax department correspondence but, simply by asserting this the petitioner cannot done away himself with the moral and legal obligation being the director of the company whose liability is crystallized by the department substantially at the relevant point of time during which the petitioner was director. Therefore, at the relevant time when the petitioner’s holding was to the extent of 98.33% in the capacity as a director, he cannot disown his fiduciary position towards the company and can shunt himself away from the liability which has been crystallized. The directors have sometimes been called not only as trustees but commercial trustees as well and therefore, looking to the legal position of directors in the company simply because the petitioner has remained dormant, cannot evade himself from the huge revenue demand which is faced by the company. Section 2(13) of the Companies Act defines word ‘director’ which indicates that any person occupying the position of a director by whatever name called. Thus, it is not the name by which the person is called but, a position he occupies and the functions and duties which he discharges that determine whether in fact he is a director or not. Simply because the petitioner has remained non-participative, cannot absolve himself from the ground reality which is faced by the company and therefore, looking to this overall situation of a legal position of director, it can thus be seen that simply because the word ‘private limited’ is not mentioned by the company claiming to be a director of a public limited company, the petitioner cannot shunt himself away from the responsibility which is crystallized against the company. There appears to be no cogent explanation reflecting about the procedure which is adopted by the company of induction of petitioner as a director in a short time contrary to norms as also about his outgoing from the company and therefore, when the petitioner is holding 98.33% in the company cannot just walk away by asserting that except bringing capital he had nothing to do with the company. This fiduciary position in the company cannot be overlooked by the Court as well and therefore, it appears that the authority concerned has rightly exercised the powers to protect the revenue of the department. The aforesaid distinguishable feature between private limited company and public limited company would lead to a situation where the petitioner cannot be allowed to take shelter of corporate veil to find himself non-responsible to the liability of the department.

24. The aforesaid situations which are prevailing and discussed above has taken the Court to another issue of scope of Section 179 of the Act which is by now well defined and therefore, without dwelling much into that, straightway we may refer to the decisions which are cited by the respective sides. Learned counsel for the petitioner has made an attempt to rely upon one unreported decision delivered by the Division Bench of this Court in Special Civil Application No.21206 of 2015 decided on 8.7.20 16 and tried to contend that no liability can be fastened upon the director personally under the guise of lifting of corporate veil. Now if we peruse the said case, we may first see that the petitioner of that case was working as a Computer Engineer in one associate company of Mr.Sunil Kakkad named as Sai Infosystem (India) Ltd. and later on, floated a company in the name of Power Infocontrol and Service Pvt. Ltd. Upon persuation of Mr.Sunil Kakkad, he agreed to become a nominal director in the year 2007. The petitioner had not even the share holding in the company nor was drawing the salary from the company and then, later on, he ceased to be director in July,201 1 and therefore, in this case, only the name of the petitioner was utilized without any contribution to the company and therefore, in that context and in the background of that fact, a decision was taken that there was no material to permit the corporate veil to be lifted. Whereas, here in this case we feel that there is a specific material and the background of fact which necessitated not only the authority but even to this Court to pierce the corporate veil and therefore, the case cited by the learned  counsel for the petitioner is of no assistance.

25. It is a settled position of law that if there is a slight change in the facts, the same would make a world of difference in applying principle of law propounded in the decision and here, there is a substantial change in the fact which does not permit the Court to take assistance of the aforesaid decision cited by the learned counsel for the

26. Relying upon another decision of this Court in case of Ram Prakash Singreshwar Rungta & Ors. V/s. Income Tax Officer, reported in 370 ITR 641, learned counsel for the petitioner contended that order in question is not in consonance with the law propounded in this case. In the said decision, the Division Bench of this Court has propounded that unless and until there is a gross negligence, misfeasance or breach of duty on the part of the petitioner, due to which the tax dues of the company could not be recovered, no resort to be made to Section 179 of the Act against the directors. But again we refrain from adopting said proposition basically in view of the fact that the fact situation contained in the said decision are quite distinct from what is on hand and therefore, we are of the opinion that this judgment can have no bearing on the central issue involved in the present petition. It appears to this Court that there may not be direct allegation of misfeasance or gross negligence but, again there is certainly dereliction of duty being in a fiduciary position as director of a company as at the relevant point of time the petitioner was holding 98.33% shares and he just allowed the company to operate at the sweet will of the directors but, that story which has been put up appears to be not sound enough to permit the petitioner to evade the huge liability and therefore, this case on hand permits the Court not to take assistance from the said decision which is recorded and stated above.

27. The overall situation if we analyze in its true perspective then only one conclusion which can be arrived at is that the corporate veil to be lifted and rightly so by the authority. The reason itself is explanatory from the above mentioned circumstances which are emerging from the record and therefore, without much dwelling in it, since it has been pointed out either the Court is desisted from reiterating, however, in the decision in case of Pravinbhai M. Khemi (Supra) in which the Division Bench of this Court has analyzed the entire scheme of Section 179 of the Act and has also analyzed the well recognized principle of lifting or piercing of corporate veil after considering the entire case law on Section 179 of the Act and therefore, the background of present case on hand necessitated this Court to take assistance from few of the observations made in the aforesaid decision which are reproduced hereinafter. In the said judgment, the Court has considered series of decisions on the issue of Section 179 of the Act and after considering all the relevant pronouncements of the Supreme Court, the Court has held that corporate veil can be lifted. Relevant observations based upon series of decisions are reproduced hereinafter :

“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.

16. 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.

17. 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

18. 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. In our view 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 above, 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.

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.

22. To our mind entire procedure was defective. Large number of observations have been made by the Assistant Commissioner in the said order without ever 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. To our mind 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 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 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.”

28. On this issue of lifting of corporate veil, relying upon series of decisions including the Supreme Court, the Division Bench of the Delhi High Court in case of India Waste Energy Develoment Ltd. & Anr. V/s. Government of NCT of Delhi & Anr., reported in 2003 (114) Company Cases 82 (Delhi) has also held that even in a situation where exigency arises, in absence of any statutory provision also, the Court is entitled to lift the veil and therefore, few observations of the said judgment related to the issue in question are quoted hereinafter :

“13. The subject and the concept of lifting the corporate veil has come up for consideration before the Supreme Court umpteen times but we do not propose to burden the judgment by making reference to all the decisions, relied upon by learned counsel for the parties. We will notice a few decisions which are directly on the point.

“In Meenakshi Mills’ case (supra), while dealing with a situation arising under the Income Tax Actt, which does not contain any specific provision regarding lifting of corporate mask, their Lordships of the Supreme Court observed that: “it is well established that in a matter of this description the income tax authorities are entitled to pierce the veil of corporate entity and to look at the reality of the transaction. It is true that from the 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.”

It is trite that a company, registered under the Companies Act, is a legal personality distinct from its members and generally corporate veil may not be lifted unless the Legislature so provides but in certain exceptional cases, which would embrace those cases where the corporate entity is used for tax evasion or to circumvent tax obligation, the Court is entitled to lift the corporate veil and to pay regard to the economic realities behind the legal facade. If the situation so demands and for the ends of justice the corporate personality itself may be disregarded. It is thus, well settled that the corporate veil can be cracked open even in the absence of a statutory provision, when it is felt that the corporate entity is being used as a device or cloak to circumvent tax obligations or as an instrument of fraud.”

29. The aforesaid proposition of law on the issue of center of controversy of applicability of Section 179 of the Act takes us to the specific finding arrived at by the authority while passing the order in question. The authority, after examining the structure of the company in question i.e. M/s.Hirak Biotech Limited, has specifically found that the company – M/s.Hirak Boitech Limited was formed only to provide accommodation entries in the form of bogus share capital and share premium. It was also found specifically by the authority that though the summons were issued to other directors of the company, none have appeared including Mr.Pratik R. Shah, whose shelter is taken by present petitioner and therefore, it appears to the authority that on one hand, Mr.Pratik R. Shah has not appeared in the office and on the other hand, the present petitioner – Mr.Ajay S. Patel has brought an affidavit in his favour and therefore, it appears to the authority that there is a systematic design which rightly necessitated the authority to lift the corporate veil. It is also found by the authority that at the relevant point of time, the company was of one man show and substantially managed and controlled by petitioner and that conclusion is arrived at on the basis of materials on record which are indicated specifically that substantial cash flow and substantial increase in capital is only after induction of petitioner as a director and certificate of commencement of business was obtained by the company only after petitioner being joined in the company.

30. After analyzing the definition of ‘public limited company’ coupled with definition of ‘private limited company’ defined under Section 3 of the Companies Act, the entire affairs upon examination by the authority has found that there appears to be of characteristic of Hirak Biotech Limited as defecto private limited company and therefore, simply because word ‘private limited’ is not mentioned, the petitioner cannot take shelter of ‘public limited’ nomenclature of a company. It is also found from the record that authority has not simply considered the substantial holding of the petitioner and then, assumed. The authority has, however, considered the manner and method of other directors’ conduct of not cooperating, manner and method of induction and resignation of petitioner as also considered other steps which have failed to recover huge crystallized revenue demand and also analyzed gradual decrease and evaporation of substratum of a company after the petitioner resigned from the company and then, has also considered the huge financial crunch upon which the entire substratum is evaporated under the steps of securitization. Therefore, here it appears that this is not a simple case of petitioner coming and going away from the company for which he is claiming to be non-responsible at all but, it requires detailed examination which has rightly been examined by the authority. Therefore, these findings which are arrived at by the authority on the basis of record and upon basis of explanation tendered by the petitioner, these findings are not in a position of dislodge by this Court in exercise of extraordinary jurisdiction. The statutory provisions cannot be considered in so hyper technical manner which frustrates the very object for which it has been included in the statute. There are ample circumstances available on record even in addition to the findings specifically arrived at by the authority which reflect that  the authority has rightly resorted to provision of Section 179 of the Act. This Court sitting in a writ jurisdiction substantially in exercise of extraordinary equitable jurisdiction cannot ignore such kind of situation prevailing on record and see it helpless just because a defence is put up that company in question is a public limited company and therefore, no resort to Section 179 of the Act can be made. The case of Pravinbhai M. Khemi (Supra) is sufficient answer to hold that there is no illegality and/or irregularity of any nature which is committed by the authority while passing the order impugned in the petition.

31. Now in the light of above position if we look at self-imposed restrictions which are well recognized in exercise of extraordinary jurisdiction of this Court, it would become clear that the specific findings which are reflected on record cannot be given a go-bye simply because there appears to be one or the other reasons no so cogently assigned by the authority. The Court has to see the ultimate overall conclusion of the authority in consonance with the relevant record and on the basis of this, we find that there is no irregularity and/or illegality of any nature which warrants this Court to exercise of extraordinary jurisdiction to arrive at this self-imposed restrictive scope of Articles 226 or 227 of the Constitution of Ample assistance is provided to this Court by following decisions of Apex Court which are sufficient enough to arrive at the conclusion which is arrived at by this Court in the present judgment.

32. Of course, the Division Bench of this Court, at the time of admission of the present petition in April,2016, has considered the judgment in case of Ram Prakash Singheshwar Rungta & Ors. V/s. Income-tax Officer, reported in 370 ITR 641 (Gujarat) as cited by the petitioner. But upon analysis in detail of the entire background of the facts, we feel that said decision in a straight jacket formula cannot be applied as also the decision in case of Radhey Mohan Sharma V/s. Deputy Income-tax Officer, reported in (2014) 44 com66 (Gujarat). We reiterate that if there is a difference in facts and circumstances, the same would make a world of difference in apply the principle and therefore, on analysis of entire situation of the case on hand, we are of the opinion that no case is made out by the petitioner.

33. In view of aforesaid circumstances, after considering the case from every aspect, we are of the considered opinion that there appears to be no infirmity in the order which is impugned in the petition and the petition being devoid of merits, deserves to be dismissed and accordingly, the same is dismissed. Rule is discharged. Interim relief, if any, granted earlier stands vacated. There shall be no order as to costs.

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