Ajay Surendra Patel Vs DCIT (Gujarat High Court)
Summary: The Gujarat High Court quashed the order dated 31.03.2016 passed under Section 179 of the Income Tax Act, 1961, fastening the tax dues of Hirak Biotech Limited upon its former director, Ajay Surendra Patel. The petitioner had served as director only from 20.03.2005 to 05.09.2005. The company was incorporated as a public limited company, but the Revenue sought to treat it substantially as a private company by lifting the corporate veil, principally because the petitioner was alleged to hold about 98.33% of its shares during the relevant period. The Court held that the status of a registered public limited company cannot be doubted merely because one director holds a majority or substantial number of equity shares or because its shares were not offered to the public. Classification as public or private depends upon the statutory characteristics of the company and not merely upon concentration of shareholding. The Court distinguished Pravinbhai M. Kheni Vs Assistant Commissioner of Income-tax, observing that the circumstances justifying lifting of the corporate veil in that case were egregious and could not be mechanically applied.
The Revenue had also relied upon a statement of another director, Shri Pratik P. Shah, without giving the petitioner an opportunity to deal with it, thereby violating principles of natural justice. Further, after the petitioner explained his limited tenure and lack of involvement in management, bank accounts, contracts and financial affairs, the authority was required to determine whether non-recovery was attributable to his gross negligence, misfeasance or breach of duty. No such findings were recorded. Consequently, the requirements of Section 179(1) were not satisfied and the impugned recovery order was quashed.
