Rajendra R. Singh v. Assistant Commissioner Of Income Tax -9(2)(2), Mumbai,Room

Digitallysigned bySHRADDHASHRADDHAKAMLESHKAMLESHTALEKARTALEKARDate:2022.07.2811:49:20+0530 IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION WRIT PETITION NO. 3590 OF 2019 Rajendra R. Singh,residing at A-301, Sunny Side,Lokhandwala Complex, Andheri (W),Mumbai 400 053PAN : AAZPS0622B ....Petitioner V/s 1. Assistant Commissioner Of Income Tax -9(2)(2), Mumbai,Room No. 665, 6[th] foor,Aayakar Bhavan, M.K. Road,Mumbai-400 020. 2. Principal Commissioner of Income Tax-9, Room No.214, 2[nd] Floor, Aayakar Bhavan, M.K. Road,Mumbai-400 020. 4. Union of India,Through the Secretary,Ministry of Finance,Government of India, North Block, New Delhi – 110 001. ....Respondents *** Mr. Madhur Agrawal with Mr. Harsh M. Kapadia for petitioner.Mr.Suresh Kumar for respondents.Mr Akhileshwar Sharma for the respondents-revenue **** CORAM : DHIRAJ SINGH THAKUR AND ABHAY AHUJA, JJ. Judgment reserved on : 4[th] July 2022Judgment pronounced on : 26[th] July 2022 PER DHIRAJ SINGH THAKUR, J. : 1.In this petition, the petitioner who is the Chairman andManaging Director of one “Crest Paper Mills Limited (“CPML”),seeks the issuance of a writ of certiorari for quashing inter-aliathe order dated 13[th] February 2018 passed under section 179 ofthe Income Tax Act, 1961 (‘The Act’) holding the petitioner liable topay a demand of Rs.3,98,19,430/- alongwith interest undersection 220(2) of the Act which was otherwise due and payable bythe company, CPML. The demand outstanding against CPML wasfor the assessment year 2010-11. 2.Briefy stated the material facts in the light of which thepresent controversy has arisen are as under :- (a)A Show Cause Notice dated 24[th] January 2018 wasserved upon the petitioner by the Assistant Commissioner ofIncome Tax, Circle 9(2)(2), Mumbai informing the petitionerthat tax dues for an amount of Rs.3,88,19,430/- wereoutstanding against M/s. Crest Paper Mills Ltd. for theassessment year 2010-11 and that the same had not beenpaid by the assessee company so far. The petitioner thereforewas asked to show cause as to why proceedings undersection 179 of the Act be not initiated against him in his capacity as a Director of the said Company. Reply to the Show Cause Notice : 3.The petitioner then submitted its response to the showcause notice taking a defence that jurisdiction under section 179of the Act could be assumed as against a director of a privatecompany and not against a public company. 4.A further stand was taken that proceedings against aDirector could not have been initiated directly without frstinitiating recovery proceeding against the company. It was alsostated that before action under section 179 is initiated against aDirector, there has to be a proper fnding that recovery of taxarrears was not possible from the company and further that inthe show cause notice, there was no such averment that the taxdue cannot be recovered from the company. Order impugned : 5.By virtue of the order impugned dated 13[th] February 2018,the objections and contentions raised by the petitioner wererejected. It was held that the allegation that the proceedingsunder section 179 were directly initiated was baseless. It was heldthat after the tax demand, several phone calls were made to the ARs of the assessee which did not elicit any response whereafterthe bank account of the assessee was attached for recovery ofdues and further that proceedings under section 179 was initiatedbecause the assessee was unwilling and non-co-operative to payits tax dues. 6.On the issue whether section 179 could be resorted toagainst the directors of the assessee company being a publiccompany, it was held that no evidence had been furnished by thepetitioner to prove that it was a public company. ARs of the assessee which did not elicit any response whereafterthe bank account of the assessee was attached for recovery ofdues and further that proceedings under section 179 was initiatedbecause the assessee was unwilling and non-co-operative to payits tax dues. 6.On the issue whether section 179 could be resorted toagainst the directors of the assessee company being a publiccompany, it was held that no evidence had been furnished by thepetitioner to prove that it was a public company. 7.It was further held that the assessee company having beendelisted from the stock exchange as a penal measure for failure tocomply with the requirements of the Listing Agreement did notnot warrant that the benefts attached to a public companyshould be accorded to the assessee company. 8.It was further held that assuming the assessee was a publiccompany, yet by lifting the corporate veil, even the directors ofsuch companies could be brought within the purview of section179 especially where the affairs of the company were notconducted as a public limited company in its true sense. Reliancein this regard was placed upon Pravinbhai M. Kheni Vs. Assistant Commissioner of Income-tax, Central Circle-2 & 2 [1] . 9.With a view to show that the affairs for the assesseecompany were run more like a private enterprise. The followingfactors were highlighted : (a)Employees beneft expense claimed by the assesseewas mere 61,841 in contrast to director’s remuneration at2,88,000. (b)A.O. has categorically concluded that the transactionsundertaken by the assessee are nothing but accommodationentries in huge turnover recorded despite having practicallyno employees. (c)Major share holder of the assessee company (above 5%)is M/s. Duteons Finvest Pvt. Ltd. whose directorship is heldby Rajendra Ramlachhan Singh, who is also a director in theassessee company. 10.Based upon the above reasoning and by holding that thepetitioner during the relevant period, was a part of the decisionmaking process which led to the crystallization of the demand forthe assessment year 2010-11, the petitioner was held jointly and severally liable for the entire demand of Rs.3,98,19,430/- alongwith interest under section 220(2) of the Act, outstanding in thename of M/s. Crest Paper Mills Limited. This order was challengedin revision under section 264 of the Act before the DeputyCommissioner of Income-tax which too was dismissed vide orderdated 12[th] February 2019 in a summary fashion and hence thepresent petition. Scope and ambit of section 179 : 11.Before we proceed to deal with the issues raised during thecourse of hearing and the arguments in support thereof, it wouldbe benefcial to briefy refer to the provisions of section 179 of theAct which envisages that if the tax dues from a private company,in respect of any income of any previous year cannot be recovered,then, every person who was a director of the private company atany time during the relevant previous year shall be jointly andseverally liable for the payment of such tax unless he proves thatnon-recovery cannot be attributed to any gross neglect,misfeasance or breach of duty on his part in relation to the affairsof the company. 12.It, thus, follows that before the jurisdiction is assumed and exercised under section 179 against the Director the AssessingOffcer must feel satisfed that : a) tax was due from the Private Limited Company, andthat that b) the tax dues cannot be recovered from such a company 13.However, in Delhi Development Authority Vs. SkipperConstruction Company (P) Ltd. and another [2], it was held that in acase where it is found that the public company was incorporatedonly as a facade, for purposes of tax evasion and fraud, thecorporate veil could be pierced to look at the reality behind thecorporate veil. 12.It, thus, follows that before the jurisdiction is assumed and exercised under section 179 against the Director the AssessingOffcer must feel satisfed that : a) tax was due from the Private Limited Company, andthat that b) the tax dues cannot be recovered from such a company 13.However, in Delhi Development Authority Vs. SkipperConstruction Company (P) Ltd. and another [2], it was held that in acase where it is found that the public company was incorporatedonly as a facade, for purposes of tax evasion and fraud, thecorporate veil could be pierced to look at the reality behind thecorporate veil. Some of the aspects which are required to be gone intobefore applying the principle of ‘lifting the corporate veil’ forpurposes of exercising jurisdiction under section 179 of the Actagainst the Directors of a public company, a Bench of this Court in Kishan Lal Vs. Union of India[3], held : “11 We do not wish to express any opinion as towhether the corporate veil ought to be lifted in thepresent case even assuming that it is permissible to doso in matters under the Income Tax Act. Suffce it tostate that even assuming that it is permissible to doso, there are several issues which ought to be takeninto account before deciding whether or not to lift 2AIR 1996 SC 2005 3[2016] 76 taxman.com 168 (Punjab & Haryana) corporate veil. Neither the show cause notice nor theimpugned order refers to certain crucial facts includingas to the extent of share holding of the directors, theextent of control exercised by them regarding theaffairs of the company and the extent of theirrepresentation on the board of directors. It would alsobe necessary to consider the Articles of Association ofthe company and any other agreements that may existbetween the share-holders inter se. There are severalother factors also which must be taken intoconsideration including as to whether the companywas converted into a public limited company for thepurpose of avoiding statutory liability benefting thepetitioners alone and/or conferring any other beneftsupon the petitioners or any one or more of them alone.Lifting the corporate veil in a case such as this hasdrastic consequences. The impugned order does notconsider the same in any detail.” 14.In the present case, it can be seen that the notice undersection 179 of the Act issued by respondent No.1 did not at allinform the petitioner of its intention to treat the company, i.e.,CPML as a public company by invoking the principle of ‘lifting thecorporate veil’ much less did it refer to any material or conclusionbased upon which it could assume jurisdiction under section 179of the Act against the directors of a Private Company. On the other hand, the respondent No.1 invoked theprinciple of lifting the corporate veil to hold that CPML was in facta privately held enterprise under the garb of a public companyonly after the petitioner had taken an objection to the respondentNo.1 assuming jurisdiction against a public company. 15.We do not wish to go into the question as to whether, thefacts and circumstances of the case justifed invoking theprinciple of lifting the corporate veil as in our opinion, theprocedure adopted by respondent No.1 was clearly violative of theprinciples of natural justice and without affording to thepetitioner, an opportunity of being heard on the question, as towhy the principle of ‘lifting the corporate veil’ be not applied in thecase of CMPL to justify the recovery of the tax dues from thedirectors. 15.We do not wish to go into the question as to whether, thefacts and circumstances of the case justifed invoking theprinciple of lifting the corporate veil as in our opinion, theprocedure adopted by respondent No.1 was clearly violative of theprinciples of natural justice and without affording to thepetitioner, an opportunity of being heard on the question, as towhy the principle of ‘lifting the corporate veil’ be not applied in thecase of CMPL to justify the recovery of the tax dues from thedirectors. 16.The orders impugned are also unsustainable on anotherground. Power under section 179 of the Act can be exercisedagainst the Directors upon satisfaction of certain conditions onlyif the tax dues cannot be recovered from the private company. Tojustify that the tax dues cannot be recovered, the AssessingOffcer has to enumerate the steps taken towards recovery of taxdues from the company. For example, attachment of the accountsof the company as also, its movable and immovable assets, effortsmade by the Assessing Offcer in identifcation of the variousmovable and immovable assets of the company, and so on and soforth. The Show cause notice under section 179 of the Act, dated 24[th] January 2018, on the other hand, reads as under :- “1In the case of M/s. Crest Paper Mills Limited(PAN : AAACCC4343D), the demand of Rs.3,98,19,430/- is outstanding. 2The aforesaid demands have been raised videorder giving effect to the order of CIT(A) u/s 250 ofthe IT Act and have been outstanding since long butthe same has not been paid by the assessee companyso far…..” 17.A reading the show cause notice would therefore clearlysuggest that there was no satisfaction recorded that the taxcannot be recovered. It needs to be understood that recoveryprocedure under section 179 of the Act against the directors is notto be resorted to casually and only because it is convenient to doso for affecting recovery of the tax dues. 18.With a view to show that the respondent No.1 hadmechanically resorted to the provisions of section 179 of the Act,the petitioner has relied upon an order of attachment, dated 6[th]March 2019, whereby the Tax Recovery Offcer-2, Thane hasordered the attachment of land at Village Kalivali, Taluka Panvel,Dist. Raigad to show that if respondent had made an effort, thetax dues could be recovered from the company. An additional affdavit has also been fled by the petitioner. In response to this additional affdavit, an affdavit in replyhas also been fled by the Deputy Commissioner of Income Tax-1(2)(1), Mumbai in which a stand is taken that steps for sale of theproperty attached would be initiated after getting the fair marketvalue determined. This statement itself has the effect of nullifyingthe action initiated under section 179 of the Act against thepetitioner rendering the order impugned unsustainable in law. 19.In the light of the discussion herein above, the Writ Petitionis allowed.The impugned order dated 13[th] February 2018 as alsothe order dated 12[th] February 2019 passed under section 264 ofthe Act are quashed. However, in case, the tax dues are not fullysatisfed upon sale of the property that has been attached, thenthe Assistant Commissioner can proceed in the matter afresh inaccordance with law, after giving an opportunity of being heard tothe petitioner, in the light of the observations made by us in thepreceding paragraphs. [ABHAY AHUJA, J.] [ DHIRAJ SINGH THAKUR, J.]