Sca/12254/2002 Of Pravinbhai M Kheni v. Asstt.commisioner Of Income Tax Central Circle-2

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No. 12254 of 2002 For Approval and Signature: HONOURABLE MR.JUSTICE AKIL KURESHIHONOURABLE MS.JUSTICE HARSHA DEVANI =========================================================1[Whether Reporters of Local Papers may be allowed ]to see the judgment ?1[Whether Reporters of Local Papers may be allowed ]to see the judgment ? 2[To be referred to the Reporter or not ?] 3[Whether their Lordships wish to see the fair copy ]of the judgment ?Whether this case involves a substantial question of law as to the interpretation of the of the judgment ?Whether this case involves a substantial question of law as to the interpretation of the 4constitution of India, 1950 or any order made thereunder ?constitution of India, 1950 or any order made thereunder ? 5[Whether it is to be circulated to the civil ]judge?judge? =========================================================PRAVINBHAI M KHENI - Petitioner(s) Versus ASSTT.COMMISIONER OF INCOME TAX CENTRAL CIRCLE-2 & 2 - Respondent(s) ========================================================= Appearance :MR JP SHAHfor Petitioner(s) : 1,RULE SERVED for Respondent(s) : 1 - 3.MR MB PURABIA for Respondent(s) : 1,MR TANVISH U BHATT for Respondent(s) : 1,MR SUDHIR M MEHTA for Respondent(s) : 3, ========================================================= CORAM :HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MS.JUSTICE HARSHA DEVANI Date : 06/11/2012 ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. The petitioner has prayed for quashing the recoveryproceedingsundertakenbythe the SCA/12254/2002 respondents against the petitioner for the income tax dues of M/s. M. Kantilal and Co. Ltd.,Surat. The petitioner has challenged orders Annexure-G, J and O passed by the respondents in this respect. 2. We may notice facts in brief. 2.1) The petitioner is a director of a private limited company M/s. M. Kantilal & Co. ltd.(here-in-after referred to as “the company”). On 7.1.1999 there were search proceedings on the company under section 132 of the Income Tax Act, 1961(“the Act” for short). Pursuant to such operations, block assessment under section 158BC of the Act was framed on 23.3.2001 computing totalincomeofthecompanyat Rs.259,22,64,020/-. The company preferred an appeal before the Commissioner(Appeals) who by his order dated 18.9.2002 reduced the computation of total income to Rs.130,54,95,443/-. 2.2) On the ground that the tax could not be recovered from the company, the respondents initiated proceedings under section 179 of the Act against the petitioner. On 13.9.2001, the Deputy Commissioner of Income-tax issued a notice to the petitioner stating as under : “2. As a result of passing block search assessment order of M/s. M. Kantilal & Co. Ltd., on 23.3.2001, a demand of Rs. 155.33 crores is outstanding as on today. After giving proper SCA/12254/2002 opportunity to this company, coercive measures as per I.T. Act has been initiated. The company has defaulted in making the payment. From the records it is ascertained that you are one of the Directors of this Pvt. Ltd. Company for the block period. Therefore as per the section 179 of the I.T. Act, you will be jointly and severally liable for the payment of the outstanding demand of M/s. M. Kantilal & Co. Ltd. 3. Please explain as to why recovery proceedings should not be initiated against you in the light of section 179 of the I.T. Act for the outstanding demand of the Company M/s. M. Kantilal & Co. where you are one of the directors. SCA/12254/2002 opportunity to this company, coercive measures as per I.T. Act has been initiated. The company has defaulted in making the payment. From the records it is ascertained that you are one of the Directors of this Pvt. Ltd. Company for the block period. Therefore as per the section 179 of the I.T. Act, you will be jointly and severally liable for the payment of the outstanding demand of M/s. M. Kantilal & Co. Ltd. 3. Please explain as to why recovery proceedings should not be initiated against you in the light of section 179 of the I.T. Act for the outstanding demand of the Company M/s. M. Kantilal & Co. where you are one of the directors. 4. Your reply must be received in my office within 3 days of the receipt of this notice. In case of non-receipt of your reply from your side, it will be construed that you do not have say anything in this regard and further recovery action as per I.T. Act will be resorted. Expecting Cooperation from your side.” 2.3)In response to such notice, the petitioner replied under communication dated 20.9.2001. The petitioner opposed any recovery from him on the ground that the said company was a public limited company duly incorporated under the Companies Act, 1956. Provisions of section 179 of the Act would be applicable only where tax is due from a private company and, therefore, no recovery against the petitioner under section 179 of the Act can be made for dues of the said company. 2.4)The Assistant Commissioner of Income-tax however, passed the impugned order Annexure-G on 15.4.2002 and disregarded the petitioner's SCA/12254/2002 4/50 objections. He noted that the company was subjected to search operation pursuant to which by the appellate order for the block assessment under section 158BC of the Act, tax liability of the company was determined at more than Rs.155 crores. He outlined the efforts made for recovery of such tax dues from the company by issuance of several notices, by issuing attachment orders and by proceeding under section 281 of the Act, despite which, no recovery could be made from the company. He therefore, concluded that “from the above actions taken it is apparent that recovery of tax cannot be made from the company.” He thereupon proceeded to examine the petitioner's objection with respect to non applicability of section 179 of the Act. He overruled such objections observing : “The matter has been examined for the attachment of stock of rough and polished diamonds, which is around Rs. 5.00 to 6.00 crores. The TRO., Central Range, Surat is pursuing the matter for the attachment of said stock. Even after the attachment of the said stock of diamonds there would be huge demand of around Rs. 150.00 crores of tax dues to be paid by the assessee company. The Balance Sheet of the company has been analyzed, and it is found that the said undisclosed income has not reflected in the accounted Balance Sheet of the assessee company. Even the immovable property is not in the name of the company where the unaccounted income might have been invested. Therefore, it is apparent that the unaccounted income of the company has been misappropriately utilised by the Directors and Shareholders of M/s M Kantilal & Co. Ltd. A Memorandum of Association of M/s M Kantilal & Co. Ltd. Has been analyzed. The following are the directors/shareholders of M/s M Kantilal & Co. Ltd :- [1] Shri Manjibhai Mavjibhai Patel [2] Shri Pravinbhai Mohanbhai Kheni [3] Shri Kantibhai Mohanbhai Kheni [4] Shri Himmatbhai Mohanbhai Kheni [5] Shri Mukeshbhai Mavjibhai Patel [6] Shri Kanjibhai Mavjibhai Patel & [7] Shri Vipulkbhai Manjibhai Patel It may be mentioned that all the above persons are the family members and relate to M. Kantilal family. Further, the Memorandum of Association shows that the main object of the company are as under :- A Memorandum of Association of M/s M Kantilal & Co. Ltd. Has been analyzed. The following are the directors/shareholders of M/s M Kantilal & Co. Ltd :- [1] Shri Manjibhai Mavjibhai Patel [2] Shri Pravinbhai Mohanbhai Kheni [3] Shri Kantibhai Mohanbhai Kheni [4] Shri Himmatbhai Mohanbhai Kheni [5] Shri Mukeshbhai Mavjibhai Patel [6] Shri Kanjibhai Mavjibhai Patel & [7] Shri Vipulkbhai Manjibhai Patel It may be mentioned that all the above persons are the family members and relate to M. Kantilal family. Further, the Memorandum of Association shows that the main object of the company are as under :- “To takeover business, and undertaking carried on under the name and style of M/s M Kantilal & Company, having its registered office at 1205, Panchratna, Opera House, Bombay – 400 004 alongwith all the belonging, funds, assets, rights, privileges, liabilities, obligations, and contracts of M/s M Kantilal & Company, and on such takeover the firm shall stand dissolved. To carry on in India and elsewhere the business of manufacturing, dealing, buying, selling, importing and exporting of gems, diamonds (natural and synthetic), pearls, rubies, emeralds and precious and semi-precious stones of every kind and description, in rough, uncut, cut, or polished form, ornaments and jewelleries of gold, silver, platinum or any other precious metal and alloy thereof, including ornaments and jewelleries studded with precious or semi-precious stones. To carry on the business of manufacturing trading, dealing, importing and exporting in and of, all forms of precious and semi-precious stones including Diamonds, Gems, Rubies, Sapphires, Emeralds, Pearls.” A perusal of the main object of Memorandum of Association revels that the company was formed with the main object to takeover the business of out going concern i.e. M/s M Kantilal & Co., a SCA/12254/2002 firm where most of the Directors were the partners. Thereafter, from the inception of the company, the objectives of M/s M Kantilal & Co Ltd was to run a family business of M Kantilal family. Huge undisclosed income is computed U/s 158 BC in the name of M/s M Kantilal & Co, firm for the block period taking over of the firm by M/s M Kantilal & Co Ltd. The total undisclosed income was computed for Rs. 884354291/- and the said assessment has been set-aside by CIT(A) and the assessment is in progress. Further, the Directors of the company have created huge assets in their own name in the form of immovable property. Therefore, it is evident that the unaccounted income of the company which is flagship concern of the Group has been utilised for acquiring the property in the hands of Directors. This view is further fortifies by analysing the balance-sheet of the Company which shows that there is not even a single immovable property in the name of the company. Section 179 deals with recovery of demand from a Director in the case of private limited company when the demand cannot be recovered from the company. In the instant case, M/s M Kantilal & Co. Ltd. has not intentionally been registered with the words “private” in Incorporation Certificate, to escape the responsibility U/s 179. In the circumstance discussed above, it is clear that the Directors have enjoyed unaccounted income of the assessee. Therefore, it is proper to recover the dues of tax from the Directors. In this connection, the decision of the Supreme Court reported in 1996 All India Reporter 2005 in the case of DDA Vs Skipper Construction Co Pvt Ltd is directly applicable where the Hon'ble Supreme Court is of the view that if the members Ltd is directly applicable where the Hon'ble Supreme Court is of the view that if the members and directors of any company commits illegality and defrauding people by the formation of corporate body then the theory “Lifting the corporate veil” may be applied. Gist of the decision is as under : Ltd is directly applicable where the Hon'ble Supreme Court is of the view that if the members and directors of any company commits illegality and defrauding people by the formation of corporate body then the theory “Lifting the corporate veil” may be applied. Gist of the decision is as under : “The Hon'ble Supreme Court of India reported in 1996 AIR 2005 in the case of DDA Vs Skipper Construction Co Pvt ltd has given verdict on the theory of “Lifting the corporate veil”. The Hon'ble Supreme Court has held that in case of corporate bodies created by the individual and his family members for committing illegality and defrauding people, the Court can treat them one entity. The Hon'ble Supreme Court has further held that the concept of corporate entity was evolved to encourage and promote trade and commerce but not to commit illegalities or to defraud people. Where, therefore the corporate character is employed for the purpose of the committing illegality or for defrauding others, the Court could ignore the corporate character and will look at the reality behind the corporate veil so as to enable it to pass appropriate orders to do justice between the parties concerned. The fact that an individual and members of his family have created several corporate bodies would not prevent the Court from treating all of them as one entity belonging to and controlled by that individual and family if it is found that these corporate bodies are merely cloaks behind which lurks that individual and/or members of his family and that the devise of incorporation was really a ploy adopted for committing illegalities and/or to defraud people.” In the instant case M/s M Kantiulal & Co Ltd, the word “Pvt. Ltd” is not mentioned in incorporation certificate. The fact remains that all shareholders and directors belong to a single family and these family members have earned huge unaccounted income of Rs. 259 crores as assessed in the hands of company after taking into account the evidences gathered as a result of search & seizure operation. Evidence gathered during the search & seizure operation further fortifies the idea that this company has been used as a conduit for generating unaccounted wealth. Further, the assessee company has not offered to general public any share for subscription. All the shares are held by directors only.” 2.5) The petitioner thereupon made a representation to the Assistant Commissioner on 6.5.2002. In such representation, he reiterated his contention that section 179 of the Act would not be applicable in case of a public company. He also tried to dislodge the Assistant Commissioner's findings with respect to share holdings of the petitioner and his family members as directors of the company and other grounds on which the Assistant Commissioner had ordered recovery from the petitioner. He strongly opposed the action of the Assistant Commissioner in applying the principle of lifting or piercing the corporate veil. He also tried to demonstrate through different figures that the investments made by the directors of the said company including himself were from their own sources. The petitioner thereafter, filed a revision application before the Commissioner against the order of the Assistant Commissioner dated 15.4.2002 in which he mainly contended that section 179 of the Act had no applicability. 2.6) The Commissioner by his order dated 9.4.2003 however, was pleased to reject the petitioner's revision application under section 264 of the Act. He concurred with the view of the Assistant Commissioner regarding requirement of lifting the veil. In this respect his conclusions were as under : 2.6) The Commissioner by his order dated 9.4.2003 however, was pleased to reject the petitioner's revision application under section 264 of the Act. He concurred with the view of the Assistant Commissioner regarding requirement of lifting the veil. In this respect his conclusions were as under : “(ii) In the order made u/s. 179 of the Act, the Assessing Officer has lifted the corporate veil in the case of M/s M Kantilal & Co. Ltd by relying on the decision of the Hon'ble Supreme Court in the case of Delhi Development Authorities Vs. Skipper Construction Co. Pvt.Ltd., AIR 1996 Supreme Court 2005. In the aforesaid case, the Hon'ble Supreme Court has held that the concept of corporate entity was evolved to encourage and promote trade and commerce but not to commit illegality or to defraud people. It had further held that the fact that an individual and members of his family have created several corporate bodies would not prevent the Court from treating all of them as one entity belonging to and controlled by that individual and family if it was found that these corporate bodies were merely cloaks behind which lurked that individual and/or members of his family and that the devise of incorporation was really a ploy adopted for committing illegalities and/or to defraud people. The Assessing Officer stated in the order u/s. 179 of the Income-tax Act made in the case of the assessee that the fact remained that all the directors, who were the only shareholders of M/s M Kantilal & Co. Ltd., belonged to the same family. The aforesaid company had been formed with the main object to take over the business of partnership firm known as M/s M Kantilal & Co., whose partners (four in member) became director of the company alongwith three other members of the family. These family members had earned huge unaccounted income which was evidenced on the basis of the material found during the course of the search & seizure operation. He further held that the aforesaid company was being used as a conduit for generating unaccounted wealth. This view was fortified by analysing the balance-sheet of the company which showed that there was not even a single immovable property in the name of the company. The Assessing Officer stated that the said company had not offered to the general public any shares for subscription and that all the shares of the company were held by its directors only. Thus, the management and control SCA/12254/2002 over the affairs of the company were with the aforesaid seven persons who belonged to a family. He thus lifted the veil of public company and held that M/s M Kantilal & Co. Ltd was in essence, a private company. For the reasons given by the Assessing Officer in the order u/s 179 of the Act, I agree with the conclusion reached by him with regards to the real character of M/s M. Kantilal & Co. Ltd. In view of the above, the reliance placed by the assessee on the decision of the hon'ble Supreme Court in the case of M. Rajamoni Amma Vs. DCIT (1992) , 195 ITR, 873 is not in order as on facts it was established by the Assessing Officer that the apparent entity of M/s M. Kantilal & Co. Ltd as a public company was merely a sham and a cloak to facilitate avoidance of recovery of tax due from it. (iii) The principle laid down by the hon'ble Supreme Court in its decision in the case of Delhi Development Authorities Vs. Skipper Construction Co. Pvt.Ltd. does not distinguish between a public company and a private company. As mentioned in the preceding paragraph, the hon'ble Supreme Court has held in the aforesaid case that where the corporate character was employed for the purpose of committing an illegality or for defrauding others, the court could ignore the corporate character and look at the reality behind the corporate veil. It is clear from the facts discussed by the Assessing Officer in the order made by him u/s. 179 of the Act that the purpose behind the assumed entity of a public company in the case of M/s M Kantilal & Co. Ltd was to facilitate avoidance of recovery of tax due from it. The aforesaid company has been formed with the main object to take over the business of partnership firm known as M/s M.Kantilal & Co. The search and seizure operation had revealed unaccounted production and unaccounted transactions during the period prior to the date of incorporation when the firm was in existence. The same pattern of unaccounted transactions continued after the formation of the company. Through the entity of M.s M.Kantilal & Co. Ltd., huge undisclosed income had been earned which was eventually brought to tax in the order SCA/12254/2002 of block assessment made in its case. However, there was not even a single immovable property in the name of the company which could have been attached for recovery of its tax dues. The apparent status of a public company would have protected its directors from meeting its tax liability as their liability thereunder would have been limited. Thus, it is evident that the character of a public company was employed in the case of M/s M. Kantilal & Co. Ltd to commit an character of a public company was employed in the case of M/s M. Kantilal & Co. Ltd to commit an illegality as mentioned above. In view of the above, the contention of the assessee referred to at point (iii) of para 1 is rejected. (iv) The contention of the assessee mentioned at point no. (iv) of para 1 is not in order. Under section 179 of the Act, there is no bar on the Assessing Officer to pass an order thereunder where a statement has been drawn by the T.R.O under section 222. It is only in respect of the modes of recovery specified in section 226 of the Act that after a certificate is drawn under section 222, T.R.O. Alone has the powers to make use of them. The mode of recovery of tax due from a private company specified in section 179 of the Act is distinct from the modes of recovery specified in section 226. Therefore, the aforesaid contention of the assessee is rejected. (v) As for the contention of the assessee that the action to lift the corporate veil could be taken by a court and not by the Assessing Officer, the Hon'ble Supreme Court, in the case of C.I.T. Vs. Meenakshi Mills Ltd. & Others, (1967), 63 ITR, 609, has held that the income-tax authorities are entitled to pierce the veil of corporate entity and to look at the reality of the transaction to examine whether the corporate entity was being used for tax evasion. In the aforesaid case, a separate corporate entity was brought into existence with the ulterior motive of evading the tax obligations by the assessee. In the case of the assessee also, the entity of M/s M Kantilal & Co. Ltd was brought into existence as a public company with the motive of evading the tax obligations by him as also by the other directors of the company. In view of the SCA/12254/2002 above, the contention of the assessee at point no. (1) of para 3 is rejected. M/s M Kantilal & Co. Ltd was brought into existence as a public company with the motive of evading the tax obligations by him as also by the other directors of the company. In view of the SCA/12254/2002 above, the contention of the assessee at point no. (1) of para 3 is rejected. (vi) As for the contention of the assessee at point no. (ii) of para 3, it is seen that the Assessing Officer had mentioned the fact that the company, M/s.M Kantilal & Co. ltd, had not gone in for a public issue of its shares, along with many other facts,in the order u/s.179 of the Act to substantiate his conclusion that the aforesaid company was, in essence, a private company. I agree with the Assessing Officer that the totality of the facts in the case of M/s.M Kantilal & Co. ltd revealed that it was, in reality, a private company only. (vii)As for the contention of the assessee at point no.(iii) of para.3, it is seen that the company M/s.M Kantilal & Co. ltd was assessed to tax on undisclosed income of Rs.259.23 crores for the block period. In the appellate order passed by the CIT(A) against the order of aforesaid assessment,heconfirmedassessmentof undisclosed income to the extent of Rs.130.55 crores. A perusal of the balance- sheet of the company as on 31.3.2000 and on 31.3.2001 shows that the company does not have worthwhile liquid assets of its own. As mentioned earlier, it also does not have any immovable property of its own. On the other hand, the assessee and the other directors of the company have acquired a large number of immovable properties in their own name. It is well known that apart from the stated purchase consideration 'on money' is paid for acquiring such assets. The management and control of the affairs of the company is with the assessee and six other directors who are the members of the same family. They are privy to the unaccounted transactions of the company and the destination of the income generated from such transaction. In view of the above, the contention of the assessee at point no.(iii) of para.3 is rejected.” 2.7) The petitioner at this stage approached this Court by filing the present SCA/12254/2002 petition. 3. Learned counsel Shri J.P. Shah for the petitioner vehemently contended that the authorities erred in applying the provisions of section 179 of the Act when admittedly the company was a public company. He further submitted that in any case the company should be treated to be a deemed public company in terms of section 43A of the Companies Act. 3.1) Counsel relied on the decision of the Apex Court in case of M.Rajamoni Amma and another v. Deputy Commissioner of Income-tax(assessment) and others reported in 195 ITR 873 in which it was held that where the liability of a company had arisen after the company had become deemed public company, the directors of such company would not be liable to be proceeded against any recovery of tax dues of company under section 179 of the Act. 3.2)Counsel submitted that the principle of lifting the corporate veil would be inapplicable in the present case. He further submitted that there was no material on record in any case to apply such a principle. 3.3)Counsel also contended that even otherwise the requirements of section 179 of the Act were not fulfilled. The Assistant Commissioner had not held that non recovery of SCA/12254/2002 dues of the company could be attributed to any gross negligence, misfeasance or breach of duty on part of the petitioner. 3.4)Counsel relied on the decision of Division Bench of this Court in case of Bhagwandas J. Patel v. Deputy Commissioner of Income-tax reported in 238 ITR 127 wherein it was held that liability of the tax dues is primarily of that of the company. The director can be proceeded against only if the Revenue establishes that tax could not be recovered from the company. 3.3)Counsel also contended that even otherwise the requirements of section 179 of the Act were not fulfilled. The Assistant Commissioner had not held that non recovery of SCA/12254/2002 dues of the company could be attributed to any gross negligence, misfeasance or breach of duty on part of the petitioner. 3.4)Counsel relied on the decision of Division Bench of this Court in case of Bhagwandas J. Patel v. Deputy Commissioner of Income-tax reported in 238 ITR 127 wherein it was held that liability of the tax dues is primarily of that of the company. The director can be proceeded against only if the Revenue establishes that tax could not be recovered from the company. 4. On the other hand, learned counsel for Shri Mehta for the Revenue opposed the petition contending that Assistant Commissioner as well as the Commissioner had examined the facts on record and found that it was not possible to make any recovery of the tax from the company. After following necessary procedure, order under section 179 of the Act was passed. He contended that in view of the fraud perpetrated by the petitioner and other directors of the company, it was a fit case where the corporate veil was required to be lifted. In support of his contentions, counsel relied on the following decisions : In case of U.K. Mehra v. Union of India 1) and others reported in 88 Company Cases 213, wherein Division Bench of Delhi High Court had invoked the principal of lifting or piercing the corporate veil. 2)In case of State of U.P. and others v. Renusagar Power Co. and others reported in AIR 1988 Supreme Court 1737, wherein the Apex Court invoked such principle. 3)In case of Tata Engineering and Locomotive Co. Ltd. v. The State of Bihar and others reported in AIR 1965 Supreme Court 40, wherein the Apex Court had the occasion to discuss similar issue. 4)In case of Life Insurance Corporation of India v. Escorts Ltd. and others reported in AIR 1986 Supreme Court 1370. 5. Having thus heard learned counsel for the parties and having perused the documents on record, we may first deal with the contention of the petitioner regarding non recovery of the tax dues from the company and that such non recovery being not attributable to any negligence, misfeasance or breach of duty on part of the petitioner. 6. Section 179 as is well known permits recovery of the tax due of a private company from its directors under certain circumstances. Section 179 which is of paramount importance for us reads as under :“179 Liability of directors of private company in liquidation : SCA/12254/2002 (1) Notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), where any tax due from a private company in respect of any income of any previous year or from any other company in respect of any income of any previous year during which such other company was a private company cannot be recovered, then, every person who was a director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company. (2) Where a private company is converted into a public company and the tax assessed in respect of any income of any previous year during which such company was a private company cannot be recovered, then, nothing contained in sub-section (1) shall apply to any person who was a director of such private company in relation to any tax due in respect of any income of such private company assessable for any assessment year commencing before the 1st day of April, 1962.” (2) Where a private company is converted into a public company and the tax assessed in respect of any income of any previous year during which such company was a private company cannot be recovered, then, nothing contained in sub-section (1) shall apply to any person who was a director of such private company in relation to any tax due in respect of any income of such private company assessable for any assessment year commencing before the 1st day of April, 1962.” 7. Sub-section(1) of section 179 as can be noticed provides that notwithstanding anything contained in the Companies Act, 1956, where any tax due from a private company or other company during the period when such company was a private company cannot be recovered, then, every person who was a director of the said company at the relevant time shall be jointly and severally liable for the payment of such tax. Such recovery however can be avoided, if such a person proves that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the SCA/12254/2002 company. 8. Fundamental requirement for applicability of section 179 of the Act, of-course is that tax dues cannot be recovered from the company. In case of Bhagwandas J. Patel (supra), Division Bench of this Court had taken a similar view. Division Bench observed as under : “A bare perusal of the provision shows that before recovery in respect of dues from the private company can be initiated against director,tomakethemjointlyand severally liable for such dues, it is necessary for the revenue to establish that such recovery cannot be made against the company and then and then alone it can reach the directors who were responsible for the conduct of business during the previous year in relation to which liability exists.” In case of Indubhai T. Vasa(HUF) v. Income-tax Officer reported in (2006) 282 ITR 120(Guj.), this Court reiterated such proposition following the decision in case ofBhagwandas J. Patel(supra) observing : “In these circumstances, it is not possible to accept the stand of the respondent that despite best efforts the taxes due from the Company cannot be recovered. As laid down by this Court the phrase "cannot be recovered" requires the Revenue to establish that such recovery cannot be made against the Company and then and then alone would it be permissible for the Revenue to initiate action against the director or directors responsible for conducting the affairs of the Company during the relevant accounting period. Hence, the prerequisite condition stipulated by Section 179 of the Act remains unfulfilled in context of the facts available on record by virtue of the impugned order as well as the affidavit-in-reply.” 9. In this respect we may notice the efforts made by the recovery officer to recover such dues from the company. In his impugned order dated 15.4.2002, he has outlined as many as 35 steps taken to recover the dues which read as under : SCA/12254/2002 SCA/12254/2002 21/50 SCA/12254/2002 10.It is not in dispute that despite such efforts no recovery could be made. It can thus be straightway seen that despite several attempts made by the respondents, no recovery could be made from the company. Counsel for the petitioner therefore, would be wholly incorrect in suggesting that revenue did not establish that tax could not be recovered from the company. SCA/12254/2002 9. In this respect we may notice the efforts made by the recovery officer to recover such dues from the company. In his impugned order dated 15.4.2002, he has outlined as many as 35 steps taken to recover the dues which read as under : SCA/12254/2002 SCA/12254/2002 21/50 SCA/12254/2002 10.It is not in dispute that despite such efforts no recovery could be made. It can thus be straightway seen that despite several attempts made by the respondents, no recovery could be made from the company. Counsel for the petitioner therefore, would be wholly incorrect in suggesting that revenue did not establish that tax could not be recovered from the company. SCA/12254/2002 11.With respect to the finding that such recovery cannot be attributed to any gross negligence, misfeasance or breach of duty on part of the petitioner also we are afraid such a contention cannot be accepted. This is so because in our view such condition is expressed in the negative terms namely, that unless the Director proves that non recovery cannot be attributed to any of the above-noted causes. In other words, once it is established that tax dues could not be recovered from the company and that a certain person was a director of the said private company at the relevant time, his joint and several liability would arise. It would be upto him then to establish that such liability should not arise since the non recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to affairs of the company. In the present case, the petitioner never putforth any such defence, did not urge any grounds or bring any material before the respondents to contend that his case should fall within exclusion clause of sub-section(1) of section 179. The contention that onus was on the Revenue to establish that such non recovery was attributable to gross negligence, misfeasance or breach of duty on his part, is not borne out from the plain language used in sub-section(1) of section 179 of the Act. In a recent decision dated 25,26/09/2012 passed in Special Civil Application No.3910/2012 and allied matters in case of Maganbhai Hansrajbhai Patel v. Asst. Commissioner of Income Tax and others, Division Bench of this Court had observed as under : “21. To our mind, the authority completely failed to appreciate in proper perspective the requirement of section 179(1) of the Act. We may recall that said provision provides for a vicarious liability of the director of a public company for payment of tax dues which cannot be recovered from the company. However, such liability could be avoided if the director proves that the non recovery cannot be attributed to any gross negligence, misfeasance or breach of duty on his part in relation to the affairs of the company. It is of-course true that the responsibility of establishing such facts is cast upon the director. Therefore, once it is shown that there is a private company whose tax dues have remained outstanding and same cannot be recovered, any person who was a director of such a company at the relevant time would be liable to pay such dues. However, such liability can be avoided if he proves that the non recovery cannot be attributed to the three factors mentioned above. Thus the responsibility to establish such facts are on the director.” 12.This brings us to the central and most hotly contested issue of piercing corporate veil. The fact that the company is a public company is not in dispute. The Revenue authorities while applying principle of lifting corporate veil have principally pressed in service the following factors which emerge from the impugned order of the Assistant Commissioner dated 15.4.2002. Such factors are : i)Even after the attachment of the said stock of diamonds of the company, huge demand in excess of Rs.150 crores of tax dues had remained unpaid. SCA/12254/2002 12.This brings us to the central and most hotly contested issue of piercing corporate veil. The fact that the company is a public company is not in dispute. The Revenue authorities while applying principle of lifting corporate veil have principally pressed in service the following factors which emerge from the impugned order of the Assistant Commissioner dated 15.4.2002. Such factors are : i)Even after the attachment of the said stock of diamonds of the company, huge demand in excess of Rs.150 crores of tax dues had remained unpaid. SCA/12254/2002 The balance sheet of the company shows that such undisclosed income had not been reflected in the accounted balance sheet of the assessee company. There is no immovable property in name of the company where such unaccounted income might have been invested. Thus apparently unaccounted income of the company has been misappropriated by the Directors and shareholders of the company. ii) Memorandum of Understanding of the company showsthattherearefollowing directors/shareholders :(1)Shri Manjibhai Mavjibhai Patel(2)Shri Pravinbhai Mohanbhai Kheni(3)Shri Kantibhai Mohanbhai Kheni(4)Shri Himmatbhai Mohanbhai Kheni(5)Shri Mukeshbhai Mavjibhai Patel(6)Shri Kanjibhai Mavjibhai Patel(7)Shri Vipulbhai Manjibhai Patel All the above persons are family members and related to M Kantilal family. iii) The memorandum of understanding shows that main object of the company was to takeover business, and undertaking carried on under the name and style of M/s. M. Kantilal & Company, along with all the belonging, funds, assets, rights, privileges, etc. To carry on in India and elsewhere the business of manufacturing, dealing, buying, selling, importing and exporting of gems, diamonds, pearls, rubies, etc. Thus the SCA/12254/2002 company was formed with the main object of taking over the business of the outgoing concern i.e. M/s. M Kantilal & Co. where most of the Directors were partners. From the inception the company was to run as a family business of M. Kantilal and family. v)Huge undisclosed income was computed under section 158BC of the Act in the name of the firm for the block period during which takeover of the firm of M/s. Kantilal & Co. Ltd. had taken place. vi)Directors of the company had created huge assets in their own name in the form of immovable properties. It was therefore, evident that unaccounted income of the company was utilised for acquiring such properties by the directors. vii) The Assistant Commissioner therefore, concluded that the evidence shows that the company was used as a conduit for generating unaccounted wealth. Shares of the company were not offered to general public for subscription. All shares were held by the directors only. 13.Question is if these facts are established should the corporate veil be lifted? SCA/12254/2002 14.The principle of lifting or piercing the corporate veil is neither new nor unknown. It is however, not possible of any precise definition or application in a straitjacket formula. We may notice some of the authorities dealing with such a concept. vii) The Assistant Commissioner therefore, concluded that the evidence shows that the company was used as a conduit for generating unaccounted wealth. Shares of the company were not offered to general public for subscription. All shares were held by the directors only. 13.Question is if these facts are established should the corporate veil be lifted? SCA/12254/2002 14.The principle of lifting or piercing the corporate veil is neither new nor unknown. It is however, not possible of any precise definition or application in a straitjacket formula. We may notice some of the authorities dealing with such a concept. 1) In case of State Trading Corporation of India Ltd. v. The Commercial Tax Officer and others reported in AIR 1963 Supreme Court 1811, nine Judge Bench of the Supreme Court considered the question whether a company can be considered a citizen and be permitted to approach Supreme Court under Article 32 of the Constitution of India for asserting its fundamental right under Article 19(1) of the Constitution. By majority judgement it was held that company being a juristic person is different from a citizen. Hidayatullah, J in his concurring but separate judgement made following observations on the question of effect of incorporation of a company:“29. We are dealing here with an incorporated company. The nature of the personality of an incorporated company which arises from a fiction of law, must be clearly under stood before we proceed to determine whether the word 'citizen' used in the Constitution generally or in Article 19 specially, covers an incorporated company. Unlike an unincorporated company, which has no separate existence and which the law does not distinguish from its members an incorporated company has a separate existence and the law recognises it as a legal person separate and distinct from its members. This new legal personality emerges from the moment of incorporation and from that date the persons subscribing to the memorandum of association and SCA/12254/2002 other persons Joining as members are regarded as a body corporate or a corporation aggregate and the new person begins to function as an entity. But the members who form the incorporated company do not pool their status or their personality. If all of them are citizens of India the company does not become a citizen of India any more than if all are married the company would be a married person. The personality of the members has little to do with the persona of the incorporated company. The persona that comes into being is not the aggregate of the personae either in law or in metaphor. The corporation really has no physical existence ; it is a mere 'abstraction of law' as Lord Selborne described it in G. E. Rly. Co. v. Turner(1872) 8 Ch A 149 at p.152 or as Lord Macnaghten said in the well-known case of Salomon v. Salomon & Co.ltd. 1897 AC 22 at page .51. it is "at law a different person altogether from the subscribers to the memorandum of association." This distinction is brought home if one remembers that a company cannot commit crimes like perjury, bigamy or capital murder'. This persona dicta being a creature of a fiction, is protected by natural limitations as pointed out by Palmer in his Company Law (20th edn.) p. 130 and which were tersely summed up by counsel in R. v. City of London, (1632) 8 SV Tr. 1087 at p.1138 when he asked "Can you hang its common seal?". It is true that sometimes the law permits the corporate veil to be lifted, but of that later.” In the later portion of the judgement, learned Judge dealt with the question of lifting of corporate veil in that case, for benefit of the company and observed as under : In the later portion of