In Ajay surendra Patel v. DCIT, the division bench of the Gujarat High Court categorically held that a Director of a Company cannot escape from tax liability by merely stating that he was not in charge of the affairs of the Company.
While dismissing the petition, the bench stated that the Department had rightly applied section 179 of the Income Tax Act by lifting the corporate veil of the company and found that the directors are held to be defaulters within the meaning of Section 179 of the Income Tax Act.
Coming to the factual metrix of the cases, the bench found that during the FY under consideration, 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.The IT Department initiated tax recovery proceedings against the company. The demand substantially is related to the period in which the petitioner may for a short time but was a Director.
The petitioner approached the High Court challenging the recovery proceedings initiated against him by the Income Tax Department contending that he was introduced to the company after its incorporation and 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. Further, it was contended that he put resignation within a few months.
The bench noted that the petitioner held 98% of the shares of the assessee-Company. Moreover, 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 was further noted that all the directors of the company have systematically evaded the liability of the department.
The division bench comprising of Justice Akil Kureshi and Justice A.J Shastri also observed that, “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.”
“Perusal of this statutory provision would indicate that director of a company shall exercise his duties with due and reasonable care, skill and diligence, andshall exercise independent judgment and further, a director ofa 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”, the bench also added.
Confirming the action of the authority who applied the principle of ‘lifting of corporate veil’, the bench said “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.”
Read the full text of the Judgment below.
