ANANDHI P NAIG vs UNION OF INDIA
- Court
- Gujarat High Court
C/SCA/1877/2019 JUDGMENT DATED: 06/07/2026
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/SPECIAL CIVIL APPLICATION NO. 1877 of 2019
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR. JUSTICE A.S. SUPEHIA
and
HONOURABLE MS. JUSTICE VAIBHAVI D. NANAVATI
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Approved for Reporting Yes No
√
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ANANDHI P NAIG & ORS.
Versus
UNION OF INDIA & ANR.
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Appearance:
ARJUN R SHETH(7589) for the Petitioner(s) No. 1,2,3,4,5
MR RUTVIJ R PATEL(10615) for the Respondent(s) No. 2
RULE THROUGH SPEED POST NOT RECEIVED BACK for the
Respondent(s) No. 1
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CORAM: HONOURABLE MR. JUSTICE A.S. SUPEHIA
and
HONOURABLE MS. JUSTICE VAIBHAVI D. NANAVATI
Date : 06/07/2026
ORAL JUDGMENT
(PER : HONOURABLE MR. JUSTICE A.S. SUPEHIA)
1. By way of present writ petition, the petitioners have prayed for
quashing and setting aside the impugned Show-Cause Notice dated
14.12.2018 and impugned order dated 31.12.2018 passed under
Section 179 of the Income Tax Act, 1961 (for short ‘ the Act’) and the
impugned Notice of demand under Section 156 of the Act.
2. The Coordinate Bench while issuing the Notice and granting the
ad-interim relief vide order dated 31.01.2019 had specifically recorded
contentions made by the learned Counsel appearing on behalf of the
petitioners to the extent that the petitioners were granted short time
in filing the reply i.e. less than two days to the Show-Cause Notice
dated 14.12.2018, as they had received the said Notice belatedly. The
other ground canvased and recorded in the order is related to the
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company in question, is that it is a public limited company and not a
private limited company, hence, the jurisdiction under Section 179 of
the Act could not have been invoked was also recorded.
2.1 So far as the first contention regarding less than two day’s time,
available for the petitioners to file their reply to the impugned Show-
Cause notice, we have noticed that the petitioners have categorically
made such statement at paragraph no. 5 of the writ petition. The
averments made at paragraph no.5 reflect that the petitioner nos.1
and 2 had received the Show-Cause Notice issued under Section 179
of the Act on 22.12.2018, whereas, no notice have been received so far
as petitioner nos. 3 to 5 are concerned, for the A.Y 2008-2009 and
A.Y 2011-2012. This assertion made by the petitioners in paragraph
no. 5 has not been dealt in the affidavit in reply filed by the
respondent and the same remains uncontrovered. Thus, the
petitioners who were supposed to file their reply by 24.12.2018 before
10:30 p.m. as mentioned in the impugned Show-Cause Notice dated
14.12.2018 got only two day’s time to file the reply. Ultimately, the
petitioners filed their reply on 31.12.2018, wherein they have
categorically contended that the provision of Section 179(1) of the Act,
will not be applicable to the petitioners, since, the company of which
they are Directors is a Public Limited Company and not a Private
Limited Company.
2.2 Various Judgments of the High Courts as well as Supreme
Court have been relied upon by the petitioners in their reply. It
appears that thereafter, by the impugned order passed under Section
179 of the Act the respondents have recorded that the assessee-
Company is a closely held Private Limited Company and hence, the
Directors are responsible for payment of the outstanding demand and
recovery proceedings for the assessment years mentioned therein, as
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the assessee-Company did not pay the outstanding dues despite
several letters which have been issued to the company as well as the
Directors.
3. Learned advocate Mr. Arjun Sheth while placing reliance on the
judgment of the Coordinate Bench in the case of Padmashi Devji
Vithlani. vs. Commissioner of Income Tax (2014) 44 taxmann.com 231
(Guj.) has submitted that the impugned notice as well as the orders
are required to be quashed and set aside, since, the respondents have
not offered any findings with regard to the characteristic of the
assessee-Company despite the assertions made by the petitioners that
the company was as Public Limited Company and not a Private
Limited Company. It is submitted that neither in the Show Cause
Notice nor in the order contains any allegation that the that the
company was incorporated with an oblique motive to defraud the
public exchequer. Thus, it is submitted that Show-Cause Notice as
well as the impugned orders are required to be quashed and set aside.
4. In response to the aforesaid submissions, learned Senior
Standing Counsel Mr. Rutvij Patel has submitted that the impugned
Show-Cause Notice or orders will not be quashed as the same were
precisely passed. It is submitted that upon a search and survey action
conducted in the case of Mr. Pravin Kumar Jain and his group on
01.10.2013, it was noticed that the said group through a web of
concerns, was engaged in providing accommodation entries of bogus
unsecured loans, bogus share application money, bogus sales etc and
the company viz M/s Khevana Securities and Finstock Limited had
received bogus share application money from the concerns operated
by Mr. Praveen Kumar Jain, which ultimately, resulted into
reassessment of the Company after reopening for the A.Y 2008-09 and
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A.Y 2011-12 and A.Y 2012-13. It is submitted that looking to the
share allocation it can be held that the company though has
incorporated as a Public Limited Company, however,the maximum
shares of 96.67% are held by the Directors. Thus, it is urged that the
writ petition may not be entertained.
5. Heard learned advocates appearing for the respective parties, at
length.
6. Having perused the materials on record, we are of the
considered opinion the impugned notices and orders are required to
be quashed and set aside on two counts. Firstly, the petitioners have
not been offered a reasonable time to respond to the Show-Cause
Notice as they were barely having only two days to respond to the
Show-Cause Notice dated 14.12.2018, which directs the petitioner to
file the reply by 24.12.2018 by 10:30 pm, however, they had received
the Notice on 22.12.2018 and subsequently the said reply was filed,
the respondent authority proceeded to pass the impugned order under
Section 179 of the Act on 31.12.2018. These facts as asserted in the
writ petition as well as recorded by the Coordinate Bench in the order
dated 31.01.2019, have not been controverted by the respondents.
6.1 Secondly, there is an additional aspect which convinced us in
setting aside the impugned Notice and the consequential order. The
petitioners have categorically asserted in the writ petition as well as in
the reply to the Show-Cause Notice, that M/s Khevana Securities &
Finstock Ltd., is a public limited company. However, neither the
Show-Cause Notice nor the impugned order has not offered any
details to the extent that in reality the company was though a closely
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held company with all its characteristics of a private limited company
so as to attract the provision of Section 179 of the Act. However, the
petitioners have not given sufficient opportunity to deal with the
allegations that the company was a closely held company and the
same was formed or incorporated only with a view to defraud the
revenue interest of the State. Furthermore, there is no allegation
leveled in the Show-Cause Notice that the company has been formed
with an oblique motive to defraud the public exchequer.
7. The Coordinate Bench in the case of Padmashi Devji Vithlani
(supra) on an identical foundation of facts about the formation of
company has held thus :-
“ 9. Whether discarding the concept of private and public limited
company contained in the Companies Act, 1956 recovery under Section
179(1) can be made from the director of a public company in question.
We need not answer in this petition. This is so because even assuming
for a moment that it was so, the revenue had to lay a foundation of
facts to come to the conclusion, as canvassed before us by the counsel
that despite its lag of a public limited company, for the purpose of the
companies Act, in reality the said company was a closely held company
with all its characters of a private limited company. Even for lifting of
the corporate veil as within the narrow confines permitted in the case of
Pravinbhai M. Kheni (supra), the foundational facts must be found in
the notice giving sufficient opportunity to the assessee to deal with the
allegations and present his own material to convince the Assessing
Officer to hold otherwise.
10. In the present case, the show cause notice is bereft of any such
details. It merely calls upon the petitioner to show cause why tax
recovery, which could not be made from the company be not made from
him under Section 179(1) of the Act. We would therefore hold that even
otherwise, in absence of any previous material indicating that the show
cause notice and any bipartite hearing on such issues by the Income
Tax Officer, such question need not be gone into. Even from the order
under section 179, we do find that the Assessing Officer had based his
case of lifting the corporate veil, as was referred to by this Court in case
of Pravinbhai M. Kheni (supra) in which, we had observed as under :-
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“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, recognized 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 Stat. 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 company.
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
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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 the 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.”
11. In the result, subject to above observations, writ petitions are
allowed. Impugned orders under Section 179 of the Income Tax Act,
1961 and the further revision orders are quashed. Rule made
absolute. ”
8. Thus, the respondent was to incorporate the foundational facts
in the show cause notice and in the impugned order showing that the
M/s. Khevana Securities and Finstock Ltd is a closely held private
company and is not a public limited company, enabling the petitioner
to deal with such fact. Hence, the writ petition succeeds. The
impugned Show-Cause Notice and order are set aside. The matter is
however, remanded to the Assessing Officer to issue a fresh Show-
Cause notice enabling the petitioner to file their reply within some
reasonable time, in light of the observations made by this Court.
Appropriate orders shall be passed within a period of 12 weeks after
the receipt of the reply filed by the petitioner. We further clarify that
the petitioner shall not take inordinate delay in filing the reply and the
same shall be filed within a period as specified in the Notice. We also
direct the respondent that show-cause notice shall be issued upon the
petitioners on the address given in the writ petition. In case of any
change in the address, the learned advocate for the petitioners shall
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inform the same to learned Senior Standing Counsel Mr. Patel.
9. All the consequential orders are hereby quashed and set aside.
Rule is made absolute.
sd/-
(A. S. SUPEHIA, J)
sd/-
(VAIBHAVI D. NANAVATI,J)
Radhika/1
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