Section 179 liability requires foundational facts in show-cause notices to lift corporate veils of public companies.

The petitioners, directors of M/s Khevana Securities Finstock Ltd., challenged a Show-Cause Notice (SCN) dated 14.12.2018 and a subsequent order dated 31.12.2018 passed under Section 179 of the Income Tax Act, 1961. The Revenue sought to recover the company’s outstanding tax dues for A.Y. 2008-09 and 2011-12 directly from the directors.

The petitioners alleged they were given less than two days to respond to the SCN, as it was received on 22.12.2018 with a deadline of 24.12.2018.

Furthermore, they contended that the company is a Public Limited Company, making Section 179—which applies to Private Limited Companies—inapplicable.

The Revenue argued that despite the "Public" label, the company was "closely held" with 96.67% shares held by directors, justifying the lifting of the corporate veil.

1. Whether the summary proceedings under Section 179 of the Act violated the principles of natural justice due to the inadequate time granted to the petitioners to respond to the Show-Cause Notice.

2. Whether the Revenue can invoke Section 179 against directors of a Public Limited Company without establishing foundational facts in the SCN to justify lifting the corporate veil.

The court applied Section 179 of the Income Tax Act, 1961, which holds directors of a private company vicariously liable for the company's tax dues if such dues cannot be recovered from the company itself.

The court relied on the precedent Padmashi Devji Vithlani v. Commissioner of Income Tax (2014) and Pravinbhai M. Kheni v. ACIT, which establish that while the corporate veil can be lifted to apply Section 179 to a public company if it is a "smoke screen" created to defraud revenue, the Revenue must first lay a foundation of these facts in the show-cause notice to allow the assessee a fair opportunity to rebut them.

The Court found the impugned orders unsustainable on two primary counts. First, it held that providing only two days to respond to an SCN constitutes a violation of natural justice, a fact the Revenue failed to controvert.

Second, regarding the status of the company, the Court observed that Section 179 is restricted to private companies. To apply it to a public company, the Revenue must prove that the entity was a conduit for fraud or a "closely held" private entity in disguise.

The Court noted that neither the SCN nor the final order contained specific allegations or evidence that the company was incorporated with an "oblique motive" to defraud the exchequer.

Following Padmashi Devji Vithlani, the Court reasoned that the "foundational facts" for lifting the corporate veil must be presented in the SCN itself; since the SCN was bereft of such details, the petitioners had no meaningful opportunity to defend against the re-characterization of the company.

The Court held that the proceedings suffered from a lack of reasonable opportunity and failed to establish the jurisdictional fact required to treat a public company as a private one under Section 179.

The matter was remanded to the Assessing Officer to issue a fresh SCN containing necessary foundational facts and to allow the petitioners a reasonable timeframe to respond. All consequential recovery notices were also set aside.