Substantial shareholding cannot convert a registered public company into a private company under Section 179.

Hirak Biotech Limited was incorporated on 25 January 2005 as a public limited company. The petitioner became its director on 20 March 2005 and resigned on 5 September 2005. For A.Y. 2006–07, tax liability of approximately ₹240.08 lakh was assessed against the Company, but remained unrecovered.

An earlier Section 179 order dated 19 November 2013 was quashed for breach of natural justice, and the matter was remanded for fresh consideration.

Pursuant thereto, the petitioner filed a detailed reply asserting that he had not managed the Company, operated its bank accounts, signed its returns or contracts, or participated in its affairs. He also relied on Form No. 32 showing his resignation and an affidavit of another director, Pratik P. Shah, stating that he had managed the Company’s affairs.

The respondent nevertheless passed the impugned order dated 31 March 2016 under Section 179, holding the petitioner liable for the Company’s tax dues. The order relied, inter alia, on a statement of Pratik P. Shah concerning alleged accommodation entries, although the petitioner had not been given an opportunity to respond to that statement.

Whether Section 179 of the Income-tax Act could be invoked against the petitioner by treating Hirak Biotech Limited, admittedly incorporated as a public limited company, as a private company merely because the petitioner held approximately 98% of its shares and allegedly exercised substantial control over it.

Whether the Revenue established that the non-recovery of the Company’s tax dues was attributable to the petitioner’s gross neglect, misfeasance or breach of duty in relation to the affairs of the Company.

Whether the impugned order was vitiated by breach of natural justice and non-application of mind because the petitioner was not given an opportunity to address the statement relied upon by the Revenue and his contrary material was not properly considered.

Section 179(1) of the Income-tax Act imposes joint and several liability on every person who was a director of a private company during the relevant previous year where the company’s tax dues cannot be recovered, subject to the director proving that such non-recovery was not attributable to his gross neglect, misfeasance or breach of duty in relation to the company’s affairs.

The Court relied on Maganbhai Hansrajbhai Patel v. Assistant Commissioner of Income-tax, [2013] 353 ITR 567 (Guj.), holding that the authority must examine the director’s explanation and record a finding connecting the non-recovery specifically with gross neglect, misfeasance or breach of duty.

The Court held that lifting the corporate veil requires exceptional and compelling circumstances; substantial shareholding, absence of a public issue, or concentration of control alone does not convert a company registered as public into a private company.

The Court held that Hirak Biotech Limited’s statutory status as a public limited company could not be disregarded merely because the petitioner temporarily held approximately 98% of its shares or because its shares were not offered to the general public.

The Company was an unlisted public company, and its classification depended on its constitutional and statutory status rather than the concentration of shareholding.

The exceptional circumstances found in Pravinbhai M. Kheni—including family control, diversion of company funds, acquisition of assets from undisclosed income and use of the company as a conduit—were not established in the present case.

Further, the petitioner had produced material showing that he was a director only for approximately five months, had not managed the Company, had not operated its bank accounts or signed financial documents, and was not a director when the assessment order was passed or when the Company’s properties were subsequently dealt with.

The respondent failed to record a finding that the petitioner had siphoned Company funds or that the Company’s tax dues became irrecoverable because of his gross neglect, misfeasance or breach of duty.

The order also violated natural justice because the petitioner was not confronted with the statement of Pratik P. Shah relied upon by the Revenue, while the later affidavit of the same person was rejected without adequate consideration.

In any event, the Revenue failed to establish that the non-recovery of tax was attributable to the petitioner’s gross neglect, misfeasance or breach of duty.

The impugned order dated 31 March 2016 was therefore quashed and set aside, and the writ petition was allowed with no order as to costs.