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August 19, 2022

Without an opportunity to be heard, the principle of lifting the corporate veil cannot be invoked

by CA Shivam Jaiswal in Income Tax, Legal Court Judgement

Without an opportunity to be heard, the principle of lifting the corporate veil cannot be invoked

Facts and Issues of the case

In this petition, the petitioner who is the Chairman and Managing Director of one “Crest Paper Mills Limited (“CPML”), seeks the issuance of a writ of certiorari for quashing  inter-alia the order dated 13th February 2018 passed under section 179 of the Income Tax Act, 1961 (‘The Act’) holding the petitioner liable to pay a demand of Rs.3,98,19,430/- alongwith interest  under section 220(2) of the Act which was otherwise due and payable by the company, CPML. The demand outstanding against CPML was for the assessment year 2010-11.

Observations by the Court

In the present case, it can be seen that the notice under section 179 of the Act issued by respondent did not at all inform the petitioner of its intention to treat the company, i.e., CPML as a public company by invoking the principle of ‘lifting the corporate veil’ much less did it refer to any material or conclusion based upon which it could assume jurisdiction under section 179 of the Act against the directors of a Private Company.

On the other hand, the respondent invoked the principle of lifting the corporate veil to hold that CPML was in fact a privately held enterprise under the garb of a public company only after the petitioner had taken an objection to the respondent assuming jurisdiction against a public company.

We do not wish to go into the question as to whether, the facts and circumstances of the case  justifed  invoking  the principle of lifting the corporate veil as in our opinion, the procedure adopted by respondent was clearly violative of the principles of natural justice and without affording to the petitioner, an opportunity of being heard on the question, as to why the principle of ‘lifting the corporate veil’ be not applied in the case of CMPL to justify the recovery of the tax dues from the directors.

Conclusion

The principle of lifting of corporate veil invoked without giving opportunity of being heard violates the principles of natural justice and hence unsustainable.

Rajendra-R.-Singh-Vs-ACIT-Bombay-High-Court

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