HC: Section 179 Action Quashed for No Hearing on Company Status

HC: Section 179 Action Quashed for No Hearing on Company Status

The petitioner challenged an order passed under Section 179 of the Income Tax Act, whereby the tax authorities sought to recover dues of M/s. Raj International Limited from him for AY 2010-11 to 2015-16. The core grievance was that the company, being a Public Limited Company, could not attract Section 179 liability, which applies only to Private Limited Companies.

The petitioner contended that the Assessing Officer had wrongly treated the company as a private company without examining its actual status. Further, no opportunity of hearing was granted before invoking the principle of lifting the corporate veil. The Revenue fairly conceded that such an exercise was not undertaken and expressed willingness to issue a fresh notice.

Issue Raised: Whether tax recovery under Section 179 can be initiated without determining company status and without granting opportunity before lifting corporate veil?

HC’s Decision: The High Court quashed the impugned order, holding that the action suffered from breach of principles of natural justice. It reiterated that before invoking Section 179, the authority must first determine whether the company is a Private Limited Company, and if required, undertake the exercise of lifting the corporate veil.

The Court emphasized that such determination cannot be made without issuing a proper show-cause notice and granting the affected person an opportunity to respond. Relying on its earlier decision, it held that absence of such procedure renders the action unsustainable. However, liberty was granted to the Revenue to initiate fresh proceedings by issuing a show-cause notice, examine the company’s status, and thereafter proceed in accordance with law.

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