842 KNOWLEDGE RESOURCE [Vol.

46
Article
Piercing the Corporate Veil: Liability of Director of a
Public Limited Company

Vikas Nehra*

This article discusses the evolution of the doctrine of lifting the corporate veil and
transplantation of the same into India in order to identify frauds or illegal acts in taxation
matters. The veil of the corporation can be lifted either under the express statutory
provisions or under the judicial interpretation. It is worthy of note that the judgments of
Gujarat High Court protect the interest of revenue authorities, and underscore the
importance of piercing the corporate veil in case of a Public Limited Company, since the
judgments allow revenue authorities to pierce the corporate veil and look at the reality of
the transaction so as to make persons behind the corporate shell liable. Piercing the
corporate veil in taxation matters is a judicial technique and not a legislative one.

Introduction
Since a corporation has a juristic separate entity of its own1, it is entirely different
from the persons who constitute it2; it has a common seal; it can enter into contracts;
it is capable of suing and being sued in its own name; it is capable of owning and
disposing its property.3 A corporation has no mind of its own; it must act through
living persons.4 In England the concept of separate legal entity was heralded by the
decision in Solomon v. Solomon & Co. Ltd.5 The famous Solomon’s case also recognized
the doctrine known as lifting the veil of the corporation.
Occasions arise when the facade of the corporate personality does not provide
reasonable measures to determine its liability, and it, therefore becomes imperative to
lift veil of corporate entity and see through.6 ‘Lifting’ or ‘piercing’ of the veil of
corporation is a situation where the very existence of the company is disregarded. In
taxation matters, piercing the veil is an attempt to identify the persons who are
responsible for frauds or illegal acts.
The veil of the corporation can be lifted either under the express statutory provisions
or under the judicial interpretation in order to determine the tax liability of the
corporation. There are some situations in respect of taxation where the veil is lifted by
the courts. The concept of piercing of corporate veil seems to be consistently applied
by the courts in two situations, one where the statutory provisions provide for lifting
of corporate veil and the second where some of the real beneficiaries of the corporate
advantage have created complex web and want to remain behind the corporate veil
in order to defeat the revenue interest of the state.
It is worthy of note that Section 179 of the Income-Tax Act, 1961 permits tax recovery
from the directors of a private limited company if tax recovery cannot be made against
the company. It becomes necessary, therefore, for the revenue authorities to establish

* Advocate, Rajasthan High Court Jaipur-Bench. The author can be contacted at

vikasnehra.nluo@gmail.com, +91-9950348629

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 PIERCING THE CORPORATE VEIL:
2014] LIABILITY OF DIRECTOR OF A PUBLIC LIMITED COMPANY
843

that demand of tax cannot be recovered from the company and then alone the revenue
authorities can initiate proceedings against the director or directors responsible for
the conduct of business of company during the relevant accounting period. 7
Section 179 provides for lifting the corporate veil in taxation matters.
The court can disregard the corporate form and hold the directors liable if it is used
for tax evasion or to circumvent tax obligation.8 The Supreme Court in the case of
Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd.,9 has
observed that it is the duty of the court, in every case where ingenuity is expended to
avoid taxing and welfare legislations, to get behind the smoke-screen and discover
the true state of affairs.

Judicial Discourse: Tax Recovery by Lifting the Corporate Veil

In 2012, the Gujarat High Court in the case of Pravinbhai M. Kheni v. Assistant
Commissioner of Income Tax,10 pronounced an authoritative ruling on the liability of
directors of public limited company so far as recovery of tax dues of the company is
concerned. In the instant case, search operations were carried out by the Revenue
authority under Section 179 of the Income-Tax Act, 1961. Pursuant to search
proceedings, the tax liability determined was more than Rs. 155 crores. Despite the
attachment of the assets of the company, the Revenue authorities could not be able to
recover from the company. The Revenue authorities requested for lifting the corporate
veil by concluding that the company was only a conduit for creation of unaccounted
money. The director of the company contended that directors of the public limited
company can’t be held liable for the tax dues of the company in view of provisions of
Section 179 of the Income-Tax Act, 1961. Section 179 would be applicable only where
tax is due from a private company. The Gujarat High Court after referring to provisions
of Section 179 made the following observations:
• The concept of piercing of corporate veil (sometimes referred to as cracking the
corporate shell) contemplated by Section 179 has to be applied by courts sparingly,
carefully and with caution and only where such application is justified by the
parameters laid down in the section itself. Further, the boundaries of such
principle have not yet been defined and areas where such principle may have
to be applied may expand.
• The concept of piercing of corporate veil is generally applied by the courts in
two situations, one where the statute itself permits or provides for and the
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 State.
• The court can ignore the corporate status and strike at the real beneficiaries of
complex design 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 Gujarat High Court finally concluded that if facts stated by the revenue are
established, even a director of public limited company can be held liable for recovery
of the tax dues of the company under Section 179 of the Income-Tax Act, 1961.
Another important case concerning directors’ liability is Sandeep A. Mehta v. ITO,11 in
which the Gujarat High Court opined that the ratio of decision in Pravinbhai M. Kheni
is not applicable in the present case because the Petitioners (directors) were never

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844 KNOWLEDGE RESOURCE [Vol. 46

concerned with the day to day affairs of the company until December 28, 2005 and
the company had already become public limited company. Further, the court held the
Petitioners cannot be held responsible and liable for payment of tax demand raised
against the company under Section 179 of the Income-Tax Act, 1961.
In a very recent case, Radhey Mohan Sharma v. Deputy Commissioner of Income Tax
(OSD),12 the Gujarat High Court quashed the action of the income-tax authorities by
holding that the Petitioner being the director of the public limited company, the
provisions of the Section 179 of the Income-Tax Act, 1961 are non-applicable. In the
instant case, the company was incorporated as a public limited company in May, 1992.
It came out with a public issue in June, 1996. The Petitioner-Director of the said
company resigned on September 6, 1997. The revenue issued notice to recover tax
dues of the years 1995-96, 1996-97 and 1997-98. The court refused to permit the
piercing of corporate veil on the ground that foundational facts are completely missing
which permits the piercing of corporate veil. The court further held that there is no
material on record to permit the piercing of corporate veil except non-fulfillment of
the obligation by the company of the tax demands. It depicts that in case of public
limited company, the courts will lift the veil only if 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 State.

Concluding Remarks
The Gujarat High Court has on many occasions commented on the doctrine of lifting
the veil of the corporation in taxation matters and its reluctance to lift the veil of the
corporation under the express statutory provisions of the Income-Tax Act, 1961. But
the veil is often lifted in situations where a complex web has been created to defraud
the revenue interest of the State. Furthermore, if the public limited company fails to
pay tax demands, then the directors of the company are liable for payment of tax
demands. In the case of a public limited company, the doctrine of lifting the veil of the
corporation is a judicial technique and not a legislative one.
Generally and broadly speaking, it can be said that the income-tax authorities can
pierce the corporate veil under Section 179 of the Income-Tax Act, 1961 and look at the
reality of the transaction so as to make persons behind the corporate shell liable. On the
basis of survey of judicial rulings and express statutory provisions of the Income-Tax
Act, it can, therefore, be safely concluded these judgments have dispelled the euphoria
surrounding directors’ liability so far as public limited company is concerned.

Endnotes
1. Nicholas Bourne, Principles of Company Law, 14 (3rd ed. 1998), See also Gower, The Principles of
Modern Company Law, 62 (2nd ed.) [hereinafter, Gower].
2. CIT v. Sree Meenakshi Mills Ltd., MANU/SC/0138/1966: (1967) 63 ITR 609 (SC).
3. Reinier Kraakman, John Armour, Paul Davies, Luca Enriques, Henry Hansmann, Gerard
Hertig, Klaus Hopt, Hideki Kanda and Edward Rock, The Anatomy of Corporate Law: A
Comparative and Functional Approach, 8 (Oxford University Press, 2009).
4. Tesco Supermarkets Ltd. v. Nattrass, (1971 All ER 127).
5. (1897) A.C. 22.
6. Gower, supra note 1 at 183, See also Krishna Bahadur, Personality of Public Corporation And
Lifting the Corporate Veil, 14(2) Journal of Indian Law Institute 218 (1972).

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2014] THE GOVERNMENT MUST GRASP THE NETTLE 845
7. Bhagwandas J. Patel v. Deputy CIT, MANU/GJ/0119/1998: (1999) 238 ITR 127 (Guj), See also
Indubhai T. Vasa (HUF) v. ITO, MANU/GJ/0122/2005: (2006) 282 ITR 120 (Guj).
8. CIT v. Sree Meenakshi Mills Ltd., MANU/SC/0138/1966: (1967) 63 ITR 609 (SC).
9. MANU/SC/0236/1985: (1986) 157 ITR 77 (SC), AIR 1986 SC 1.
10. MANU/GJ/0169/2012: (2013) 353 ITR 585 (Guj).
11. Special Civil Application No. 10686 of 2013 with Special Civil Application No. 10688 of 2013,
Decided on October 15, 2013.
12. MANU/GJ/0412/2014: (2014) 184 CompCas 358 (Guj).

The Government must grasp the nettle

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The government, as the largest shareholder, is quickly running out of options in securing a
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governance of boards of banks in India’ (the PJ Nayak Committee Report). What are
the Committee’s recommendations and will these recommendations get implemented?
The Committee points out that the government does not have the money to inject the
enormous amount of capital that the government owned banks need between now
and March 2018. Based on a scenario analysis, the Committee concluded that capital
injection could vary from Rs 2.10 lakh crores to Rs 5.87 lakh crores. The largeness of
these figures impacts the government’s ability to achieve fiscal consolidation. So
either these banks are privatized or, if the government wants to continue to own these
banks, focus need to shift to “design a radically new governance structure for these
banks which would better ensure their ability to compete successfully.”
A simple reality check suggests that the government cannot remain invested in its own
banks. HDFC Bank just proposed raising Rs 10,000 crores, which would result in an equity
dilution of just 5.2%. But, if Bank of Baroda were to raise this much capital, its shareholders
will get diluted by almost 25%, Canara Banks by 54% and OBC’s by over 100%.
But, the Committee takes a more pragmatic view and assumes the government will
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banks) that it currently owns. If it did not, this report would have been shelved by

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