2008 (1) TMI 623 - HC - Companies Law

Attachment of the properties of the partners of the petitioner - arrears of sales tax - Held that - If M/s. Sri Mappillai Vinayagar Roller Flour Mills pays the sum of ₹ 5,95,963, then there may not be any arrears of sales tax as far as they are concerned and as such, the attachment of the properties of the partners of the petitioner have to be raised. Learned counsel for the petitioner undertakes that the said sum of ₹ 5,95,963 will be paid by M/s. Sri Mappillai Vinayagar Roller Flour Mills immediately and seeks a direction from this court to the respondent to raise the attachment on such payment.Considering the said submission, the respondent is hereby directed to raise the attachment in respect of the properties of the petitioner-firm with effect from the date of payment of the said sum of ₹ 5,95,963 by M/s. Sri Mappillai Vinayagar Roller Flour Mills.

Summary

Issues Involved:
1. Attachment of property for sales tax arrears of other entities.
2. Liability of the partnership firm for tax arrears of other firms and companies.
3. Validity of attachment proceedings under the Revenue Recovery Act.
4. Legal distinction between different legal entities and partners' liabilities.
5. Application of rule 40 of the TNGST Rules, 1959.
6. Piercing the corporate veil.

Issue-wise Detailed Analysis:

1. Attachment of Property for Sales Tax Arrears of Other Entities:
The petitioner, a partnership firm, challenged the attachment of its property for the sales tax arrears of two private limited companies and another partnership firm. The petitioner argued that the property belonging to the partnership firm cannot be attached for the arrears of other legal entities, even if some partners are common across these entities. The court agreed with the petitioner, stating that the properties of the petitioner-firm cannot be attached for the arrears of the limited companies, as they are separate legal entities.

2. Liability of the Partnership Firm for Tax Arrears of Other Firms and Companies:
The court examined whether the properties of the partners of the petitioner-firm, who are also directors of the two private limited companies and partners of another firm, could be attached for the sales tax arrears of the other entities. The court held that the liability of the directors of a company is distinct from the liability of the company itself, and any dues from the company must be recovered only from the company, not from its directors. Similarly, the court held that the entire properties of the petitioner-firm cannot be proceeded against for the tax arrears of another firm, but the shares of the common partners can be attached.

3. Validity of Attachment Proceedings under the Revenue Recovery Act:
The respondent issued a notice of attachment under section 27 of the Revenue Recovery Act, attaching the petitioner's property for the sales tax arrears of other entities. The court found that the attachment proceedings were not valid to the extent they sought to attach the entire properties of the petitioner-firm, including the shares of partners who were not liable for the arrears of the other entities. The court directed the respondent to raise the attachment in respect of the properties of the petitioner-firm upon payment of the recalculated tax arrears by the concerned entity.

4. Legal Distinction Between Different Legal Entities and Partners' Liabilities:
The court reiterated the legal principle that a company is a separate legal entity from its directors, and a partnership firm is distinct from its partners. The court cited previous judgments, including K.S. Narasimhan v. CTO and Karuna Elastics v. CTO, to emphasize that the liabilities of one legal entity cannot be imposed on another merely because of common partners or directors.

5. Application of Rule 40 of the TNGST Rules, 1959:
The respondent contended that under rule 40 of the TNGST Rules, the properties belonging to common partners are liable to be proceeded against. The court, however, clarified that while the revenue can proceed against the shares of the common partners in the petitioner-firm towards the tax arrears of another firm, it cannot attach the shares of partners who are not liable for the arrears.

6. Piercing the Corporate Veil:
The respondent argued for piercing the corporate veil, citing the decision in India Waste Energy Development Ltd. v. Government of NCT of Delhi, where the court allowed lifting the corporate veil in cases of tax evasion or fraud. The court, however, did not find sufficient grounds to apply this principle in the present case, as the petitioner-firm and the limited companies were distinct legal entities, and the attachment of the petitioner's property for the arrears of the companies was not justified.

Conclusion:
The court concluded that the impugned proceedings seeking to attach the properties of the petitioner-firm for the tax arrears of other entities were not sustainable. The court directed the respondent to raise the attachment upon payment of the recalculated tax arrears by the concerned entity and emphasized the legal distinction between different entities and the limited scope of partners' liabilities. The writ petition was disposed of with the court's directions to the respondent.