2009 (11) TMI 863 - HC - VAT and Sales Tax

Recovery proceedings against the personal assets of the petitioners - whether the tax dues from the corporate body can be recovered from the assets of the directors of corporate body? Held that - The facts and circumstances of the case that the arrears of tax dues against the company cannot be recovered from the personal assets of the petitioners who were the directors of the company. Hence, the recovery notice against the petitioner (annexure 1 to the petition) is not sustainable in law and is liable to be quashed. The writ petition, therefore, succeeds and is allowed. The recovery notice issued against the petitioner (annexure 1 to the petition) is quashed.

Summary

Issues:
Recovery proceedings against personal assets of directors of a company for outstanding tax dues.

Analysis:
The petitioners, former directors of a company, sought to quash recovery proceedings against their personal assets for outstanding tax dues against the company. The respondents, Trade Tax Officer, directed the petitioners to deposit the amount, claiming it was related to trade tax dues against the company. The petitioners argued that recovery proceedings against them were illegal and without jurisdiction. The central issue was whether tax dues from a corporate body could be recovered from the personal assets of its directors. The petitioners relied on a Division Bench decision stating that recovery from personal assets of directors is not automatic unless the doctrine of lifting the corporate veil applies. The court emphasized that recovery from personal assets should only occur if specifically provided in the statute or warranted by law.

The court highlighted that the doctrine of lifting the corporate veil should not be applied routinely, but only when corporate personality is misused to evade liabilities or commit fraud. It was noted that the promoters or shareholders are usually held responsible when the corporate veil is lifted, not the directors unless the statute provides otherwise. The court stressed the importance of investigating the individuals behind the corporate facade before holding directors personally liable for company debts. The respondents did not plead the doctrine of veil against the petitioners in this case.

The court referred to previous judgments where recovery proceedings were allowed against company assets, not personal assets of directors. The court differentiated this case from a previous case where assets were diverted for personal benefit. The court held that the burden lies on the party seeking to lift the corporate veil to provide relevant material and facts justifying such action. It was emphasized that the legal personality of a corporate body should not be ignored lightly, and the doctrine of piercing the veil should only be invoked in cases of fraud or misrepresentation.

In this case, the court concluded that tax dues against the company cannot be recovered from the personal assets of the petitioners who were directors of the company. The recovery notice against the petitioners was deemed unsustainable in law and was quashed. However, the judgment clarified that recovery proceedings against the company itself would not be affected and could proceed in accordance with the law.