2011 (7) TMI 1036 - HC - VAT and Sales Tax

Whether in respect to tax dues or other public revenue or in other cases, if one has to discard the corporate personality, then the initial burden would lie upon it to place on record relevant material and facts to justify invocation of doctrine of lifting of veil and to plead that the corporate shell be not made a ground of defence? Held that - In the present case, the company was declared as a sick company under the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985. The findings necessary, to proceed against the assets of the directors of the company for lifting of corporate veil, would have required investigation into the affairs of the company. In the aforesaid facts, the writ petition is allowed. The impugned notice dated March 28, 2004 for the assessment year 1999-2000 for recovery of trade tax dues is quashed to the extent that recovery be not forced against the assets of the directors of the company. It will be open to the Department to proceed against the assets of the company, or apply before the BIFR where the proceedings are still pending. It will also be open to the Department to carry out investigation to find out if the directors of company have played any fraud, and the circumstances necessary for lifting of corporate veil are available, before proceeding to recover the trade tax dues for them.

Summary

Issues involved:
Challenge to recovery of trade tax dues against a public limited company's directors.

Analysis:
The case involved a challenge to the recovery of trade tax dues against the directors of a public limited company. The petitioners, as directors of the company, argued that the trade tax dues should not be recoverable from them unless there are allegations of fraud or misuse of the corporate structure for illegal purposes. They contended that the U.P. Trade Tax Act, 1948, does not provide for the recovery of trade tax from the directors of a public limited company without specific allegations. The petitioners referred to a case where the doctrine of lifting the corporate veil was considered for recovering trade tax dues from directors.

The court noted that the Trade Tax Department did not conduct any investigation to establish the liability of the directors for the company's dues. It emphasized that directors of a public limited company operate on behalf of the shareholders and are shielded from personal liability under the company's corporate structure. Referring to legal precedents, the court highlighted that recovery from a company should not automatically extend to the personal assets of its directors unless explicitly provided by law.

The court cited previous judgments to explain the doctrine of lifting the corporate veil, emphasizing that it should not be invoked without substantial evidence of fraud or misconduct by the directors. The court stressed that the burden of proof lies with the party seeking to pierce the corporate veil, requiring detailed factual investigations to determine the individuals responsible for any wrongdoing. In this case, since the company was declared a sick company under the relevant law, the court ruled in favor of the petitioners, quashing the recovery notice against the directors' assets.

The judgment allowed the Trade Tax Department to pursue recovery against the company's assets or seek recourse through the appropriate legal channels, such as the BIFR. It also permitted the Department to investigate any potential fraud by the directors and gather evidence necessary to lift the corporate veil before proceeding with the recovery of trade tax dues against them.