2013 (11) TMI 1392 - HC - Central Excise

Clandestine Removal of goods - liability of successor - Cooling/indoor units of split air conditioner & other parts of air conditioner manufactured and cleared without payment of duty No registration was obtained Statutory compliances were not made - Documents seized prior and post incorporation of the company - Appellant contended that the company was incorporated on 29th January, 1998 and had started manufacturing operations from 1st April, 1998 and that they cannot be saddled with the liability of duty or penalty pertaining to the period between 1st July, 1996 to 31st March, 1998 - Whether the appellant company is liable and could be assessed for the period prior to its incorporation i.e. 1st April, 1998 Held that - Kuldeep Singh Punn was certainly available and could have been assessed in respect of his clandestine and wrongful activities - In his absence, even the legal heirs may have been liable but not the successor - A successor would have been liable only for recovery of the liability once the assessment order was passed and adjudicated under Rule 230(2). The mandatory and primary condition of sub-section (3) to Section 170 is that the Revenue should not be in a position to recover the dues from the predecessor and then only the successor is liable - The appellant company has taken over assets and liabilities of Kuldeep Singh Punn - The liabilities taken over, were mentioned in the books of accounts and not those which were not mentioned or were clandestine activities undertaken by Kuldeep Singh Punn in his personal or individual capacity as a sole proprietor, before the company was incorporated on 29th January, 1998 and started business with effect from 1st April, 1998 - the succession is not stated or claimed to be fraudulent - The statutory provisions or the legislative mandate is the primary and guiding principle, to make the successor vicariously liable to pay the liabilities of the predecessor - to initiate and continue proceedings against a firm, which was dissolved, it was necessary that there should be a statutory provision. Separate legal entity Vicarious liability - Whether the appellant-company can be held to be vicariously liable for the dues and the liability of an individual and promoter director Held that - There has been an extraordinary and serious error in the order passed, which is of a basic or fundamental nature - The appellant was incorporated only on 29th January, 1998 and came into existence on the said date as a separate juristic entity and a legal person - The appellant could not have indulged in clandestine and wrong sales prior to 29th January, 1998 as it was not in existence and was not carrying on manufacturing activities till 31st March, 1998 - Before the said date, Kuldeep Singh Punn in his individual capacity as a sole proprietor and was carrying on the business of manufacture and sales of air conditioners and cooling units from the same premises from where the appellant started operating. Principle of lifting of corporate veil has no application - Principle of vicarious liability has to be created and enacted under statute by the Legislature - Sometimes the doctrine is applicable by the courts to punish and impose penalties or fines by lifting the corporate veil as offences or violations of law committed by natural persons behind the company - But in such cases, the offences or violations are committed by the artificial juristic person and do not relate to period prior to the incorporation Decided in favour of Appellant.

Issues Involved:

1. Liability of the appellant company for the period prior to its incorporation.
2. Validity of assessment and imposition of duty, penalty, and interest on the appellant company for the period prior to its incorporation.
3. Application of Rule 230(2) and Section 11 of the Central Excise Act, 1944 in the context of successor liability.
4. Principle of lifting the corporate veil and vicarious liability.

Issue-wise Detailed Analysis:

1. Liability of the appellant company for the period prior to its incorporation:

The primary question framed was whether the appellant company could be assessed for the period before its incorporation on 1st April 1998. The court noted that the appellant company was incorporated on 29th January 1998 and started operations on 1st April 1998. The business prior to this date was conducted by Kuldeep Singh Punn as a sole proprietor. The court emphasized that a company, once incorporated, is a separate legal entity distinct from its promoters or directors. Therefore, the appellant company could not be held liable for activities conducted by Kuldeep Singh Punn in his capacity as a sole proprietor before the company's incorporation.

2. Validity of assessment and imposition of duty, penalty, and interest on the appellant company for the period prior to its incorporation:

The court found that the assessment and imposition of duty, penalty, and interest on the appellant company for the period before its incorporation were fundamentally flawed. The appellant company was not in existence before 29th January 1998 and could not have engaged in any manufacturing activities before 1st April 1998. The court highlighted that the principle of independent corporate existence is significant and cannot be ignored unless there is a statutory mandate or exceptional reasons to pierce the corporate veil. The court rejected the argument that the corporate veil should be lifted to make the appellant company liable for the actions of Kuldeep Singh Punn as a sole proprietor.

3. Application of Rule 230(2) and Section 11 of the Central Excise Act, 1944 in the context of successor liability:

The court examined Rule 230(2) of the Central Excise Rules, 1944, which allows for the detention of excisable goods and assets of a successor for the purpose of recovering duty due from the predecessor. However, the court clarified that this rule applies only when there has been an assessment of duty on the predecessor and does not permit the original assessment of duty on the successor. The court also referred to Section 11 of the Central Excise Act, 1944, which deals with the recovery of sums due to the government, and noted that the proviso to this section, inserted in 2004, supports the interpretation that recovery can be made from the successor's assets but does not create a charge to impose tax on the successor.

4. Principle of lifting the corporate veil and vicarious liability:

The court discussed the principle of lifting the corporate veil, which is typically applied to hold individuals behind a company accountable for the company's obligations. However, in this case, the court found that the principle was not applicable as the appellant company was being held liable for the actions of its promoter director before its incorporation. The court emphasized that vicarious liability must be created by statute and cannot be imposed in the absence of a statutory provision. The court concluded that the appellant company could not be held liable for the dues and liabilities of Kuldeep Singh Punn as a sole proprietor before the company's incorporation.

Conclusion:

The court answered the question of law in favor of the appellant-assessee, holding that the appellant company could not be assessed or held liable for the period prior to its incorporation. The court clarified that the Revenue could still pass an order against Kuldeep Singh Punn if permissible by law for the period before 1st April 1998. No costs were awarded in the case.

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