2014 (7) TMI 489 - HC - VAT and Sales Tax

Recovery of the sales tax/ trade tax dues outstanding against the Company - Ex parte order passed - Lifting the corporate veil - whether the liability due against the Company can be fastened and recovered against the Directors of the Company - Held that - in a case where the corporate personality has been obtained by certain individuals as a mask to prevent tax liability or to divert the funds of the Company for some illegal purpose, the corporate veil can be lifted so that the persons can be identified and made responsible and the tax liability of the Company could be recovered from the persons responsible for such fraud. However, this doctrine cannot be applied as a matter of course in a routine manner to recover the dues of a Company on the mere pretext that the dues are now not recoverable from the Company and, therefore, a resort has been made to recover the dues of the Company from the personal assets of the Directors. If such a course is permitted, it will lead to disastrous results and would completely destroy the juristic personality of the Company. The principle of lifting the corporate veil is to find out as to who was responsible for committing the fraud and diverting the assets of the Company. It is not necessary that recovery has to be made against the Director or a promoter shareholder. The purpose of lifting the veil is to find out the person, who was operating behind the corporate personality for his personal gain. Company has filed an appeal against the ex parte assessment order, which is pending consideration. Consequently, the Company is still in existence. The substratum of the Company has not eroded. The mere fact that the Company has failed to pay the dues is by itself insufficient to invoke the doctrine of lifting the corporate veil and is not sufficient to ignore the statutory corporate personality conferred upon the Company - Company has filed an appeal against the ex parte assessment order, which is pending consideration. Consequently, the Company is still in existence. The substratum of the Company has not eroded. The mere fact that the Company has failed to pay the dues is by itself insufficient to invoke the doctrine of lifting the corporate veil and is not sufficient to ignore the statutory corporate personality conferred upon the Company - Decided in favour of assessee.

Summary

Issues Involved:
1. Legality of the recovery notice issued against the Directors for the company's tax dues.
2. Applicability of the doctrine of lifting the corporate veil in the context of tax recovery.

Detailed Analysis:

1. Legality of the Recovery Notice Issued Against the Directors:
The petitioners challenged the recovery notice dated 29th December, 2007, issued for the recovery of sales tax/trade tax dues outstanding against the Company. The primary issue was whether the liability due against the Company could be fastened and recovered from the Directors. The Court referred to multiple precedents to establish that recovery proceedings against a company under the Sales Tax Act cannot be pursued against the private assets of its Directors unless specifically provided in the statute or warranted by law. The Court cited several cases, including L. Parmeshwari Das Vs. The Collector of Bulandshahr (1955), Satish Chand Singhal Kanpur and others Vs. Assistant Commissioner (Assessment) I Sales Tax, Kanpur and others (1987), and Shri Puroshottam Das Beriwal, Kanpur Vs. Deputy Collector (Collections), Sales Tax, Kanpur (1989), to affirm that the liability against a company can only be enforced against the company's assets and not against the personal assets of its Directors.

2. Applicability of the Doctrine of Lifting the Corporate Veil:
The Court examined whether the doctrine of lifting the corporate veil could be applied to hold the Directors personally liable for the company's tax dues. The doctrine allows the Court to look beyond the company's separate legal entity to hold individuals accountable in cases of fraud or misuse of the corporate structure. The Court acknowledged that this doctrine is well-established and can be applied in cases where the corporate personality is used to evade tax or commit fraud, as seen in cases like Telco & ors vs. State of Bihar (1965) and CIT vs. Shree Minakshi Mills Ltd Madurai (1967). However, the Court found that in the present case, there were no allegations or evidence of fraud or misuse by the Directors. The only plea was that petitioner no.1, being a Director, was responsible for running the company's affairs and was liable to satisfy the outstanding dues. This was deemed insufficient to invoke the doctrine of lifting the corporate veil.

The Court concluded that the company, being a separate legal entity, was solely responsible for its tax dues, and the Directors could not be held personally liable in the absence of statutory provisions or evidence of fraud. Consequently, the impugned recovery notice was quashed, and the writ petition was allowed. The Court left it open to the respondents to recover the amount from the company's assets.