2023 (7) TMI 1409 - HC - Indian Laws

Recovery of outstanding corporate tax dues from the personal assets of either of the petitioners - Lifting of corporate veil to enforce the tax liability of a corporate entity on its directors and other functionaries etc. - Burden of proof on revenue authorities to justify piercing the corporate veil - HELD THAT - Both generally (by way of a principle of law and also in the present facts) it is impermissible to allow the revenue authorities to rely on any assumption or presumption as to malfeasance or scam or fraud. Neither the revival offered by BIFR was challenged nor there is any other material on record to reach such conclusion. Insofar as the conduct of the business upon revival is concerned merely because statutory exemptions and benefits might have been claimed and those were declined would also not per se establish any malfeasance or misconduct or other conduct or omission attributable to the petitioners as may allow the recovery proceedings to be continued against them- for the dues of the company - Exemptions are claimed in accordance of perception of the claimant. Those are dealt with and decided by statutory bodies on their own merits. Rejection of a claim may never be treated to be a fraudulent act unless necessary facts are asserted and established. At present there is no allegation of any fraudulent claim to exemption made. The order dated 30.3.2005 only records the claims thus made by the company were rejected. Fact of resignation by petitioners as directors of the company - HELD THAT - Continuance as directors of a corporation may be prima-facie evidence as to who was responsible for running with the affairs of the corporation yet it may never be relevant or enough to reach a conclusion that therefore such person acted fraudulently or committed malfeasance or misconduct or other act or omission as may expose him/them to the exceptional liability of recovery of dues of the corporation from their personal assets - The revenue failed to discharge its burden to prove special facts as may have exposed the petitioners to the impugned recovery proceedings. To that extent the facts found proven in the order dated 30.3.2005 as confirmed in appeal vide order dated 31.12.2007 are wholly extraneous to the issue. That discussion has already been made above. The corporate veil of the company is found intact. The petitioner is entitled to writ of Mandamus to restrain the respondent authorities from recovering the tax dues of the corporation M/s. Maharashtra Steel Ltd. For Assessment Years 1985-86 (U.P. Central) to 1995-96 (U.P. Central) from the personal assets of the petitioner - The writ petition is thus allowed.

Summary

Issues Involved:
1. Quashing of impugned recovery certificates.
2. Restraining recovery from personal assets of petitioners.
3. Lifting of corporate veil to enforce tax liability on directors.

Issue 1: Quashing of Impugned Recovery Certificates

The petitioners sought a writ of certiorari to quash the impugned recovery certificates issued by respondent no. 3 on the direction of respondent no. 4. The High Court initially dismissed the writ petition, noting that the directors of the company had used the corporate entity to defraud creditors and evade taxes. The Supreme Court remanded the matter for reconsideration, emphasizing that the High Court had not analyzed the contention in light of the settled legal position in "Meekin Transmission Ltd. Vs. State of Uttar Pradesh and others".

Issue 2: Restraining Recovery from Personal Assets of Petitioners

The petitioners also sought a writ of mandamus to restrain the respondents from recovering the company's tax dues from their personal assets. The Supreme Court highlighted that the second prayer in the writ petition was broad enough to argue that no part of the company's financial liability could be fastened upon the directors without clear findings of their acts of commission and omission. The High Court, upon reconsideration, found no evidence of malfeasance or misconduct by the petitioners that would justify lifting the corporate veil to recover the company's tax dues from their personal assets.

Issue 3: Lifting of Corporate Veil to Enforce Tax Liability on Directors

The High Court initially upheld the lifting of the corporate veil, citing the directors' fraudulent activities. However, the Supreme Court remanded the case, noting that the High Court had not considered the legal position that lifting the corporate veil should not be applied routinely. Upon reconsideration, the High Court found that the revenue authorities had failed to prove that the petitioners had operated the company for personal gain. The court reiterated that the doctrine of lifting the veil should be applied only in cases of fraud or illegal purposes, and not as a routine matter to recover dues from directors' personal assets.

Conclusion:

The High Court, upon remand, concluded that the corporate veil of the company remained intact and restrained the revenue authorities from recovering the tax dues from the personal assets of the petitioners. The writ petition was allowed, and the revenue authorities were directed to pursue recovery from the assets of the corporation in accordance with law.