2009 (7) TMI 1179 - HC - VAT and Sales Tax

Winding up - Lifting of corporate veil - recovery proceedings - Held that - In the present case, there is not even a whisper that the company has been wound up, which would result into attracting of applicability of section 18 of the CST Act. On principle as well as on precedent it becomes obvious that the writ petition merits acceptance. Accordingly, all recovery proceedings against petitioner No. 2 are set aside and a direction is issued to the respondents to restrain from issuing any notice to petitioner No. 2 or his attorney, petitioner No. 1, on the pretext of effecting recovery of sales tax under the Act or under the CST Act. The action of the respondents being wholly unwarranted and against the settled law, the respondents are liable to be saddled with cost. The cost is assessed at ₹ 20,000.

Summary

Issues involved:
Recovery of sales tax from a former director of a company, application of company law principles, liability of directors for tax recovery, interpretation of section 18 of the CST Act.

Analysis:
The judgment addressed the issue of recovery of sales tax from a former director of a company. The petitioners argued that recovery from a former director was not permissible as the company is a separate legal entity. The court considered the principle that a company is a distinct entity and the directors cannot be held personally liable for company debts. The respondents argued that recovery from directors was allowed under section 18 of the CST Act.

The court examined the legal position and past judgments on the matter. It was established that a company is a separate legal entity, and recovery cannot be made from directors for company debts. The court cited previous cases such as Surinder Nath Khosla v. Excise and Taxation Commissioner [1964] 15 STC 838 and Tikam Chand Jain v. State Government of Haryana [1987] 67 STC 388 to support this principle. The court emphasized that directors cannot be substitutes for the company in their individual capacity.

The court also considered the argument regarding section 18 of the CST Act, which allows recovery from directors. However, the court rejected this argument, stating that section 18 applies when a company has been wound up, which was not the case in the present situation. The court highlighted that recovery proceedings against a former director were unwarranted and against established legal principles.

Based on the legal analysis and precedents cited, the court ruled in favor of the petitioners. It set aside all recovery proceedings against the former director and directed the respondents to refrain from issuing any further notices for tax recovery. The court also ordered the respondents to pay costs amounting to Rs. 20,000. The judgment concluded by disposing of the writ petition in favor of the petitioners.