TaxTMI 
TaxTMI 
2008 (2) TMI 406
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....d was converted in a Public Limited Company subsequently. In 1991 it became a sick unit and made a reference under Section 15(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter referred to as the "1985 Act") to the Board for Industrial and Financial Reconstruction (hereinafter referred to as "BIFR") which was registered as Case No.109 of 1991. The Industrial Development Bank of India (hereinafter referred to as the "IDBI") was appointed as operating agency for submitting rehabilitation scheme vide order dated 02.06.1992. However, it appears that during the period rehabilitation matter was pending before BIFR, the petitioner-Company continued with the business but did not pay sales tax (now termed as trade tax) for the period of 1993-94 to 1997-98 which comes to about Rs. 42.88 lacs. The aforesaid tax was allowed to be paid in instalments. The petitioner no.1 deposited first instalment of Rs. 5.36 lacs on 30.04.1998 but thereafter no subsequent instalment was paid. However, on its request, the respondent-State of U.P., vide letter dated 01.11.1999, rescheduled instalments commencing from 30.10.1999 and onwards, and, the petitioner no.1 was required to pa....
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.... and others, AIR 1998 SC 2928. 4. Per contra, learned Standing Counsel placing reliance on the Division Bench decision of this Court in Naresh Chander Gupta (Supra) and Sri Ram Gupta Vs. The Assistant Collector, 2003 NTN (23) 995 contended that in respect to the tax dues outstanding against a Company, recovery can be made from the personal assets of the Directors of the Company by applying the doctrine of 'piercing the veil' i.e. 'lifting of veil of the corporate personality' and, therefore, the demand made by the respondents from the petitioner no. 2 is valid. He further contended that proceedings before BIFR came to an end on 14.03.2003. Having failed rehabilitation, the BIFR vide order dated 14.03.2003 held that the Company should be recommended for winding up, therefore, on and after 14.03.2003 it cannot be said that any matter is pending before BIFR. He further contended that in any case, at the instance of the petitioner no.1, payment of tax dues in instalments was allowed and he had also paid first instalment on 13.04.1998, therefore, having agreed to pay the entire dues in instalments, the petitioner no.1 now cannot be permitted to wriggle out of his unde....
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....s and other employees, their inter-relationship and the extent to which one or the other is liable in respect to the matter of the Company. Concept of Companies-History of Incorporation of Companies and relevant statutes: 9. The history of Modern Company Law can be traced back to 14th century (see Gower's Principles of Modern Company Law 4th Edition at page 24) when in England, under the Royal Charters, the Merchant Organisations were allowed to be engaged in Foreign Trade and Settlement. Formal incorporation was not essential and each member of the association traded with his own stock and on his own account subject to obeying the Rules of the Company. The Charters were normally obtained to acquire the monopoly of trade for members of the Company, and, Governmental power over the territory, the Company got right to trade. Loosely, this kind of trade used to be known as trading on joint stock in partnership. They were more in the nature of trade protection association. In fact, the East India Company which received its first Charter in 1600 was granted monopoly of trade with the Indies. These kinds of Charters became more prevalent in 16th century. With the passage of tim....
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.... a document called 'Memorandum of Association' can proceed for incorporation of the company. The deed of settlement was done away but it was provided that in addition to the Memorandum of Association it should adopt the model articles attached to the Act and was to be registered in the register of the companies. The first Companies Act came to be enacted in 1862 which has been described by Sir Francis Palmer as the "Magnacarta of Cooperative Enterprise". Since then the aforesaid Act has been replaced by several Companies Act in England as well as in India. 12. Here, In India the first enactment was the Indian Companies Act, 1866 which was replaced by Indian Companies Act, 1913 and then the Companies Act, 1956 i.e. the Act which is holding the field till date. Status of Company, Directors and Shareholders-individually and inter se in Common Law as well in the Act 13. The Act mainly contemplates two kinds of companies namely, Private Company and Public Company. Besides, it also applies to existing companies namely, as were formed and registered under various enactments prior to enforcement of the Act as provided under Section 3(1)(ii) of the Act. A "Private Company" ....
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....position of shareholder in a company with limited liability by shares is that when the company earn profits and declare dividends, as per its articles, he is entitled to participate in it and get his share in the dividend. In the event of winding up, he has a further right to participate in the distribution of the companies assets in accordance with the rights given to him under the articles. Beyond this he acquires no interest in the assets of the company (See Mrs. Bacha F. Guzdar, Bombay Vs. Commissioner of Income Tax, Bombay, AIR 1955 SC 74). Besides, he has all such rights as available to a member namely, voting right. 18. For management of the affairs of the company, the Act requires for appointment of Directors who are collectively known as "Board of Directors" or "Board". The term "Director" is defined under Section 2(13) of the Act and reads as under: "(13) "director" includes any person occupying the position of director, by whatever name called;" 19. Section 252 of the Act provides that every public company shall have atleast three Directors. Section 253 provides that the Director must be only an individual and no body, corporate, association or firm shall be app....
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....ovided further that a managing director of a company shall exercise his powers subject to the superintendence, control and direction of its Board of Directors;" 21. Besides the Directors and Managing Director, there may be some other persons namely, Manager or Managing Agent, Secretaries etc. who may also be responsible for management of the company, wholly or partially, as the case may be. The terms 'Manager' and the 'Managing Agent' are defined under Section 2(24) and (25) of the Act and reads as under: "(24) "manager" means an individual (not being the managing agent) who, subject to the superintendence, control and direction of the Board of Directors, has the management of the whole, or substantially the whole, of the affairs of a company, and includes a director or any other person occupying the position of a manager, by whatever name called, and whether under a contract of service or not; (25) "managing agent" means any individual, firm or body corporate entitled, subject to the provisions of this Act, to the management of the whole, or substantially the whole, of the affairs of a company by virtue of an agreement with the company, or by virtue of its....
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.... us to go in further details of those provisions for the purpose of present case. 25. From the above discussion the position as culled out is that the word "Company" imports an association of number of individuals formed for a common purpose. When such an association is incorporated, it becomes a body corporate, a legal entity, separate and distinct from such individuals. Such incorporation must owe its existence to a statutory authority. The corporation/Company, in law, is equal to a natural person and has a separate legal entity of its own. Once incorporated, the entity of the corporation is entirely separate from that of the its share holders. It bears its own name; has a seal of its own; its assets are separate and distinct from those of its members; it can sue and be sued exclusively for its own purpose; the liability of the members or share holders is limited to the capital invested by them; the creditors of the Company cannot obtain satisfaction from the assets of the share holders/members of the company and similarly creditors of the members/share holders have no right to the assets of the Company. This position was recognised in Salomon Vs. Salomon and Co., 1897 AC 22 a....
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....d by it though all are intangible. If the estate of the company is taken over by the government, it would not constitute as taking over of the management of the company. 29. The juristic personality of the company is recognised for approaching the Courts under the Constitution of India also for protection of fundamental rights which are guaranteed to 'persons'. However, they may not seek protection in respect to fundamental rights which are guaranteed to a 'citizen' for the reason that the company is a person but not a citizen (State Trading Corporation of India Ltd. Vs. The Commercial Tax Officer and others, AIR 1963 SC 1811). Whenever, there is an infringement of fundamental right under Article 19 which are guaranteed to a 'citizen', causing a grievance to a shareholder of the company, it was held by the Apex Court in Bennett Coleman and Co. Ltd. and others Vs. Union of India and others, AIR 1973 SC 106 that such shareholder may approach the Court for protection of such right, though the company itself cannot claim protection of such right. 30. It also leads to the conclusion that a company incorporated under the Act is not created by the Act but com....
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....visions of the statute, and, sometimes by judicial pronouncements. 34. The most important exception in this regard is that of "piercing the veil" or "lifting the corporate veil" to find out who is the real person, beneficiary or in controlling position of the Company. The doctrine of "lifting the veil" has marked a change in the attitude the law had originally adopted towards the concept of separate entity or personality of the corporation but the same has not been applied in general or routine manner. It has been adopted exceptionally whenever and wherever the situation warranted. The circumstances in which the said doctrine has been invoked vary from case to case. 35. Lord Denning M.R. in Littlewoods Stores Vs. I.R.C., (1969) 1 W.L.R. 1241 said: "The doctrine laid down in Salomon's case has to be watched very carefully. It has often been supposed to cast a veil over the personality of a limited company through which the courts cannot see. But that is not true. The courts can, and often do, draw aside the veil. They can, and often do, pull off the mask. They look to see what really lies behind. The legislature has shown the way with group accounts and the rest. And th....
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....sociated Rubber Industry Ltd., Bhavnagar and another, AIR 1986 SC 1 the Court held where ingenuity is expended to avoid taxing and welfare legislation, it is the duty of the Court to get behind the smoke-screen and discover the true state of affairs. There, a new company was created wholly owned by the principal company without having assets of its own except of those transferred to it by the principal company and with no business or income of its own except of receiving the dividends from shares transferred to it by the principal company. The purpose evident from the entire action was to reduce the amount to be paid by way of bonus to workmen. In the circumstances, the Court lifted the veil and held principal company to be responsible for payment of bonus on the entire amount without making any distinction between the new company and the principal company. It upheld application of lifting of veil to prevent device to avoid welfare legislation and said that it may be lifted where a statute itself contemplates lifting the veil, or fraud or improper conduct is intended to be prevented, or a taxing statute or a beneficent statute is sought to be evaded or where associated companies ar....
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....rincipal company. The Apex Court pierced the veil in the present case in view of the fact that Renusagar Power Company was wholly owned subsidiary of Hindalco and completely controlled by the same to the extent of even day to day affairs. The entire generation of electricity of Renusagar Power Company was consumed by M/s Hindalco and it was also found from the facts that the separate company was set up by the Hindalco to avoid any complication in future if power station is taken over by the State or Electricity Board. In order to avoid liability of electricity duty it sought to rely on the principle that two companies are different entities. The Court in the aforesaid facts and noticing that the device was sought to be relied to avoid liability of electricity duty, ignored the distinct juristic personality of the companies, lift the veil of the subsidiary and held that both companies are one and the same for the purpose of liability of electricity duty. The Court further held that in modern company jurisprudence the veil on corporate personality even though not lifted, sometimes is becoming more and more transparent. It was thus held that the consumption of electricity by Hindalco ....
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....employed to defraud creditors, to evade an existing obligation, to circumvent a statute, to achieve or perpetuate monopoly, or protect knavery or crime, the Courts will draw aside the web of entity, will regard the corporate company as an association of live, up-and-doing, men and women shareholders, and will do justice between real persons. Consequently in the aforesaid case the corporate character was ignored by the Court observing that Tejwant Singh and his family has evolved the said method not to encourage and promote trade and commerce but to commit illegalities and defraud peoples. 50. In Subhra Mukherjee and another Vs. Bharat Coking Coal Ltd. and others, 2000 (3) SCC 312 it was observed that to look at the realities of the situation and to know the real state of affairs behind the facade of the principle of the corporate personality, the Court would pierce the veil of incorporation. In the said case some immovable property was alleged to be sold in favour of the wives of the Directors of the Company which is alleged to be collusive and, therefore, the Court applied the doctrine of piercing the veil to ascertain the true nature of the transaction, as to who were the real....
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....istrict Magistrate, Fatehpur and others, 2002 (3) UPLBEC 2707 and Naresh Chander Gupta (Supra). 54. In M/s Nand Auto Hire Purchase Pvt. Ltd. (Supra) the recovery of road tax was in dispute. The petitioner contended that the truck was handed over to the financier M/s Nav Instalments and, therefore, recovery should be made from the said financier which is a different legal entity. From the facts on record the Court found that the petitioner, M/s Nand Auto Hire Purchase Pvt. Ltd. has its Managing Director, Sri Vishnu Bhagwan Agrawal who was also the managing partner of the firm M/s Nav Instalments. In these circumstances not finding any substantial distinction between the person who was operating behind the said two bodies, and noticing that the entire attempt was to frustrate recovery of road tax, this court recorded a finding of fact that Sri Vishnu Bhagwan Agrawal is really controlling both namely, the petitioner as well as M/s Nav Instalments by invoking the doctrine of piercing the veil. In these circumstances, holding that writ is a discretionary remedy, the Court declined to interfere in writ jurisdiction. The aforesaid judgement cannot be said lay down proposition that when....
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....usiness. Thus the petitioner is not entitled to the protection of the principle laid by the decision in Salomon Vs. Salomon and Co. Ltd. (supra)." We find that in para 19 of the judgement on the basis of the factual finding recorded in the said case the Court declined to exercise its discretionary remedy under Article 226 of the Constitution in favour of the petitioner. The observations made in para 20 of the judgement were thus not on an issue involved as such. The provisions of the Companies Act, the position of Directors qua company was neither in issue nor any argument was raised nor it can be said that such an issue was decided and the provisions of Companies Act having also not been referred to and considered, in our view, the said observations cannot be said to be a binding precedent and are per incurium. With great respect to the Bench we also notice that even the provisions of the Trade Tax Act which provides to what extent recovery can be made from persons, other than dealers who is registered under the Trade Tax Act, have not been noticed and considered. At this stage it would be appropriate to refer Section 8 sub-section 3 of the U.P. Trade Tax Act, 1948 which reads ....
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....Income Tax Act, 1961 which reads as under: 179. (1) Notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), where by tax due from a private company in respect of any income of any previous year or from any other company in respect of any income of any previous year during which such other company was a private company cannot be recovered, then, every person who was a director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company. (2) Where a private company is converted into a public company and the tax assessed in respect of any income of any previous year during which such company was a private company cannot be recovered, then, nothing contained in sub-section (1) shall apply to any person who was a director of such private company in relation to any tax due in respect of any income of such private company assessable for any assessment year commencing before the 1st day of April, 1962." 58. A perusal of Secti....
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....arrying on business, shall be personally responsible without any limitation of liability for all or any of the debts or other liabilities of the company, as the court may direct. 60. We have not been shown that any similar provision exist in U.P. Trade Tax Act empowering recovery of dues of the company from the Directors or shareholders personally. At this stage it would be appropriate to notice another Division Bench decision of this Court in Adesh Kumar Jain and others Vs. U.P. S.E.B. and others, 1998 All. C.J. 266 the Court while rejecting a similar contention that the Director of the company would be personally liable for dues of the company held that though it is true that the Director of a company may be an agent of the company but that would not result in making the assets of the company to be the assets of the Director and vice versa. It further held that in the absence of any statutory provisions, recovery from the personal assets of the Director cannot be made. In para 7 of the judgement, the Court held: "7. Director's liabilities in some of the enactments have already been dealt with in provisions contained in the relevant laws such as Employees State Insurance....
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.... System Pvt. Ltd. was the husband of Smt. Poonam Suri. On purchase of land by Smt. Poonam Suri, it is said that M/s Krisons Electronics System Pvt. Ltd. company became tenant of Smt. Poonam Suri. A fresh lease deed was executed between M/s Krisons Electronics System Pvt. Ltd. and Smt. Poonam Suri on 17.07.1987. However, the possession of the said property was handed over by M/s Krisons Electronics System Pvt. Ltd. to Smt. Poonam Suri on 10th April/July 1997. Smt. Poonam Suri executed a transfer cum sale deed of the plot in question in favour of M/s Reflex Industries, a proprietorship firm on 31.03.1998. For recovery of tax dues to the tune of Rs. 2,35,90,606/- the authorities sealed the premises on 19.01.1999 whereagainst M/s Reflex Industries filed the aforesaid writ petition claiming that neither the said petitioner nor Smt. Poonam Suri, the then owner of the plot in question, were defaulter and, therefore, the aforesaid premises could not be sealed for recovery of dues of M/s Krisons Electronics System Pvt. Ltd. In the counter affidavit, the facts as as disclosed before this Court were that M/s Krisons Electronics System Pvt. Ltd. was a private company owned by one family namely....
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.... and 17 of the judgment where the Court observed that the doctrine of piercing the veil of corporate personality must be adopted by our Courts in the matter of electricity dues as this has assumed mammoth dimensions of hundreds or thousands of crores of rupees which unscrupulous businessmen are not paying under cover of the doctrine of corporate personality and the Court should not give shelter to the businessmen under the doctrine of corporate personality. We have no doubt, at all, in application of doctrine of piercing the veil even in respect of electricity dues whenever the circumstances and the facts so warrant. However, the said observations cannot be treated to be an exposition of law that whenever electricity dues are to be recovered from a company, the same can be proceeded against the personal assets of the Directors also without looking to the basic ingredients which would be necessary to invoke the doctrine of piercing the veil. No such proposition has been laid down by the Court. So far as application of this doctrine is concerned, irrespective of the nature of dues, we are in respectful agreement with the Bench that whenever there is an attempt on the part of an indiv....
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.... cases and expressly stated and reiterated in Purshottam Das Beriwal (Supra) is as under: "The cardinal principle of law is that when there is a liability against a company, no recovery can be made from personal assets of its Director, unless it is specifically provided in the Statute or warranted by law. It is not brought to brought to our notice that there is any specific provision in the U.P. Sales Tax Act, whereunder recovery of the liability outstanding against a company can be made against the personal assets of its Director." 69. The legal position as discerned from the above is that in a case where the corporate personality has been obtained by certain individuals as a cloak or a mask to prevent tax liability or to divert the public funds or to defraud public at large or for some illegal purposes etc., to find out as to who are those beneficiaries who have proceeded to prevent such liability or to achieve an impermissible objective by taking recourse to corporate personality, the veil of the corporate personality shall be lifted so that those persons who are so identified are made responsible. However, this doctrine is not to be applied as a matter of course, in a rou....
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....ible personally when the veil is lifted it would be wholly irrelevant as to whether such person is a Director or a promoter shareholder or otherwise of the company since the purpose of lifting the veil is to find out the person/s who is operating behind the corporate personality for his personal gain. Such person may be individual or group of persons belonging to a family or relatives or otherwise a small group collected with a common objective of achieving some illegal, immoral or improper purpose etc. So long as no investigation is made into various aspects, we are not able to understand as to how and what manner a Director of a company can straightway be proceeded personally for recovering dues of a company unless it is so provided by some provision of the statute. 71. Recently considering a similar controversy with reference to the provisions of Payment of Wages Act, the Apex Court in P.C. Agarwala Vs. Payment of Wages Inspector, M.P. and others, AIR 2006 SC 3576 has held as under: "17. It is trite law that liability of a person is dependent upon the Statutory prescriptions governing such liability. Sections 5 and 291 of the Companies Act, 1956 (in short 'Companies Ac....
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....he Company has been discarded by adopting the doctrine of lifting the veil, in 15 categories and some of which are as under: "(1) where companies are in relationship of holding and subsidiary (or sub-subsidiary) companies; (2) where a shareholder has lost the privilege of limited liability and has become directly liable to certain creditors of the company on the ground that, with his knowledge, the company continued to carry on business six months after the number of its members was reduced below the legal minimum; (3) in certain matters pertaining to the law of taxes; death duty and stamps, particularly where the question of the "controlling interest" is in issue; (4) in the law relating to exchange control; (5) in the law relating to trading with the enemy where the test of control is adopted; (6) where a holding company or a subsidiary company were not working in an autonomous manner and thus were treated as forming an economic unit; (7) where the new company was formed by the members of an existing company holding 9/10 shares in the existing company and only with an object of expropriating the shares of minority share holders of the existing company; (8) where the device of ....
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....s, have obtained the shell of corporate personality as a pretext or mask to cover up a transaction or intention of those individual/individuals is neither legal nor otherwise in public interest. In effect the attempt of those individuals have to be shown akin to fraud or misrepresentation. The legal personality of the corporate body thus can be ignored in such cases since it is well settled that fraud vitiates everything and, therefore, the benefit of legal personality obtained by someone for purposes other than those which are lawful or even if lawful but not otherwise permissible, the corporate personality being the result of such fraudulent activity would have to be discarded but not otherwise. These are the things based on positive factual material and cannot be presumed in the absence of proper pleadings and material to be placed by the person who is pleading to invoke the doctrine of piercing the veil and to ignore the juristic personality of the corporate body. Once relevant material is made available by the authority or person concerned, thereafter it would be the responsibility of the other side to place material to meet the aforesaid facts but the mere fact that the compa....
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....mently that this is not a fit case in which this Court may exercise its discretion under Article 226 of the Constitution since huge public revenue has not been paid by the petitioners and, therefore, even petitioner no. 2 is not entitled for any indulgence in equitable and discretionary jurisdiction. 82. So far as the petitioner no.1 is concerned, we have already held that there is no fault in making recovery against it and the writ petition to that extent is liable to be dismissed. 83. However, so far as petitioner no. 2 is concerned, it is not disputed that he is not the dealer under the U.P. Trade Tax Act and, therefore, the amount of tax recoverable from petitioner no.1 is not liable to be paid by the petitioner no. 2 under the aforesaid Act. The liability of the petitioner no. 2 is being extended only on the ground that he being Director of petitioner no.1 is liable to pay tax dues of petitioner no.1 from his own personal assets and if not paid the same may be recovered from him personally by coercive methods. For the aforesaid purpose the respondents have not been able to show any statutory provision under which the petitioner no. 2, as Director of the petitioner no.1, ....