TaxTMI 
TaxTMI 
2023 (7) TMI 1409
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....which this Hon'ble Court may deem fit and proper in the interest of justice." 3. After exchange of the affidavits, the writ Court proceeded to dismiss the writ petition vide its order dated 20th September, 2012. In doing so, the co-ordinate bench of this Court noted the earlier law on the subject- lifting of corporate veil, to enforce the tax liability of a corporate entity on its directors and other functionaries etc. While dismissing the writ petition, the co-ordinate bench made the following observations:- "28. In the present case from the material on record, there is no doubt that the petitioners and other directors persuaded the BIFR to allow them to run the sick industrial company with fresh infusion of funds from IFCI with two nominee directors of IFCI. The company started business in 1991. The application for eligibility certificate under Section 4-A was made with false declaration that the plant and machinery is new. The eligibility certificate was not granted. Initially the company was doing well but as soon as Shri I.S. Gambhir and Shri L.K. Luthra took over successively as Managing Directors of the company, they started defrauding in payment of sales tax....
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....ef claimed was wide enough to permit the appellant(s) to pursue the argument that no part of financial (tax) liability of the Company can be fastened upon them much less in absence of clear finding about their acts of commission and omission, in light of exposition of the Division Bench of the same High Court in "Meekin Transmission Ltd. Vs. State of Uttar Pradesh and others" reported in (2008) SCC Online All 161, in particular, paragraph 72 of the reported decision, which reads thus : " 72. 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 routine manner and as a day to day affair so a....
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....ppellant(s) in light of the settled legal position restated in the earlier judgments of the same Court, referred to in the reported judgment. Resultantly, we deem it appropriate to relegate the parties before the High Court for reconsideration of the Writ Petition(s) afresh leaving all contentions available to both sides open to be decided on their own merits in accordance with law. We order accordingly. We may not be understood as having expressed any opinion either way on the merits of the submissions in the present appeal(s) or the grounds urged in the remanded writ petitions. The parties to appear before the High Court on 26th March, 2021, on which date the Court may proceed with the matter or to pass appropriate directions as may be permissible in law. Interim protection in terms of order dated 8th July, 2013 to continue till 26th March, 2021. The appeal and pending applications are disposed of accordingly." 7. In such circumstances, the matter has been placed before us. 8. Pleadings are complete. By means of the first supplementary counter affidavit (inadvertently described as first supplementary rejoinder affidavit), the State has al....
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....s to have carried on business claiming such benefit of exemption and concession. However, as a fact that exemption was never granted. Accordingly, assessment order came into existence and consequential recoveries arose against the company, description of which has been given in the order dated 30th March, 2005. That may be extracted as below:- 10. Notwithstanding the outstanding recovery of Rs.14,79,89,836/- against the company, Shri Rahul Agarwal would submit that there is neither any allegation made in the entire order dated 30.3.2005 nor any act or omission attributable to the instant petitioners has been alleged as may expose them to the vicarious liability being enforced against them. Thus, it has been submitted, merely because the company may have sought statutory exemptions and benefits that were denied or merely because the company filed returns claiming such exemptions, that it may not have been found legally entitled to, or merely because the directors of the company may not have participated in the assessment proceedings resulting in creation of the outstanding demands against the company, it may never be inferred ipse- facto, that the petitioners became liable for th....
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....ioner, pursuant to the decision of the division bench in Naresh Chander Gupta (supra) had been dealt with and it had been made clear that the directors of a corporate body would not automatically become responsible for the tax dues existing against such corporate body, unless in the peculiar facts and circumstances of the case, it is found that they were the persons, owning and running the business behind the corporate shell. Further, heavy reliance has been placed on the statutory scheme of Section 8 of the Act, which does not contemplate or lay down any general rule to allow for such recoveries to arise against the directors or other functionaries of a corporate entity. The statute is stated to lay down a general rule that the tax dues of a corporate entity be recovered from the assets of that entity. Only by way of exception, if facts are available (to the revenue), and upon their due assertion and proof, the corporate veil may be lifted and recoveries may arise against such persons, who may be found to have operated the corporate shell for his/their personal benefit. 17. On the other hand, learned counsel for the revenue would contend, in absence of any challenge raised to t....
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....pursue the relief that no part of the financial liability of the corporation may be fastened on its directors. Presently, we are ceased with the matter in proceedings, upon the remand. Therefore, the observation of the Supreme Court (as noted above) has a material bearing. A denovo exercise (to that extent), may neither be permitted nor be desirable, at this stage. 20. Second, the objection being raised by the learned Standing Counsel is also not found acceptable for another reason. Even if we accept as correct, the order dated 30.3.2005 passed by the assessing authority as confirmed in appeal vide order dated 31.12.2007, we do not find any recital in either of those orders, recording any finding or containing any allegation of any act or omission performed by either of the petitioners as may have allowed the revenue authorities to reach a conclusion that they were the persons, who had operated the shell of the company, for their personal benefit. The order dated 30.3.2005 only records the fact of the company having become 'sick' and having been revived, perhaps at the instance of the petitioners, who were its then directors. At the same time, the order further records t....
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....Supra) the dues of trade tax were sought to be recovered from M/s. Shiv Sewa Samiti, a society registered under the Societies Registration Act of which the petitioner, Naresh Chander Gupta was the secretary. Though recovery certificate was issued against the society but it was alleged by the petitioner that the revenue recovering authorities were proceeding against the assets of the petitioner himself. On the pleadings, the Court found that the petitioner has neither shown as to whether there are other office bearers of the society or not and as to who actually is running and controlling the society. Further the Court recorded a finding that the petitioner was really managing the entire society and had control over its operations and has created society for evading tax or for other extraneous reasons as is evident from the following: 18. On the facts of the present case we are of the opinion that the petitioner was really managing the entire society and had control over its operations. He has only created the society for the evading tax or for other extraneous reasons. 56. In these circumstances, the Court declined to exercise its discretionary remedy under Articl....
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....assessing authority may, at any time or from time to time, by notice in writing a copy of which shall be forwarded to the dealer at his last address known to the assessing authority, require- (a) any person from whom any amount is due or may become due to the dealer, or (b) any person who holders or may subsequently hold money for or on account of the dealer, to pay to the assessing authority- (i) forthwith upon the money becoming due or being held, or (ii) at or within the time specified in the notice not being before the money becomes due or is held. So much of the money as is sufficient to pay the amount due by the dealer in respect of arrears of tax or other dues under this Act, or the whole of the money when it is equal to or less than that amount. Explanation- For the purpose of this sub-section, the amount due to a dealer or money held or on account of a dealer by any person shall be computed after taking into account such claim, if any, as may have fallen due for payment by such dealer to such person and as may be legally subsisting." 58. The Court in para 21 of the judgement in Naresh Chander Gupta (Su....
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....given an overriding effect over the various provisions of the Act and makes Director of a Private Company responsible for payment of tax dues outstanding, of the period, he was Director, provided he proves that non recovery is not attributed to any gross neglect, misfeasance or breach of duty on his part. The said provision, therefore, while making Director of the private company responsible for payment of tax dues jointly and severally, makes an exception that in case he proves that the assets of the company are not sufficient to meet tax dues and have reduced for reasons not attributable to him on account of any gross neglect, misfeasance or breach of duty, then such person would not be responsible. The legislature thus has also recognised even in the said statute the principle that the doctrine of lifting of veil in the matter of tax dues is to be applied to prevent fraud etc. and not where the company has suffered despite its normal bona fide function. The persons responsible for its management are not to be made responsible for normal depreciation of capital or assets merely because the dues are of Tax. Further even the said provision is applicable only to private companies an....
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....ons of Food Prevention Act, Factories Act, Provident Fund Act, Industrial Disputes Act etc. etc. There is no provision in the U.P. Government Electricity Undertaking (Dues Recovery) Act, 1958 or Electric Supply (Consumers) Regulations, 1984 or even in the Indian Electricity Act, 1910 which may make it possible to read that a Director can be taken to be the successor of the Company which had entered into the agreement with the Board as a Consumer taking note of the definition of the word 'Consumer' in any of the three laws referred to above. 62. Where under the agreement or the statutory provisions, only the company is liable to pay the dues, in such cases the Directors would not be personally responsible and the doctrine of lifting the veil cannot be invoked in such case as is evident from following in the judgement of Adesh Kumar Jain (Supra): ......In the instant case, there is an agreement between the parties and also the statutory provisions under which the only consumer company is liable for payment of the arrears of electricity dues and the Director of the company cannot be made personally liable. Hence the doctrine of lifting the veil can not be inv....
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.... of the company and not in the capacity of limited ownership by way of shareholding. Such a Director, in our view, unless is guilty of misfeasance, fraud or acting ultra vires, we are not able to understand as to how he can be made responsible personally for the dues of the company even if we apply the doctrine of piercing the veil. If in such a case the veil is to be lifted, the persons behind the veil, at the best, would be the promoters of the company or those who have sought to obtain corporate personality as a sham or bogus transaction. Similarly, in some of the companies the financial institutions, who advances funds as loan etc., nominate their Director/s to keep some kind of monitoring over the functions of the company so that it may not go on liquidation on account of negligent and careless function of the Board of Directors. Such Directors also, in our view, cannot be included in the category of the persons who would be responsible personally for the dues of the company. 71. In order to find out as to who are the persons responsible personally when the veil is lifted it would be wholly irrelevant as to whether such person is a Director or a promoter shareholder o....
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....y an exemption from the strict rule in Salomon Vs. Salomon and Co. Ltd. 77. Another learned author L.C.B. Gower in his "Principles of Modern Company Law" 4th Edition, has also given such illustration where the veil of a corporate body has been pierced and has enumerated the same as fraudulent trading, misdescription of company, and taxation mattes where the statute require etc. 26. As to procedure to be adopted, it was also observed:- "78. In the nutshell, the doctrine of lifting of veil or piercing the veil is now a well established principle which has been applied from time to time by the Courts in India also. There is no doubt about the proposition that whenever the circumstances so warrant, the corporate veil of the company can be lifted to look into the fact as to whose face is behind the corporate veil who is trying to play fraud or taking advantage of the corporate personality for immoral, illegal or other purpose which are against public policy. Such lifting of veil is also has to implemented whenever a statute so provided. However, it is not a matter of routine affair. It needs a detailed investigation into the facts and affairs of the company to find ....
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....porate personality conferred upon a company and make its Directors or shareholders responsible personally. 80. In the case in hand we do not find that any such attempt has been made by the respondents before issuing the impugned notice dated 23.05.2003 to the petitioner no. 2 requiring him to pay dues of petitioner no. 1 from his personal assets. We are informed by learned Standing Counsel that pursuant to the judgment of this Court in Naresh Chander Gupta (Supra) the Commissioner, Trade Tax has issued a circular directing various authorities to initiate recovery proceedings against the Directors of the companies where the dues have not been recovered from the companies and it is pursuant to such circular the authorities are proceeded accordingly. However, no such circular has been placed before the Court and it is not part of the record. We are not making any observation with respect to the validity of said circular but it is suffice to us to make it clear that even when the tax dues are to be recovered from a corporate body, the Directors of such corporate body would not automatically be responsible unless the doctrine of lifting of veil is found to be applicable in the ....