Sikkim High Court
Kanchenjunga Properties Pvt. Ltd. And ... vs State Of Sikkim And Ors. on 5 December, 1990
Equivalent citations: [1991]191ITR575(SIKKIM)
JUDGMENT R. Dayal, J.
1. This petition under Articles 226 and 227 of the Constitution filed by petitioner No. 1, which is a private limited company (hereinafter referred as "the company") and petitioners Nos. 2 to 5 who are its directors challenge the income-tax assessment order dated August 4, 1987, passed against the company under the Sikkim State Income-tax Manual, 1948, notices of demand issued against the petitioner, the order dated September 4, 1987, whereby the appeal preferred by petitioner No. 1 was rejected on account of its failure to make payment of 50 per cent, of the tax assessed in compliance with Notification No. 1220-200/IT and ST dated December 20, 1973, and also the validity of the Sikkim State Income-tax Manual, the notification bearing No. 1220-200/IT and ST dated December 20, 1973, Order No. 405/50 dated November 21, 1950, the Sikkim (Collection of Taxes and Prevention of Evasion of Payment of Taxes) Act, 1987, and also of Notification No. 32/IT dated April 2, 1987, regarding the appointment of Income-tax Officers and Notification No. 654/Home/87 dated May 27, 1987, regarding the, appointment of the appellate authority.
2. Sikkim became a component State of the Indian Union by and under the Constitution (thirty-sixth) Amendment Act, 1975, which inserted Article 371F in the Constitution. Clause (k) of that article provides that, notwithstanding anything in the Constitution, all laws in force immediately before the appointed day (i.e., 26th day of April, 1975) in the territories comprised in the State of Sikkim or any part thereof shall continue to be in force therein until amended or repealed by a competent Legislature or other competent authority. Clause (n) provides that the President may, by public notification, extend with such restrictions or modifications as he thinks fit to the State of Sikkim any enactment which is in force in a State in India, at the date of the notification. The Income-tax Act, 1961, was not in force in Sikkim at the relevant time, and so the law of income-tax which was in force on the appointed day was the law on the subject in the State of Sikkim at that time. That law is contained in the Sikkim State Income-tax Manual, 1948 (hereinafter referred to as "the Manual").
3. Petitioner No. 1 is a private limited company, incorporated under the Registration of Companies Act, Sikkim, 1961, on October 15, 1981. According to the petitioners, 51% of the shares of the company were held by the members of a joint Hindu family firm, Balchand Udairam, and the remaining 49% shares were held by ITC Limited and its subsidiaries or group companies. Four members of the joint Hindu family who are petitioners Nos. 2 to 5 were appointed as directors of the company and four more directors were appointed from the I. T. C. Group. It is further alleged that the company carried on the business of manufacturing cigarettes from November, 1981, till December 31, 1982, and accounts were prepared in respect of the period from October 15, 1981, to January 31, 1983. A notice dated May 7, 1987, was issued by the Joint Secretary, Government of Sikkim, Income and Sales Tax Department, to the petitioners stating therein that the company had a turnover of Rs. 10,20,07,807.20, besides other income of Rs. 54,794.43 in the cigarette business during the period from October 15, 1981, to January 31, 1983, but the directors did not submit their returns and failed to pay income-tax. They were directed to show cause why the turnover of Rs. 10,20,62,601.63 be not taken as the turnover for the purpose of payment of income-tax and income-tax as per the Manual be not so assessed. Reply to the show-cause notice was given by the company on May 9, 1987, where it was mentioned that the industrial unit went into production with effect from October 15, 1981, and stopped production on December 31, 1982. Liability to pay income-tax was disputed on two grounds : firstly, there is no provision in the Manual to levy and collect taxes on income of private limited companies and, secondly, the company is exempt from payment of income-tax for a period of five years from the date of commencement of production, i.e., October 15, 1981. It was also mentioned that, in the absence of any provision, the company was not liable to submit any return. Thereafter, the Income-tax Officer and the Joint Secretary, Income and Sales Tax Department, passed the impugned assessment order dated August 4, 1987, mentioning therein that the plea that there was no provision to levy and collect taxes on income of private limited companies is not tenable and the presumption that the company being a new industry is exempted from payment of income-tax for a period of five years from the date of commencement of production does not hold good, as there was no specific order of the Government allowing the exemption and the benefits under the relevant Notification No. 2/TIC dated February 16, 1974, were not automatic. In exercise of the powers under Rule 4(i) of the Manual, he passed the assessment order assessing income-tax at Rs. 30,55,108.05 on the declared turnover of Rs. 10,20,62,601.63 for the period from October 15, 1981, to January 31, 1983. A notice of demand bearing the same date was also enclosed therewith. It was mentioned therein that the amount should be paid within 45 days of the issue of the notice failing which the company would be liable to pay simple interest at the rate of 12% per annum from the date of issue of the demand in accordance with Notification No. 1220/I.T. dated December 20, 1973, and if the payment was not made even after three months from the date of the issue of the notice, penal interest at the rate of 20% on the defaulted amount would be imposed in addition to the amount of interest payable at the rate of 12% per annum referred earlier. It was also stated that if the payment was not made within the aforesaid period, proceedings would be started for the recovery by distraint, as per Rule (2) of the Public Demands Recovery Regulation. Thereafter, an appeal was preferred by the company before the appellate authority. Vide letter dated September 4, 1987, of the appellate authority, it was communicated to petitioner No. 1 that, as per Notification No. 1220-200/IT and ST dated December 20, 1973, every appeal has to be accompanied by evidence showing the payment of 50% of the tax assessed by the assessing authority and since no evidence had been produced to that effect, evidence should be produced accordingly within seven days of the receipt of the communication, failing which the appeal would stand rejected. It is common ground that no such deposit was made by the petitioners.
4. Procedure for recovery of public dues was formerly provided for by Order No. 405/50 dated November 21, 1950. A new procedure for collection of taxes was provided for by the enactment of the Sikkim (Collection of Taxes and Prevention of Evasion of Payment of Taxes) Act, 1987, which came into force with effect from August 13, 1987. Thereafter, a demand notice dated September 25, 1987, was issued to petitioner No. 1 under Section 6(1) directing the payment of the tax due within seven days from the date of the notice, failing which the amount would be recovered as per sections 7 and 8 of the Act by attachment and sale of both movable and immovable properties. Subsequently, similar notices were issued to petitioners Nos. 2 to 5 on November 13, 1987, stating therein that, as directors or shareholders, they had enjoyed the profits of the company and so they were jointly liable to pay the arrears of tax.
5. The pleas taken by the petitioners may be summarised as under :
(i) On February 16, 1974, the Secretary, Trade, Industries and Commerce, Government of Sikkim, issued a notification bearing No. 2/TIC for certain incentives to new industries in Sikkim with a view to promote orderly and speedy industrial development, and, inter alia, provided that a new industry shall be exempted from paying income-tax for a period of five years from the date the industry goes into production. Relying upon the notification, an application was made to the Director of Industries, Government of Sikkim, for a licence to set up a unit and the Government was duly informed that petitioner No. 1 would be claiming exemption from income-tax under the terms of the notification. The Director of Industries, Government of Sikkim, by, a letter dated November 9, 1981, conveyed to petitioner No. 1 the approval of the Government for setting up a.cigarette manufacturing unit in collaboration with ITC Ltd. subject to the conditions specified in the said letter. Furthermore, there is a participation clause in the notification and the terms thereof have been complied with. Besides, the Government of Sikkim decided not to participate in the venture. Moreover, taxes have not been levied and collected from other cigarette industries similarly circumstanced.
(ii) The directors or shareholders of the company are not liable to discharge the income-tax liability of the company, the company being a body corporate and a juristic person.
(iii) The Income-tax Manual and the Notification No. 1220-200/IT and ST dated December 20, 1973, were neither signed nor approved by the Maharaja of Sikkim and the originals have not been produced. The Maharaja of Sikkim did not have any rules of business or any rules of allocation of business and so it was necessary that all the orders and notifications should have been issued under his signatures. Though a Law Commission has been functioning in this State since 1976, the Income-tax Manual and the Notifications have not been published by the Commission for the reason that the Commission was not sure about the correctness and the authenticity of the Manual and the notifications.
(iv) Income-tax was collected in Sikkim since 1910 or since before that without any law and the people of Sikkim used to pay such taxes voluntarily as and when demanded by the officials of the then Maharaja. The Sikkim State Income-tax Manual, 1948, is a compilation of guidelines prepared by the officers who used to collect taxes. The Manual is not juris-prudentially legislative.
(v) Parliament has the exclusive power to make laws with respect to any of the matters enumerated in the Union List and income-tax falling in that list could be legislated upon only by Parliament and, therefore, the Sikkim State Income-tax Manual is not a valid law.
(vi) Income-tax falls within the Union List and so appointment of Income-tax Officers and appellate authorities after April 26, 1975, must have been by the Central Government and neither the State Legislature nor the State Government has any jurisdiction to make any order or issue any notification relating to income-tax. Therefore, since the appointments of Income-tax Officers and appellate authorities were made by the State Government, the appointments were without jurisdiction and consequently the actions taken by them are also without jurisdiction.
(vii) Under Clause 22 of the Manual, appeal lies to his Highness the Maharaja of Sikkim which expression, under the Adaptation of Sikkim Laws (No. 1) Order, 1975, means the "State Government". According to the petitioners, the "State Government" means the Governor as advised by the Council of Ministers, and so the appointment of the appellate authority by the State Government is without the jurisdiction or competence of the State Government and so the appeal would have to be heard either by the Governor or the Council of Ministers.
(viii) The rejection of the appeal by the appellate authority for failure of the petitioners to deposit 50% of the tax assessed was unjustified, since there was no such pre-condition stipulated in the notification bearing No. 1220-200/IT and ST dated December 20, 1973, for admission of the appeal. In the alternative, there is no such pre-condition stipulated in the Manual and no such condition could be imposed by the Notification dated December 20, 1973, which is merely an administrative order.
(ix) There is no provision in the Manual for assessment of companies and the word "person" as defined in the said Manual does not include a "company" and, therefore, assessment of taxes on a company is without jurisdiction of the Income-tax Officer.
(x) The Income-tax Officer is empowered to charge income-tax on the gross sale proceeds of the previous year but he charged income-tax on the alleged gross sale proceeds of the years 1981-82 and 1982-83 on August 4, 1987, which was barred by limitation. The Income-tax Officer had the power and jurisdiction to make assessment on August 4, 1987, only for the accounting year 1986-87 and not prior to that.
(xi) The provisions of the Sikkim (Collection of Taxes and Prevention of Evasion of Payment of Taxes) Act, 1987 (hereinafter referred to as "the Recovery Act"), are more onerous than the procedure set out in Order No. 405/50 dated November 21, 1950. The Recovery Act does not provide that any proceedings which could be taken under the order can be continued or initiated under the provisions of the Recovery Act. Besides, the Recovery Act is beyond the legislative competence of the State Legislature since the State Legislature has no power or competence to legislate in respect of any matter relating to levy of income-tax.
6. The petition has been resisted by the respondents through a counter filed by respondent No. 3, namely, the Joint Secretary and the Income-tax Officer. It is averred that petitioner No. 1 is purely a private limited company where there are no shareholders other than the family members of petitioner No. 2 and so it is a partnership concern, though incorporated under the Registration of Companies Act, Sikkim, 1961.
7. Further, it is alleged that the notification of 1974 did not give any tax exemption automatically to a private limited company and Clause (vii) thereof explains the circumstances in which the exemption could be given, and the Income-tax Department neither gave any offer nor any representation for giving income-tax relief to the 1st petitioner. It is further alleged that steps are being taken for assessment of all the companies which have not been specifically exempted. It is also stated that the directors are also liable to pay taxes as they represented petitioner No. 1. The challenge to the validity of the Recovery Act is repudiated on the ground that it is an incidental legislation for collection of taxes the levy of which was within the competence of the Sikkim Legislature and the laws which were in force in Sikkim. It is further submitted that the Recovery Act supersedes the provisions of Order No. 405/50, in so far as the collection of taxes is concerned. According to the respondents, all the proceedings regarding assessment and recovery were taken lawfully and the appeal was rejected since the petitioner failed to deposit 50% of the tax levied.
8. The first point that arises for consideration is whether petitioner No. 1 was exempt from payment of income-tax for five years from the date of the commencement of production as per the provisions of Notification No. 2/TIC dated February 16, 1974, which runs as under ;
"OFFICE OF THE SECRETARY, TRADE, INDUSTRIES AND COMMERCE, GOVERNMENT OF SIKKIM, GANGTOK.
Notification No. 2/TIC Dated the 16th February, 1974.
INCENTIVES FOR GROWING INDUSTRIES IN SIKKIM.
For quite some time the Government of Sikkim have been considering offering suitable incentives for the new industries in Sikkim with a view to promote orderly and speedy industrial development of the country. The Government of Sikkim, after careful consideration of the matter, have now decided to make available the following concessions for new industrial establishments in Sikkim with immediate effect.
(i) Electricity :
The existing concessional rate of 25 N. P. per unit up to a monthly consumption of 1,500 units and 18 N. P. per unit above 1,500 units plus the usual rebate of 10% for payment within the due date will be continued till the Lower Lagyap Project is completed. The existing rate will be reviewed after the Lagyap Project is completed.
(ii) H. T. Lines :
There will be no charge for expansion of power lines except for the length and cost of equipment which are within the premises of the consumers, provided the return on capital invested on the power line beyond a highway or a public road is found to be adequate.
(iii) Water Tax :
Wherever the industries make their own arrangement for the supply of water, no royalty on water will be charged. If the Government are to make arrangements for supply of water for industrial use, it will be arranged on no profit no loss basis.
(iv) Pipe Lines :
Government may provide such pipelines up to the premises of the industries from the existing supply lines, at Government cost subject to adequate returns on the investment within the prescribed period.
(v) Taxes :
(a) Such mining rights as may be given to any firm, factory, industry, etc., shall be negotiable separately.
(b) Income-tax :' The industries shall be exempt from paying income-tax for five years from the date the industry goes into production.
(vi) Transportation of finished goods by S. N. T. :
The existing concessional rates for carriage of down load available to Fruit Preservation Factory and Sikkim Mining Corporation will be made available to new industries,
(vii) Participation :
(a) The guiding principle would be that the majority share in any new enterprise should be that of the Government of Sikkim but this shall be open to negotiation depending on the merits of each case.
(b) Small industries : The majority share should be that of the Sikkimese people if it is undertaken with the collaboration of outside entreprenerus.
(viii) Loan from the bank :
The Bank of Sikkim will be requested to allow loans to new industries at the rate of 10% per annum and Government may consider grant of subsidy to the bank for the difference between their concessional lending rates and the actual cost of their borrowing. In the case of public sector industry, affording Government guarantee for loans will not arise. For joint sector enterprises, Government may examine each case and on merits underwrite the loans.
BY order K. Sherab, Secretary (Industries). "
9. Petitioner No. 1 submitted a proposal to the Government of Sikkim in connection with the setting up of a cigarette manufacturing unit in collaboration with Messrs. ITC Ltd. By a letter dated November 9, 1981, of the Director of Industries, Government of Sikkim, the Government's approval to this proposal was conveyed subject to the following conditions :
1. Local persons should be employed in the unit.
2. Out of 400 million cigarettes per month to be produced in three shifts, 200 million cigarettes should be of filter type.
3. Land and site will be provided by the Government at Roathak Industrial Area.
4. Kanchenjunga Properties Private Limited should have 5l (fifty one) per cent. share in participation with ITC Limited.
10. There is nothing in this letter dated November 9, 1991, to show whether petitioner No. 1 was to be entitled to exemption from payment of income-tax or whether petitioner No. 1 had informed the Government that the company would be claiming such exemption. No copy of the letter of petitioner No. 1 submitting the proposal, in consequence of which the letter dated November 9, 1981, was sent by the Government was filed by any of the parties. Therefore, there is nothing on record to substantiate the plea of the petitioners that the Government had been duly informed that the company would be claiming income-tax. In fact, certain pleadings of an earlier Writ Petition bearing No. 10 of 1982, G. B. Chettri v. State of Sikkim, negative the plea of the petitioners. That petition was brought as a public interest litigation by five employees of a rival cigarette manufacturing unit, namely, the Sikkim Tobacco Private Ltd., that set up a unit in collaboration with Golden Tobacco Company Ltd., for revoking the permission granted by the Government, vide letter dated November 9, 1981, to the present petitioner No. 1, inter alia, on the ground that, in view of the provisions of the notification dated February 16, 1974, no new industry which was not a small scale industry could be set up in Sikkim unless the Government of Sikkim had a share in it and, therefore, grant of the permission to petitioner No. 1 was in breach of that notification which constituted law. It was further alleged in paragraph 37 of the petition that a new industry was not required to pay tax for the first five years and, therefore, the State of Sikkim would not be earning any revenue whatsoever from the purely private sector undertaking of petitioner No. 1 and this would be against the Interest of the Government of Sikkim and the Sikkimese people, though petitioner No. 1 would be enjoying all the benefits made available to the industries in Sikkim. Further, it was pleaded that the Government could not give the benefit of the concessions enumerated in the notification dated February 16, 1974, without enforcing the obligations contained therein, particularly Clause (vii)(a) thereof.
11. Shri Mahavir Prasad Agarwal, petitioner No. 2 in the present petition, who is one of the directors of petitioner No. 1 filed a counter-affidavit in that case on May 17, 1982. He denied, that the notification dated February 16, 1974, had any legal sanctity attached to it and averred that it was a mere notification which related to the grant of certain incentives only. Further, it was stated that there was no law by which the State of Sikkim could compel a new intending industry to derive the benefits or incentives under the said notification. Following extracts from his affidavit are quite revealing on the point:
"25. ... I say and submit that although there is no law for registration or licensing of industries other than small scale industry in the State of Sikkim, nevertheless, from the administrative point of view, it is always expedient and commercially prudent to obtain the approval and blessings of a State Government whenever a new industry is to be established in that State. Industry has constantly to deal with the Government at various levels and it will be foolhardy for entrepreneurs to set up an industry in a State where the State Government is opposed to the said industry being set up. In view of the aforesaid the promoters of the answering respondent approached the Government of Sikkim for latter's approval. Furthermore, since the answering respondent's project required that land be made available to it by the State Government, it was considered appropriate that the State Government approve the establishment of the said factory."
29. ... It is submitted that the guidelines prescribed in the alleged notification dated February 16, 1974, only apply to the case of an industry seeking the benefits under the said alleged notification. Where, therefore, an industry does not seek to obtain or derive benefits enumerated thereunder, there is no question of the alleged notification having any application. Even assuming, therefore, without admitting that the said guidelines prescribed that the Government must have a share in the equity participation of a company not being a small scale industry, these guidelines could only come into play and would, therefore, only apply where the concerned industry has asked for and actually received such benefits or is to receive such benefits. In the present case, the answering respondent had neither asked for nor received any benefits under the said alleged notification and, therefore, in any event, and without prejudice to the contention that the alleged 1974 notification has no legal sanctity, the said alleged notification does not prohibit the setting up of a private sector enterprise like that of the answering respondent in the State of Sikkim. It is further submitted that the question whether the State Government should or should not participate in the equity of a new industry is a matter of discretion and/or economic policy of the concerned Government. Various factors have to be considered in this behalf..."
"37. In reply to paragraph 37, I say and submit that assuming without admitting that the said alleged notification dated February 16, 1974, is law and applies to incentives to new industries which are being set up, the answering respondent-company has not applied for and has not obtained any benefits thereunder."
12. Thus, in the counter filed by the present second petitioner in Writ Petition No. 10 of 1982, it was made clear that petitioner No. 1 company was not claiming exemption from income-tax. Rather, the petitioners emphasised that the benefits stipulated in the notification could not be forced on them. Undoubtedly, the petitioners did not make it known that they would claim exemption from income-tax.
13. Now, the question is whether, even though the petitioners did not claim exemption from income-tax at the time of the setting up of the cigarette manufacturing unit, they are nevertheless entitled to exemption under the notification of 1974. It is contended on behalf of the petitioners that the tax exemption was available to a new unit under paragraph (v)(b) on its own terms. However, a close analysis of the notification would show that it merely purported to specify the concessions which the Government had decided to make available to the new industrial establishments in Sikkim without creating any legal rights or obligations. Some of these concessions were to be provided if the return on capital invested was found to be adequate, as in paragraphs (ii) and (iv), or, were to be provided where the industries did not make their own arrangement as in paragraph (iii), or were negotiable as in paragraph (v)(a), or were to be considered on the merits of each case as in paragraph (viii). In their very nature, these concessions required some Government order to become available. It is inconceivable that the Government would have intended to give any of the concessions, if it was not satisfied about the participation referred to in paragraph (vii), where even negotiation was contemplated.
14. Shri S.R. Sarkar, learned counsel appearing on behalf of the petitioners, has contended that the whole of the notification of 1974 except paragraph (v)(b) was repealed by the Sikkim Industries Licensing Ordinance, 1982, and, therefore, only that paragraph is to be read and, if this is done, then it would appear that the exemption was automatic. There is no merit in the contention that the exemption which was not automatic before the repeal of a portion of the notification would become automatic after the repeal. After the merger of Sikkim with India in the year 1975, the State Legislature did not have the competence to enact any law or amend the pre-existing law about income-tax, income-tax being a Central subject. Besides, the argument that only paragraph (v)(b) of the notification continued after the promulgation of the Ordinance has no merit for the reason that Section 9 of the Ordinance was subsequently repealed by the Sikkim Industries Licensing Act, 1982, as if Section 9 of the Ordinance never existed.
15. Section 9 of the Ordinance runs as under :
"9. The Notification No. 2/TIC dated 16th February, 1974 (entitled : Incentive for Growing Industries in Sikkim), except paragraph (v)(b) thereof (relating to income-tax) is hereby repealed. This section shall be deemed to be have come into force with effect from the 24th day of May, 1976."
16. Section 8 of the Act runs as under :
"8. The Notification No. 2/TIC, dated the 16th February, 1974, relating to Incentive for Growing Industries in Sikkim except paragraph (v)(b) and paragraph vii(a) and (b) thereof (relating to income-tax and participation by the Government of Sikkim and Sikkimese people) is hereby repealed. This section shall be deemed to have come into force with effect from the 24th day of May, 1976,"
17. Learned counsel for the petitioners has contended that once the whole of the notification except paragraph (v)(b) was repealed by the Ordinance, paragraph (vii)(a) and (b) did not survive and, therefore, it was not permissible for the Legislature to provide in the Act that paragraph (vii)(a) and (b) would continue. Thus, according to learned counsel, the participation clause existed no more in law. The Supreme Court made it clear in T. Venkata Reddy v. State of Andhra Pradesh, AIR 1985 SC 724, that an Ordinance is to be treated as being effective till it ceases to operate. But, at the same time, it has also been made clear that the Legislature is not powerless to bring into existence the same state of affairs as existed before the Ordinance was passed even though they may be completed and closed matters under the Ordinance. The court observed (at p. 734) :
"20. We do not, however, mean to say here that Parliament or the State Legislature is powerless to bring into existence the same state of affairs as they existed before an Ordinance was passed even though they may be completed and closed matters under the Ordinance. That can be achieved by passing an express law operating retrospectively to the said effect, of course, subject to the other constitutional limitations. A mere disapproval by Parliament or the State Legislature of an Ordinance cannot, however, revive closed or completed transactions."
18. In the present case, the Act came into force on the same date on which the Ordinance came into force, i.e., June 19, 1982, except for Section 8. Thus, the repeal of the Ordinance under Section 17(1) took effect from the date of promulgation of the Ordinance itself, i.e., June 19, 1982. Section 8 of the Act came into force from the same date on which Section 9 of the Ordinance became effective, i.e., May 24, 1976. The result thus was that Section 9 of the Ordinance was repealed as if it never existed. Thus, paragraphs (v)(b) and (vii)(a) and (b) continued to exist from May 24, 1976, by virtue of Section 8 of the Act.
19. The petitioners have alleged that Clause (vii) of the notification of 1974 has been complied with by them because their cigarette manufacturing unit was a small scale industry and, in the circumstances, the requirement stipulated in the Director of Industries letter dated November 9, 1981, that Kanchenjunga Properties (Private) Ltd. should have 51% of the shares in participation with ITC Ltd. would only mean that 51% of the shares should be held by the local promoters of petitioner Nc. 1. The submission that the manufacturing unit was a small scale industry is repudiated in the affidavit filed on behalf of the respondents and there is nothing on record to substantiate the petitioner's allegation in this behalf. In fact, as stated earlier, in the earlier Writ Petition bearing No. 10 of 1982, where the petitioners of that case challenged the permission granted to the present petitioner No. 1 on the ground that a unit other than a small scale unit could not be permitted to be started without the participation of the Government, petitioner No. 1 nowhere alleged that it was a small scale unit and so participation of the Government was not necessary. Rather, it was pleaded that no benefits under the notification were being claimed. Further, the petitioners have alleged in paragraph 5 of the present petition that, during the period of about one year from November, 1981, to December 31, 1982, petitioner No. 1 had a total turnover of more than Rs. 10 crores. In the very nature of things, it would be inconceivable that this could be so in a small scale industry. Then the petitioners pleaded that the Government decided not to participate in the venture and so the exemption could not be denied for no fault of theirs. This only emphasises the fact that the exemption was not automatic and it required some Government order to become available. It was for the Government to decide, having regard to all the relevant factors, including the one about profitability of the unit, as to whether to grant or not to grant the exemption. It was for this reason and also because the petitioners did not want to be bound by the obligations contained in the notification that they took the stand in the earlier writ petition that they did not intend to take the benefit of the exemption of income-tax under the notification.
20. The petitioners have also taken the plea of discriminatory treatment against them by alleging that the respondents have not levied and collected income-tax from other cigarette manufacturing companies similarly circumstanced. To this contention, the reply of the respondents is that steps are being taken for assessment of all the companies which have not been specifically exempted. There can be no doubt that everyone is entitled to equality of treatment. It is the duty of the State to levy tax on every person who is liable to pay tax. There is no discretion whether to impose or not to impose tax on a person who is liable to pay tax, So, when some persons have unjustifiably been left out of the tax net, others who have been proceeded against, cannot claim to be left out, though as citizens having substantial interest in that the State gets its due revenue for the betterment and well being of the people at large, including themselves, they may claim that others who are also liable to pay tax must not be left out. The concerned authorities should, therefore, see that those who have been left out be also proceeded against.
21. Arguments were also advanced on the question whether the notification of 1974 amounted to a pre-merger law within the meaning of Clause (k) of Article 371F of the Constitution. But, since, in view of the above discussion, petitioner No. 1 is not entitled to exemption under the notification even if the notification is treated as law, it is not necessary to decide this question. Accordingly, it is held that petitioner No. 1 was not exempt from paying income-tax under the Manual.
22. Now, the question is whether the directors or shareholders of the company cannot be proceeded against for discharging the tax liability of the company, the company being a body corporate and a juristic person. The petitioners have alleged that petitioner No. 1 company being limited by shares and as a juristic person, petitioners Nos. 2 to 5 who have already paid the value of their shares cannot be made liable to pay the tax due from the company. There is no doubt about the true legal position that the company in law is equal to a natural person and has a legal entity of its own. The entity of the company is entirely separate from that of its shareholders ; it bears its own name and has a seal of its own ; and it can sue and be sued exclusively in its own name for its own purpose. Even then, it has to be remembered that it is brought into existence by a human agency and as such may be used as an instrument or as a mask or cloak for some fraudulent activity by its promoters or as a device or stratagem for some illegal or improper purpose. Where the company is used as a cloak or as a device, the court does not hesitate to ignore the principle of legal person of the company and look behind the veil of its incorporation to grant appropriate relief. The Supreme Court observed in Tata Engineering and Locomotive Co. Ltd. v. State of Bihar [1964] 34 Comp Cas 458 ; 468 ; AIR 1965 SC 40, 46.
"(24) . . . However, in the course of time, the doctrine that the corporation or a company has a legal and separate entity of its own has been subjected to certain exceptions by the application of the fiction that the veil of the Corporation can be lifted and its face examined in substance. The doctrine of the lifting of the veil thus marks a change in the attitude that law had originally adopted towards the concept of the separate entity or personality of the Corporation. As a result of the impact of the complexity of economic factors, judicial decisions have sometimes recognised exceptions to the rule about the juristic personality of the corporation ..."
23. Further it was observed (at p. 470 of 34 Comp Cas ; at p. 47 of AIR 1965 SC) :
"(27) . . . Broadly stated, where fraud is intended to be prevented, or trading with an enemy is sought to be defeated, the veil of a corporation is lifted by judicial decisions and the shareholders are held to be the persons who actually work for the corporation."
24. In CIT v. Sri Meenakshi Mills Ltd. [1967] 63 ITR 609, 616 ; AIR 1967 SC 819, 822, the Supreme Court said :
" (8) ... It is true that from the juristic point of view the company is a legal personality entirely distinct from its members and the company is capable of enjoying rights and being subjected to duties which are not the same as those enjoyed or borne by its members. But in certain exceptional cases the court is entitled to lift the veil of corporate entity and to pay regard to the economic realities behind the legal facade. For example, the court had power to disregard the corporate entity if it is used for tax evasion or to circumvent tax obligation ..."
25. Again the Supreme Court reiterated in L. I. C. of India v. Escorts Ltd, [1986] 59 Comp Cas 548 ; AIR 1986 SC 1370, 1418.
"(90) . . . Generally and broadly speaking, we may say that the corporate veil 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 are inextricably connected as to be, in reality, part of one concern. It is neither necessary nor desirable to enumerate the classes of cases where lifting the veil is permissible, since that must necessarily depend on the relevant statutory or other provisions, the object sought to be achieved, the impugned conduct, the involvement of the element of the public interest, the effect on parties who may be affected, etc."
26. Jagadish Swarup, in his Commentaries on the Companies Act, 1956, 2nd Edition, Vol. 1, at page 110, has referred to the observations made by Sanborn J., in United States v. Milwaukee Refrigerator Transit Co., 142 Fed 247 (255) quoted in Ballantine on Corporation at p. 293 "If any general rule can be laid down, in the present state of authority, it is that a corporation will be looked upon as a legal entity as a general rule, and until sufficient reason to the contrary appears ; but, when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons." In Kalinga Tubes Ltd. v. Shanti Prasad Jain, AIR 1963 Orissa 189, the view was expressed that a private limited company is, in substance, a partnership.
27. Law is thus firmly established that, in certain exceptional cases, the court is entitled to lift the veil of corporate entity and pay regard to the economic realities behind the legal facade to prevent tax evasion and circumvention of tax obligation and to regard the corporate entity as an association of persons. In the present case, the petitioners have pleaded in paragraph 1 of the petition that the shareholders of the company carry on business or hold property through the agency or instrumentality of the company. In paragraph 4, they have said that 51 % of the shares were held by the members of a joint Hindu family firm, M/s. Balchand Udairam, and the remaining 49% shares by M/s. ITC Limited or its subsidiaries of group companies. Further, it is stated that four members of the said joint Hindu family firm, M/s. Balchand Udairam, were appointed as directors of petitioner No. 1 and four more directors were appointed from the ITC group. The respondents have pleaded that the Income-tax Department is aware of only four directors. The petitioners have not produced any evidence to show that four directors were appointed from the ITC group. In any case, more than half of the shares were held by only one family and the remaining by another group. The petitioners have alleged that during the period from November 1981, till December 31, 1982, during which period only, the company carried on manufacturing activity, the company made a profit in excess of Rs. 6.30 crores and the board of directors proposed a dividend of Rs. 6.28 crores. As stated earlier, the petitioners were then not claiming exemption from income-tax under the notification of 1974 and, therefore, they had no doubt that income-tax had to be paid. The question is : Did the distribution of almost the whole profit amongst the members of the two groups without making provision for the payment of income-tax not amount to a fraudulent or improper act on the part of the directors ? Had they made provision for income-tax, they could not have distributed almost the whole of the profits amongst themselves, their family members and members of the group as they did. So, if, in the circumstances, the directors are required to discharge the income-tax liability of the company, it will not amount to their making good any loss which could have been incurred by the company for, then they will merely be parting with the money which they were not entitled to have with themselves or their family members or members of another group. It is significant to note that income-tax liability is much less than what was distributed by the directors as dividend. It was not disputed during arguments that the assets of the company are not enough to satisfy the income-tax liability. Where profits have been unjustifiably distributed and tax obligation is sought to be circumvented by treating the corporate entity as a shield, to allow the directors to defeat the claim of the Income-tax Department would be to justify wrong behind the corporate veil. The corporate veil should, therefore, be lifted to prevent circumvention of tax evasion and the directors and the shareholders should not be allowed to continue to retain the amount which must have already been paid as income-tax. Therefore, the shareholders and the directors are liable to discharge the income-tax liability of the company. The liability of the directors is joint and several though, subsequently, they may pursue their own remedies against other shareholders in order that the burden may be borne equitably by all concerned.
28. As regards the contention of the petitioners that the Income-tax Manual and the notification bearing No. 1220-200/IT and ST dated December 20, 1973, were neither signed nor approved by the Maharaja of Sikkim, copies of the Manual and the relevant notification do not purport to show that the originals bore the signatures of the Maharaja. Copy of the Manual does not purport to show that the original bore the signature of any person. The copy of the Notification No. 1220-200/IT and ST dated December 20, 1973, shows that the original bore the signature of the Finance Secretary, Income-tax and Sales Tax Department. The words "By Order" are also written indicating that the notification was issued by the Order of the Chogyal. It is true that none of the copies shows that the originals bore the signature of the Chogyal and the original of none of them was produced by the State Government. But, merely for this reason, it cannot be said that these did not have the approval of the Chogyal. Whether the Maharaja of Sikkim had any rules of business or any rules of allocation of business is not of any relevance, because, to consider the validity of the pre-merger laws, such questions have not to be gone into. The only relevant factor which has to be considered is as to whether the pre-existing laws were in force immediately before the date of the merger. The fact that the Law Commission has not been able to publish the Manual and the notifications does not lead to the inference that the Commission was not sure of the correctness and authenticity of the Manual and the notifications. There can be no doubt about the factual position that the Income-tax Manual was in force in the State of Sikkim prior to the merger since Government employees the businessmen were paying income-tax under no other law than the Manual of 1948. Since these were in force immediately before the appointed day, they are laws as per the provisions of Clause (k) of Article 371F. It is true that the Income-tax Manual and the relevant notification have not been published till now so as to bring them within easy reach of the people and even the courts have to act on the typed or cyclostyled copies. The need for publication of laws can never be over-emphasised since, without publication, it is difficult to get access to them. So, the State in order to ensure proper compliance ought to have published the laws. However, only for this reason, the laws to which access could have been had, if a search had been made for them, though with difficulty did not become inoperative, particularly when they are primarily concerned with levy and collection of taxes and not with punishment for offences for non-compliance.
29. As for the contention of the petitioners that the Income-tax Manual is not jurisprudentially legislative, it being a mere compilation of guidelines prepared by the Officers who used to collect taxes, there is absolutely no basis for this contention. There is no warrant for the view that the guidelines were prepared by the Officers who used to collect taxes and that they had no sanction of the Maharaja. It is unthinkable that the tax would have been collected without the sanction of the Maharaja. It is difficult to believe that income-tax was collected since 1910 or even before that without any law or that the people used to pay tax voluntarily. Voluntary compliance with law is different from saying that the payments were made without any sanction. The very word "tax" carries the implication of compulsion. A bare perusal of the Manual would show that its issue was an exercise of a legislative act. It imposes liability to pay taxes, directs all persons doing business to complete their accounts within a prescribed period, makes provision for imposition of fine where a statement or a verification in an income-tax return is found to be false, empowers the Income-tax Officer to issue process to enforce the attendance of persons for the purpose of enquiry into any matter arising out of assessment of income-tax and makes provision for appeal. Thus, it contains a command which has to be obeyed by the persons covered thereunder. Accordingly, the contention that the Manual is not jurisprudentially legislative is not valid.
30. The next contention of the petitioners is that since Parliament has the exclusive power to make laws with respect to income-tax, the subject of income-tax falling in the Union List, the Sikkim State Income-tax Manual is not a valid law. However, this contention is contrary to the provisions of Clause (k) of Article 371F which provides that, notwithstanding anything in the Constitution, all laws in force immediately before the appointed day in the territories comprised in the State of Sikkim or any part thereof shall continue to be in force therein until amended or repeated by a competent Legislature or other competent authority. There is nothing in the provision to suggest that, in order to be valid, the subject with which the pre-existing law dealt must be within the legislative competence of the State Legislature. On the other hand, the non-obstante clause makes it clear beyond any doubt that pre-existing laws are valid even if they are contrary to any other provision in the Constitution.
31. The next contention of the petitioners that since the subject of income-tax falls within the Union List, the appointment of Income-tax Officers and appellate authorities must have been by the Central Government is also not valid. Since the implementation of the law contained in the Sikkim State Income-tax Manual is the responsibility of the State Government, it is that Government that has the jurisdiction to appoint the Officers to perform the duties thereunder. Further, Clause 2(x) of the Manual defines "Income-tax Officer" as meaning a person appointed by the Government entrusted with the conduct or management of the levy or assessment of income-tax coming within the purview of the Manual. Sub-clause (vi) of that clause defines "Government" as "The Government of Sikkim". Both these provisions make it abundantly clear that an Income-tax Officer under the Manual has to be appointed by the State Government. The fact that the subject of income-tax falls within the Union List has no bearing on this point,
32. As regards the question as to the authority competent to hear an appeal against the assessment of income-tax, Clause 22 of the Manual provides that an "appeal from the assessment of income-tax or penalty imposed under any of the foregoing clauses will lie to His Highness the Maharaja of Sikkim through the department concerned." Under the Adaptation of Sikkim Laws (No. 1) Order, 1975, issued in exercise of powers conferred by Clause (1) of Article 371F of the Constitution by the President, the expression "His Highness the Maharaja of Sikkim" means the "State Government". The expression "State Government" has to be given a reasonable interpretation as per the constitutional scheme. Merely because an appeal was to be heard before the merger by the Maharaja in person, it does not mean that the appeal will have to be heard after the merger by the Governor or all the Ministers sitting together. Under Clause (1) of Article 166, all executive action of the Government of a State shall be expressed to be taken in the name of the Governor. This will have to be so even when the concerned file is not to be put up before the Governor. Under Clause (3) of that article, the Governor shall make rules for the more convenient transaction of the business of the Government of the State, and for the allocation among Ministers of the said business in so far as it is not business with respect to which the Governor is by or under the Constitution required to act in his discretion. Under the Government of Sikkim (Allocation of Business) Rules, 1975, made by the Governor in exercise of the powers conferred by Clause (3) of Article 166, the subject "Taxation and allied measures" falls under "Finance Department". A notification bearing No. 654/Home/87 dated May 27, 1987, was issued by the Chief Secretary, Government of Sikkim, appointing the "Secretary to the Government of Sikkim in the Finance Department" as the appellate authority. Undoubtedly, on these facts, the Finance Secretary meets the requirement of the "State Government" as an appellate authority. Therefore, there is no merit in the contention that the appeal would have to be heard either by the Governor or the Council of Ministers.
33. As regards the contention about the condition of deposit of 50% of the assessed amount as a precondition for preferring an appeal, paragraph 3 of the Notification bearing No. 1220-200/IT and ST dated December 20, 1973, provides that an "assessee may present an appeal for the revision of assessment made against him after payment of fifty per cent. of the amount assessed in which case he shall not be treated as in default in respect of the amount in dispute. He will not be, however, treated as such if the appeal, on determination, has been found to be frivolous and preferred only to gain time for payment." The requirement that an appeal may be filed after payment of 50% of the amount assessed, necessarily means that an appeal cannot be filed without payment of that amount. When a person is not to be treated as a defaulter is not germane to the question whether an appeal can or cannot be preferred without depositing the amount. However, it has been made clear that if the appeal is preferred after depositing the amount, the assessee would not, ordinarily, be treated as a defaulter though he will be treated as a defaulter if the appeal, on determination, is found to be frivolous and preferred only to gain time for payment.
34. As regards the alternative plea, Clause 22 of the Manual reads as under :
"22. Appeal against assessment under this Manual.--Appeal from the assessment of income-tax or penalty imposed under any of the foregoing clauses will lie to His Highness the Maharaja of Sikkim through the Department concerned."
35. There is no doubt that the Manual does not require any deposit to be made as a condition precedent to prefer an appeal. However, as observed earlier, the Notification bearing No. 1220-200/IT and ST dated December 20, 1973, prescribes such a condition in paragraph 3.
36. This notification was issued by the Secretary Finance, Income-tax and Sales Tax Department "By Order", indicating that the notification was issued by order of the Chogyal. It contains certain commands in its 3 paragraphs which have to be obeyed by the people of Sikkim who are covered thereunder. Thus, the notification is not merely an administrative order, but, having been issued in exercise of legislative power, is a pre-merger law, saved by Clause (k) of Article 371F, and has the legal effect of amending the Manual to the extent stated in paragraph 3 thereof.
37. As regards the next point, the petitioners have alleged that there is no provision in the Sikkim State Income-tax Manual for assessment of companies and the word "person" as defined in the Manual does not include a "company" as an entity for assessment. Clause 4(i) of the Manual says : "Income-tax shall be charged on the gross sale proceeds of previous year of all persons engaged in business at the rate prescribed." Clause 2(vii) says : "'Person' includes individual, joint or undivided family, firm or any other association of individuals." Evidently, the definition is inclusive and not exhaustive. This does not exclude from its sweep the one that is ordinarily included in the expression "person". A company is a legal entity and an artificial person, distinct from its members and is thus covered within the expression "person". There is nothing in the definition to suggest the exclusion of such a person from its scope. Furthermore, the definition includes within its sweep "any other association of individuals". The company is also an association of persons and is thus covered within these words as well. Clearly, the company is included within the definition of "person" and is eligible to be taxed under the Manual.
38. The next contention of the petitioners is that, as per the Manual, income-tax could be charged on the gross sale proceeds of the previous year and so on August 4, 1987, assessment could be made only for the accounting year 1986-87 and not prior to that year. As stated earlier, Clause 4(i) of the Manual provides that "income-tax shall be charged on the gross sale proceeds of the previous year of all persons engaged in business at the rate prescribed." Previous year is defined in Clause 2(viii) as under :
"2(viii). 'previous year' in respect of an assessment means the financial year from 1st April to 31st March preceding the year in which tax assessed is to be collected."
39. If the relevant words employed in the definition of "previous year" are substituted for the expression, "previous year" in Clause 4(i), the latter clause will read like this :
"Income-tax shall be charged on the gross sale proceeds of the financial year from 1st April to 31st March preceding the year in which tax assessed is to be collected from all persons engaged in business at the rate prescribed"
40. Thus, there are no words of limitation to restrict the assessment only in respect of the gross sale proceeds of the year which immediately precedes the year in which assessment is made. Neither Clause 4(i) nor Clause 2(viii) says in which year an assessment is to be made. "Previous year" is defined with reference to the year in which tax assessed is to be collected but does not say when tax can be assessed or for which period tax can be assessed. Evidently, assessment cannot be made in a year for the sale proceeds of the same year in which assessment is made. At the earliest, assessment can be made in the financial year which immediately follows the year for which assessment is to be made. Ordinarily, the preceding year for which assessment is to be made, would be the previous year. But this does not mean that a previous year will cease to be a previous year for the purpose of Clause 4(i) if one or more years pass before the assessment is made.
41. Rule of construction is well settled that the language of a statute imposing a tax must be strictly construed. But the construction must be fair, reasonable and just on the language used. Since the manual does not define "previous year" precisely and it is not stated during which period alone an assessment can be made, it is necessary to look into the context. There is no specific provision in the Manual enjoining upon persons liable to pay tax to file income-tax returns, yet the fact that a return could even then be filed is evident from Clause 20 which makes a reference to an income-tax return by making a provision for imposition of fine on a person who makes a false statement or a false verification in an income-tax return. It is common ground between the parties that, in actual practice, the Income-tax Officer used to visit the business establishments of the people and make assessment by getting relevant information from them and after looking into their relevant records. The Officer would ordinarily look into the records of the financial year preceding the financial year in which they made the visit, but, if, on account of the failure of the Officer to make the visit or on account of the failure of an assessee to prepare proper accounts or for any other reason, a particular year's income had escaped from being assessed, did it mean that assessment could not be made subsequently ? It would not be a fair and reasonable construction to put on Clause (4)(i) to hold that if tax could not be assessed on the sale proceeds of a year in the next financial year, the tax would be evaded on account of the bar of limitation in Clause 4(i) against the Chogyal, prohibiting the assessment in a subsequent year, even though an assessee could be punished with fine for making a false statement or a false verification in an income-tax return. Such a construction would be wholly incompatible with the context. Neither on strict construction, nor on a fair and reasonable construction in the background of the context, has the submission of the petitioners any substance. Fair and reasonable construction of Clause 4(i) would be to hold that, by using the expression "of the previous year", normal procedure which is ordinarily followed that income of a particular year is assessed in the next year, was mentioned, without the implication that if tax could not be so assessed, income would acquire immunity from tax liability. The submission of the petitioners in this regard thus fails.
42. The next contention raised on behalf of the petitioners is that the Sikkim (Collection of Taxes and Prevention of Evasion of Payment of Taxes) Act, 1987 (hereinafter referred to as Act No. 7 of 1987), is beyond the competence of the State Legislature, since the State Legislature has no power or competence to legislate on any matter relating to levy of income-tax. Under Section 4 of this Act, the Government was enjoined upon the duty to appoint one or more Inspectors for the purposes of the Act. "Tax" has been defined under Section 3(d) to mean a tax payable under the taxation laws in force in the State of Sikkim. Thus, this Act has been enacted for collection of taxes which are payable under the taxation laws in force in the State of Sikkim. Since income-tax which is payable under the Sikkim State Income-tax Manual has to be collected by the State Government, the argument of the petitioners that since income-tax is a subject falling under the Union List, the State Legislature has no competence to pass an enactment for the collection of that tax is without merit. The State of Sikkim is entitled to recover income-tax under the Manual not on account of any power given under any entry in the Seventh Schedule but because the Manual was a law in force in Sikkim immediately before the appointed day and continued to be in force by virtue of Clause (k) of Article 371F. It is a consequence of the doctrine of pith and substance that once a law in pith and substance falls within a legislative entry, the incidental encroachment on an entry in another list does not affect its validity. The machinery devised for the effective collection of tax is incidental or supplemental to the levy of tax and so, when the State has the competence to levy tax under any of the provisions of the Constitution, the State Legislature has the competence to devise an effective machinery for its collection.
43. Now, the question is whether the tax cannot be collected under the Recovery Act, its provisions being more onerous than those of Order No. 405/50 dated, November 21, 1950, which runs as under :
" SIKKIM STATE ORDER NO. 405/50 In supersession of all previous orders on the subject, the following rules shall govern the realisation of all public dues :
1. Whenever any moneys due to the Government become payable the officer-in-charge concerned shall issue a preliminary writ of demand notifying the amount and the date by which the defaulter shall pay the sum due into the bank (treasury).
2. Any objections preferred will be disposed of by the Officer-in-charge. A final writ of demand will then be served on the defaulter in the prescribed form, and if the objector is present during the objection proceedings, the notice may be served to him during these proceedings.
3. (a) If the legality of the demand is challenged (wholly or in part), the party demurring to pay may, within a period of three months, move the court for adjudication. ,
(b) If the court finds the objection frivolous or without proper cause, special costs may be awarded to the Department.
4. If no case is filed in court within the limitation period prescribed under Clause (3), it shall be presumed that the legality of the demand is accepted by the defaulter ; and the Officer-in-charge shall proceed to realise the amount as laid down in these rules.
5. Any suit filed after the expiry of the limitation period of three months calculated from the date of the final writ of demand shall be summarily dismissed.
6. If there is no response to the final writ of demand issued under Clause (a), the Officer-in-charge is hereby invested with the civil court's power to realise the amount due, by distress sale of movable and landed property of the defaulter, in that order, up to the extent of the demand.
Gangtok, J. S. Lall, I.C.S. The 21st November, 1950. Dewan, Sikkim State."
44. The procedure prescribed in this order was not found to be adequate and, therefore, to provide for measures for effective collection of taxes and also for prevention of evasion of due tax under the taxation laws in force in the State, the State Legislature passed the Sikkim (Collection of Taxes and Prevention of Evasion of Payment of Taxes) Act, 1987, which received the assent of the Governor on August 13, 1987. The respondents have alleged in their counter that the Act has superseded the provisions of Order No. 405/50 in so far as collection of taxes is concerned. The reason for adding the qualification that the supersession is only as regards the collection of taxes is that the order relates to the recovery of not only taxes, but also other Government dues. Provision for recovery of other types of public demands has been made by the State Legislature, by the enactment of the Sikkim Public Demands Recovery Act, 1988. The stand taken by the petitioners is contradictory inasmuch as, on the one hand, they have alleged that the provisions of the Sikkim (Collection of Taxes and Prevention of Evasion of Payment of Taxes) Act, 1987, are more onerous than the provisions of Order No. 405/50 ; on the other, they have sought a declaration that the Order is illegal, void and of no effect. Despite this contradictory stand, it is now necessary to consider whether Order No. 405/50 stands repealed by the Sikkim (Collection of Taxes and Prevention of Evasion of Payment of Taxes) Act as regards the collection of taxes.
45. Section 5 of the Act provides that every tax due to the Government of Sikkim shall be collected by the Inspector by distraint and sale of movable and immovable properties. Sub-section (1) of Section 6 provides that the Inspector shall serve a demand directing the payment of tax due on the person who is liable to pay, within seven days. Sub-section (2) provides the manner of service of such demand. Section 7(1) says that the Inspector shall attach the movable and immovable properties upon failure to pay the tax demanded within the stipulated time. Sub-section (2) provides for the procedure for attachment. Sub-section (1) of Section 8 provides that the Inspector shall, after due publication, sell the properties attached under Section 7 by public auction. Procedure for public auction has been prescribed in Sub-section (2). Sub-section (3) says that the Inspector shall appropriate the amount of tax due to the Government from out of the sale proceeds and refund the excess amount, if any, to the person whose property has been auctioned after defraying the expenditure incurred on public auction. Provisions have also been made regarding search and seizure and impostion of punishment. It would appear that the procedure prescribed in the Act is much more comprehensive and effective for the collection of taxes than that provided in Order 405/50. At the same time, it shortens the procedure. The prescription in the Order of first serving a preliminary writ of demand, then of disposing of objections, if any, then of issuing a final writ of demand and, thereafter, waiting for three months, when the party demurring to pay may move the court for adjudication, seems to be unnecessarily prolix in a tax matter. So much of procedure has been substituted for, in the Act, by the mere prescription to serve a demand. Besides, though paragraph 6 of the Order says that "the Officer-in-Charge is hereby invested with civil court's power to realise the amount due, by distress sale of movable and landed property of the defaulter, in that order," it does not provide for the manner in which the power is to be exercised. After the procedure has been provided for in the Act, the procedure contemplated in the Order cannot co-exist. In Sections 5, 6, 7 and 8, the word "shall" has been used which means that, after the commencement of the Act, no discretion has been left for proceeding under the Order. Therefore, Order No. 405/50 stands superseded by the Act in so far as the collection of taxes is concerned. However, on behalf of the petitioners, reliance has been placed on Northern India Caterers (Pvt) Ltd. v. State of Punjab, AIR 1967 SC 1581. There the question was whether Section 5 of the Punjab Public Premises and Land (Eviction and Rent Recovery) Act which provided for a speedier and less favourable procedure for the eviction of the unauthorised occupants of public premises repealed the ordinary remedy of a civil suit. The majority judgment delivered by Shelat J. said (at p. 1584) :
"... The rule of construction is that where a statute provides ir express terms that its enactment will repeal an earlier Act by reason of its inconsistency with such earlier Act, the latter may be treated as repealed. Even where the later Act does not contain such express words, if the coexistence of the two sets of provisions is destructive of the object with which the later Act was passed, the court would treat the earlier provision as impliedly repealed. A later Act which confers a new right would repeal an earlier right if the fact of the two rights co-existing together produces inconvenience, for, in such a case it is legitimate to infer that the Legislature did not intend such a consequence. If the two Acts are general enactments and the later of the two is couched in negative terms, the inference would be that the earlier one was impliedly repealed. Even if the later statute is in affirmative terms, it is often found to involve that negative which makes it fatal to the earlier enactment..."
46. Notice was taken of the fact that the word "may" and not "shall" was used in Section 5 which enabled the Collector to discriminate against some by exercising his power under Section 5 and take proceedings by way of a suit against others, both the remedies being simultaneously available to the Government. It was pointed out that if the ordinary law of the land and the special law provided two different and alternative procedures, one more prejudicial than the other, discrimination will result if it is left to the will of the authority to exercise the more prejudicial against some and not against the rest. It was held that undoubtedly Section 5 conferred an additional remedy over and above the remedy by way of suit and that by providing two alternative remedies to the Government and leaving it to the unguided discretion of the Collector to resort to one or the other and to pick and choose some of those in occupation of public properties and premises for the application of the more drastic procedure under Section 5, that action had lent itself open to the charge of discrimination and as being violative of Article 14. In the present case, no discretion has been left as regards the collection of taxes. This has been done by the use of the word "shall", as stated earlier. Thus, there is no option but to hold that Order No. 405/50 has stood repealed by the enactment of the Act in so far as the collection of taxes is concerned.
47. In the result, it is declared that the Sikkim State Order No. 405/50 dated November 21, 1950, stands repealed after the enactment of the Sikkim (Collection of Taxes and Prevention of Evasion of Payment of Taxes) Act, 1987, as regards the collection of taxes. In other respects, the petition is dismissed. There shall be no order as to costs.
48. DR. B. N. mISRA C. J.--Facts of the case, respective stands of the parties and the points raised by the petitioners have been noted by my learned brother in his judgment.
49. I come straight to the question whether, as argued by Mr. S. R. Sarkar, learned counsel appearing for the petitioners, the petitioners are entitled to exemption from payment of income-tax or, as submitted by Mr. Vepa P. Sarathi, learned Advocate-General appearing for the contesting respondents, the petitioners are liable to pay income-tax under the Taxation Laws in force in the State of Sikkim. In this context, it is worthy of note that, though in paragraph 3 of this writ petition, it is stated that an application was duly made to the Director of Industries, Government of Sikkim; for a licence to set up the unit and the Government was duly informed that petitioner No. 1, the company, would be claiming exemption from payment of income-tax in respect of its unit in terms of Government Notification No. 2/TIC dated February 16, 1974, neither the date of the petitioners' letter to the Director of Industries is disclosed nor has a copy of the said letter been produced by the petitioners before this court. No explanation is offered as to why this important letter has been withheld. If only a copy of this letter had been filed, it would have clearly shown whether or not the petitioners had informed the Government that they would be claiming exemption from payment of income-tax, It is significant to note that the affidavit to the present writ petition was sworn by Shri Mahavir Prasad Agrawal, one of the directors of petitioner No. 1, on November 5, 1987 (see the affidavit appended to the original writ petition before amendment) and surprisingly, the same Shri Mahavir Prasad Agrawal had filed an affidavit on behalf of the same company in Writ Petition No. 10 of 1982 on May 14, 1982, wherein, in paragraph 37, he had clearly stated that the company has not applied for nor obtained any benefits under Government Notification No. 2/TIC dated February 16, 1974. The two affidavits are contradictory and totally inconsistent. In the written argument submitted to this court by learned counsel for the petitioners, there is a reference to the application by petitioner No. 1 and the date of the letter is stated to be November 7, 1981, though the date is not mentioned in the writ petition. It is explained in the written argument that the whole idea of the said application was only to bring to the notice of Government that the petitioner was going to establish a new industry so that there might not be any difficulty in future to avail of the incentive guaranteed and/or promised. Thus, in the written argument submitted to the court, though there is a reference to the petitioners' letter, there is no mention that the petitioners had given any intimation to the Government that they would be claiming exemption from payment of income-tax. In view of the totally contradictory statements of Shri Mahavir Prasad Agrawal in the present writ petition and in Writ Petition No. 10 of 1982, and as the petitioners have failed to produce before this court a copy of their application to the Government to set up the unit as well as claiming exemption from payment of income-tax, it must be held that the petitioners have failed to prove that they had made any application to the Government to the effect that, on setting up their unit, they would be claiming exemption from payment of income-tax. Further, the petitioners have filed a copy of Order No. 1890/IT dated October 29, 1986, issued by the Income and Sales Tax Department of the Government of Sikkim, annexure 'X', wherein Anil Plastic Industries of Gangtok were exempted from payment of income-tax for a period of five years from the date of production. No such specific exemption order of the Government in respect of petitioner No. 1 has been filed in the present case. It must, therefore, be held that not only that the petitioners have failed to prove that they had applied for exemption or intimated to the Government that they would claim exemption from payment of income-tax, but the Government had also not passed any specific order in favour of petitioner No. 1 granting it exemption from payment of income-tax.
50. Learned counsel for the petitioners next submitted that exemption from payment of income-tax was automatic under Government Notification No. 2/TIC dated February 16, 1974, and as a new industry, petitioner No. 1 was entitled to exemption from payment of income-tax for a period of five years from the date of production irrespective of whether it had specifically applied for such exemption or not. In this context, it is also argued that on the coming into force of the Sikkim Industries Licensing Act in June, 1982, except paragraph (v)(b), all the other paragraphs of the Government Notification No. 2/TIC dated February 16, 1974, were repealed with effect from May 24, 1976, and as such the participation provisions contained in paragraph (vii) of the 1974 Notification were not applicable to the new unit established by petitioner No. 1. Learned Advocate-General, on the other hand, submitted that the aforesaid Ordinance was repealed by the Sikkim Industries Licensing Act, 1982, and, while paragraph (v)(b) of the 1974 Notification was retained as before, paragraph (vii)(a) and (b) was rein-troduced by the aforesaid 1982 Act with effect from May 24, 1976. According to learned Advocate-General, on the coming into force of the Sikkim Industries Licensing Act, 1982, the position obtaining prior to May 24, 1976, was again brought into existence. It may be recalled that paragraph (v)(b) of the 1974 Notification deals with exemption from income-tax while paragraph (vii) (a) and (b) deals with the guidelines for participation. Learned counsel for the petitioners relies upon a decision of the Calcutta High Court in Haran Chandra Dutt v. State of West Bengal, AIR 1952 Cal 907, in support of his submission that acts completed during the life of an Ordinance are permanent in nature and their effect continues notwithstanding the expiry of the ordinance. In the Calcutta case, it was held that the old District Board which stood dissolved by virtue of a Government Notification issued under one of the clauses of the Ordinance could not be revived on the expiry of the Ordinance. That decision has no application to the facts of this case. Here, the 1982 Act has retrospectively restored the pre-May 24,-1976 position. Subject to Constitutional limitation, it is permissible for the Legislature to bring into existence the same state of affairs as obtained before the date of passing of the Ordinance by enacting an express law operating retrospectively to the said effect. This principle has been authoritatively laid down by the Hon'ble Supreme Court in its decision in T. Venkata Reddy v. State of Andhra Pradesh, AIR 1985 SC 724 (see paragraph 20). In the present case, the Sikkim Industries Licensing Act of 1982 restored the same state of affairs as existed prior to May 24, 1976 by virtue of its retrospective operation from that date. Thus, it follows that paragraph (v)(b) and paragraphs (vii)(a) and (b) of the 1974 Notification continued in force.
51. It has been argued by learned counsel for the petitioners that paragraphs (v) and (viii) of the 1974 Notification were independent of each other ; the former dealt with exemption from income-tax and the latter with guidelines for participation and, therefore, the question of exemption had nothing to do with the requirement of participation. It seems that--learned counsel is seeking to attach to the 1974 Notification a meaning which it was never intended to bear. The 1974 Notification should not be broken up as suggested by learned counsel; both parts must be read as integral parts of one document, one limb dealing with incentives and the other with guidelines on participation. In order to avail of the concession, the industry must first abide by the guiding principles relating to participation and that would be a proper reading of the 1974 Notification.
52. Learned counsel for the petitioners next referred to annexure 'B', Government letter dated November 9, 1981, wherein certain conditions were laid down by the Government for compliance by the petitioners and submitted that those conditions had been complied with. Local promoters of petitioner No. 1, i.e., petitioners Nos. 2 to 5 held 51% shares while I.T.C. Ltd. held 49% shares. On this basis, it has been argued that petitioner No. 1 had satisfied the participation provisions contained in paragraph (viii)(b) of the 1974 Notification and as such was entitled to exemption from payment of income-tax as provided in paragraph (v)(b). It is not possible to accept this contention as no materials have been placed before the court to show that petitioner No. 1 was a small industry as contemplated in the provision contained in paragraph (vii)(b). On the other hand, when a sum of rupees ten crores twenty lakhs and sixty-two thousand odd is the declared income for the period from October 15, 1981, to January 31, 1983, as per the "profit and loss account" for that period appended to annexure "C" (p. 142) by the petitioner, it would not be reasonable to hold that petitioner No. 1 was a small industry. Further, Government letter dated November 9, 1981, annexure "B" does not at all deal with any question of payment of income-tax or exemption from payment of the same. In paragraph 4(H) of the writ petition, reference is made to the affidavits filed on behalf of the State of Sikkim in Writ Petitions Nos. 1 of 1982 and No. 10 of 1982. A copy of the affidavit filed on behalf of the State of Sikkim in Writ Petition No. 10 of 1982 has been filed by the petitioner as annexure "R". On going through the averments contained in the affidavit filed by the State of Sikkim and the contents of paragraph 4(H) of the writ petition, it is seen that, in some cases, the State of Sikkim had undertaken negotiations with new enterprises regarding shareholding. Paragraph (vii)(a)of the 1974 Notification provides that the "guiding principle would be that the majority share in any new enterprise should be that of the Government of Sikkim but this shall be open for negotiation depending on the merits of each case." Therefore, there was nothing wrong in the negotiations with new enterprises. However, nowhere in the aforesaid affidavits is there any statement that exemption from payment of income-tax was automatic under the 1974 Notification as soon as a new industry was established.
53. Accordingly, it must be held that petitioner No. 1 has failed to prove that it had expressly claimed or informed the Government that it would claim exemption from payment of income-tax and that it was not entitled to automatic exemption from payment of income-tax.
54. The next question is whether petitioner No. 1, the company, incorporated under the Sikkim Registration of Companies Act, 1961, is liable to be assessed under the Sikkim State Income-tax Manual, 1948. According to learned counsel for the petitioners, a company registered under the Sikkim Registration of Companies Act is not assessable as it does not come within the definition of the expression "person" as contained in Section 2(vii) of the Sikkim State Income-tax Manual. The definition of "person" as contained in the Sikkim State Income-tax Manual is as follows :
"'person' includes individual, joint or undivided family, firm or any other association of individuals."
55. No doubt a company is a legal entity and has its own corporate personality but, at the same time, it is certainly an association of individuals and as such there is no reason why it should not come within the definition of "person" as contained in the Sikkim State Income-tax Manual. The fact that the expression "company" is separately defined in the Indian Income-tax Act cannot provide a guideline in respect of the definition of the expression "person" as contained in the Sikkim State Income-tax Manual.
56. It is further submitted by learned counsel for the petitioners that petitioners Nos. 2 to 5 who are directors of the company (petitioner No. 1) are not personally liable to pay the income-tax dues of the company and that such dues can be met only from the assets of the company. In support of this proposition, reliance is placed on a decision of the Calcutta High Court in Gadadhar Dey v. TRO [1974] 96 ITR 543, wherein it was, inter alia, held that the directors of a private limited company had no personal liability to pay the taxes of the company under the Companies Act, 1956, and that Section 179 of the Income-tax Act could have no application in the facts and circumstances of that case. Learned Advocate-General has, on the other hand, argued that, in the facts of this case, the directors of petitioner No. 1 are personally liable to pay the income-tax dues of the, company, and that even otherwise they are also liable to pay tax as they were persons engaged in business in the State of Sikkim and as such liable to pay income-tax under Section 4(i) read with Section 5 of the Sikkim State Income-tax Manual. The general proposition that a company has a corporate personality entirely distinct from its members and that the directors of a private limited company have no personal liability to pay the tax of the company is subject to the overriding principle that the cloak of incorporation is never to be used for any illegal purpose, e.g., evasion or circumvention of tax obligations. A catena of decisions upholds this salutary principle and some of these decisions have been referred to by my learned brother who has also discussed in detail the attendant circumstances, including distribution of almost the entire profits amongst the two groups of directors without making provision for tax in order to evade the tax liability of the company, justifying the lifting of the corporate veil; On a careful consideration of the facts and circumstances of this case, I find that this is a fit case where, for the ends of justice and for protection of public interest, the corporate veil must be lifted. It must be held that petitioners Nos. 2 to 5 are jointly and severally liable to pay the income-tax dues of the eompany, petitioner No. 1. In view of this finding, the question whether petitioners No. 2 to 5 are liable to pay income-tax being "persons engaged in business" in the State of Sikkim does not arise.
57. Another contention raised on behalf of the petitioners is that the procedure prescribed in Order No. 405/50 dated November 21, 1950 (annexure "M"), Notification No. 1220/200/IT & ST dated December 20, 1973 (annexure "N") and the Sikkim (Collection of Taxes and Prevention of Evasion of Payment of Taxes) Act, 1987, prescribed three different modes for recovery of income-tax and no guidelines having been provided in the Sikkim (Collection of Taxes and Prevention of Evasion of Payment of Taxes) Act, 1987, the provisions of which are more onerous, the scope for resort to the provisions of the 1987 Act or to the aforesaid less stringent recovery laws at the unfettered discretion and will of the concerned authority is bound to result in discrimination amongst similarly circumstanced assessees. On a scrutiny of the relevant laws, it is seen that sections 18 and 19 of the Sikkim State Income-tax Manual, 1948, extracted hereunder deal with recovery of taxes :
"18. Tax when payable : general rules. -- Any amount specified as payable in a notice of demand, shall be paid into the State Bank within the time given thereunder, and any assessee failing so to pay shall be deemed to be in default provided that, when an assessee has presented an appeal, the appellate authority may in his discretion pass stay order when the assessee will not be treated as in default in respect of such tax so long the stay order remains in force.
19. When an assessee is in default in making payment of income-tax the Government may in its discretion direct that in addition to the amount of arrears, a sum not exceeding that amount shall be recovered by distraint from the assessee by way of penalty."
58. Sikkim State Order No. 405/50 dated November 21, 1950, provides for realisation of all "public dues". This order does not specifically deal with income-tax dues but the expression "public dues" would also include income-tax dues. Notification No. 1220-200/IT and ST dated December 20, 1973, provides for varying and incremental rates of interest in case the income-tax dues are not cleared by the assessees within the time prescribed therein. The Sikkim (Collection of Taxes and Prevention of Evasion of Payment of Taxes) Act, 1987, was passed to "provide for effective collection of taxes due under several taxation laws in force in the State of Sikkim" as "the machinery for collection of taxes leviable under the taxation laws in force in the State of Sikkim and prevention of evasion of payment of taxes thereof" were not adequate. A careful study of the provisions of the 1987 Act, particularly sections 4 to 9, dealing with appointment of Inspectors, collection of tax, demand, attachment, sale of property and "search and seizure", respectively, indicates that the 1987 Act has not left any discretion, option or alternative with the concerned authority to proceed to recover income-tax dues in any manner other than that provided in the 1987 Act itself. The aforesaid sections are clearly mandatory and they exhaust the entire field of procedure for recovery of income-tax dues in the State of Sikkim. The statutory provisions for recovery of income-tax laid down in the 1987 Act, after the coming into force of that Act, exclude the application of all other modes for recovery of income-tax provided in the earlier taxation laws and other laws. The 1987 Act leaves no room for the concerned authority to discriminate between one assessee and another in the matter of recovery of income-tax. The allegation of discrimination put forward on behalf of the petitioners must, therefore, be rejected. However, I would not go so far as to hold that the provisions for recovery of income-tax as "public dues" in the Sikkim State Order No. 405/50 dated November 21, 1950 or the provisions for recovery of income-tax dues in the other taxation laws have been impliedly repealed after the coming into force of the Sikkim (Collection of Taxes and Prevention of Evasion of Payment of Taxes) Act, 1987, as the question of repeal had not been argued at the Bar and, in my opinion, in the facts of this case, it is not necessary to decide it. For the present case, it would suffice to say that the exclusive provisions regarding collection and recovery of income-tax contained in the Sikkim (Collection of Taxes and Prevention of Evasion of Payment of Taxes) Act, 1987, have displaced the corresponding provisions in the earlier taxation laws in force in the State of Sikkim covering the whole field of collection and recovery and they leave no room for application of the collection and recovery provisions of the earlier laws.
59. As regards the other point raised in this writ petition, I agree with the views expressed thereon by my learned brother and have nothing more useful to add.
61. In the result, the writ petition fails and is dismissed. There shall be no order as to costs. It remains for us to express our gratitude for the care and assistance which we received from all learned counsel appearing in this case.