Uttarakhand High Court
Jagteshwar Prasad Bansal And Ors vs State Of Uttarakhand And Anr on 7 December, 2017
Author: Rajiv Sharma
Bench: Rajiv Sharma
Reserved Judgment
IN THE HIGH COURT OF UTTARAKHAND AT NAINITAL
Writ Petition (M/S) No. 73 of 2012
Jagteshwar Prasad Bansal & others ....Petitioners
Versus
State of Uttarakhand & another ....Respondents
Mr. S.K. Posti, Advocate for the petitioners. Mr. Mohit Molekhi, Standing Counsel for the State.
Judgment Reserved- 30.11.2017 Date of Judgment - 07.12.2017 Hon'ble Rajiv Sharma, J M/s Sunshine Industries Ltd. Rudrapur is a limited company. It was incorporated under the Companies Act, 1956 on 08.12.1995. Its registered office is at National Capital Territory of Delhi. It was incorporated to do the business in manufacturing and sale of MS Ingots and alloys.
2. Petitioners were appointed as Directors of the company for a period of one year, as per Clause 80 of Article of Association.
3. The assets of the company were assessed to Rs.3,57,47,354.55/- as on 01.04.2006. Petitioners have placed on record the balance-sheet of the company as on 31.03.2007. The company was assessed under the Uttarakhand VAT Tax, 2005 for the assessment year 2007-
08. The liability was created against the company. Petitioners have placed on record a copy of assessment order for the year 2007-08 under Section 25(7) of the Vat Act as well as Section 9(2) of Central Sales Tax Act.
4. Respondent no.2, on 12.12.2011, issued a recovery certificate to the District Magistrate/Collector of District U.S. Nagar for recovering the tax dues and penalty 2 imposed upon the company for the assessment year 2007-
08.
5. The case of the petitioners, in a nutshell, is that the directors of the company are not liable and the amount can be recovered only from the assets of the company. Their further contention is that they have tendered their resignations.
6. Learned counsel for the State submits that the petitioners are liable under Section 12 of Uttarakhand VAT Act, 2005. He has supported the assessment orders issued vide Annexure No.3 (colly.).
7. I have heard and gone through the impugned order carefully.
8. Section 2(11)(e) of the Uttarakhand VAT Act, 2005 (hereinafter referred to as the Act) reads as under: -
"(e) an individual, a firm or a company or other body corporate, club, Hindu Undivided Family or any other system of joint family, association of persons, trust, and co-operative society or any other society, whether such society is incorporated or un-incorporated, and which carries on such business including buying goods for and selling to its members for a price, fee or subscription, whether in the course of business or not."
9. Section 12(1) of the Act provides the liability of directors of private company in liquidation.
10. The question raised in this petition has fallen for consideration before the Division Bench of Allahabad High Court, reported in 2010 (20) STR 390 All., in the case of "Meeking Transmission Ltd. through its Managing Director vs. State of Uttar Pradesh through Secretary, Institutional Finance, U.P. Govt. & others". The Division Bench after considering the entire case law has come to the conclusion that the directors were not liable for outstanding tax dues. The Division Bench has also held that in order to find out as to who are the persons responsible personally when the 3 veil is lifted it would be wholly irrelevant as to whether such person is a Director or a promoter shareholder or otherwise of the company since the purpose of lifting the veil is to find out to person(s) who is operating behind the corporate personality for his personal gain. The Division Bench has further held that whether in respect of tax dues or other public revenue or in other cases, if one has to discard the corporate personality, then the initial burden would lie upon it to place on record relevant material and facts to justify invocation of doctrine of lifting of veil and to plead that the corporate shell be not made a ground of defence. The Division Bench has held as under:-
"7. Now the second aspect needs to be adjudicated in this matter is whether outstanding tax dues of petitioner No. 1 can be recovered from the personal assets of the petitioner No. 2 who is Director of the petitioner- Company.
8. This question has to be considered in the light of the status of Company vis a vis its share holders, directors and other employees, their inter-relationship and the extent to which one or the other is liable in respect to the matter of the Company.
67. On the contrary, in the absence of any statutory provisions, this Court has repeatedly held that the dues of a company cannot be recovered from personal assets of the Directors (See Malik Products India, Ghaziabad v. Sales Tax Officer, Ghaziabad 1989 U.P.T.C. 458; Satish Chand Singhal, Kanpur and Ors. v. Assistant Commissioner (Assessment) Sales Tax Kanpur and Ors. 1987 U.P.T.C. 473; Chhedi Lal Gupta v. Additional Commissioner of Trade Tax, Varanasi and Ors. 2002 (20) NTN 20, G.C. Mehrotra, Allahabad (Supra); Sudershan Kumar Gulati, Kanpur and Ors. v. Deputy Collector (Collection, Sales Tax, Kanpur and Ors. 1994 U.P.T.C. 717; Purshottam Das Beriwal, Kanpur v. Deputy Collector (Collections), Sales Tax, Kanpur 1989 U.P.T.C. 456; Yogendra Kumar Tyagi and Ors. v. Collector, Muzaffarnagar and Ors. Writ Petition No. 8260 of 1996, decided on 20.03.1996; Surendra Kumar v. Collector, Muzaffarnagar Writ Petition No. 35755 of 1993, decided on 16.12.1993; Jugal Kishore Paliwal v. Collector, Muzaffarnagar, Writ Petition No. Nil of 1994, decided on 10.05.1994; Bhiku Ram Jain v. State of U.P. 2001 U.P.T.C. 364; Shri Mahendra Kumar Jaipuria v. Commissioner of Trade Tax U.P. Lucknow and Anr. VSTI 2007 All. H.C. 150; Ram Nath Gupta v. State of U.P. and Ors. 1999 U.P.T.C. 1289; Dr. Pawan Jain v. Commissioner, Trade Tax, U.P., Lucknow and Anr. VSTI 2007 All. H.C. 152; Devendra Prakash Goel and Anr. v. Commissioner of Trade Tax, U.P., Lucknow and Anr. VSTI All.H.C. 153 and Smt. Uma Singhania and Anr. v. Assistant Collector (Collection), Trade Tax, Kanpur and 4 Anr. VSTI 2007 All. H.C. 157 [in which one of us (Hon'ble Sushil Harkauli, J.) a member].
68. For the sales tax dues of the company the individuals are not responsible but it is the assets of the company which can be proceeded against as held in L. Parameshwari Das v. Collector of Bulandshahr (1955) 25 Comp Cas 343 (All) and Desiraju Vankatakrishna Sarma Re AIR 1955 AP 26.
69. The cardinal principle which has been laid down in the aforesaid cases and expressly stated and reiterated in Purshottam Das Beriwal (Supra) is as under:
The cardinal principle of law is that when there is a liability against a company, no recovery can be made from personal assets of its Director, unless it is specifically provided in the Statute or warranted by law. It is not brought to brought to our notice that there is any specific provision in the U.P. Sales Tax Act, whereunder recovery of the liability outstanding against a company can be made against the personal assets of its Director.
70. 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 as to recover the dues of a company, whenever and for whatever reason they are unrecoverable, from the personal assets of the Directors. If such a course is permitted, it would lead to not only disastrous results but would also destroy completely the concept of juristic personality conferred by various statutes like the Act in the present case and would make several enactments and their effect to be redundant and illusory. Moreover, the shallowness of arguments in favour of making Directors personally responsible can be considered from another angle. In every case the Director may not be a shareholder of the company. He may have been appointed as Director for taking advantage of his expertise in his field of vocation or profession, and for achieving goals for which the company is incorporated. Such Director is paid remuneration, if any, for the services he rendered.
Otherwise he is not at all a beneficiary of the business or trade etc., as the case may be, in which the company is engaged. Such benefit would be available only to the shareholders as they would only be entitled to share the profits earned by the company in the form of dividend as decided by the Board of Directors. In such case such Director, though is an agent of the company but he is more in the nature of an officer 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 5 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 or otherwise of the company since the purpose of lifting the veil is to find out the person/s who is operating behind the corporate personality for his personal gain. Such person may be individual or group of persons belonging to a family or relatives or otherwise a small group collected with a common objective of achieving some illegal, immoral or improper purpose etc. So long as no investigation is made into various aspects, we are not able to understand as to how and what manner a Director of a company can straightway be proceeded personally for recovering dues of a company unless it is so provided by some provision of the statute.
79. Whether in respect to tax dues or other public revenue or in other cases, if one has to discard the corporate personality, then the initial burden would lie upon it to place on record relevant material and facts to justify invocation of doctrine of lifting of veil and to plead that the corporate shell be not made a ground of defence. A personality conferred by the statute cannot be overlooked or ignored lightly and in a routine manner or on a mere asking. In fact whenever the veil is to be pierced, it would mean that somebody, individual or group of individuals, have obtained the shell of corporate personality as a pretext or mask to cover up a transaction or intention of those individual/individuals is neither legal nor otherwise in public interest. In effect the attempt of those individuals have to be shown akin to fraud or misrepresentation. The legal personality of the corporate body thus can be ignored in such cases since it is well settled that fraud vitiates everything and, therefore, the benefit of legal personality obtained by someone for purposes other than those which are lawful or even if lawful but not otherwise permissible, the corporate personality being the result of such fraudulent activity would have to be discarded but not otherwise. These are the things based on positive factual material and cannot be presumed in the absence of proper pleadings and material to be placed by the person who is pleading to invoke the doctrine of piercing the veil and to ignore the juristic personality of the corporate body. Once relevant material is made available by the authority or person concerned, thereafter it would be the responsibility of the other side to place material to meet the aforesaid facts but the mere fact that the company has failed to pay the Government dues or public revenue, that by itself 6 would not invite the doctrine of piercing the veil and is not sufficient to ignore the statutory corporate personality conferred upon a company and make its Directors or shareholders responsible personally.
81. Neither in the notice nor in the counter affidavit filed in the present case any such case has been made out by the respondents and in a mechanical manner, the impugned notice has been issued to petitioner No. 2 on the analogy that responsibility of the Director personally operates suo moto whenever tax dues of company are not paid. The said assumption on the part of the respondents is thoroughly misconceived and we express our dissatisfaction with the manner in which the respondents have proceeded without understanding legal position in this regard in correct perspective."
11. In the present case, respondent no.2 has not placed on record any material that the petitioners have played any fraud or misrepresentation.
12. The notices, in the present case, have been issued mechanically. Petitioners cannot be held automatically responsible for outstanding dues unless the responsibility of the director was fixed after lifting the veil.
13. In the definition clause, the Company is made liable not the directors.
14. Respondent no.2 has relied upon Section 12(2) of the Act in its reply. It only provides that the director shall be responsible, if the company is in liquidation.
15. The assessment orders are also in the name of the dealer as M/s Sunshine Industries Ltd., Rudrapur and not in the names of directors.
16. The judgment of the Division Bench of Allahabad High Court reported in 2010 (20) STR 390 All., in the case of "Meeking Transmission Ltd. through its Managing Director vs. State of Uttar Pradesh through Secretary, Institutional Finance, U.P. Govt. & others", has been considered by the Division Bench of same High Court in 2014(3) ALJ 501, in the case of "Kanwar Hasan vs. State of U.P.". The Division Bench of Allahabad High Court has held as under:-
7"3. The issue which is raised in these proceedings is covered by a judgment of a Division Bench of this Court in M/s. Meekin Transmission Ltd., Kanpur Nagar v. State of U.P. and others 2008 (4) ADJ 360 (DB)) : (2008) (4) ALJ 789 where the Division Bench held that a Company, following the well settled principles of law, has a separate juristic personality and there is no provision in the U.P. Trade Tax Act (which was the legislation in that case) under which the dues of the dealer Company could be recovered from the personal assets of a Director.
4. Learned Standing Counsel appearing on behalf of the respondents does not dispute the legal position but submits that the recovery citation has been issued only against the Company.
5. Section 2(h) of the U.P. Value Added Tax Act, 2008 defines the expression 'dealer' to mean any person who carries on in Uttar Pradesh the business of buying, selling, supplying or distributing goods directly or indirectly, for cash or deferred payment or for commission, remuneration or other valuable consideration. The definition also includes a company or body corporate.
6. In the present case, it is not in dispute that the Company is the dealer registered under the provisions of the Act.
7. Section 38 of the Act refers to a situation where a limited company is wound up and any tax assessed on the company under this Act for any period, whether before or in the course of or after its liquidation, cannot be recovered. In such an event, every person who was a Director of the limited company at any time during the period for which the tax is due shall be jointly and severally liable for the payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the Company."
17. In the present case also, the company is not under liquidation.
18. Similar view has been taken by the Division Bench of Allahabad High Court in the case reported in 2014 NTN (54) 315, titled as "Anupam Jalan vs. State of U.P. & others", where by the Division Bench of the Allahabad High Court has held that a distinct juristic personality and the properties of a Director cannot be attached for the recovery of the dues of the Company. The Division Bench has held as under:-
"The submission of the petitioner is that there is no provision under the Companies Act, 1956 under which the dues of a Company incorporated under the Companies Act, 1956 can be recovered from a Director or former Director and, hence, the recovery notice as exhibit (Annexure-5) contrary to law. The submission of the petitioner is supported by the judgment of this Court in 8 Meekin Transmission Ltd. Kanpur Nagar & another vs. State of U.P. and others [2008] 36 NTN DX 107. A Company incorporated under the Companies Act, 1956 has a distinct juristic personality and the properties of a Director cannot be attached for the recovery of the dues of the Company unless there is a statutory provision to that effect. In the absence thereof, the recovery action which is initiated against the petitioner by a notice at Annexure-5 would have to be quashed and set aside and is, accordingly, set aside. However, this order should not preclude the authorities from taking due steps for the recovery of the amount due and payable against the assets of the Company and from investigating as to whether any of the assets of the Company are held by the petitioner."
19. Accordingly, the writ petition is allowed. Impugned Annexure No.4 dated 12.12.2011 is quashed and set-aside.
(Rajiv Sharma, J.) NISHANT