JUDGMENT M. Katju and R.S. Tripathi, JJ.
1. This writ petition has been filed for a writ of certiorari quashing the impugned recovery proceedings initiated against the petitioners under the U.P. Trade Tax Act.
2. Heard learned counsel for the parties.
3. The petitioners are the Directors of M/s Sikandrabad Chemicals Private Limited which is a limited liability Company. For the assessment year 1995-96 against the aforesaid Company under the Central Sales Tax Act a demand of Rs. 7,66,072/- was vised by the Assessing Officer and pursuant thereto the recovery proceedings were initiated against the petitioners.
4. It is alleged by learned counsel for the petitioners Sri M. Manglik that the petitioners being Directors of the Company are not personally liable to pay the dues of the Company.
5. We have carefully considered the submissions of the parties. It is true that the legal principle is that a Company is a separate legal entity distinct from its Directors and shareholders vide Solomen v. Solom & Co. Ltd. 1897 AC 22 (HL). However, the principle of piercing the veil of corporate personality has also been evolved by the Court, vide Subhra Mukherjee v. Bharat Coking Coal Ltd. 2000 (3) SCC 312, Calcutta Chromotype Ltd. v. Collector of Central Excise AIR 1998 SC 1651, New Horizons Limited v. Union of India 1995 (1) SCC 478, Delhi Development Authority v. Skipper Construction Co. Pvt. Ltd. 1996 (4) SCC 622, CIT v. Minakshi Mills AIR 1967 SC 819. Juggilal Kamapat v. CIT AIR 1969 SC 932, etc.
6. In the Delhi Development Authority case (supra), the Supreme Court following its decision in Tata Engineering and Locomotive Company Ltd. v. State of Bihar AIR 1965 SC 40 observed :
7. The law as stated by Palmer and Gower has been approved by this Court in Tata Engineering and Locomotive Company Limited v. State of Bihar (1964) 6 SCR 895 : (AIR 1965 SC 40). The following passage from the decision is apposite (para 27 of AIR) "Gower has classified seven categories of cases where the veil of a corporate body has been lifted. But it would not be possible to evolve a rational, consistent and inflexible principle which can be invoked in determining the question as to whether the veil of the corporate personality should be lifted or not. Broadly, where fraud in intended to be prevented, or trading with enemy is sought to be defeated, the veil of corporate is lifted by judicial decisions and the shareholders are held to be persons who actually work for the corporation."
8. In the same decision the Supreme Court also observed that the concept of corporate entity was evolved to encourage and promote trade and commerce but not to commit illegalities or to defraud people. Where therefore, the corporate character is employed for the put pose of committing illegality or for defrauding others, the Court would ignore the corporate character and will look at the reality behind the corporate veil so as to enable it to pass appropriate orders to do justice between the parties concerned. The Supreme Court also observed quoting 'Gower's Modern Company Law'- "Where the protection of public interest is of paramount importance or where the company has been formed to evade obligation imposed by the law, the Court will disregard the corporate veil."
9. In State of U.P. v. Renusagar Power Co. 1988 (4) SCC 59 the Supreme Court observed :
"It is high time to reiterate that in the expanding horizon of modern jurisprudence, lifting of corporate veil is permissible. Its frontiers are unlimited. It must however, depend primarily on the realities of the situation. The horizon of the doctrine of lifting of corporate veil is expanding."
10. In Tata Engineering's case (supra) the Supreme Court observed that doctrine of the lifting of the veil thus marks a change in the attitude that the law had originally adopter towards the concept of the separate entity or personality of the Corporation. As result of the impact of the complexity of economic factors, judicial decisions have sometime recognized exceptions to the rule about the juristic personality of the corporation. It may be that in course of time these exceptions may grow in number and to meet the requirements of different economic problems/the theory about the personality of the corporation may he confined more and more.
11. Thus the Supreme Court, itself has stated that with the passage of time the exceptions to the rule of corporate personality can grow in number to meet the new requirements, and these exceptions have an expanding horizon.
12. The aforesaid decisions have been followed by this Court in a Division Bench decision in Civil Misc. Writ Petition No. 37833 of 2002, Sanjay Kumar Gupta v. District Magistrate, Fatehpur, decided on 24.9.2002.
13. We may mention that the principle that a Company (or Society) is a distinct legal entity was evolved to encourage business and industry since many businessmen feared to start new businesses or ventures because if the said business/venture failed (due to competition; recession etc.) their personal assets e.g. house, car, furniture, clothing savings etc could be attached and sold for the recovery in respect of the dues against the company or society. This principle was not made to help tax evaders as stated in the aforesaid decisions. As observed by the Supreme Court in Tata Engineerings case (supra), the concept of corporate entity was evolved to encourage and promote trade and commerce but not to commit illegalities or to defraud people. Where, therefore, the corporate character ii employed for the purposes of committing illegality or for defrauding others the court will ignore the corporate character and will look at the reality behind the corporate veil so as to enable it to pass appropriate orders to do justice between the parties concerned. The Supreme Court also observed that where the protection of public interest is of paramount importance, or where the company has been formed to evade obligation imposed by the law, the Court will disregard the corporate veil.
14. In State of U.P. v. Renusagar Power Co. (supra) the Supreme Court observed : "the horizon of the doctrine of lifting of corporate veil is expanding."
15. The doctrine of the lifting of the veil thus marks a change in the attitude that the law had originally adopted towards the concept of the separate entity or personality of the Corporation. The Supreme Court has evolved many exceptions to the principle chat a company is a distinct legal entity and it has observed in the above case that these exceptions may grow in number to meet the requirement of different economic problems, and the theory about the personality of the corporation may be confined more and more.
16. In our opinion, the veil of separate entity of the company should be lifted in the present case. The petitioners claims to be the Directors of the Company but they have not mentioned in the writ petition whether there are any assets of the Company against which the impugned recovery can proceed. They have also not mentioned who are the other Directors and shareholders of the Company and who really runs and controls the Company. In the absence of these facts, which have! been suppressed by the petitioners, we can reasonably assume that the assets of the Company have been diverted or siphoned off by the petitioners for their own benefit. Tax dues have to be paid and we will not permit the use of the doctrine of corporate personality to help anyone to evade tax recoveries.
17. On the facts of the present case we are of the opinion that the petitioners were really managing the Company and had control over its operations. They are only seeking to use the corporate character of the Company for evading tax.
18. Moreover writ is a discretionary remedy vide J.T. 2003 (6) SC 20, 1997 (1) SCC 134, 2004 A.L.J. 924 etc. We are not inclined to exercise our discretion under Article 226 in favour of such persons like the petitioners who wish to evade tax. The decision cited by the petitioners are in our opinion distinguishable for reasons given above.
19. The Supreme Court has held in some of the above decisions that in tax matters the veil of corporate personality can be lifted so that the tax dues can be realized. The doctrine of piercing the veil of corporate personality has an expanding horizon. We are therefore expanding this doctrine and declare that ordinarily if there are tax dues against the corporate personality they can be realized from the Directors, or others who control the company. This is necessary because in our country what is happening is that huge tax dues are often being evaded by unscrupulous businessmen under the cover of the doctrine of corporate personality. The time has come when this widespread malpractice which is seriously harming the national economy must be stopped The Government cannot run and it cannot carry on its welfare programmes if it does not receive taxes. As observed by the Supreme Court in Asst. Collector of Central Excise v. Dunlop India Ltd., AIR 1985 SC 330 (vide Para 7):
"No government business or for that matter no business of any kind can be run on mere bank guarantees. Liquid cash is necessary for the running of Government or indeed any other enterprise."
Thus the petitioners are not entitled to the protection of the principle laid by the decision in Salomon v. Salomon and Co. Ltd (supra).
20. This Court has taken the same view in Sri Ram Gupta v. The Assistant collector (Collection) Trade Tax, Writ Petition No. 1039 of 2003, decided on 5.9.2003 and in Naresh Chandra Gupta v. The District Magistrate, Writ Petition No, 382 of 2003, decided on 13.3.2003.
21. Following the aforesaid decisions this petition is dismissed.