Tax Dues Can't Be Collected From Director Of Company Under Liquidation Unless Provided By Some Statute: Allahabad High Court Reiterates
Relying on its earlier decision in A.S. Solanki Vs. State of U.P. and others, the Allahabad High Court has reiterated that tax dues cannot be collected from director of company under liquidation unless it has been provided in any statute.The Allahabad High Court in A.S. Solanki had held that in a case where it was ascertained that the corporate veil had been used for malafide intent,...
Relying on its earlier decision in A.S. Solanki Vs. State of U.P. and others, the Allahabad High Court has reiterated that tax dues cannot be collected from director of company under liquidation unless it has been provided in any statute.
The Allahabad High Court in A.S. Solanki had held that in a case where it was ascertained that the corporate veil had been used for malafide intent, the corporate personality shall be lifted so that the individuals responsible could be held liable. However, this doctrine could not be applied as a matter of course and be used to recover the dues of a company when they were unrecoverable, from the personal assets of the Directors.
Further, it was held, that it is not necessary that the Director of a company also be a shareholder. The Director could be an individual hired for his expertise in the field and be paid a salary in exchange. In which case, he would not benefit directly from the profits of the company in the form of dividends. In the view of the Court, such a director, could not be made personally responsible for the dues of the company unless guilty of misfeasance, fraud or acting ultra vires.
The Court had held that the doctrine of piercing the veil could not applied to such a circumstance or in a case where a director was nominated to monitor the functions of the company so that it may not go on liquidation on account of negligence.
“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.” held the Court in A.S. Solanki.
The Court had held that without a proper investigation it would be difficult to determine who exactly had been benefiting by hiding behind the corporate personality. In such a case, holding the Director of a company personally responsible for recovering any outstanding dues, unless specifically mentioned in some statute, would be bad in law.
Case Background
The Official Liquidator was hired by the Delhi High Court as Provisional Liquidator of the respondent Company-under-Liquidation on 09.09.2013. Provisional Liquidator took over the assets of the Company in October of the same year. Thereafter, ex-parte assessment orders were passed for A.Y.s 2010-11, 2011-12 and 2012-13. However, tax demands against the respondent company remained outstanding. The assessing authority initiated proceedings against the director to recover the tax demand from the personal assets of the company.
Petitioner, a director of the company, approached the High Court where interim protection was granted to him.
Counsel for petitioner submitted that petitioner was never in a position to have exposed himself to any vicarious liability in terms of the tax dues of the respondent company. It was submitted that liability under U.P. VAT Act, 2008 and/or the Central Sales Tax Act, 1956 would not be applicable generally or in the present situation. It was further stated that respondent company was not a proprietary enterprise of the petitioner and that he had not behaved in a manner that may have lead the authorities to believe that he was the real person that had conducted business in the name of the respondent company.
In the counter affidavit, respondent had argued that the directors who had been managing the company were negligent and had not taken any care to participate in the assessment proceedings. The Court noted that this was the only place that found mention of petitioner's supposed misconduct so as to invite liability to himself in terms of the tax dues.
“Besides the above, no other special fact has been pleaded in the Counter Affidavit as may lead to an inference that the revenue authorities had lifted the corporate veil and had found the petitioner to be the real person who benefited from the business transactions of the Company-under-Liquidation,” observed the Court.
High Court Verdict
The Court relied on the judgement of the Allahabad High Court in M/S Meekin Transmission Ltd. and others Vs. State of Uttar Pradesh and others that had been considered at length in A.S. Solanki Vs. State of U.P. and others.
The Court in A.S. Solanki had held that the law laid down in Naresh Chander Gupta could not be said to be a precedent for holding that whenever tax dues were to be recovered from a company, its Director would be personally responsible even though there was no such provision in the relevant statute
The Court had held that in respect of realising tax dues or other public revenue, the piercing of the corporate veil would have to be justified and the same could not be done on a mere asking. It stated that where the corporate personality was being used for unlawful purposes or fraudulent activities, it would ipso facto, have to be discarded but not otherwise. The Court held that the juristic personality of the corporate body could not be ignored on the mere fact the company had failed to pay the government dues or public revenue and the same would not be sufficient to pierce the veil and make the Directors personally liable.
“We are not making any observation with respect to the validity of said circular but it is suffice to us to make it clear that even when the tax dues are to be recovered from a corporate body, the Directors of such corporate body would not automatically be responsible unless the doctrine of lifting of veil is found to be applicable in the facts and circumstances of the affairs of that company and thereafter it is further found as to who are the persons who were operating behind the veil. Otherwise, a Director or shareholder cannot be made personally responsible for the dues of a company except of those cases where such a provision is made in the statute or otherwise warranted in law,” held the Court in A.S. Solanki Vs. State of U.P. and others.
The bench comprising of Justice Saumitra Dayal Singh and Justice Donadi Ramesh observed that in the case of the petitioner, Pranay Dhabhai, the Maharashtra VAT authorities had initiated a similar recover for the A.Y.s, 2009-2010, 2010-2011, 2011-12, which were subsequently withdrawn.
The Court directed the revenue authorities to restrain themselves from recovering the outstanding tax dues of the Company under Liquidation from the personal assets of the petitioner. At the same time, it held that the revenue authorities were free to proceed against the assets of the Company under Liquidation without any objection of the petitioner.
Accordingly, the present writ petition was allowed.
Case Title: Mr. Pranay Dhabhai v. State Of U.P. And 2 Others 2024 LiveLaw (AB) 299 [WRIT TAX No. - 638 of 2017]
Citation: 2024 LiveLaw (AB) 299
Counsel for Petitioner: Shubham Agrawal