Malfeasance And Fraudulence Necessary For Piercing Corporate Veil For Tax Recovery: Allahabad High Court

The Allahabad High Court has held that since there was no specific finding with respect to any fraud, malfeasance or personal gain against the directors, the corporate veil could not be pierced to recover tax dues of the company from its directors.

A bench comprising of Justices Saumitra Dayal Singh and Vinod Diwakar held

“Therefore, both generally (by way of a principle of law and also in the present facts), it is impermissible to allow the revenue authorities to rely on any assumption or presumption as to malfeasance or scam or fraud. Neither, the revival offered by BIFR was challenged nor there is any other material on record to reach such conclusion. Insofar as the conduct of the business upon revival is concerned, merely because statutory exemptions and benefits might have been claimed and those were declined would also not per se establish any malfeasance or misconduct or other conduct or omission attributable to the petitioners as may allow the recovery proceedings to be continued against them- for the dues of the company. Such occurrences are common and natural in the facts brought before us.”

Facts:

Petitioners, in the bunch of writ petitions, were directors in M/s Maharashtra Steel Ltd. from February 1991 till 31.07.1992. The unit was declared sick by the Board of Industrial Finance and Reconstructing under the Sick Industrial Undertakings (Special Provisions) Act, 1985 on account of losses. A revival scheme was prepared under which the Industrial Finance Corporation of India (IFCI) was to provide a fresh infusion of funds.

Application for exemption of the unit from trade tax under Section 4-A was rejected by the Divisional Level Committee by order dated 18.12.1995. The directors did not appear in assessment proceedings pertaining to both U.P. and Central Sales Taxes for A.Y. 1991-92 to 1995-96.

Therefore, assessment order was passed on 30.03.2005, which was confirmed by the appellate authority by order dated 31.12.2007. Respondent Department ordered recovery certificates against the directors of the company including the Petitioners. Consequentially, recovery citations were issued which are also impugned.

Previous Order by a coordinate Bench:

A bench comprising of Justices Sunil Ambwani and Aditya Nath Mittal dismissed the writ petitions holding that corporate veil can be lifted to recover tax dues of a company from the directors.

The Court observed that the application for eligibility certificate under Section 4-A was made with false declaration and was therefore not granted. Even though initially the company was doing well, soon after the change in management, it defaulted in payment of dues relating to sales tax (central and state), excise and electricity.

“The directors of the company hiding behind the corporate veil made use of the corporate entity under the umbrella of BIFR to circumvent statutes, commit illegality and evade the liability of payment of taxes, central excise dues and electricity dues. The returns were not filed. The entire amount was utilised for personal gains. The directors used the State resources for enriching themselves. They robbed the coffers of the State while sitting in Delhi. The corporate veil under the patronage of BIFR was used as subterfuge to avoid payment of taxes. In the facts and circumstances we do not find any good ground to interfere with the recoveries from the personal assets of the petitioners”, held the Court.

Supreme Court order:

Thereafter, Petitioners approached the Supreme Court. The Apex Court remanded the matter back to the High Court stating that the High Court had overlooked the decision of its coordinate bench in Meekin Transmission Ltd. Vs. State of Uttar Pradesh and others where it was held the cloak or veil is only be lifted in cases where such corporate personality is being used by its directors for gaining benefits or objectives which are impermissible in law. Corporate veil cannot be lifted in routine manner as it will be “disastrous” and would destroy the concept of juristic personality granted to a company. Unless a director is guilty of misfeasance, fraud or acting ultra vires, he cannot be made personally liable for the dues of the company.

Order of the Court after remand:

The bench comprising Justices Saumitra Dayal Singh and Vinod Diwakar stated that a de novo exercise of recovery against the petitioners is neither permissible nor desirable at this stage solely due to orders dated 30.03.2005 and 31.12.2007 by the revenue having attained finality. As noted by the Supreme Court, the relief claimed by the instant petitioners to the extent of no financial liability of the corporation being fastened on its directors still survives.

The Court noted that order dated 30.03.2005 does not record any finding to the effect that the directors were operating the shell of the company for their personal benefit. Said order only stated the fact that the unit was sick and had been revived, as also that the revival package was under the aegis of a statutory body.

The Court further stated that it is impermissible to allow the revenue to rely on any assumption or presumption as to malfeasance, or scam, or fraud. No material was available on record to reach a conclusion of fraud by the petitioners, nor was the revival order by BIFR challenged. Mere claim of exemption from tax, or rejection of said claim also does not establish fraud per se, unless necessary facts are established.

Considering the factum of the petitioners’ resignation, it was held that continuance of directors may be prima facie evidence as to responsibility of affairs of the corporation, but not enough to reach the conclusion that such persons acted fraudulently so as to enable recovery of dues of the corporation from their personal assets.

Citing Meekin Transmission Ltd. and others Vs. State of Uttar Pradesh and others (2013) 58 VST 2001 (All), the Court held that the revenue failed to discharge its burden to prove special facts (fraud, malfeasance, escaping tax liability, taking advantage of corporate personality for immoral, illegal or other purposes against public policy, etc.) which would have exposed petitioners to recovery proceedings. Allowing the writ, the revenue was restrained from recovering corporation dues from the petitioners, with liberty to do so from the assets of the corporation.

Case Title: AS Solanki v. State of UP and Others [Writ Tax No. 1499/2005]

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