2014 (5) TMI 534 - HC - VAT and Sales Tax

Evasion of Tax - Lifting of Corporate veil - Quashment of recoveries the corporate entity is employed to circumvent statute or to evade the existing obligation to commit illegality or defrauding others; and have resorted to dubious methods to artifice or subterfuge to avoid payment of taxes the corporate veil can be lifted to recover the dues from the persons responsible for such illegal acts. Relying upon Calcutta Chromotype Ltd vs. Collector of Central Excise Kolkata 1998 (3) TMI 138 - SUPREME COURT OF INDIA - There is no doubt that the petitioners and other directors persuaded the BIFR to allow them to run the sick industrial company with fresh infusion of funds from IFCI with two nominee directors of IFCI - The application for eligibility certificate u/s 4-A was made with false declaration that the plant and machinery is new - The eligibility certificate was not granted - Initially the company was doing well but as soon as Shri I.S. Gambhir and Shri L.K. Luthra took over successively as Managing Directors of the company they started defrauding in payment of sales tax both State and Central; the excise dues and electricity dues - They incurred liability of several crores of rupees and did not participate in the proceedings of assessment - The date when the company again stopped production has not come on record - However the company started production with fresh capital given by IFCI only to defraud the secured creditors to avoid taxes and electricity dues - 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 No ground is found to interfere with the recoveries from the personal assets of the petitioners Decided against assessee.

Summary

Issues Involved:
1. Quashing of recoveries issued by the Assistant Collector against the petitioners.
2. Liability of directors for trade tax dues.
3. Application of the doctrine of lifting the corporate veil.
4. Assessment of trade tax and Central Sales Tax.
5. Misrepresentation and fraud by the company and its directors.
6. Appeals against the order lifting the corporate veil.

Issue-wise Detailed Analysis:

1. Quashing of Recoveries Issued by the Assistant Collector:
The petitioners sought to quash the recoveries issued by the Assistant Collector, Grade-I, Saraswati Vihar, Delhi, on the directions of the Deputy Commissioner (Assessment) Trade Tax-8, Ghaziabad, for recovering trade tax dues amounting to Rs. 2,95,67,763/- including interest and other amounts as per the recovery notices dated 4.4.2000 and 14.7.2005.

2. Liability of Directors for Trade Tax Dues:
The petitioners, who were directors of M/s Maharashtra Steels Limited, were held personally liable for the trade tax dues. The company, declared as a 'sick industrial unit' by the Board of Industrial Finance and Reconstructing (BIFR), had applied for tax exemptions under false pretenses. The Divisional Level Committee rejected their application for an Eligibility Certificate for exemption from Trade Tax due to non-cooperation and the company's closure for more than six months with huge arrears of tax.

3. Application of the Doctrine of Lifting the Corporate Veil:
The court applied the doctrine of lifting the corporate veil, holding the directors personally liable for the company's tax dues. The Assessing Authority found sufficient evidence of large-scale tax evasion, fraud, and misuse of the corporate entity to evade statutory liabilities. The court emphasized that the corporate veil can be lifted when the corporate personality is used to commit illegalities or evade taxes.

4. Assessment of Trade Tax and Central Sales Tax:
The assessment orders for both U.P. and Central Sales Tax were passed for the assessment years 1991-92 to 1995-96. The petitioners did not produce any books of accounts during the assessments, and the orders were framed based on available evidence, revealing significant tax evasion.

5. Misrepresentation and Fraud by the Company and Its Directors:
The company, under the management of the petitioners, made false declarations regarding the newness of their machinery to obtain tax exemptions. They were also involved in electricity theft and evasion of excise duty. The court found that the directors utilized the corporate entity to defraud the State and avoid statutory obligations.

6. Appeals Against the Order Lifting the Corporate Veil:
Only two directors, Shri I.M. Puri and Shri G.L. Tandon, successfully appealed against the order lifting the corporate veil, arguing that they were part-time directors nominated by IFCI and not responsible for day-to-day management. The appeals of other directors were either dismissed or not filed, and the order became final against them.

Conclusion:
The court dismissed the writ petitions, upholding the recoveries from the personal assets of the petitioners. The court found that the directors used the corporate entity to defraud the State and evade liabilities, justifying the lifting of the corporate veil to hold them personally accountable for the dues. The doctrine of lifting the corporate veil was applied to uncover the real culprits hiding behind the corporate entity and ensure that justice and statutory obligations were upheld.