Recovery From Directors of Service Tax Dues Owed By A Company Impermissible Without Lifting Corporate Veil

[Rakesh Chitkara]

A         Introduction

It is an established principle that a Company is a separate legal identity distinct from its Shareholders and Directors and is liable for all of its actions.

But when the Directors commit economic crimes in the  shadow of the Company, the law postulates that the corporate veil can be lifted to unmask  the illegitimate beneficiary. Legal morality demands all measures to protect the interest of the society.   Pertinent question therefore is whether the lifting of corporate veil was permitted in the erstwhile Service tax regime?

B         Lifting of Corporate Veil in Service Tax

Section 87 of the Finance Act, 1994 ('the Act') deals with recovery of  tax dues but  does not explicitly provide how to collect from it’s Directors if the Company has not paid its tax dues.  

C          Some Judicial Pronouncements

In SUNIL PARMESHWAR MITTAL VERSUS DY. C. (RECOVERY CELL) , C. EX., MUMBAI-I [2005 (8) TMI 116 - BOMBAY HIGH COURT] has upheld the principle that without any provision in law, the Department cannot recover tax dues from the Director. 

In SATISH D. SANGHAVI VERSUS UNION OF INDIA  [2009 (9) TMI 711 - BOMBAY HIGH COURT], Bombay High Court has held that demand of the company cannot be recovered from the director in the absence of statutory provisions in the Central Excise Act, 1944.   However, proceedings are still underway under Section 18 of the Central Sales Tax Act where a burden is placed upon a director to show that non-recovery cannot be attributed to him for his gross negligence, misfeasance or breach of duty. 

A similar question was raised in the case of SUMAN N AGARWAL VERSUS UNION OF INDIA AND ANOTHER [2013 (1) TMI 644 - BOMBAY HIGH COURT] wherein the Director was  not a Noticee to the Show Cause Notice and in that case, Bombay High Court held that there is no provision in the Customs Act 1962 similar to Section 179 of the Income Tax Act 1961 or Section 18 of the Central Sales Tax Act 1956 where the dues of a private limited company can be recovered from its directors.(Relying on VANDANA BIDYUT CHATERJEE VERSUS THE UNION OF INDIA & OTHERS - 2012 (4) TMI 42 - BOMBAY HIGH COURT)

In its recent judgement pronounced this month, Bombay High Court in Girdhari Lal Lath vs. State of Maharashtra, held that attachment of Bank Account u/s 44(6) of MVAT Act of an assessee, a Director of a ‘public company’ is unjustified and without any legal sanction. Since Sub Section (6) of Section 44 of the MVAT Act is subject to the Companies Act, 2013 the definitions and distinctions laid down in the Companies Act, 2013 vis-a-vis public company and private company would be applicable to Section 44(6) of the MVAT Act as if by way of incorporation.  In such circumstances, fastening of liability on the Petitioner for the alleged default of the company by attachment of the bank account of the Petitioner does not appear to be justified and is without any legal sanction.

In the case of Shiv Kumar Jatia vs State Of NCT Of Delhi, Supreme Court has held that individual directors can be made accused only if there is sufficient material to prove their active role coupled with criminal intent.

D         Judicial Interpretation on how to lift the Corporate veil :

In PURSHOTTAM DAS GUPTA, VERSUS THE UNION OF INDIA THROUGH THE SECRETARY, MINISTRY OF FINANCE, THE COMMISSIONER OF CUSTOMS (IMPORT-I) , TAX RECOVERY CELL [2019 (3) TMI 310 - BOMBAY HIGH COURT] provided some broad guidelines about when the Corporate veil should  be lifted. The same are as prescribed below:-

• The fact that the Corporate veil has lifted must be clearly discernible from the orders in the adjudication proceedings, in the sense the Show Cause Notices must be directed to the Director personally and in addition to the corporate entity.
• Corporate entity together with the Director must be heard and the Director must be granted an opportunity to satisfy the Adjudicating Authority that insofar as the company and its business is concerned, the Director may, as a part and parcel of the Board, lay down broad policies and take decisions in relation thereto but the day-to-day business is not discharged by him. Proof of involvement not only in the day-to-day activities but all affairs will also have to be placed on record to establish the piercing of veil.

E          Reference is invited to  MEEKIN TRANSMISSION LTD. VERSUS STAE OF UP. [2008 (2) TMI 406 - ALLAHABAD HIGH COURT] where in requirement of lifting of corporate veil to make directors liable for payment of companies dues is discussed. The broad principles upheld in the case are :-

1. There is no doubt about the proposition that whenever the circumstances so warrant, the corporate veil of the company can be lifted to look into the fact as to who is trying to play fraud or taking advantage of the corporate personality for immoral, illegal or other purpose which are against public policy.
2. Such lifting of veil is also has to be implemented whenever a statute so provided.
3. It is not a matter of routine affair. It needs a detailed investigation into the facts and affairs of the company to find out as to whether the veil of the corporate personality needs to be lifted in a particular case.
4. After lifting the veil, it is not always that the Directors would automatically be responsible but again it is a matter of investigation as to who is/are the person/s responsible and liable that had occasioned for application of the said doctrine.
5. Initial burden would lie upon the Department to place on record relevant material and facts to justify invocation of doctrine of lifting of veil and to plead that the corporate shall be not made a ground of defence.
6. After lifting of Corporate veil, the legal personality of the corporate body can be ignored 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.
7. Lifting of veil should be based on positive factual material and cannot be presumed.
8. 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 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.

F          Scenario after Introduction of GST

It is noteworthy that if the demand of service tax has been confirmed or the demand has reached finality on or after 01.07.2017 then, as per provisions of Section 142(8)(a) of CGST Act, the amount so confirmed , if not recovered from the Company can be recovered from its Directors. The relevant provision is as reproduced below:-

"where in pursuance of an assessment or adjudication proceedings instituted, whether before, on or after the appointed day, under the existing law, any amount of tax, interest, fine or penalty becomes recoverable from the person, the same shall, unless recovered under the existing law, be recovered as an arrear of tax under this Act and the amount so recovered shall not be admissible as input tax credit under this Act;"

Section 89 of CGST Act is as reproduced below:-

"(1) Notwithstanding anything contained in the Companies Act, 2013 (18 of 2013), where any tax, interest or penalty due from a private company in respect of any supply of goods or services or both for any period cannot be recovered, then, every person who was a director of the private company during such period shall, jointly and severally, be liable for the payment of such tax, interest or penalty 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."

G         Conclusion : In such a situation, in our opinion, the Directors shall be jointly and severally liable for recovery of tax dues.

(We express our deep gratitude to Commissioner-CBIC Mr. Govind Dixt, and  (alphabetically)  S/Sh. B M Biyani, Mr. C Mallikarjun Reddy, Mr. Harpreet Singh SCGSC, Mr. Jelvis Henriques,  Mr. PK Mittal, Mr. Raghu, Mr.  Shailesh Sheth and Mr. Srinivasan for sharing their knowledge)

Rakesh Chitkara, Adv. With CA Pooja Jajwani