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Judgment
Akil Kureshi, CJ
Petitioner is a private limited company registered under the Companies Act. Petitioner has challenged the action of the respondents of blocking the User ID of the petitioner which would prevent the petitioner from carrying out its business of dealing in raw rubber scrap.
Brief facts are as under:
The petitioner is a private limited company engaged in the business of raw rubber scrap. The petitioner purchases such materials from local dealers and sends outside the State by way of branch transfer which branch office is situated at Guwahati. For such purpose the petitioner enjoys registration under the Tripura Value Added Tax Act, 2004 (VAT Act, for short) and Central Sales Tax Act,1956 (CST Act, for short). Case of the petitioner is that the petitioner has been filing periodic returns of its turnover and also paying necessary taxes without any delay. Despite this, the respondents i.e. the VAT authorities under the State Government had blocked the petitioner's User ID for the purpose of uploading its sales and purchases on the official website without passing any formal order in this respect. This brought the petitioner's entire business to a standstill. The petitioner thereupon filed representations before the State authorities, however, the User ID was not activated upon which the present petition came to be filed.
The respondents have filed an affidavit dated 8th of December, 2016 sworn by one Atanu Dewanjee, Under Secretary, Govt. of Tripura in which the reasons cited for blocking the petitioner's User ID is that two persons Mrs. Kuku Kapoor and Mr. Rohit Kapoor are the partners of one M/s Agartala Rubber Industry engaged in the same business of buying and selling raw rubber scrap. The said partnership firm M/s Agartala Rubber Industry has sizeable tax dues of the VAT authority. These partners of Agartala Rubber Industry, Mrs. Kuku Kapoor and Mr. Rohit Kapoor are also the directors of the petitioner firm. Despite notices since the said partnership firm did not pay its taxes, to ensure recoveries of such dues of the VAT department, the User ID of the petitioner company was blocked. Reference is made to explanation to Section 76 of the VAT Act which states that directors in relation to a firm means a partner in the firm. Reliance is also placed on Section 57 of the VAT Act.
In this background, counsel for the petitioner submitted that User ID of the petitioner company could not have been blocked for unpaid dues of the partnership firm even though the partners of the firm may be directors or the petitioner company. She submitted that a limited company has independent identity different from its directors and the dues of the directors or the firm in which the directors are partners, cannot be recovered from the company.
Counsel further submitted that even the dues of the said Agartala Rubber Industry have not yet crystallized. Our attention was drawn to an order dated 28.01.2019 passed by the Division Bench of this Court in Writ Petition (C) No.357/2014 in which Agartala Rubber Industry had challenged its dues relying on a decision of this Court dated 28th July, 2017 in case of Bright Rubber Processor Pvt. Ltd. in WP(C) No.234 of 2015. In the said order the Court noticing that the issues are identical but the decision of this Court in case Bright Rubber Processor (supra) has been carried in appeal by the State and the Supreme Court has stayed the judgment, disposed of the writ petition of Agartala Rubber Industry by providing that the outcome of such proceedings before the Supreme Court in case of Rubber Processor would govern the said petitioner also.
On the other hand, learned counsel for the respondents opposed the petition contending that Agartala Rubber Industry has sizeable unpaid tax dues with the department. Despite notices such taxes have not been paid. Partners of Agartala Rubber Industry are the directors of the petitioner company. The User ID of the company was therefore blocked.
In our opinion, the State action is wholly without authority of law. Even if, Agartala Rubber Industry has any unpaid dues of the Government, the same cannot cast its shadow on the petitioner company which has a different and distinct identity. Merely because the partners of Agartala Rubber Industry are directors of the petitioner company, by itself would not change this position. Unless and until the respondents bring in the element of lifting the corporate veil, the dues of the partnership firm or for that matter partners of the firm cannot be recovered from a private limited company. A registered company, be it private limited or a public company, has an identity, independent and distinct from its member or director. The personal dues of the member or the director cannot be recovered from such company unless, as noted above, the corporate shell can be cracked or the corporate veil can be lifted for valid reasons. In the present case no such attempt has been made by the respondents. It is not the case of the respondents that only in order to defraud the government revenue, by way of artificial arrangement, members of the firm instituted a limited company. In other words it is not the case of the respondents that establishment of the private limited company is nothing but facade and in reality it is the partners of the firm which carry on and continue the same business as that of the partnership and that this is done only with a view to depriving the government of its legitimate revenue through fraudulent means.
In case of Vodafone International Holdings BV Vrs. Union of India & Anr. reported in (2012) 6 SCC 613 it was observed that in a corporate structure, the subsidiaries of holding company are on individual and independent entities. The principle that an incorporated company as a legal person is different from its shareholders was applied. It was held that in the context of income tax, holding company's income is different from its shareholders income.
In case of Arcelormittal India Private Limited Vrs. Satish Kumar Gupta & Ors., reported in (2019) 2 SCC 1, the Supreme Court discussed the doctrine of piercing the corporate veil. This is in background of the principle that a shareholder is a separate legal entity from the company in which he holds the share. Following observations may be noted:
"35. Similarly in Balwant Rai Saluja v. Air India Ltd. (2014) 9 SCC 407, this Court in following Escorts Ltd. (1986) 1 SCC 264, held: (Balwant Rai case, SCC pp.439-41, paras 70-73)
"70. The doctrine of "piercing the corporate veil" stands as an exception to the principle that a company is a legal entity separate and distinct from its shareholders with its own legal rights and obligations. It seeks to disregard the separate personality of the company and attribute the acts of the company to those who are allegedly in direct control of its operation. The starting point of this doctrine was discussed in the celebrated case of Salomon v. A.Salomon & Co. Ltd. [1897 AC 22] Lord Halsbury, LC, negating the applicability of this doctrine to the facts of the case, stated that: (AC pp.30 & 31)
"[a company] must be treated like any other independent person with its rights and liabilities [legally] appropriate to itself ... whatever may have been the ideas or schemes of those who brought it into existence."
Most of the cases subsequent to Salomon case [1897 AC 22], attributed the doctrine of piercing the veil to the fact that the company was a "sham" or a "façade". However, there was yet to be any clarity on applicability of the said doctrine.
In recent times, the law has been crystallised around the six principles formulated by Munby, J. in Ben Hashem v. Ali Shayif [2008 EWHC 2380 (Fam)]. The six principles, as found at paras 159-64 of the case are as follows:
(i) Ownership and control of a company were not enough to justify piercing the corporate veil;
(ii) The court cannot pierce the corporate veil, even in the absence of third-party interests in the company, merely because it is thought to be necessary in the interests of justice;
(iii) The corporate veil can be pierced only if there is some impropriety;
(iv) The impropriety in question must be linked to the use of the company structure to avoid or conceal liability;
(v) To justify piercing the corporate veil, there must be both control of the company by the wrongdoer(s) and impropriety, that is use or misuse of the company by them as a device or facade to conceal their wrongdoing; and
(vi) The company may be a "façade" even though it was not originally incorporated with any deceptive intent, provided that it is being used for the purpose of deception at the time of the relevant transactions. The court would, however, pierce the corporate veil only so far as it was necessary in order to provide a remedy for the particular wrong which those controlling the company had done.
The principles laid down by Ben Hashem case [2008 EWHC 2380 (Fam)] have been reiterated by the UK Supreme Court by Lord Neuberger in Prest v. Petrodel Resources Ltd. [(2013) 2 AC 415], Lord Sumption, in Prest case [(2013) 2 AC 415], finally observed as follows: (AC p. 488, para 35)
"35. I conclude that there is a limited principle of English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company's separate legal personality. The principle is properly described as a limited one, because in almost every case where the test is satisfied, the facts will in practice disclose a legal relationship between the company and its controller which will make it unnecessary to pierce the corporate veil."
The position of law regarding this principle in India has been enumerated in various decisions. A Constitution Bench of this Court in LIC v. Escorts Ltd. [(1986) 1 SCC 264], while discussing the doctrine of corporate veil, held that: (SCC pp. 335-36, para 90)
"90. ... Generally and broadly speaking, we may say that the corporate veil may be lifted where a statute itself contemplates lifting the veil, or fraud or improper conduct is intended to be prevented, or a taxing statute or a beneficent statute is sought to be evaded or where associated companies are inextricably connected as to be, in reality, part of one concern. It is neither necessary nor desirable to enumerate the classes of cases where lifting the veil is permissible, since that must necessarily depend on the relevant statutory or other provisions, the object sought to be achieved, the impugned conduct, the involvement of the element of the public interest, the effect on parties who may be affected, etc.' "
Reliance on the explanation to Section 76 of the VAT Act or contents of Section 57 thereof would be of no consequence. The explanation merely clarifies that in relation to a partnership firm, the term of 'director' would mean the partner of the firm. Section 57 of the VAT Act reads as under:
"57. Liability of Partners :-
(1) Notwithstanding anything contained in the Indian Partnership Act, 1932 or any contract to the contrary, where any firm is liable to pay tax under this Act, the firm and each of the partners of the firm shall be jointly and severally liable for such payments and accordingly any notice or order under this Act may be served on any person who was a partner during the relevant time whether or not the firm has been dissolved and all the provisions of this Act shall apply accordingly.
(2) Where any such partner retires from the firm, he shall be liable to pay the tax, penalty, sum forfeited and interest remaining unpaid at the time of his retirement and any such amount due up to the date of retirement though un-assessed at that date."
Thus, as per sub-section(1) of Section 57 notwithstanding anything contained in the partnership Act or any contract to the contrary, each partner of a firm would be jointly and severally liable for payment of the dues of the firm under the said Act. Sub-section (2) of the Section 57 further provides that even if such partner retires from the firm he would be liable to pay the tax or penalty as the case may be remaining unpaid at the time of retirement.
These provisions undoubtedly fasten the liability of the unpaid dues of the partnership firm on its partners. The partners would be thus jointly and severally liable to pay the dues of the firm arising under the VAT Act notwithstanding anything contained to the contrary in a partnership Act or any contract. However, what the respondents are seeking to recover is the unpaid dues of the firm from a private limited company. Indirectly this amounts to seeking recovery of the dues of the directors of the company from the limited company which, as observed earlier, as per settled law, cannot be done.
In the result, the petition is allowed.
The action of the respondents in blocking the User ID of the petitioner company is set aside. The respondents shall forthwith release the User ID.