India Waste Energy Development Ltd. and anr. Vs. Govt. of Nct of Delhi and anr. - Court Judgment

D.K. Jain, J.

1. In this third round of litigation with the Sales Tax authorities, by this petition under Article 226 of the Constitution of India, the petitioner seeks to challenge the order, dated 20 March 2001, passed by the Deputy Collector (Recovery)/Collector, Sales Tax, New Delhi, holding the petitioner company to be the transferee company, liable to pay the outstanding sales tax dues of the transferor company, namely M/s. Byford Leasing Limited, hereinafter referred as the Byford, in terms of Section 32 of the Delhi Sales Tax Act, 1975 (for short the Act) and having defaulted in discharging the said liability, liable to be proceeded against under Section 139 of the Delhi Land Reforms Act, 1954 (for short the Land Reforms Act).

2. In order to appreciate the controversy involved, we shall briefly notice the material facts, which are as follows:

The first petitioner is a company incorporated on 9 March 1998 with the main object of carrying on the business of collection, processing and disposal of solid municipal waste etc. The second petitioner is one of the directors of the company. On 28 September 2000 the petitioner received a copy of the notice under Section 139 of the Land Reforms Act, addressed to the Administrator, Greater NOIDA Authority, whereby the amounts due to the petitioner from the authority were attached for the dues of Byford. The said warrant of attachment was challenged by the petitioner in Civil Writ petition No. 6434/2000 before this Court. However, during the course of hearing, it was stated by counsel for the Sales Tax authorities that the said warrant of attachment would not operate against the petitioner. Upon this statement, the writ petition was disposed of vide order dated 24 January 2001.

3. On 25 January 2001, the petitioner was served with a fresh notice, dated 24 January 2001, addressed to the District Collector, NOIDA, Chairman of Greater NOIDA, requiring them to remit all amounts due to the petitioner from them in terms of attachment order dated 10 October 2000. In the notice it was alleged that the petitioner being a sister concern of Byford, having common directors belonging to the same company and executing certain works of Greater NOIDA, was liable to pay the dues outstanding against Byford. This notice was also impugned by the petitioner in Civil Writ petition No. 640/2001 before this Court. The petition was, however, disposed of vide order dated 7 February 2001, with a direction to the respondents to grant an opportunity to the petitioner to put forth its view point on the issue whether it can be treated as the benami of Byford. Pursuant to the said order, a show cause notice was issued to the petitioner on 9 February 2001. After taking into consideration petitioner's reply dated 22 February 2001, the Collector has passed the impugned order.

4. The order is challenged on diverse grounds, namely: (i) the Collector of Sales Tax has no power, jurisdiction or authority to hold that Byford and the petitioner are one and the same entity inasmuch as there is no provision in any law much less in the Act, conferring authority in the Collector to lift the corporate veil from the face of the petitioner, investigate and return such a finding; (ii) the Collector has no power or authority to issue show cause notice under Section 32 of the Act as no power has been conferred by the Administrator on the Collector to take recourse to the action envisaged in the show cause notice; (iii) Section 32 of the Act cannot be applied in the instant case because it contemplates liability in the case of transfer of business and since Byford has not transferred any business to the petitioner, there is no transaction by which the petitioner came into possession of any thing which earlier belonged to the Byford; (iv) a business which is not exigible to the Sales Tax does not attract the provisions of Section 32 and since in the instant case not only was there any transfer of business, much less there was any transfer of business of purchase and sale of goods from Byford to the petitioner, the Section is not attracted; and (v) a Company being a separate legal entity, by virtue of Section 34 of the Companies Act, 1956, the concept of two entities being one entity is unknown to law.

5. The petition is resisted by the respondents. In the affidavit in opposition, it is stated that petitioner No. 1 is one of the companies forming part of Byford group and is owned and controlled by one Shri B.K. Sahni, his family members, including petitioner No. 2; the family either directly or through companies controlled by them owned about 99% of the shareholdings of the petitioner company; Byford group consists of six companies including M/s. Byford Motors Limited, Byford Leasing Limited and the petitioners. It is pointed out that for the purpose of raising capital of the petitioner company, Byford Motors, by a book entry transferred 8,44,500 shares of Byford Leading to the petitioner and the petitioner, in turn, transferred its 8,44,500 shares to Byford Motors; the said B.K. Sahni, father of petitioner No. 2 and his family members are the directors in all the group companies owned and controlled by him and other shareholders, besides having very marginal and nominal shareholding in the companies forming part of Byford group are also persons related and associated with them; the said B.K. Sahni and his family controlled companies have withdrawn more than Rs. 1 Crore from Byford under the head 'advance recoverable' and are using the corporate entity of petitioner No. 1 as an instrument to deprive the respondents of their legitimate dues. It is, thus, pleaded that the Collector was justified in lifting the corporate veil of the petitioner and treating it as the defaulter company.

6. We have heard Mr. Sandeep Sethi, learned counsel for the petitioner and Mr. A.S. Chandhiok, learned senior counsel for the respondents.

7. As noted above, the order of the Collector has been challenged on various grounds but during the course of hearing, the main thrust of Mr. Sethi's argument was that since the business of waste management was not exigible to sales tax, Section 32 of the Act had no application and, thereforee, the liability of Byford could not be fastened on the petitioner. It is urged that since the entire liability of Byford pertains to its business of selling cars and the said business having not been transferred to the petitioner, these dues cannot be recovered from the petitioner, even if it is assumed that Byford had transferred its business of waste management to the petitioner. It is also pleaded that there has been no attempt by the petitioner to circumvent the recovery proceedings against Byford. Learned counsel has submitted with considerable fervour that the question of lifting the corporate veil does not arise at all because there is no specific provision in the Act or the Rules enabling or authorising the Collector to do so. In support of the second proposition, reliance is placed on the decisions of the Supreme Court in Tata Engineering and Locomotive Co. Ltd. v. State of Bihar and Ors. (1964) 34 Comp. Cas. 458, Andhra Pradesh State Road Transport Corporation v. The Income Tax Officer, B-1, B-Ward, Hyderabad and Anr. : [1994]52ITR524(SC) and Electronics Corporation of India Ltd. and Ors. v. Secretary, Revenue Department, Government of Andhra Pradesh and Ors. : AIR1999SC1734 .

8. Mr. A.S. Chandhiok, learned senior counsel for the respondent on the other hand, while supporting the interpretation placed by the Collector to the provisions of Section 32 of the Act, has strenuously urged that the Collector was competent to tear off the corporate veil to go behind the corporate personality even in the absence of a specific provision in the Act in that behalf. To buttress his argument that Byford had transferred its business of waste management to the petitioner immediately after warrant of attachment was issue against Byford on 1 February 2000, learned counsel for the respondents has invited our attention to various documents placed on record. In support of his plea that the corporate veil could be lifted even in the absence of any statutory provision, learned counsel has placed reliance on PNB Finance Limited v. Shri Shital Prasad Jain and Ors. (1983) 54 Comp. Cas. 66, Ravi Kant v. National Consumer Disputes Redressal Commission : AIR1997Delhi182 , Commissioner of Income-tax Calcutta v. Associated Clothiers Limited Calcutta : AIR1963Cal629 , The Commissioner of Income-tax Madras v. Meenakshi Mills Limited Madurai : [1967]63ITR609(SC) , Juggilal Kamlapat v. Commissioner of Income-tax U.P. : [1969]73ITR702(SC) , State of U.P. and Ors. v. Renu Sagar Power co. and Ors. : AIR1988SC1737 and Life Insurance Corporation of India v. Escorts Ltd. : 1986(8)ECC189 . Lastly, it was submitted that the scope of judicial review being very limited, on the facts of the case, particularly in view of the conduct of the petitioner in trying to hoodwink the department, this Court may not interfere with the impugned order.

9. Thus, the first and foremost question arising for consideration is whether the provisions of Section 32 of the Act were attracted on the facts in hand and the Collector was competent to treat the petitioner company as the transferee company within the meaning of the Section?

Section 32 of the Act reads as follows:

'Section 32: Liability in case of transfer of business

1) Where a dealer, liable to pay tax under this act, transfers his business in whole or in part, by sale, gift, lease leave or license, hire or in any other manner whatsoever, the dealer and the person to whom the business is so transferred shall jointly and severally be liable to pay the tax (including any penalty) due from the dealer up to time of such transfer, whether such tax (including any penalty) has been assessed before such transfer, but has remained unpaid or assessed thereafter;

2) Where the transferee or the lessee of a business referred to in Sub-section (1) carries on such business either in his own name or in some other name, he shall be liable to pay tax on the sale of goods effected by him with effect from the date of such transfer and shall, if he is an existing dealer, apply within the prescribed time for amendment of his certificate or registration.'

10. The Section, falling in chapter VI of the Act containing provisions for fixing liability to pay tax etc. of the dealer on certain other persons on the happening of specified events, creates the liability of the transferee for the dues of the transferor-dealer even for the period prior to the transfer of the business, in whole or part. It provides that if the transferor-dealer, at the time of the transfer, has failed to discharge his tax obligations under the Act, the transferee would be liable to discharge that obligation in the same manner and to the same extent as if he were the transferor-dealer himself. The Section creates a fiction in order to impose upon the transferee the liability incurred by the transferor at a time when he had no concern with the business of the transferor. In other words, under the Section, as a result of the transfer, a vicarious liability is imposed upon the transferee, when in fact he had nothing to do with the business of the transferor. At the same time, the transferor is not absolved of the outstanding liabilities by reason of the transfer. The Section only imposes an additional liability on the transferee. It is evident from the language of the Section that it is in a way supplementary to Section 3 of the Act, which is the charging Section, because it imposes an additional liability on the transferee while reserving the liability of the transferor to discharge the same. In our view, the tax liability of the dealer, which can be fastened on the transferee is the tax which remains unpaid in respect of the business transferred. Thus, what the Section postulates is that if a transferor-dealer, at the time of the transfer, has failed to discharge any obligation in respect of the business transferred by him, the transferee dealer would also be liable to discharge that obligation in the same manner and to the same extent as if he were the transferor-dealer himself. In other words, transferee-dealer's liability is co-extensive with the liability of the transferor-dealer to pay tax in respect of the business transferred. Alternatively put, if the transferor-dealer had no liability to pay tax in respect of such business, there would not be any liability on the transferee. thereforee, in our view, the scope of the Section cannot be enlarged to include the liability of the transferor-dealer remaining unpaid in respect of the other businesses which he may be carrying on in addition to the business transferred, as is sought to be canvassed by learned counsel for the respondents.

11. A bare reading of Sub-section (2) of Section 32 supports the interpretation given by us to Sub-section (1). This sub-section makes it mandatory for the transferee, if he is an existing dealer, to apply for amendment of the certificate or for registration in case he chooses to carry on the transferred business, thereby discharging the transferor from any tax liability from the date of transfer of 'such' business. We find substance in the contention of learned counsel for the petitioner that the word 'such' as appearing in Sub-section (2) pertains to the business referred to in Sub-section (1) and further it must be business of goods exigible to tax because otherwise, if the business transferred is not exigible to tax, the requirement of getting the registration certificate amended makes no sense. Apparently, Sub-section (2) does not apply to a transferee who is not an existing dealer, irrespective of the fact whether the transferred business is exigible to tax or not. The transferee in such a case would be governed by other provisions relating to registration etc. depending on the nature of goods he is dealing in, his total turnover etc. We, thereforee, have no hesitation in holding that Section 32 of the Act would be attracted only when the transferred business was exigible to tax in the hands of the transferor-dealer. Thus, the order of the Collector on his aspect of the matter cannot be sustained.

12. Coming to the second issue, namely, whether in the absence of a specific provision in the Act. the Collector was competent to lift the corporate veil to see whether the entire exercise undertaken by Byford in stopping the business of waste management and getting the petitioner into that business was with a view to evade the action initiated by the respondents for recovery of its dues from Byford from the proceeds of waste management business, hitherto carried on by Byford?

13. The subject and the concept of lifting the corporate veil has come up for consideration before the Supreme Court umpteen times but we do not propose to burden the judgment by making reference to all the decisions, relied upon by learned counsel for the parties. We will notice a few decisions which are directly on the point.

14. In Meenakshi Mills' case (supra), while dealing with a situation arising under the Income Tax Act, which does not contain any specific provision regarding lifting of corporate mask, their Lordships of the Supreme Court observed that: 'it is well established that in a matter of this description the income tax authorities are entitled to pierce the veil of corporate entity and to look at the reality of the transaction. It is true that from the juristic point of view the company is a legal personality entirely distinct from its members and the company is capable of enjoying rights and being subjected to duties which are not the same as those enjoyed or borne by its members. But, in certain exceptional cases, the Court is entitled to lift the veil of corporate entity and to pay regard to the economic realities behind the legal facade.'

15. In State of U.P. and Ors. v. Renusagar Power Co. and Ors. (supra) the Apex Court observed as follows:-

'It is high time to reiterate that in the expanding of horizon of modern jurisprudence, lifting of corporate veil is permissible. Its frontiers are unlimited. It must, however, depend primarily on the realities of the situation. The aim of the legislation is to do justice to all the parties. The veil on corporate personality even though not lifted sometimes, is becoming more and more transparent in modern company jurisprudence. The concept of lifting the corporate veil is a changing concept and is of expanding horizons.'

16. In Life Insurance Corporation of India v. Escorts Ltd. (supra), on which strong reliance is placed by learned counsel for both the parties, while observing that it is neither necessary no desirable to enumerate the class 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, it was emphasised that the corporate veil should be lifted where the associated companies are inextricably connected as to be, in reality, part of one concern. It was also said that ever since A. Salomon v. A. Salomon and Company Ltd. 1897 A.C. 22 was decided that a company has an independent and legal personality distinct from the individuals who are its members, it has since been held that the corporate veil may be lifted and the corporate personality may be ignored and the individual members recognised for who they are in certain exceptional circumstances.

17. The topic of tearing the veil and looking behind the company as legal persona has been elaborately discussed in Palmer's Company Law. While stating that 'generally speaking, the Courts are more inclined, in appropriate circumstances, to lift the veil of corporateness where question of control are in issue than where a question of ownership arises', several situations necessitating the lifting of corporate veil have been enumerated. For our purpose, it would suffice to note two of the stated circumstances, namely, (i) the matters pertaining to the law of taxation, particularly where the question on controlling interest is in issue and (ii) where the device of incorporation is used for some illegal or improper purpose.

18. It is trite that a company, registered under the Companies Act, is a legal personality distinct from its members and generally corporate veil may not be lifted unless the Legislature so provides but in certain exceptional cases, which would embrace those cases where the corporate entity is used for tax evasion or to circumvent tax obligation, the Court is entitled to lift the corporate veil and to pay regard to the economic realities behind the legal facade. If the situation so demands and for the ends of justice the corporate personality itself may be disregarded. It is thus, well settled that the corporate veil can be cracked open even in the absence of a statutory provision, when it is felt that the corporate entity is being used as a device or cloak to circumvent tax obligations or as an instrument of fraud.

19. Coming to the facts in hand, we are of the view that the finding of the Collector that the business of solid waste management was transferred by Byford to the petitioner with a view to evade payment of outstanding sales tax dues and, further, the business of the said two companies is so enmeshed and intermingled that these two companies can be considered to be one and same entity, operating through its 'head and brain' B.K. Sahni, is well founded. As noted above, the petitioner is shareholder of Byford and the 84,45,000 shares held by it have not been purchased but acquired by exchange of shares in Byford Leasing by M/s. Byford Motors for equal value shares of the petitioner. Thus, the funds in the form of shares have flowed through the permeable membrane of corporateness adopted by the two companies from Byford to the petitioner to function commercially. Vide letter dated 16 June 2000, signed by Arvind Sahni, son of B.K. Sahni and one of the directors of both the companies, Byford confirms to the Health Officer, NOIDA that 'the entire manpower, infrastructure, experience and resources developed by Byford Leading Limited for this purpose would be made available to India Waste Energy Development Limited'. Furthermore, admittedly, the petitioner was incorporated on 9 March 1998 but, as per the auditor's report, till 31 December 1999 it had not started any business activity and, as a matter of fact, it had applied for permission from Pollution Control Board, through B.K. Sahni, on 27 March 2000, i.e. after 1 February 2000, when warrants of attachment was issued against Byford. Incidentally, the registered office of both the companies is also at the same place. In the light of the aforenoted legal position and in view of the material available on record, briefly referred to above, we do not find any illegality, irrationality or procedural impropriety in the impugned order on the issue, warranting interference by this Court.

20. Before parting with the case, we may also deal with the stand of the petitioner with regard to the authority of the Collector to issue the show cause notice, which resulted in the passing of the impugned order, on the ground that no such power had been conferred on the officer by the Administrator. Copies of the gazette notification dated 27 March 1998 has been placed before us showing that in exercise of powers conferred under Sub-section (2) of Section 9 of the Act, the Administrator had appointed the officer concerned as Deputy Commissioner, Sales Tax to assist the Commissioner of Sales Tax in execution of the functions under the Act and another notification dated 22 January 1999, issued in exercise of powers conferred by Clause (a) of Sub-section (1) of Section 27 of the Punjab Land Revenue Act, 1887, as in force in the National Capital Territory of Delhi, conferring upon the officer concerned the powers of Collector under the said Act for the recovery of sales tax dues recoverable as arrears of land revenue. Since we have endorsed the view taken by the Collector that the entire exercise of getting the business of waste management shifted from Byford to the petitioner was undertaken to evade realisation of tax dues of Byford, we do not find any illegality in respondents' taking recourse to the provisions of Section 139 of the Land Reforms Act.

In the result, the petition fails and is accordingly dismissed with no order as to costs. All interim orders/directions stand vacated.