IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. CWP No. 9666 of 1987 Date of Decision: July 21, 2009 A.P. Raheja and another ...Petitioners Versus State of Haryana and others ...Respondents CORAM: HON'BLE MR. JUSTICE M.M. KUMAR HON'BLE MR. JUSTICE JASWANT SINGH Present: Mr. Suvir Sehgal, Advocate, for the petitioners. Ms. Ritu Bahri, DAG, Haryana, for the respondents. 1. Whether Reporters of local papers may be allowed to see the judgment? Yes 2. To be referred to the Reporters or not? Yes 3. Whether the judgment should be reported in the Digest? M.M. KUMAR, J. Shri Rajiv Raheja-petitioner No. 2 is a former Director of M/s V.P. Engineering Service Private Limited, Karnal (for brevity, ‘the Company’) whereas Shri A.P. Raheja-petitioner No. 1 is his attorney. The respondent department served notices on petitioner No. 1 being the attorney of petitioner No. 2 to effect recovery of sales tax amounting to Rs. 90,000/-, in respect of assessment year 1981-82 on the ground that petitioner No. 2 had been director of the Company. C.W.P. No. 9666 of 1987 The notices were duly replied by petitioner No. 1 on 2.11.1987 (P-3 & P-4). He also filed an affidavit stating that petitioner No. 2 is son of petitioner No. 1 and he is settled in U.K. and he had resigned as a Director of the Company on 21.11.1983 (P-5). It has further been asserted in the petition that the letter of resignation was forwarded to the Registrar of Companies on 20.12.1983 on a prescribed form (P-2). The prayer made by the petitioner is that no recovery from a former Director of the Company could be effected because the Company is a separate entity and the assessment has been made against the Company and not against an individual Director. The basic principle of Company law that corporate character of the Company continues and the Director cannot be made liable is sought to be applied at the instance of the petitioners. In the written statement filed by the respondents the usual objection of non-filing of an appeal under Section 39 of the Haryana General Sales Tax Act, 1973 (for brevity, ‘the Act’) has been raised. It has further been stated that under Section 18 of the Central Sales Tax Act, 1956 (for brevity, ‘CST Act’), recovery could be effected from the Director as well. When the matter came up for consideration at the motion stage on 28.12.1987, the Vacation Bench has issued notice for January 7, 1988 and arrested of petitioner No. 1 was stayed till further orders. When the Division Bench issued notice of motion, stay was allowed to continue. Mr. Suvir Sehgal, learned counsel for the petitioners has argued that within these jurisdiction itself the principle of law that no 2 C.W.P. No. 9666 of 1987 recovery of tax could be effected from the Director, has been settled by a Division Bench of this Court as early as 1964 in the case of Surinder Nath Khosla v. Excise and Taxation Commissioner, [1964] 15 S.T.C. 838. According to the learned counsel an incorporated company is a juristic person and a separate identity distinct from any individual shareholder. Therefore, the business carried on by the company belongs to it in its juristic capacity and not to its shareholders. For similar view reliance has also been placed on another judgment of learned Single Judge in the case of Tikam Chand Jain v. State Government of Haryana, (1987-2) 92 P.L.R. 151. Ms. Ritu Bahri, learned State counsel, however, has submitted that Section 18 of the CST Act permits recovery from the Director of the Company. We have thoughtfully considered the submissions made by the learned counsel for the parties and are of the view that the petitioners have not been treated fairly by the respondents. It is well settled principle of law that a Company registered under the Companies Act, 1956 is a complete separate entity and it has a corporate veil which can be lifted only for limited purposes. The directors of the company cannot be substitute of the company in their individual capacity. However, the respondent State of Haryana preferred to proceed against one of the directors-petitioner No. 2 by issuing him notice to recover the amount of arrears of sales tax, which were payable by the company. Petitioner No. 1, who is attorney of petitioner No. 2, replied to the recovery proceedings initiated by the 3 C.W.P. No. 9666 of 1987 Assistant Collector, Tis Hazari, New Delhi and stated that his son Shri Rajiv Raheja, who was director in the company, had ceased to be its director on 20.12.1983 when his resignation dated 21.11.1983 was forwarded to the Registrar of Companies. He also clarified that according to the Company Law and the Act, no recovery proceedings could be initiated against the director of a company in his personal capacity for recovering the arrears due against the company. Although no precedent for the above proposition would be required, yet the issue was settled by a Division Bench of this Court as early as 1964 in the case of Surinder Nath Khosla (supra) on which reliance has been placed by the learned counsel for the petitioners. The Division Bench held that a incorporated company is a juristic person, a separate entity distinct from any individual shareholder and the business carried on by the company belongs to it as a juristic person and not to its planners like the Managing Director or the Directors. It is equally well settled in the case of partnership firm that the liability has to be shared by the partners individually as well as severally. This is the basic distinction which is well rooted and is very well known in the legal world. The matter was again considered by a learned Single Judge of this Court in the case of Tikam Chand Jain (supra) wherein it was held that in the Company Law there is no provision making the Managing Director personally liable for the recovery of the dues of the company. Two more Division Benches of this Court deserves to be noticed on the issue, namely, Suneet Khurana v. Assistant Collector, (1997) 10 PHT 495 (P&H) and 4 C.W.P. No. 9666 of 1987 Mukesh Gupta v. State of Haryana, (1996) 8 PHT 326 (P&H). Another Division Bench of this Court in the case of Om Parkash Walecha v. State of Haryana, 2008 (1) PLR 547 (of which one of us M.M. Kumar, J. was a member) after considering various judgments, has reiterated the same principle. The argument that Section 18 of the CST Act could be invoked, has also been rejected in Om Parkash Walecha’s case (supra) because Section 18 would be applicable in case the company has been wound up. In the present case, there is not even a whisper that the company has been wound up, which would result into attracting of applicability of Section 18 of the CST Act. On principle as well as on precedent it becomes obvious that the writ petition merits acceptance. Accordingly, all recovery proceedings against petitioner No. 2 are set aside and a direction is issued to the respondents to restrain from issuing any notice to petitioner No. 2 or his attorney petitioner No. 1 on the pretext of effecting recovery of sales tax under the Act or under the CST Act. The action of the respondents being wholly unwarranted and against the settled law, the respondents are liable to be saddled with cost. The cost is assessed at Rs. 20,000/-. The writ petition stands disposed of in the above terms. (M.M. KUMAR) JUDGE 5 C.W.P. No. 9666 of 1987 (JASWANT SINGH) July 21, 2009 JUDGE Pkapoor 6