JUDGMENT
J. Kanakaraj, J. (Chairman)
1. Petition on being called today upon hearing both sides the Tribunal ordered as follows :
All these cases are connected with each other as the facts to be narrated, will disclose.
2. The petitioner Sri Jayajothi and Company Ltd., is a company registered under the Companies Act, 1956. They were running a textile mill at Rajapalayam. They went in for expansion and the expanded unit was referred to as “B” unit. The Government of Tamil Nadu had issued G.O. Ms. No. 500 dated May 14, 1990 providing for certain sales tax concession in respect of new units as well as expanded units. As per the Government order the “B” unit which was established at a cost of more than Rs. 3.00 crores applied for eligibility certificate under the said Government order. By an order dated July 9, 1992 an eligibility certificate was issued by the State Industries Promotion Corporation of Tamil Nadu (hereinafter called “the SIPCOT”).
3. The eligibility certificate permitted deferral of sales tax to the extent of 388.20 lakhs of rupees commencing from February 1, 1992 to January 31, 1997. The deferred sales tax was payable from February 1, 1997 to March 31, 2002. An agreement was entered into on August 6, 1992 with the Government of Tamil Nadu represented by the Assistant Commissioner of Commercial Taxes. The petitioners were availing of sales tax deferral under the said agreement.
4. While so, by G.O. Ms. No. 48 dated February 11, 1994, Government issued further direction that the sales tax deferral granted will be treated as deemed to have been paid and an identical amount will be treated as Government loan. To the said effect a fresh agreement was executed on September 28, 1995.
5. On February 15, 1996 a new subsidiary company called Sri Jayajothi Textile Mills (P) Ltd., was incorporated. Similarly, on July 1, 1996, another subsidiary company called Sri Jayajothi Textile (P) Ltd., was incorporated. According to the petitioner the said two companies are subsidiary companies of the petitioner-company. It was resolved in the general body meeting of the “B” unit that the assets and liabilities of the “B” unit would be transferred to the subsidiary unit Sri Jayajothi Textile Mills (P.) Ltd. According to the petitioner the Board of Directors and the shareholders of the subsidiary company comprises of the same family members as that of the petitioner-company. However, it is further pointed out that though the resolution was passed, no document has been executed in pursuance of the said resolution.
6. Under the above circumstances, the first respondent issued a notice on January 2, 1997 informing the petitioner that they had violated the conditions of the agreement made on August 6, 1992 and September 28, 1995 by transferring the assets to the subsidiary company, namely, Sri Jayajothi Textile Mills Private Ltd. It was therefore, pointed out that the deferral facility was liable to be cancelled and the loan amount with interest was recoverable. On January 22, 1997 a further notice was issued in form B-6 read with Section 26 of the Tamil Nadu General Sales Tax Act, 1959 attaching the bank accounts of the petitioners. The petitioner disputed the correctness of the above notice and filed the O.P. Nos.561 and 562 of 1997. In O.P. No. 561 of 1997, the prayer is to quash the notice dated January 2, 1997 demanding a tax of Rs. 20,16,731 apart from additional surcharge and Central sales tax. In O.P. No. 562 of 1997, the prayer is to quash the proceedings dated January 22, 1997 relating to the very same demand and addressed to the Bank of Madurai and Bank of India. A perusal of the notice dated January 2, 1997 shows that the creation of the subsidiary unit and the transfer of assets and liabilities to Sri Jayajothi Textile Mills (P) Ltd., was contrary to the terms of the agreement and therefore for the said violation the petitioner had lost the benefit of the deferral scheme and consequently the entire amount of sales tax from 1992-1993 became payable. Similarly, the notice dated January 22, 1997 addressed to the banks also refers to the violation of the terms and conditions of the agreements and the entire amount was due and payable from the petitioner and consequently the bank attachment had been issued. In the affidavit filed in support of the petition several grounds are taken to question the correctness of the notices. But the main and important ground raised in the petitions are as follows :
(1) Though the petitioner-company had resolved to transfer the fixed assets to the subsidiary company, in law no document had been executed to complete the possession.
(2) The transfer of the fixed assets from the holding company in favour of a wholly owned subsidiary company is not prohibited tinder the agreements.
(3) The transfer in any event does not affect the interest of the Commercial Taxes Department.
7. When the above O.Ps. were taken up for hearing on December 23, 1998 the following temporary direction was issued hoping that some solution could be arrived at :
“There is a subsequent development in the case, in the sense that a petition has been filed by the parent company on November 4, 1998, seeking amendment of the agreement to enable the subsidiary company to maintain the schedule of repayment as per the earlier agreement with the parent company. If the above proposal is not prejudicial to the interest of the Revenue, there can be no objection for the Commercial Tax Officer to took into the matter and pass appropriate orders. The pendency of this O.P. need not be a bar to the authorities passing orders. In this view of the matter, we direct the Commercial Tax Officer II, Rajapalayam Assessment Circle, to pass orders on the petition dated November 4, 1998 on or before January 29, 1999. The O.Ps. are stand adjourned to February 1, 1999.”
8. Based on the above direction of the Special Tribunal the respondent-Commercial Tax Officer, Rajapalayam, has passed orders on January 25, 1999 rejecting the request of the petitioner-company. The reasons for the rejection are :
1. The petitioner-company is a limited company whereas the transferee-company is a private limited company and they cannot be held as one of the same company.
2. The petitioner-company had not produced any order of the SIPCOT for approval of the scheme of transfer to the subsidiary company.
3. In order to protect the interest of the State revenue there was no alternative but to reject the application.
The above order dated January 25, 1999 is challenged in O.P. No. 249 of 1999
9. Mr. C. Natarajan, appearing for the petitioners argues that the scope and purpose of the Government Order G.O. Ms. No. 500 dated May 14, 1990 should be understood before interpreting the clauses of the agreement. According to him the paramount consideration of the Government order is to encourage new industries in backward areas or expansion of industries in backward areas. Therefore, any interpretation of the scheme of deferral announced by the State Government should be done with a view to encourage and uphold new industries and expansion of industries in backward areas. Technical interpretation to cut at the root of the scheme should not be encouraged. With this background, it is pointed out that the creation of a subsidiary company and transfer of the assets to the subsidiary company would not mean alienation of the assets to a third party. According to the counsel the holding company retains its control over the fixed assets because the subsidiary company is fully under the control of the holding company. Mr. C. Natarajan, relies on the judgment of the Supreme Court in AIR 1988 SC 1737 (State of U.P. v. Renusagar Power Co.). Argues Mr. Natarajan, that even though transferee-company is a separate legal entity in law, the court must lift the corporate veil and see that the subsidiary company is nothing but the extended arm of the holding company and there is no scope for argument that the fixed assets have been alienated to some third party. In the said judgment of the Supreme Court the facts are that the subsidiary company was created solely for the purpose of supplying electricity to the holding company, to avail of the exemption from payment of electricity duty. The company had to prove that he was using the electricity from his own source of generation. Therefore, the question was whether the supply by the subsidiary company could be treated as the “own source of generation” of the holding company. In the said judgment it has been held that the corporate veil must be lifted and it must be held that the power supply from the subsidiary company was the power supply of the holding company itself and therefore the exemption from payment of electricity duty could be availed of. We have carefully perused the said judgment and we find that it cannot be applied to the facts of the present case. As many as 11 reasons are given by the Supreme Court to hold that the only object of creating the subsidiary company was to supply power to the holding company. The subsidiary company was not a public utility, but a captive plant of the holding company. In the very same judgment it has been pointed out that the court had disregarded the separate legal entity of a company only where the company was formed or used to facilitate the evasion of legal obligation. Chandrachud, C.J. in AIR 1982 SC 697 (Western Coalfields Ltd. v. Special Area Development Authority, Korba) observed that where a company is formed or used to facilitate the evasion of legal obligation, the court can disregard the separate legal entity of a company. Distinguishing the said observation the Supreme Court in State of U.P. v. Renusagar Power Co. AIR 1988 SC 1737 observes :
“Indubitably, in this case there was no question of evasion of taxes but the manner of treatment of the power plant of Renusagar as the power plant of Hindalco and the Government taking full advantage of the same in the case of power cuts and denial of supply of 100 per cent power to Hindalco, in our opinion, underline the facts and, as such, imply acceptance and waiver of the position that Renusagar was a power plant owned by Hindaico.”
10. Therefore, it is clear that the question of lifting the corporate veil should be resorted to only in extreme cases which do not come within the purview of the above observation. Mr. C. Natarajan, then refers to judgment of the division Bench of the Madras High Court in W.A. No. 1355 of 1995 dated August 25, 1998. In this case the learned counsel for the petitioner had argued to the contrary, when the Tamil Nadu Electricity Board refused to give concessional tariff on the ground that a particular company cannot be treated as a new industrial undertaking. In that case, Mr. C. Natarajan, refers to a number of decisions for the preposition that the corporate veil can be lifted only when the statute itself contemplates lifting of the veil or on the ground of fraud or improper conduct which the court wants to prevent, where there is evasion of tax. Having regard to the object of the particular notification the court held that a sister concern cannot be given the advantage to claim concession. Therefore, this decision also does not advance the case of the petitioner. Reference was made to [1983] 53 STC 388 (All.) (Commissioner of Sales Tax, U.P. v. Good Luck Rubber and Allied Industries) for the preposition that an interpretation which would promote the legislative intent, namely, the development of industrial unit, had to be adopted. Therefore, notwithstanding the re-constitution of a partnership-firm the Allahabad High Court had held that the unit was entitled for the benefit of exemption. [1990] 76 STC 462 (Guj) (Yeast Alco Enzymes Limited v. State of Gujarat) was relied upon for the preposition that the emphasis was on the pioneer unit and not the pioneer entrepreneur. We are not concerned with such a construction in the case before us.
11. But the decision which according to the petitioner is clinching is the decision of the Special Tribunal in O.P. No. 32 of 1999 dated February 5, 1999. In that case a partnership concern was given the benefit of the deferral scheme under the very same Government order. The partnership-firm converted itself into a private limited company and on the ground that there was violation of the agreement, the entire arrears were demanded. The argument was that there was no condition prohibiting the change of constitution, but the prohibition was against alienation of the fixed assets of the unit. In that case a Division Bench of this Special Tribunal agreed with the assessee that there was no specific condition prohibiting the evasion of the company into a private limited company. The properties of the concern was still with the assessee. The SIPCOT had approved the change of constitution. Under those circumstances, the Special Tribunal held that the assessee was entitled to have the deferral continued on the execution of a new agreement with the Directors of the private company. Those crucial facts are not also available in the instant case.
12. The learned Government Advocate Mr. R. Mahadevan, argues that para 4 of the agreement dated September 28, 1995 prohibits the petitioner from alienating the fixed assets until the Government loan is fully repaid. Para 7 provides for getting permission before the sale of fixed assets. Para 8 of the agreement says if any condition is not fulfilled the deferral already granted shall be cancelled. The entire amount will thereupon become recoverable, under the Revenue Recovery Act. The amount is also liable to be burdened with interest at 24 per cent per annum. Further, it is pointed out that there was an arbitration agreement on February 23, 1996 in which all the family properties were allotted to 5 parties. The “B” unit, namely, the petitioner-company was allotted to Mr. T.R. Jayaraman. As per the resolution of general body meeting held on October 31, 1996, the assets and liabilities of the “B” unit was transferred to the subsidiary company by name Sri Jayajothi Textile Mills Private Ltd., which was incorporated on February 15, 1996. It is therefore futile to argue that the fixed assets had not been transferred to continue with the original agreement holder. For the same reason this case is distinguishable from the case in O.P. No. 32 of 1999. In fact by their letter dated January 10, 1997 addressed to the SIPCOT they have prayed for issue of an eligibility certificate to and in favour of the said subsidiary company Sri Jayajothi Textile Mills Private Ltd. It is only under those circumstances that the impugned notices were issued. Reliance is also placed on the judgment of the Supreme Court in AIR 1970 SC 564 (Ruatom Cavasjee Cooper v. Union of India) where the following observations are found :
“A company registered under the Companies Act is a legal person, separate and distinct from its individual members. Property of the company is not the property of the shareholders. A shareholder has merely an interest in the company arising under its Articles of Association, measured by a sum of money for the purpose of liability, and by a share in the profit. Again a director of a company is merely its agent for the purpose of management. The holder of a deposit account in a company is its creditor ; he is not the owner of any specific fund lying with the company. A shareholder, a depositor or a director may not therefore be entitled to move a petition for infringement of the rights of the company, unless by the action impugned by him, his rights are also infringed.”
13. In the order dated January 25, 1999, rejecting the request of the petitioner to amend the eligibility certificate and enter into a fresh agreement with the subsidiary company it is pointed out that the original agreement holder was a limited company, whereas the subsidiary company is a private limited company, It is rightly pointed out that both the companies cannot be held to be one and the same company. Further, the parent company had become a separate unit and a separate registration certificate under the Tamil Nadu General Sales Tax Act was obtained with effect from October 31, 1996 in the name and style of Sri Jayajothi Textile Mills Private Ltd., the transferee-company. No doubt, it is not pointed out as to how the interest of the revenue will suffer especially when the subsidiary company had been making payment of the deferred sales tax as per schedule.
14. On a consideration of the entire facts and circumstances we are not satisfied that relief could be given to the petitioner. Such a decision will lay down a bad precedent. We cannot say with certainty that the reconstitution of a firm or a company will not at all affect the revenue. Similarly, when fixed assets are transferred to the different entity we cannot say that the interest of the revenue will not suffer. It all depends upon the manner in which the transferee-company conducts itself. So far as the conduct of the transferee-company, the revenue has always got to depend upon the conduct of the transferee-company, which may be good or bad. Therefore, when the parties enter into a contract it must be held that the terms of the contract should be strictly adhered to. This is the only way of safeguarding the interest of both the parties. When parties enter into a contract with open eyes they should remember that they have to adhere to the terms of the contract. No party to the agreement can interpret the clauses in his own way and insist on the other party to agree with his interpretation. This approach will be unsettling the entire contract law. We are not inclined therefore, to quash the notices dated January 2, 1997 or January 22, 1997 as prayed for. Similarly, the prayer to quash the order dated January 25, 1999, also fails. We have to record that we have given an opportunity to the respondent to reconsider the matter and see whether the request of the petitioner could be accommodated, even during the pendency of the proceedings by an order dated January 25, 1999. The respondents have rejected the request of the petitioner-company. Even now we feel that the matter cannot be foreclosed. It is still open to the respondents to look into the matter and see whether the interest of the revenue can be protected by entering into a new agreement with the subsidiary company after getting a fresh eligibility certificate from SIPCOT. Our suggestions is based upon the promotion of new industries in backward areas which seems to be the object of the Government Order No. 500 dated May 14, 1990. Leaving the doors open for fresh negotiations we enforce the terms of the agreement strictly by rejecting all the O.Ps. All the O.Ps. are therefore dismissed with the above observations.
And this Tribunal doth further order that this order on being produced be punctually observed and carried into execution by all concerned.
Issued under my hand and the seal of this Tribunal on the 17th day of March, 1999.