TMI Blog1990 (12) TMI 280X X X X Extracts X X X X X X X X Extracts X X X X ..... act that the Government of Tamil Nadu decided to implement a certain scheme by forming separate corporations under the control of the road corporations in the State and accordingly approved the scheme of Cheran Transport Corporation Limited for the formation of a separate engineering corporation to provide employment opportunities to the unemployed technicians as also to provide maintenance facilities for its bus service. So thus it found that it is clear that, in pursuance of the Government scheme, Cheran Engineering Corporation has been formed separately though the overall supervision at the initial stage was vested with Cheran Transport Corporation Limited. On the said basis and on the basis that the two corporations are separate legal entities, the Tribunal has held that it will be wrong to say that they formed part of the same legal entity. The question herein, therefore, is whether Cheran Transport Corporation Limited, Coimbatore, and Cheran Engineering Corporation, Pollachi, which, under a Government scheme, are said to be two separate legal entities will be assessed separately on their respective turnovers or Cheran Engineering Corporation shall be treated as an agency of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any had been formed by third parties, and the vendor purchased the whole of its shares from them, had the shares registered in the name of himself and a nominee, and had himself and the nominee appointed directors. It was held again that the acquisition of the company and the conveyance of the land to it was a mere 'cloak or sham' for the evasion of the contract of sale, and specific performance of the contract was, therefore, ordered against the vendor and the company". Pennington has further observed that American courts have been far readier to disregard a company's separate legal personality. Whenever they found that a certain company was formed to facilitate the breach of the general law or of a contractual obligation, they thought the veil should be pierced. How their attitude hardened in this regard has been stated by Pennington in the words of Sanborn J. "...A corporation will be looked upon as a legal entity as a general rule . . . but when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, of defend crime, the law will regard the corporation as an association of persons". Pennington has referred to a judgment of Atkinson J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 (SC); 3 SCC 230; AIR 1986 SC 649, the Supreme Court has said (at page 161 of 154 ITR): "It is up to the court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and consider whether. the situation created by the devices could be related to the existing legislation with the aid of "emerging techniques of interpretation as was done in W. T. Ramsay's case [1981] 2 WLR 449; [1982] AC 300, Burmah Oil Co. Ltd.'s case [1982] Simon's Tax Cases 30 and Dawson's case [1984] 1 All ER 530; [1984] 2 WLR 226 (HL) to expose the devices for what they really are and to refuse to give judicial benediction". The Supreme Court has quoted the observations in Dawson s case [1984] 1 All ER 530; [1984] 2 WLR 226 (HL) (at page 157 of 154 ITR): "The fact that the court accepted that each step in a transaction was a genuine step producing its intended legal result did not confine the court to considering each step in isolation for the purposes of assessing the fiscal results". In CIT v. Meenakshi Mills Ltd. [1967] 63 ITR 609, the Supreme Court has stated (at page 616): "It is true that from the ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 1986 SC 12, after referring to the judgment in CIT v. Meenakshi Mills Ltd. [1967] 63 ITR 609 (SC) and McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148, the Supreme Court has observed (at p. 136 of 59 Comp Cas): "It is true that in law the Associated Rubber Industry Ltd., and Aril Holdings Ltd., were distinct legal entities having separate existence. But, in our view, that was not an end of the matter. It is the duty of the court, in every case where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smoke-screen and discover the true state of affairs. The court is not satisfied with form and leave well alone the substance of a transaction". In CTTv. Meenakshi Mills Ltd. [1967] 63 ITR 609, the judicial approach to such problems is stated as follows (page 137 of 59 Comp Cas): "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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be utilised in proper expenditure and not wasted. See the observations in CWT v. Arvind Narottam [1988] 173 ITR 479 (SC); [1988] 4 SCC 113; AIR 1988 SC 1824. It is not necessary, in the facts of this case, to notice the change in the trend of judicial approach in England: Sherdley v. Sherdley [1987] 2 All ER 54. While it is true, as observed by Chinnappa Reddy J. in McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 (SC), that it is too much to expect the Legislature to intervene and take care of every device and scheme to avoid taxation and it is up to the court sometimes to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and to expose the devices for what they really are and to refuse to give judicial benediction, it is necessary to remember as observed by Lord Reid in Greenberg v. IRC [1971] 47 TC 240 (HL), that one must find out the true nature of the transaction. It is unsafe to make bad laws out of hard facts and one should avoid subverting the rule of law. Unfortunately, in the instant case, facts have not been found with such an approach by the lower authorities and the High Court had no alternative on the facts as foun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... implications of the business transactions of the two corporations and their relationship with each other. Since we have come to the conclusion that the Appellate Tribunal has not tested the case in accordance with law and since we also notice that the Appellate Assistant Commissioner also did not apply himself to the tests that would reveal the real character of the Engineering Corporation, we set aside the order of the Appellate Tribunal and affirm the order of the Appellate Assistant Commissioner with the modification that the Assessing Officer shall afford an opportunity to the parties to bring such evidence as they may deem fit and proper and determine in accordance with law as to whether the Engineering Corporation is a subsidiary of the Transport Corporation and, although it has got a separate legal identity, it does not act of its own but acts for and on behalf of the Transport Corporation. In the result, this tax case revision is allowed. The order of the Appellate Tribunal and that of the Appellate Assistant Commissioner, to the extent indicated above, are set aside. The case is remitted to the assessing officer for disposal in the light of the observations made above ..... X X X X Extracts X X X X X X X X Extracts X X X X
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