TMI Blog1963 (2) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... this 21st March, 1952, there was an agreement between the Associated Clothiers Ltd., the assessee, described as having its registered office at 5, Mission Row Extension, Calcutta and called the Vendor and this Phelps and Co. Ltd. described as having its registered office at 21, Old Court House Street, Calcutta as the purchaser. It is found as a fact that Phelps and Co. Ltd. transferred all its assets and liabilities to the assessee, although the agreement of the 21st March 1952 says a part , and it is also further found as a fact that all the shares of the purchaser company were held by the assessee. It has also been admitted by the assessee that all the shareholders and all the Directors of these two companies were the same at the relevant time and their objects in the Memorandum and Articles of Association were for all practical purposes identical. 3. The controversy arises with regard to a building at 9A, Connaught Place, New Delhi. It was an asset of the assessee as on the 21st March 1952, By Clause 9 of the Agreement dated 21st March, 1952, the transfer of the said premises was deemed to take effect from the 1st July, 1952 and the purchaser company was entitled to all ren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ference is short but the arguments at the bar have been long and elaborate. Independently of all cases and authorities none of which incidentally is directly on the point involved, the whole question in this case is whether it is at all a sale from self to self. In other words, whether this particular sale by one limited company to another limited company as two distinct legal and juristic entities could be regarded as a sale from self to self on the ground that their share-holders and directors are the same. It raises the proverbial question whether the Court can and should lift the veil in this context. 6. It is best to remember the actual language of the second proviso to Section 10(2)(vii) of the Income-tax Act. Before actually quoting the provision of the second proviso it may be recalled that section deals with business and says that the tax shall be payable by an assessee under the head Profits and gains of business, profession or vocation in respect of the profits or gains of any business or profession carried on by him and then it is followed by Sub-section (2) dealing with computation of such profits and gains after making allowances mentioned there. Section 10(2)(vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereof we are unable to accept this contention. A company is not the same as its share-holders; a company is distinct from its shareholders. A company is not the same as its directors; it is distinct from its directors. The separate legal character of the limited company is recognised by law. The leading case for holding this view is of course Salomon v. Salomon and Co., (1897) AC 22. One of the most recent decisions on the point is of the Privy Council in Catherine Lee v. Lee's Air Farming Ltd. reported in 1961 AC 12. Lord Morris at page 27 in 1961 AC 12 said that an incorporated company was a distinct legal entity separate from its governing director. In another recent decision of the English Court of Appeal in Tunstall v. Steigmann reported in 1962 (2) WLR 1045 the same principle is laid down that a limited company and the individual or individuals forming the company are separate legal entities, however complete the control might be by one or more of the individuals over the company. In the arguments at the Bar on behalf of the assessee, it has been contended before us that there have been a number of departures from the principle of 1897 AC 22 in order that the Courts may g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dly two separate genuine companies doing business side by side. The fact, therefore, that they had the same directors and the same shareholders does not make them the same self. A, a company and B, a company may be two separate limited companies with the same directors and same shareholders and even doing same business, e.g., in coal or steel bit even then, they are separate companies and legal entities, and transactions between them or sales and purchases between them, cannot be regarded as transactions or sales from self to self. Modern legislation, independently of any question or case of fraud, has however, introduced instances where the veil is and can be lifted and we shall presently indicate them. But before doing so it is necessary to clear the smoke screen created by the overworked Judicial passion of looking at the substance of the thing in tax cases. 11. This doctrine of lifting the veil is a doctrine of limited application and is guarded by many rules of wholesome caution. The desire for 'looking at the substance of the thing' has often led to a misapplication of the doctrine of lifting the veil and specially in taxation cases it has been severely criticise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on delivering the advice of the Privy Council says: Their Lordships think it necessary once more to protest against the suggestion that in revenue cases 'the substance of the matter' may be regarded as distinguished from the strict legal position. 12. Speaking for myself, this slogan for looking at the substance even on its own tenets, is an empty sound. Let us look at it a little more closely, and let us even look at the substance. What is the substance? Is it intended to say that the substance of a company is the share-holder? Is it intended to say that the substance of the company is the director? If that be so, then what happens to the company, when the share-holder or the director changes? Surely then the company still remains. In other words, the substance of the company remains. Therefore, neither the share-holder nor the director, nor its staff nor furniture nor building for the matter of that, is the substance of the company. The doctrine that a limited company is an entirely independent separate legal entity is not a mere doctrine of form. It is equally and more fundamentally, a doctrine of substance because a company continues even though its assets or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an exchange; it is not a partition; it is not a mortgage. I do not know what it is unless it is a conveyance on sale. I do not know what is necessary to constitute a sale except a transfer of property from one person to another for money, or, for the purposes of the Stamp Act, for stock or marketable security. But then it is said, Oh, it is only a redistribution of property . But is it? I do not consider it a redistribution at all. It is an entire transfer of property from one set of people to another body altogether; and whether there are, as there may well be hereafter, additional persons taking shares in this company is perfectly immaterial. This really also indicates that this is not a case of redistribution or reorganisation of the property. 14. Dr. Debiprasad Pal, appearing for the assessee, has tried to attract us with decisions which are not under Section 10(2)(vii) of the Income-tax Act and not as between two limited companies existing side by side but which deal with the general theory of lifting the veil and transactions from self to self. He first relied on the decision of the Bombay High Court in . That case is distinguishable on many grounds from the present R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounting year. In Kooka's case, however, there was a sale of the shares in pursuance of the trading or business activity and actual profits resulting from the sale. Therefore, the Supreme Court says in Kooka's case that the question there is not whether the state has a power to tax potential future advantage but the question is how should actual profits be computed when admittedly there has been a sale in the business sense and actual profits have resulted therefrom. The Supreme Court also took into consideration the leading English decision in Sharkey v. Wernher reported in (1956) 36 Tax Case 275. It is said in Kooka's case by the Supreme Court that in both Sharkey's case, (1956) 36 Tax Cas 275 as. well as in Kikabhai's case what had happened was that a part of the stock-in-trade was withdrawn and the question was at what figure in the trading accounts the withdrawal should be accounted for. In Kikabhai's case the Court came to the conclusion that the withdrawal should be at the cost price. In Sharkey's case, (1956) 36 Tax Cas 275 the House of Lords came to the conclusion that the proper figure-should be the market value which gave a fairer measure of as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere that the funds vested in the trustees of the deeds were now held upon the same trusts as before for the benefit of the same persons, now the employees of the company. That case, therefore, cannot help the assessee in the present Reference before us. 16. It is, therefore, plain from the authorities and principles discussed above that the doctrine of lifting the veil of incorporated company is a doctrine of limited application. Only in exceptional cases the veil is lifted and those cases also are limited in their application and they proceed on broad general principles. In the first place, the veil of incorporation is not intended to conceal the internal affairs of the company from view because the Companies Act itself recognises it as an essential feature of corporate personality that it should be accompanied by the widest publicity. These special instances may be classified as (1) under express statutory provisions, as for instance, members being liable under the Companies Act if the numbers of the company are allowed to fall below the prescribed minimum or in the case of fraudulent trading or misdescription of company or in the case of drawing distinction between holding an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enefits Association Ltd. v. Commissioner of Income-tax, West Bengal to which I was a party, and specially 'the observations made there at page 270 (of ITR) : (at p. 608 of AIR) on the fundamental proposition or general application that one cannot trade with oneself and make profit. That observation cannot help the assessee in this case because the whole question here is that whether it is a case of trading with one self in a different context. The whole* question here is, whether two legally different incorporated companies can be said to be identical self. On the authorities discussed above we have no hesitation in holding that they are not the same self but are different. Dr. Pal also tried to rely on another decision of this Court reported in the same volume of (Commr. of Income-tax (Central) Calcutta v. Mugneeram Bangur and Co..) (Cal). But then that case is not at all under Section 10(2) (vii). It is also a case of partnership which ceased to exist after such transfer. 18. Palmer in the Twentieth Edition of Company Law at pages 130-137 summarises the five main instances in which modern Company Law would disregard the principle that the company is an independent legal &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ying on business at least for 10 years from 1952 to 1962. In the second place, it is now admitted by the assessee that the assessee has gone into liquidation by a resolution of the company on the 6th January, 1962 and which resolution has been published in the Calcutta Gazette on the 18th January, 1962. A copy of the Calcutta Gazette is directed to be filed herewith and should be kept on the records. It cannot, therefore, be contended that the liquidation of the assessee has also meant the liquidation of Phelps and Co. Ltd., which continued to carry on its business. Therefore, they cannot be the same self. Thirdly, from the minutes of the extraordinary general meeting of the assessee held on Saturday, the 6th January, 1962 whereby under a special resolution the assessee was resolved to be wound up, we find that there was another h resolution which expressly describes Messrs. Phelps and Co. Private Ltd. to be a 'subsidiary' of the assessee. Now if Phelps and Co. Ltd. was a subsidiary of the assessee, as it must be held on the assessee's own admission by virtue of that resolution. the admitted copy of which is directed to be filed herewith and should be kept with the reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee brought proceedings under the Stamp Act before the pun-jab High Court which is now reported as Associated Clothiers Ltd. v. Union of India through the Secretary, Central Board of Revenue, , and obtained an exemption that they claimed by way of remission of the stamp duty chargeable on the instrument of transfer of property in cases where 90% of the issued share capital of the transferee company was for the benefit of the transferor company. Therefore, these two companies were treated as separate and not as the same self. 21. Finally, on this vexed question of lifting the veil of corporate personality the proposition must be emphasised that the persons veiled by the corporate personality are as a rule not themselves allowed to lift the veil which they have put on. The decision of the House of Lords in Macaura v. Northern Assurance Co., Ltd., and, reported in 1925 A. C. 619 according to which neither a share-holder nor a simple creditor of a company has any insurable interest in any particular asset of the company indicates the law that, if the assessee itself in this case has put the veil of incorporation, then it becomes difficult to see how it can now plead that the v ..... X X X X Extracts X X X X X X X X Extracts X X X X
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