TMI Blog1967 (12) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... s right in holding that the claim of the assessee for the deduction of Rs. 31,26,000 was rightly rejected and coming under section 2(m)(ii) of the Wealth-tax Act?" The assessee acquired, pursuant to a resolution of its board of directors, dated October 22, 1929, 1,59,924 preference shares out of 1,60,000 preference shares and 1,99,948 equity shares out of 2,00,000 ordinary shares issued by G. F. Kellner and Company, an incorporated and registered company whose main business was railway catering in North India. The assessee acquired the shares partly for cash and partly in lieu of its own shares issued to the shareholders of Kellners. By another resolution dated February 4, 1930, the board of directors of the assessee decided to purchase and did purchase all the current assets " excepting firstly but only for the time being the agreements relating to catering on the East Indian Railway, the Great Indian Peninsular Railway and the Bengal and North Western Railway" and the goodwill of Kellners for a consideration of Rs. 31,26.000. Part of this consideration was to be paid in cash on demand by Kellners pursuant to a resolution to be passed at the general body meeting of the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... G. F. Kellner and Company Ltd. 31,26,000 Less : Cost of shares of G. F. Kellner and Company Limited, which under agreement between the appellant (assessee) and the company may be considered as payment of Rs. 31,23,844 of above consideration 31,23,006 -------------- Balance 2,994 ------------- Before the Wealth-tax Officer, the assessee's point of view was that the cost of the shares should really be taken to be on the assets-side which is exempt from computation of net wealth and is not liable to wealth-tax under section 5(1)(xix) and that the liability of Rs. 31,26,000 is a debt owed within the meaning of the main part of section 2(m) of the Act. The Wealth-tax Officer did not accept this view but was of the opinion that the liability shown as above in the balance-sheet had been incurred in relation to the exempted asset, to wit, the shares referred to in the balance sheet, and should, therefore, be left out of consideration by reason of section 2(m)(ii). This view prevailed with the Appellate Assistant Commissioner, Wealth-tax, and so too with the Tribunal. The Tribunal's reasoning was this. In the balance-sheet the sum of Rs. 31,23,006 almost representing the value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of rights and liabilities, as erroneously considered by the Tribunal, and that in fact and in law the liability incurred for the purchase of the assets of Kellners was liable to be discharged on demand by Kellners and that it is only in the event of Kellners deciding to go into liquidation that liberty was reserved to the assessee to surrender to the liquidators its shares in Kellners so as to reduce its indebtedness in the manner stated in clause 8 of the resolution of the board of directors of the assessee dated February 4, 1930. On the other hand, for the revenue, it is stated that the balance-sheet for each of the years as on the two valuation dates has been the basis of the assessments, that the balance-sheet itself showed that the liability incurred for the purchase of the assets had been set off by adjustment of the cost of shares and thus either there was no liability or, if there was one, it was related to the shares purchased by the assessee in Kellners. In support of this contention, it is suggested that it is the substance of the matter which should be regarded for the purposes of taxation and that means, in a case like this, the revenue and the court are entitled to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company. Section 6 deals with exclusion of certain debts and assets outside India. The procedure as to how the value of the assets is to be determined has been prescribed by section 7(1). Clause (a) of sub-section (2) of the section contains the procedure for what is generally known as global valuation on the basis of the balance-sheet drawn up of the affairs of the business carried on by the assessee instead of determining separately the value of each asset held by the assessee in his business. The effect of these provisions in the present context appears to be that the shares purchased by the assessee in Kellners, though an asset, are nevertheless exempt from payment of wealth-tax. The assets purchased by the assessee from Kellners will have to enter into the computation of its net wealth. If that be so, as it should be, and this is not denied as far as we can understand learned counsel for the revenue, the question arises whether the liability incurred by the assessee in purchasing those assets of Kellners is not a debt owed by the assessee which should be deducted from the aggregate value of the assessee's assets in computing its net wealth. Everybody has proceeded on the assu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s has actually been regarded so as is evident from the terms of the matter in the balance-sheet. We do not think that this manner of thinking is at all justified either having regard to the legal position or the facts. The assessee, in our opinion, rightly contends that the liability incurred in purchasing the assets of Kellners had nothing whatever to do with the liability therein incurred for purchase of the shares. The consideration for the purchase of the shares was paid, as we mentioned earlier, partly in cash and partly by transferring shares in the assessee-company to some of the shareholders in Kellners. Further, the purchase of the shares in Kellners was in point of time earlier than the purchase of the assets of Kellners. The effect of clause 8 in the resolution dated February 4, 1930, is not to create any relation between the shares and the liability so as to bring the liability within sub-clause (ii) of clause (m). That clause speaks of a liability incurred in relation to any property not chargeable to wealth-tax. Surely, it cannot be said that the liability in this case was incurred in relation to the shares which are exempt from tax. The liability, as a matter of fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this view it should follow that the liability is not within the purview of sub-clause (ii) of clause (m) of section 2, and the assessee is entitled to deduction thereof from the aggregate value of its assets. The argument, however, for the revenue is that the assessee in the balance-sheet set off the liability against the value of the shares and showed only Rs. 2,994 as liability and this manner of looking at it is in accord with the substance of the matter, namely, the fact that the assessee has acquired almost all the shares of Kellners as well as its assets so that it is virtually the owner of Kellners. By this process of reasoning the Tribunal viewed that there was a merger of rights and liabilities of the two companies so that in effect there was no debt owed which called for reduction in the present assessments. This argument overlooks the fact that the two companies are distinct, different and independent of each other. Each is a corporate body with separate rights and liabilities. The Companies Act contains provisions which enable a company to purchase shares in another company and thus become a controlling company. Merely because a company purchases almost the entirety ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il of the corporate character of a company and from the standpoint of its shareholders, the company can be regarded as a citizen, the Supreme Court declined on that basis to regard a company as a citizen. Repelling an argument that in proper cases the courts were at liberty to pierce through the veil, the Supreme Court observed at page 674 : "Thus, at present, the judicial approach in cracking open the corporate shell is somewhat cautious and circumspect. It is only where the legislative provision justifies the adoption of such a course that the veil has been lifted. In exceptional cases where courts have felt 'themselves able to ignore the corporate entity and to treat the individual shareholder as liable for its acts', the same course has been adopted. Summarising his conclusions, Gower has classified seven categories of cases where the veil of a corporate body has been lifted. But it would not be possible to evolve a rational, consistent and inflexible principle which can be invoked in determining the question as to whether the veil of the corporation should be lifted or not. Broadly stated, where fraud is intended to be prevented, or trading with an enemy is sought to be def ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion." That case proceeded on the special facts, namely, Sri Thyagaraja Chettiar, who was the moving figure both in the bank and in each of the assessee-companies having had knowledge of a pre-arrangement. In the instant case before us, there is no trace of any attempt at evasion of tax liability. It is true that it does not appear that Kellners had been carrying on business after it had sold its assets to the assessee. But it is not denied that it has been submitting its returns and has been assessed to wealth-tax including in its net wealth the liability owed by the assessee to it. There is certainly no mixing up of the rights and liabilities of the two companies or any particular individual or individuals being the moving spirit controlling the affairs of both the companies through a common hand or agency. The separate identity of the two companies has always been stressed and the terms of clause 6 have been given effect to. Merely on the basis of the balance-sheet entries, it is impossible to conclude that there has been liquidation of the liability of the assessee to Kellners. Even today Kellners can make a demand for repayment of the debt owed by the assessee. The assessee c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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