WORKMEN V. ASSOCIATED RUBBER INDUSTRY LTD.

(1985) 4 SCC 114)

SUBMITTED TO: PROF SHANTANU CHOUBEY
FACULTY OF CORPORATE LAW.

FINAL DRAFT SUBMITTED FOR THE COURSE OF CORPORATE LAW.

AUGUST, 2018

CHANAKYA NATIONAL LAW UNIVERSITY, PATNA

ACKNOWLEDGEMENT

1
Writing a project is one of the most significant academic challenges I have ever faced. Though

this project has been presented by me but there are many people who remained in veil, who

gave their all support and helped me to complete this project.

First of all, I am very grateful to my subject teacher PROF SHANTANU CHOUBEY without

the kind support and help of whom the completion of the project was a herculean task for me.

She donated her valuable time from her busy schedule to help me to complete this project and

suggested me from where and how to collect information and data.

I am very thankful to the librarian who provided me several books on this topic which proved

beneficial in completing this project.

I acknowledge my friends who gave their valuable and meticulous advice which was very

useful and could not be ignored in writing the project. I want to convey a most sincere thanks

to my parents for helping me throughout the project.

SHUBHI MISHRA

ROLL NO. 1439

7th SEMESTER

Contents
RESEARCH QUESTION ....................................................................................................................................................... 4
2
RESEARCH METHODOLOGY:........................................................................................................................................... 4

SOURCE OF DATA: ............................................................................................................................................................. 4

Limitations of the Study:......................................................................................................................................................... 4

INTRODUCTION................................................................................................................................................................. 4

CHAPTER 1 – ....................................................................................................................................................................... 9

LIFTING OF CORPORATE VEIL. ................................................................................................................................... 9

CHAPTER 2 – ..................................................................................................................................................................... 13

STATUORY PROVISION OF LIFTING OF CORPORATE VEIL. ............................................................................ 13

CHAPTER 3 - THE CASE LAW (Workmen v. Associated Rubber Industry Ltd. (1985) 4 SCC 114) ................... 16

OBJECTIVE OF THE STUDY:

To study all the aspects of corporate law in india. The problems associated with the same.

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RESEARCH QUESTION
The general view of the researcher is to find that when the corporate veil can be lifted.

RESEARCH METHODOLOGY:
The researcher has used doctrinal method in her research, that is, extensive use of literary sources and materials.
The researcher mainly uses secondary sources to provide substance to the research analysis. In some cases, the
researcher shall be bound to extract materials directly from the literary work of certain authors which the
researcher intends to adequately cite and notify in due course of time.

SOURCE OF DATA:
The researcher will collect the data from the following sources:

Secondary Sources: Books

Websites
Articles

Limitations of the Study:

Though this is an immense project and pages can be written over the topic due to time, finance, and territorial
constraints the researcher has been compelled to deal with a limited number of concepts only.

INTRODUCTION
The Associated Rubber Industry Ltd. had purchased, some years back, shares of
INARCO Ltd. by investing a sum of Rs 4,50,000. They were getting annual dividends
4
in respect of these shares and the amount so received was shown in the profit and loss
account of the company year after year. It was taken into account for the purpose of
calculating the bonus payable to the workmen of the company. Some time in the
course of the year 1968, the company transferred the shares of INARCO Ltd. held by
it to Aril Bhavnagar Ltd. (changed to the Aril Holdings Ltd.), a subsidiary company
wholly owned by The Associated Rubber Industry Ltd. Aril Holdings Ltd. had no
other capital except the shares of INARCO Ltd. transferred to it by the Associated
Rubber Industry Ltd. It had no other business or source of income whatsoever except
receiving the dividend on the shares of INARCO Ltd. The dividend income from the
shares of INARCO Ltd. was not transferred to The Associated Rubber Industry Ltd.
and therefore, it did not find place in the profit and loss account of the company with
the result that the available surplus for the purposes of payment of bonus to the
workmen of the company became reduced. The net result of the exercise was that
bonus at the rate of 4% only was paid to the workers for the year 1969 instead of at
the rate of 16% to which they would have otherwise been entitled. We may mention
here that Aril Holdings Ltd. was itself wound up in the year 1971 and amalgamated
with The Associated Rubber Industry Ltd.

3. The workmen of The Associated Rubber Industry Ltd., Bhavnagar raised an

industrial dispute claiming that they were entitled to be paid bonus at the rate of 16%
for the year 1969. According to them, the transfer of the shares of INARCO Ltd. to
Aril Holdings Ltd. was no more than a device to avoid payment of higher bonus to
the workmen. The Industrial Tribunal and thereafter the High Court of Gujarat under
Article 226 of the Constitution, held that The Associated Rubber Industry Ltd. and
Aril Holdings Ltd. were two independent companies with separate legal existence
and therefore, the profits made by Aril Holdings Ltd. could not be treated as profits
of The Associated Rubber Industry Ltd. for the purpose of computing the gross profits
earned by The Associated Rubber Industry Ltd. It was further held that there was no
evidence to show that the transfer of shares to Aril Holdings Ltd. was only a device
to avoid payment of bonus to the workmen.

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 4. 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 to be satisfied with form and
leave well alone the substance of a transaction. In CIT v. Sri Meenakshi Mills Ltd.
[AIR 1967 SC 819], the judicial approach to such problems was stated as follows:
“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 regard to the economic realities behind the legal facade.
For example, the Court has power to disregard the corporate entity if it is used for tax
evasion or to circumvent tax obligation. For instance, in Apthorpe v. Peter
Schoenhofen Brewing Co. [4 TC 41], the Income Tax Commissioners had found as
a fact that all the property of the New York company, except its land, had been
transferred to an English company, and that the New York company had only been
kept in being to hold the land, since aliens were not allowed to do so under New York
law. All but three of the New York company’s shares were held by the English
company, and as the Commissioner also found, if the business was technically that
of the New York company, the latter was merely the agent of the English company.
In the light of these findings the Court of Appeal, despite the argument based on
Salomon case [1897 AC 22], held that the New York business was that of the English
company which was liable for English income tax accordingly. In another case –
Firestone Tyre and Rubber Co. v. Llewellin [(1957) 1 WLR 464] – an American
company had an arrangement with its distributors on the Continent of Europe
whereby they obtained supplies from the English manufacturers, its wholly owned
subsidiary. The English company credited the American with the price received after
deducting the costs plus 5 per cent. It was conceded that the subsidiary was a separate
legal entity and not a mere emanation of the American parent, and that it was selling

6
its own goods as principal and not its parent’s goods as agent. Nevertheless, these
sales were a means whereby the American company carried on its European business,
and it was held that the substance of the arrangement was that the American company
traded in England through the agency of its subsidiary.”
More recently we have pointed out in McDowell & Co. Ltd. v. CTO [(1985) 3 SCC
230]:
“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 Ramsay, Burmah Oil and Dawson, to expose the devices
for what they really are and to refuse to give judicial benediction.”

5. If we now look at the facts of the case, what do we find? A new company is
created wholly owned by the principal company, with no assets of its own except
those transferred to it by the principal company, with no business or income of its
own except receiving dividends from shares transferred to it by the principal company
and serving no purpose whatsoever except to reduce the gross profits of the principal
company. These facts speak for themselves. There cannot be direct evidence that the
second company was formed as a device to reduce the gross profits of the principal
company for whatever purpose. An obvious purpose that is served and which stares
one in the face is to reduce the amount to be paid by way of bonus to workmen. It is
such an obvious device that no further evidence, direct or circumstantial, is necessary.
It was argued that in 1971, the Aril Holdings Ltd. was wound up and amalgamated
with The Associated Rubber Industry Ltd. and that this circumstance showed that the
initial creation of Aril Holdings Ltd. was not a device of avoidance. Probably, after
Aril Holdings Ltd. was created, some unforeseen difficulties arose which have not
been brought to light before us and it became necessary to wind it up and amalgamate
it with The Associated Rubber Industry Ltd. We are therefore, satisfied that the
amount of dividend from INARCO Ltd. received by the Aril Holdings Ltd. should be
7
taken into account in assessing the gross profit of The Associated Rubber Industry
Ltd. for the purpose of calculating the rate of bonus payable to the workmen of The
Associated Rubber Industry Ltd. The appeal is allowed and it is declared that the
workmen of the Associated Rubber Industry Ltd., Bhavnagar are entitled to be paid
bonus at the rate of 16% for the year 1969.

8
 CHAPTER 1 –
LIFTING OF CORPORATE VEIL.
“The principle of veil of incorporation is a legal concept that separates the
personality of a corporation from the personalities of its shareholders and protects
them from being personally liable for the company’s debts and other obligations.
While a company is a separate legal entity, the fact that it can only act through
human agents that compose it, cannot be neglected. Since an artificial person is
not capable of doing anything illegal or fraudulent, the façade of corporate
personality might have to be removed to identify the persons who are really guilty.
This is known as lifting of the corporate veil. Besides the statutory provisions for
lifting the corporate veil, courts also do lift the corporate veil to see the real state
of affairs. However, even though the legislature and the courts have in many cases
now allowed the corporate veil to be lifted, it should be noted that the principle of
veil of incorporation is still the rule and the instances of lifting or piercing the veil
are the exceptions to this rule”
Before dealing with the lifting of corporate veil it is pertinent to define what the
meaning of a company is. Strictly, a company has no particular definition but section
3(1) (i) of the Companies Act attempts to provide the meaning of the word in context
of the provisions and for the use of this act. It states: ‘a company means a company
formed and registered under this Act or an existing company as defined in section 3
(1) (ii).’ The company must be registered under the Companies Act for it to become
an incorporated association. If it is not registered it becomes an illegal association.
This paper would deal with the lifting of corporate veil and its aspects with the
judicial decisions. Let us first discuss the exact meaning of corporate veil and lifting
of corporate veil with limited liability concept.
Corporate veil:
A legal concept that separates the personality of a corporation from the personalities
of its shareholders, and protects them from being personally liable for the company’s
debts and other obligations.

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Lifting of Corporate veil:
At times it may happen that the corporate personality of the company is used to
commit frauds and improper or illegal acts. Since an artificial person is not capable
of doing anything illegal or fraudulent, the façade of corporate personality might have
to be removed to identify the persons who are really guilty. This is known as ‘lifting
of corporate veil’.
It refers to the situation where a shareholder is held liable for its corporation’s debts
despite the rule of limited liability and/of separate personality. The veil doctrine is
invoked when shareholders blur the distinction between the corporation and the
shareholders. A company or corporation can only act through human agents that
compose it. As a result, there are two main ways through which a company becomes
liable in company or corporate law: firstly through direct liability (for direct
infringement) and secondly through secondary liability (for acts of its human agents
acting in the course of their employment).
There are two existing theories for the lifting of the corporate veil. The first is the
“alter-ego” or other self theory, and the other is the “instrumentality” theory.
The alter-ego theory considers if there is in distinctive nature of the boundaries
between the corporation and its shareholders.
The instrumentality theory on the other hand examines the use of a corporation by its
owners in ways that benefit the owner rather than the corporation. It is up to the court
to decide on which theory to apply or make a combination of the two doctrines.
Concept of limited liability:
One of the main motives for forming a corporation or company is the limited liability
that it offers to its shareholders. By this doctrine, a shareholder can only lose what he
or she has contributed as shares to the corporate entity and nothing more. This
concept is in serious conflict with the doctrine of lifting the veil as both these do not
co-exist which is discussed by us in the paper in detail.

10
DEVELOPMENT OF THE CONCEPT OF “LIFTING THE CORPORATE
VEIL”
One of the main characteristic features of a company is that the company is a separate
legal entity distinct from its members. The most illustrative case in this regard is the
case decided by House of Lords- Salomon v. A Salomon & Co. Ltd[i]. In this case
Mr. Solomon had business of shoe and boots manufacture. ‘A Salomon & Co. Ltd.’
was incorporated by Solomon with seven subscribers-Himself, his wife, a daughter
and four sons. All shareholders held shares of UK pound 1 each. The company
purchased business of Salomon for 39000 pounds, the purchase consideration was
paid in terms of 10000 pounds debentures conferring charge on the company’s assets,
20000 pounds in fully paid 1 pound share each and the balance in cash. The company
in less than one year ran into difficulties and liquidation proceedings commenced.
The assets of the company were not even sufficient to discharge the debentures (held
entirely by Salomon itself) and nothing was left to the insured creditors. The House
of Lords unanimously held that the company had been validly constituted, since the
Act only required seven members holding at least one share each and that Salomon
is separate from Salomon & Co. Ltd. The entity of the corporation is entirely separate
from that of its shareholders; it bears its own name and has a seal of its own; its assets
are distinct and separate from those of its members; it can sue and be sued exclusively
for its purpose; liability of the members are limited to the capital invested by them.
Further in Lee v. Lee’s Air Farming Ltd., it was held that there was a valid contract
of service between Lee and the Company, and Lee was a therefore a worker within
the meaning of the Act. It was a logical consequence of the decision in Salomon’s
case that one person may function in the dual capacity both as director and employee
of the same company.
In The King v Portus; ex parte Federated Clerks Union of Australia, where Latham
CJ while deciding whether or not employees of a company owned by the Federal
Government were not employed by the Federal Government ruled that the company
is a distinct person from its shareholders. The shareholders are not liable to creditors

11
for the debts of the company. The shareholders do not own the property of the
company.
In course of time, the doctrine that a company has a separate and legal entity of its
own has been subjected to certain exceptions by the application of the fiction that the
veil of corporation can be lifted and its face examined in substance.
Thus when “Tata Company” or “German Company” or “Government Company” is
referred to, we look behind the smoke-screen of the company and find the individual
who can be identified with the company. This phenomenon which is applied by the
courts and which is also provided now in many statutes is called “lifting of the
corporate veil”. As a consequence of the lifting of the corporate veil, the company as
a separate legal entity is disregarded and the people behind the act are identified
irrespective of the personality of the company. So, this principle is also called
“disregarding the corporate entity”.

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 CHAPTER 2 –

STATUORY PROVISION OF LIFTING OF CORPORATE VEIL.

Section 5 of the Companies Act defines the individual person committing a wrong or
an illegal act to be held liable in respect of offences as ‘officer who is in default’.
This section gives a list of officers who shall be liable to punishment or penalty under
the expression ‘officer who is in default’ which includes a managing director or a
whole-time director.
Section 45– Reduction of membership below statutory minimum: This section
provides that if the members of a company is reduced below seven in the case of a
public company and below two in the case of a private company (given in Section
12) and the company continues to carry on the business for more than six months,
while the number is so reduced, every person who knows this fact and is a member
of the company is severally liable for the debts of the company contracted during that
time. In the case of Madan lal v. Himatlal & Co.s the respondent filed suit against a
private limited company and its directors for recovery of dues. The directors resisted
the suit on the ground that at no point of time the company did carry on business with
members below the legal minimum and therefore, the directors could not be made
severally liable for the debt in question. It was held that it was for the respondent
being dominus litus, to choose persons of his choice to be sued.
Section 147- Misdescription of name: Under sub-section (4) of this section, an officer
of a company who signs any bill of exchange, hundi, promissory note, cheque
wherein the name of the company is not mentioned is the prescribed manner, such
officer can be held personally liable to the holder of the bill of exchange, hundi etc.
unless it is duly paid by the company. Such instance was observed in the case of
Hendon v. Adelman.
Section 239– Power of inspector to investigate affairs of another company in same
group or management: It provides that if it is necessary for the satisfactory
completion of the task of an inspector appointed to investigate the affairs of the
company for the alleged mismanagement, or oppressive policy towards its members,
13
he may investigate into the affairs of another related company in the same
management or group.
Section 275- Subject to the provisions of Section 278, this section provides that no
person can be a director of more than 15 companies at a time. Section 279 provides
for a punishment with fine which may extend to Rs. 50,000 in respect of each of those
companies after the first twenty.
Section 299- This Section gives effect to the following recommendation of the
Company Law Committee: “It is necessary to provide that the general notice which
a director is entitled to give to the company of his interest in a particular company or
firm under the proviso to sub-section (1) of section 91-A should be given at a meeting
of the directors or take reasonable steps to secure that it is brought up and read at the
next meeting of the Board after it is given. The section applies to all public as well as
private companies. Failure to comply with requirements of this Section will cause
vacation of the office of the Director and will also subject him to penalty under sub-
section (4).1
Sections 307 and 308- Section 307 applies to every director and every deemed
director. Not only the name, description and amount of shareholding of each of the
persons mentioned but also the nature and extent of interest or right in or over any
shares or debentures of such person must be shown in the register of shareholders.
Section 314- The object of this section is to prohibit a director and anyone connected
with him, holding any employment carrying remuneration of as such sum as
prescribed or more under the company unless the company approves of it by a special
resolution.
Section 542- Fraudulent conduct: If in the course of the winding up of the company,
it appears that any business of the company has been carried on with intent to defraud
the creditors of the company or any other person or for any fraudulent purpose, the
persons who were knowingly parties to the carrying on of the business, in the manner
aforesaid, shall be personally responsible, without any limitation of liability for all or
any of the debts or other liabilities of the company, as the court may direct. In Popular
1
Guide to Companies Act, 17th edn 2010, part 1, A. Ramaiya, Pg 582
14
Bank Ltd., In Re it was held that section 542 appears to make the directors liable in
disregard of principles of limited liability. It leaves the Court with discretion to make
a declaration of liability, in relation to ‘all or any of the debts or other liabilities of
the company’. This section postulates a nexus between fraudulent reading or purpose
and liability of persons concerned.

15
CHAPTER 3 - THE CASE LAW (Workmen v. Associated
Rubber Industry Ltd. (1985) 4 SCC 114)
By contrast with the limited and careful statutory directions to ‘lift the veil’ judicial
inroads into the principle of separate personality are more numerous. Besides
statutory provisions for lifting the corporate veil, courts also do lift the corporate veil
to see the real state of affairs. Some cases where the courts did lift the veil are as
follows:
United States v. Milwaukee Refrigerator Transit Company – In this case the U.S.
Supreme Court held that “where the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud or defend crime, the law will disregard the
corporate entity and treat it as an association of persons.”
Some of the earliest instances where the English and Indian Courts disregarded the
principle established in Salomon’s case are:
Daimler Co. Ltd. v. Continental Tyre and Rubber Co. (Great Britain) Ltd – This
is an instance of determination of enemy character of a company. In this case, there
was a German company. It set up a subsidiary company in Britain and entered into a
contract with Continental Tyre and Rubber Co. (Great Britain) Ltd. for supply of
tyres. During the time of war the British company refused to pay as trading with an
alien company is prohibited during that time. To find out whether the company was
a German or a British company, the Court lifted the veil and found out that since the
decision making bodies, the board of directors and the general body of share holders
were controlled by Germans, the company was a German company and not a British
company and hence it was an enemy company.
Gilford Motor Co. v. Horne – This is an instance for prevention of façade or sham.
In this case an employee entered into an agreement that after his employment is
terminated he shall not enter into a competing business or he should not solicit their
customers by setting up his own business. After the defendant’s service was
terminated, he set up a company of the same business. His wife and another employee
16
were the main share holders and the directors of the company. Although it was in
their name, he was the main controller of the business and the business solicited
customers of the previous company.
The Court held that the formation of the new company was a mere cloak or sham to
enable him to enable him to breach the agreement with the plaintiff.
Re, FG (Films) Ltd – In this case the court refused to compel the board of film censors
to register a film as an English film, which was in fact produced by a powerful
American film company in the name of a company registered in England in order to
avoid certain technical difficulties. The English company was created with a nominal
capital of 100 pounds only, consisting of 100 shares of which 90 were held by the
American president of the company. The Court held that the real producer was the
American company and that it would be a sham to hold that the American company
and American president were merely agents of the English company for producing
the film.
Jones v. Lipman – In this case, seller of a piece of land sought to evade specific
performance of a contract for the sale of the land by conveying the land to a company
which he formed for the purpose and thus he attempted to avoid completing the sale
of his house to the plaintiff. Russel J. describing the company as a “devise and a
sham, a mask which he holds before his face and attempt to avoid recognition by the
eye of equity” and ordered both the defendant and his company specifically to
perform the contract with the plaintiff.
Tata Engineering and Locomotive Co. Ltd. State of Bihar – In this case it was stated
that a company is also not allowed to lay claim on fundamental rights on the basis of
its being an aggregation of citizens. Once a company is formed, its business is the
business of an incorporated body thus formed and not of the citizens and the rights
of such body must be judged on that footing and cannot be judged on the assumption
that they are the rights attributable to the business of the individual citizens. 2
N.B. Finance Ltd. v. Shital Prasad Jain – In this case the Delhi High Court granted
to the plaintiff company an order of interim injunction restraining defendant
2
Guide to Companies Act, 17th edn 2010, part 2, A. Ramaiya, Pg 3781s
17
companies from alienating the properties of their ownership on the ground that the
defendant companies were merely nominees of the defendant who had fraudulently
used the money borrowed from the plaintiff company and bought properties in the
name of defendant companies. The court did not in this case grant protection under
the doctrine of corporate veil.
Shri Ambica Mills Ltd. v. State of Gujarat – It was held that the petitioners were
as good as parties to the proceedings, though their names were not expressly
mentioned as persons filing the petitions on behalf of the company. The managing
directors in their individual capacities may not be parties to such proceedings but in
the official capacity as managing directors and as officers of the company, they could
certainly be said to represent the company in such proceedings. Also as they were
required to so act as seen from the various provisions of the Act and the Rules they
could not be said to be total strangers to the company petition.
CHAPTER 4 – CASE LAWS.
APPROACH OF THE INDIAN COURTS IN THE 21ST CENTURY
Subhra Mukherjee v. Bharat Coking Coal Ltd. – Sham or façade- In this case a
private coal company sold its immovable property to the wives of directors prior to
nationalization of the company. In fact, documents were ante-dated to show the
transaction was prior to nationalization of the company). Where such transaction is
alleged to be sham and collusive, the Court was justified in piercing the veil of
incorporation to ascertain the true nature of the transaction as to know who were the
real parties to the sale and whether it was genuine and bona fide or whether it was
between the husbands and wives behind the façade of the separate entity of the
company.
Bajrang Prasad Jalan v. Mahabir Prasad Jalan – Subsidiary-holding company-
The court, for the purpose of considering a complaint of oppression held that the
corporate veil can be lifted in the cases of not merely of a holding company, but also
its subsidiary when both are family companies.
Singer India v. Chander Mohan Chadha – The concept of corporate entity was
evolved to encourage and promote trade and commerce but not to commit illegalities
18
or to defraud the people. Where therefore the corporate charter is employed for the
purpose of committing illegality or for defrauding others, the court would ignore the
corporate character and will look at the reality behind the corporate veil so as to
enable it to pass appropriate orders to do justice between the parties concerned.
Saurabh Exports v. Blaze Finance & Credits (P.) Ltd. – Defendant no. 1 was a
private limited company. Defendant no. 2 and 3 were the directors of that company.
Defendant no. 4 was the husband of D-3 and the brother of D-2. Allegedly on
representation of D-4 that D-1 company was inviting short term deposits at good
interest rates, plaintiff made a deposit of Rs. 15 lakhs in the company for a period of
6 months. When the company failed to pay the amount, the plaintiff sued it for the
said amount along with interest. D-2 and 3 denied their liability in the ground that
there was no personal liability of the directors as the deposit was received in the name
of the company. D-4 denied the liability on the ground that it had nothing to do with
the transaction in question as he was neither a director nor a shareholder of the
company so it was held that he had no locus in the company and hence not liable. It
was held that D-3 being a house wife had little role to play and therefore could not
be made liable. The plaintiff was sought to be defrauded under the cloak of a
corporate entity of D-1 and, therefore, corporate veil was lifted taking into
consideration that D-1 was only a family arrangement of the remaining defendants.
D-2 was running the business in the name of the company. So D-1 and D-2 were both
personally liable.
Universal Pollution Control India (P.) Ltd. v. Regional Provident Fund
Commissioner – This is a case of ‘default in payment of employee’s provident fund’-
Certain amount was due and payable to provident fund office by the sister concern of
the petitioner-company, a demand was raised on the petitioner company only on the
ground that two directors of these two companies were common. It was held that the
contention raised by the respondent that the Court should lift the corporate veil and
fasten the liability on the petitioner was without any merits and was baseless. Both
the companies were separate legal entities under the provisions of the Companies Act
and there was no provision under the Provident Fund Act that a liability of one
company can be fastened on the other company even by lifting the corporate veil.

19
The Decision of Karnataka High Court. Decided On 24.03.2011 – Richter Holding
Ltd. v. The Assistant Director of Income Tax[xxv]– Richter Holdings Ltd., a Cypriot
company and West Globe Limited, a Mauritian company purchased all shares of
Finsider International Co. Ltd. (FICL), a U.K. company from Early Guard Ltd.
another U.K. company. FICL held 51% shares of Sesa Goa Ltd. (SGL), an Indian
company. The Tax department issued a show cause notice to Petitioner alleging that
the Petitioner had indirectly acquired 51% in Sesa Goa Ltd and was therefore, liable
to deduct tax at source before making payment to Early Guard Limited. The Income
Tax Department contended that as per section 195 of the Act, the Petitioner is liable
to deduct tax at source in respect of payment made for purchase of capital asset. The
High Court of Karnataka held that the Petitioner should reply to show-cause notice
issued by the Tax department and urge all their contentions before it. The High Court
also emphasized that the fact finding authority (Tax Department) may lift the
corporate veil to look into the real nature of the transaction to ascertain the vital facts.
The aspect that deserves greater attention is that the Karnataka High Court
demonstrates a keen interest in lifting the corporate veil. This has a number of
implications. First, the Richter Holding Case extends even further the scope of the
principles laid down in the Vodafone Case. For example, in Vodafone the Bombay
High Court did not consider lifting the corporate veil to impose taxation in case of
indirect transfers. Second, it is not clear from the judgment itself whether the tax
authorities advanced the argument regarding lifting the corporate veil. Third, the
Karnataka High Court appears to have readily permitted lifting the corporate veil
without at all alluding to the jurisprudence on the subject-matter. Generally, courts
defer to the sanctity of the corporate form as a separate legal personality and are slow
to lift the corporate veil, as evidenced by Adams v. Cape Industries, unless one of the
established grounds exist.
COMPANIES BILL 2011
India being one of the top three emerging economies, has been longing for strong and
cogent corporate laws that will enable the country’s international trade to conduct its
affairs on a par with the western industrialized nations. The proposals in the Bill are
expected to act as a catalyst to fostering growth of the economy. One of the main
20
highlights of this Bill is that it proposes a mechanism for vigilance that will reward
whistle blowers. This measure will allow companies to follow transparency at every
move they initiate. The authors have mentioned a few provisions which bring in
responsibilities and liabilities upon a director.
Section 127- A director of a company is punishable with imprisonment or fine if a
dividend which is declared has not been paid or a warrant which in respect thereof
has not been posted within 30 days of the date of declaration.
Section 159 r/w 156- It is the duty of every existing director to intimate his Director
Identification Number to the company or all companies wherein he is a director
within one month of the receipt of the same from the Central Government. If any
director of a company contravenes, such director shall be punishable with
imprisonment or with fine under Section 159.
Section 166- Under this section various duties of a director are enumerated such as
the duty of good faith, of due and reasonable care, to act in accordance with the
articles of association etc. Any director in violation of these duties will be punishable
with a fine of not less that Rs 1 lakh and not more than Rs 5 lakhs.
Section 184- This section imposes a duty upon a director of a company to disclose
his concern or interest, including shareholding, in any company or companies, or
bodies corporate, companies, firms, or other associations of individuals or if he is a
party to any contract or agreement with a body corporate in which such director holds
more than 2% shareholding or otherwise as mentioned or any firm in which such
director is a partner or owner etc. Sub-section (4) is the penalty clause.
Section 194- This section puts a prohibition in forward dealings of securities of the
company, its subsidiaries or in its holding or associate company by a director of such
company. In any contravention to this effect, the director will be punishable with
imprisonment or/and fine as prescribed.

CONCLUSION.
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It should be noted that the principle of Salomon v. A. Salomon & Co. Ltd. is still the
rule and the instances of piercing the veil are the exceptions to this rule. The
legislature and the courts have in many cases now allowed the corporate veil to be
lifted. The principle that a company has its own separate legal personality of its own
finds an important place in the Constitution of India as well. Article 21 of the
Constitution of India, says that: No person shall be deprived of his life and personal
liberty except according to procedure established by law. Under Article a company
also has the right to life and personal liberty as a person. This was laid down in the
case of Chiranjitlal Chaudhary v. Union of India where the Supreme Court held that
fundamental rights guaranteed by the constitution are available not merely to
individual citizens but to corporate bodies as well except where the language of the
provision or the nature of right compels the inference that they are applicable only to
natural persons.
So, a corporation can own and sell properties, sue or be sued, or commit a criminal
offence because a corporation is made up of and run by people, acting as agents of
the company. It is under the ‘seal of the company’ that the members or shareholders
commit fraud or such acts and therefore the company should also be liable as it also
a person which is accorded fundamental rights under Article 21 of the Constitution
of India.
The other side of this coin can be that, as the company is privileged to have its own
right to life and personal liberty, how can its fundamental right be taken away by
disregarding its corporate entity for the wrongs committed by its members and not
the company itself.
As a result of incorporation, an incorporated company wears a ‘corporate veil’ and
thus acquires the ‘corporate personality’, behind which there are shareholders who
have formed the company. Although in law the company has an independent
personality, it is an artificial person and hence, behind the corporate curtain, there are
natural persons, i.e. shareholders who have associated themselves into a company.
So if this corporate personality is uncovered or unveiled, the shareholders or the
directors mostly are found to be behind the veil.

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BIBLIOGRAPHY
Guide to Companies Act, 17th edn 2010, part 1, A. Ramaiya, Pg 582

[1961] A.C. 12

(1949) 79 CLR 42

See Sealy’s Cases and Materials in Company Law,9th edn., Len Sealy, Sarah Worthington;Oxford,Pg 53

[1986] 59 Comp.Cas. 548

[2009] 99 Comp. Cas. 266 (M.P)

[1973] New Delhi LR 637

Guide to Companies Act, 17th edn 2010, part 2, A. Ramaiya, Pg 3781

[1969] 39 Comp. Cas. 685(Ker.)

http://www.business-standard.com/india/news/industry-welcomes-companies-bill/458638/

[2007] 137 Comp. Cas. 319 (Bom.)

[ 2011]199 TAXMAN 70(Kar.)

‘Lifting the corporate veil for tax purposes’ by V. Umakanth

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