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1. Ambit
One of the most interesting, but, at the same time, most difficult, questions in
company law relates to the doctrine of lifting the corporate veil. This is one of those
doctrines which is easily understood in its broad outline, but is not so easily applied
when a concrete case presents itself.
The reasons for this situation are many. In the first place, by partially disregarding the
corporate personality of an entity, the court, in fact, takes a step which is not in literal
conformity with the theory of incorporation, given effect to by a statutory provision.
Obviously, the court here assumes a jurisdiction which has to be exercised with
caution. Secondly, the circumstances in which the veil of a corporation may be lifted
and an act, nominally done by the corporation, may, by judicial construction, be
attributed to some other person or entity, are indefinite and theoretically infinite. That
must be so, because the power is asserted and exercised on grounds which are outside
the statute law relating to companies and are based on principles which are
uncodified. Those circumstances have no other definition, excepting that they are
linked by one common thread of protecting the public interest. Thirdly, because of the
elusive and uncodified character of those circumstances, differences of opinion are
bound to arise between the trial judge and the appellate court, so that legal advisers of
corporations can never predict with certainty what view the court will take about a
particular transaction, when it is argued that someone other than the company should
be held liable. In a sense, the jurisdiction to lift the corporate veil which the courts
have commenced exercising is analogous to the jurisdiction which the courts in equity
started exercising, in order to remove or reduce injustice or hardship in specific
situations that arose from strict application of common law rules. The master principle
was justice and equity, but the situations amenable to that principle could never be
codified.
1.1 This very elusive quality of the doctrine of lifting the veil has encouraged
academic thinking and discussion on the subject It is common experience that where
the sources of legal doctrine in a particular sphere are not the bare bones of a statute,
but the flexible tissues of case law, academicians feel tempted to offer not only an
analysis of what has gone into the law by past rulings, but also an anticipation of what
is likely to enter the field of law by future judicial pronouncements.
2. Legal fictions
Incidentally, it may also be mentioned that juristically the subject has another
interesting aspect also. The creation of an artificial legal person by a provision of the
nature usually found in company legislation is essentially the introduction of a legal
fiction. Statutory incorporation of a company as an entity distinct from its members is
virtually the conferment of legal personality on an association which has no legal life.
This legal fiction, having its genesis in statute, must, of course, be allowed to operate.
However, in some circumstances, the fiction may have to be disregarded or, if one
may put it that way, it has to be offset and counteracted in the interests of justice.
What the court, in effect, does when it lifts the corporate veil is this. The court,
performing its role of statutory construction, limits the statutory fiction to certain
circumstances and excludes other circumstances from its scope. In other words, the
court construes in a limited manner the statutory language creating the fiction of
incorporation.
3. Statutory construction
This is not a process peculiar to the sphere of company law. Students of statutory
interpretation are aware of the problem of how much amplitude should be attributed
to a particular statutory fiction. Two general principles, apparently in conflict with
each other, seem to be operative. These are as under:
3.1 In interpreting a statutory provision creating a legal fiction, once the purpose of
the fiction is ascertained, the court must give it its logical scope. After ascertaining the
purpose, full effect must be given to the statutory fiction and it should be carried to its
logical conclusion - State of Bombay v. Pandurang Vinayak AIR 1953 SC 244. To that
end, it will be proper and even necessary to assume all those facts on which alone the
fiction can operate - CIT v. Sardar Teja Singh ATR 1959 SC 352. In a passage which is
very often quoted, Lord Asquith stated : "If you are bidden to treat an imaginary state
of affairs as real, you must surely, unless prohibited from doing so, also imagine as
real the consequences and incidents which, if the putative state of affairs had in fact
existed, must inevitably flowed from or accompanied it. The statute says that you
must imagine a certain state of affairs ; it does not say that having done so, you must
cause or permit your imagination to boggle when it comes to the inevitable corollaries
of the state of affairs." - East & Dwelling Co. Ltd. v. Finsbury Borough Council
[1951]2 All ER 587 (HL).
To quote a proposition laid down in the context of sections 42 and 43 of the Indian
Income-tax Act, 1922 (deeming the agents of non-residents to be the assessees), "now,
when a person is deemed to be something, the only meaning possible is that whereas
he is not in reality that something, the Act of Parliament requires him to be treated, as
if he were" (p.56) - CIT v. Bombay Corpn. AIR 1930 PC 54.
3.2 But there is a counter principle, which tells us that a fiction should not be
extended beyond the purpose for which it is created. The court is entitled to ascertain
for what purposes and between what persons the statutory fiction is to be resorted to.
This comment of Lord Justice James in Ex parte Walton [1881]17Ch.D746 has been
cited in Indian cases also e.g., State of Travancore- Cochin v. Shanmugham Vilas
Cashewnut Factory AIR 1953 SC 333. It is by virtue of this counter principle, it seems
that courts exercise jurisdiction to lift the corporate veil.
a.
b.
c.
d.
e.
f.
the main objectives of this judicial device. But the discussion could be rudderless
without a definition. It was Aristotle who pointed out that defining a basic concept
could be the first step towards acquiring knowledge about it. It is believed that when
one talks of lifting the corporate veil, one has in mind a process whereby the corporate
status of an entity is disregarded and the incorporation conferred by statute is
overridden in search of reality, thereby attributing to someone other than the corporate
entity an act of the entity. In other words, the fiction created by statute is displaced or
effaced, and in its place, the reality is substituted. The transference of the act of the
entity to someone else may take various forms. That someone else may be a
shareholder, a director or another corporation, as is illustrated by some instances
mentioned above. The objectives sought to be achieved by such transference are also
various. The object may be to benefit the revenue by checking evasion, or to prevent
violation of some statutory restriction by de-recognising circumventing devices. But
the thread that connects all these diverse instances must be sought in some basic
concepts, which (as suggested above) is the legal transference of an act of a corporate
entity to some other individual or entity, thus restoring reality in place of a legal
fiction. Of course, this is not to say that the process should be readily resorted to.
5.1 "Lifting the veil" is itself an interference with a state of affairs brought into being albeit artificially - by law. The 'veil' is there because it was brought into existence by a
legal provision. To override a legal doctrine by substituting something in its place is a
piece of activism. And activism, whether of the judiciary or of any other institution,
has its limits, its pitfalls, its grey areas, its twilight zones. This is the reason why
courts have often been warned against adopting the device of lifting the corporate veil
too readily. There must be a counter-balancing consideration, weighty enough to
justify effacement of a legal concept. There is no more lucid or terse statement of the
gist of the concept than that to be found in an American case - United States v.
Milwankee Refrigerator Transit Co. [1906] 142 F. 247 - "When the notion of legal
entity is used to defeat public convenience, justify wrong, protect fraud or defend
crime, the law will regard the corporation as an association of persons".
6. Rationale
The rationale underlying a judicial decision to lift the veil has been linked up
sometimes with the need to check fraud. Two academic writers have put it on a more
elastic plane. "English legal thinking... shows no inhibition to piercing the veil where
it is intended to use the veil for the protection of interests which are unworthy of such
protection" - E.J. Cohn & C. Simitis [1963] 12 ICLQ 189. This leaves a more elastic
scope for judicial creativity, because the test is expressed in terms of a veil which
protects "interests unworthy of protection", without enumerating the interests as such.
Illustrative of this is the English case of Gilford Motors Co. Ltd. v. Home [1933] Ch.
935 (CA). In that case, the court held that a former director of the plaintiff company
who had bound himself by a restraint of trade clause could not escape its operation by
hiding behind a company formed as "a mere cloak or sham for the purpose of
enabling him to commit a breach of his covenant...." An injunction was accordingly
granted against the defendant personally as well as against the company formed by
him. Of course, every case of lifting the veil is not necessarily a case of fraud, illegal
object or conspiratorial and behind the curtain activities. The doctrine may be applied
even where these elements are totally absent, or if present, are present in a minor
degree. Thus, in Torquay Hotel Co. (supra), the directors of a company were held
had to be lifted and the separate personality of the company had to be disregarded.
That is how the doctrine came to be operative. Of course, as has been indicated above,
the present scope of the doctrine, as elaborated in the cases, is much wider. Broadly
speaking, in England, the important cases in which this exceptional approach has been
adopted are as under :
In some cases, the Legislature has lifted the veil, e.g. , in requiring, holding
and subsidiary companies, to prepare group accounts - Smith, Stone & Knight
Ltd. (supra) and Charles worth, Mercantile Law [1984] ELBS Reprint 1985, p.
70.
If the controlling shareholder uses the company as his agent, the doctrine is
applied - Wallersteiner (supra) and Charles worth, Mercantile Law (supra).
If the corporate form is abused for an unlawful or immoral purpose, the
doctrine is applied - Gilford Motors Co. Ltd. (supra) and Charles worth,
Mercantile Law (supra).
If lifting the veil is necessary to give effect to legislation (such as enemy
trading legislation) and is justified on the basis of control exercised by some
entity over a company, the doctrine is applied Daimler Co. Ltd. (supra).
7.1 The doctrine as evolved in England has travelled overseas and has come to be
applied in many Commonwealth countries (apart from India). For example, the
Canadian case - Fern Brand Waxes Ltd. v. Pearl. [1972] 3 OR 839 (CA.) - holds that
the separate identity of a company is not to be used as an instrument to perpetrate
fraud, see Mervyn Woods, "Lifting the Corporate Veil in Canada" [1957] 37 Can. B.
Rev. 1176. There are also precedents from New Zealand and Australia recognising
this doctrine, see Kaiser Aluminium & Chemical Corporation v. Reynolds Metal Co.
[1969] 43 ALJR 156 JR Mackenzie Ltd. v. Gianoutos & Booleris [1957] NZLR 309
and Re Securiti bank Ltd. (No. 2). [1978] 2 NZLR 136.
Subject wise also, the doctrine of lifting the veil has ranged over an extensive field,
competing with its wide geographical coverage. Thus - to cite only a few important
instances without intending to be exhaustive - the doctrine of lifting the veil has been
applied in the following branches of law :
mentioned that the Law Commission of India some time ago recommended an
amendment of article 19 to widen its scope to cover corporations registered under
Indian law, barring those which are subject to substantial foreign control.
cases where arguments for lifting the corporate veil are addressed to the court in
matters involving civil consequences.
duty on his part in relation to the affairs of the company. This is a negative provision
throwing the onus on the director to prove his non-culpability.
The Companies Act, 1956 itself imposes personal liability in certain cases. For
example, where business is carried on beyond six months after knowledge that the
membership of the company has gone below the statutory minimum [section 45], or a
contract is made by misdescribing the name of the company [section 147], or the
business is carried on only to defraud creditors [section 542], members or officers
who are parties to such transactions are personally liable -William C. Leitch Bros.
[1932] 2 Ch. 71 and Nagendra Prabhu v. Popular Bank AIR 1970 Ker. 120.
In Littlewoods Mail Order Stores Ltd. v. IRC [1969] 3 All ER 855 (CA), Lord
Denning said: "The doctrine laid down in Salomon v. Salomon (supra) has to
be watched very carefully. It has often been supposed to cast a veil over the
personality of a limited company through which the courts cannot see. But that
is not true. The courts can and often do draw aside the veil. They can, and
often do, pull off the mask. They look to see what really lies behind. The
Legislature has shown the way with group accounts and the rest. And the
courts should follow suit. I think that we should look at the Fork company and
see it as it really is - the wholly-owned subsidiary of the taxpayers. It is the
creature, the puppet of the taxpayers in point of fact, and it should be so
regarded in point of law."(p. 860) In the above case, the taxpayers carried on a
big business at premises in Oxford Street, London which in 1956 were worth
2,000,000 if sold with vacant possession and 60,000 a year rent on a yearly
tenancy, but which they held on a 99 years lease. Under an arrangement made
in 1958, a wholly owned subsidiary of the taxpayers became freeholders of the
premises. The former freeholders became the subsidiary's lessees under a lease
of 22 years at a rent of 6 a year, and the taxpayers became sub-lessees of the
former freeholders. It was held that the deduction of rent in computing the
taxpayers' profits for tax purposes was properly limited to 23,444, i.e.,
excluding the increase in the rent of 19,006 as being a sum paid for the
acquisition of a capital asset (the freehold), through their wholly owned
subsidiary.
In Wallersteiner v. Moir (No. 1) [1974] 3 ALL ER 217 (CA), there was
purchase of shares with financial assistance of the company. The director was
responsible for procuring loan but loan was used in connection with purchase
of the company's shares. Part only of the loan was recovered by the company.
Liability of the director to the company for loss was held to arise. Lord
Denning, M.R.'s dicta in this case are lucid : "I am prepared to accept that the
English concerns - those governed by English company law or its counterparts
in Nassau or Nigeria - were distinct legal entities. I am not so sure about the
Liechtenstein concerns - such as the Rothschild trust, the Cellpa trust or Stawa
A.G. There was no evidence before us of Liechtenstein law. I will assume, to,
that they were distinct legal entities, similar to an- English limited company.
Even so, I am quite clear that they were just the puppets of Dr. Wallersteiner.
taken by the assessee at a branch in British India. Whether this was part of an
arrangement or scheme between the assessee and bank was the question. It
was held on the facts that the entire transaction formed part of a basic
arrangement or scheme between the respondent companies (assessees) and the
bank that the moneys deposited by the respondent companies at Pudukottai
should be brought into British India after they were taken by the bank outside
the taxable territories.
Juggilal Kamlapat v. CIT 73 ITR 702 (SC) is important. In that case the
managing agency of a firm was terminated and a company appointed as
managing agents. Compensation was paid to the firm for termination of
agency. It was held that in cases such as this, the income-tax authorities were
entitled to pierce the veil of corporate personality and look at the reality of
transaction. It was true that from the juristic point of view, the company was a
legal personality entirely distinct from its members, and the company was
capable of enjoying rights and being subjected to duties which were not the
same as those enjoyed or borne by its members. But in certain exceptional
cases, the court was entitled to pierce the veil of corporate entity and pay
regard to the economic realities behind the legal facade. The court had power
to disregard the corporate entity if it was used for tax evasion or to circumvent
tax obligations or to perpetrate fraud. There was proper material before the
Tribunal in support of its finding that the receipt of Rs.2,00,000 was a receipt
in the course of its managing agency business and hence a revenue receipt.
The managing agency asset was enjoyed by the four individual partners in a
different capacity with the same object of profit-making. There was, therefore,
no destruction of the apparatus of the profit-making assets, i.e., managing
agency contract.
In Tata Engineering & Locomotive Co. Ltd. v. State of Bihar AIR 1965 SC 40,
the Supreme Court held that corporations and companies, not being citizens,
cannot petition under article 32 of the Constitution. In such a case, the doctrine
of lifting the veil of corporation cannot be allowed. The corporation in law is
equal to a natural person and has a legal entity of its own. 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 separate and distinct from those
of its members. In the course of time, the doctrine that the corporation or a
company has a legal and separate entity of its own has been subjected to
certain exceptions by the application of the fiction that the veil of the
corporation can be lifted and its face examined in substance. There is no scope
for applying the doctrine of lifting the veil of a corporation to hold that when a
petition is made on behalf of a company, it is the shareholders who are really
moving the court under article 32 and so the existence of the legal and juristic
separate entity of the petitioners as a corporation or a company should not
make the petitions filed by them under article 32 incompetent. If the
corporations and companies are not citizens, it means that the Constitution
intended that they should not get the benefit of article 19 of the Constitution. It
should, however, be mentioned that in a subsequent decision, the Supreme
Court has held that shareholders of a company can challenge the validity of a
law on the ground of infringement of article 19 and in such a petition, the
company can be joined - Bennett Coleman v. Union of India AIR 1973 SC 106
and DFO v.Biswanath Tea Co., AIR 1981 SC 1369.
enactment. In dealing with matters relating to general public, statutes are presumed to
used words in their popular rather than the narrowly legal or technical sense. This is
particularly so when the narrow interpretation is bound to defeat the object of the Act.
General words and phrases are more or less elastic and admit of restriction or
extension to suit the legislation in question, however wide they may be in the abstract.
It is also well recognised that if there is any ambiguity in the phraseology of a statute,
that construction which facilitates the remedying of the potential abuse is to be
preferred, and it is the duty of the court to place such construction as shall suppress
the mischief and advance the remedy. While interpreting various Land Reform Acts,
the Supreme Court has also adopted a similar approach, as is clear from the decision
reported in Chemeli Wati v. Delhi Municipal Corporation AIR 1986 SC, 1191,
Buddhan Singh v. Babi Bux AIR 1970 SC 1880, State of Andhra Pradesh v. Mohd.
Ashrafuddin AIR 1982 SC 913 and Begulla Bapi Raju v. State of Andhra Pradesh AIR
1983 SC 1073. It may be mentioned that the principle that the object of the statute is
to be borne in mind in construing it, can be traced to the dictum of Chief Justice
Abbot in R. v. Hall. [1822] 107 ER 47 cited with approval in the Privy Council by
Lord Romilly in Re Lyne [1861] 16 ER 688 (PC). This was quoted again by Maxwell
and the Supreme Court of India has adopted it in Workmen of Bimakuchi Tea Estate v.
Management of Bimakuchi Tea Estate AIR 1958 SC 355 : "The words of a statute,
when there is a doubt about their meaning; are to be understood in the sense in which
they best harmonise with the subject of the enactment and the object which the
legislature had in view. Their meaning is found not so much in a strict grammatical or
etymological propriety of language, nor even in its popular use, as in the subject or in
the occasion on which they are used, and the object to be attained."
18.1 The Supreme Court in Renusagar's case was confronted with a very simple
English word 'own'; the court could have placed a literal construction and given
dominance to the technical legal aspect by reiterating the conservative doctrine that a
company is a distinct personality. But the court chose not to be bound down by that
doctrine. Rather, it expanded the region of the word 'own' by allowing it to embrace
within its sweep an undertaking technically owned by another company, but
substantially and exclusively utilised by the holding company. It is not that the words
were disregarded ; but they were applied in a particular manner. Once more, the
judgment bears out the truth of a wellknown judicial comment often cited in academic
literature : words, in addition to a hard central core of meaning, have a 'penumbra, a
dim fringe' - Commissioner v. Ickelheimar, 132 F. 2d 660, 662, referred to by
Archibold Cox, "Judge Learned Hand : An Interpretation" 60 Harvard Law Review
370, 372.
19. Conclusion
The above selective survey will, it is hoped, bring out some important facets of lifting
the corporate veil. In the first place, this is an indefinite concept and much depends on
the equities of the case and the requirements of public interest. Secondly, it would be
a serious misconception to suppose that the doctrine always acts in a restrictive way
so as to take away some benefit or impose some burden by lifting the veil. In many
situations, its invocation leads to a positive benefit being conferred upon someone in
whose favour the veil is lifted. Thirdly, the spheres in which the doctrine operates are
as wide apart as property, trusts, tort and contract. Fourthly, the extension of criminal
liability in the corporate field is best left to statutory provisions rather than to the
There have been long standing controversies about the corporate personality in both
the UK and India. There has been a growing realisation that one should not be
allowed to get away with what is grossly improper or unfair or inequitable by merely
putting on the company cloak. Salomon could cock a snook at his creditors, sheltered
by Salomon & Co. in 1897 - Salomon v. Salomon & Co. [1897] AC 22 ; but specific
performance was ordered against a company to which the defendant had transferred
his property to avoid such an action against himself, 60 years later - Jones v. Lipmam
[1962] 1 All ER 442. The courts have, in recent years, made it clear that they would
like to look at the economic consequences of transactions rather than their format Furniss v. Dawson [1984] 1AU ER 530 (HL). The flight of profits to tax sanctuaries
like Jersey, Bermudas, etc., to escape legitimate tax liability, contributed, among
other things, to this development- In re Westons' settlements [1960] 1 Ch.223 and
WallerSteinerv.Moir[1974]l WLR991,but efforts to provide tax relief may also result
sometimes in the corporate identity being disregarded. For example, the Finance Act,
1967 introduced a new form of relief in the UK called 'group relief by which a
member of a group of companies could surrender its claim to relief for capital
allowance, etc., to another company which was a member of the same group (called
the claimant company).Two companies were taken to belong to a group, if one of them
was a 75 per cent subsidiary of the other or both were 75 per cent subsidiaries of a
third company. One of the oldest debates in corporate taxation pertains to the issue
where there is double taxation when a company pays tax on its own income and its
shareholders are required to pay further tax on the dividend they derive from it. There
is no uniformity on extent and manner in which relief should be offered to the
shareholders to mitigate the hardship that the existing system causes. Shri Bakshi has
referred to various judgments of the Supreme Court in tracing the evolution of the
doctrine of 'lifting the corporate veil' in India. The following cases supplement his
citations and should serve to show that the courts in India do not hesitate to intervene
when any attempt is made by anyone to evade his legal obligations through the
corporate status:
PNB Finance Ltd. v. Shital Prasad Jain [1983] 54 Comp. Cas. 66 (Delhi)
where the corporate entity was attempted to be used for a fraudulent purpose.
Jyoti Ltd. v.KanwaljitKaurBhasin[1987] 62 Comp. Cas. 626 (Delhi) where the
corporate shield was blatantly used to disobey the orders of the court willfully.
Tracway (P) Ltd. v. CST [1981] 47 (MP) where a private company was
constituted by the partners of a firm to frustrate sales tax liability.
Wood Plymer Ltd., In re. ; Bengal Hotels Ltd., In re [1977] 109 ITR 177 (SC)
where the object of amalgamation of two companies was to transfer a capital
asset to avoid the capital gains tax.
Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry
Ltd. [1986] 157 ITR 77 (SC) where a wholly owned company was used to
reduce the amount of bonus payable to the workmen.
Shri Ambica Mills Ltd., In re. Exparte Jaykrishna Harivallabhdas [1986] 59
Comp. Cas. 368 (Guj.) where the managing director, being an officer of the
company, was required to support the company's petition under section 101,
instead of pleading ignorance of the proceedings.
The following observations of Mr. Justice Chenneappa Reddy in the case mentioned
last above are a pointer to the judicial approach to corporate claims:
"It is the duty of the court, in every case where ingenuity is expended to avoid
taxation and welfare legislation, to get behind the smoke-screen and discover and
true state of affairs. The court is not to be satisfied with form and leave well alone the
substance of a transaction.... Avoidance of welfare legislation is as common as
avoidance of taxation and the approach in considering problems arising out of such
avoidance has necessarily to be the same". Judicial interpretation apart, extensive
inroads have also been made by the Legislature on the concept of the separate
personality of a company, as stressed by Mr. Justice S. Ranganathan in his book on
Corporate Taxation in India, pp. 102 -107 (Documentation Centre for Corporate and
Business Policy Research, New Delhi, 1982). Being, in essence, no more than a group
of individuals bound by a common memorandum and articles, a company is not
immune from any of the frailties to which individuals are susceptible. It is their
ingenuity and their proneness to succumb to the temptation to get round the law that
drive the Legislature to make frequent changes in the law. In the past, the revenue
authorities were required to ascertain the place (in or outside India) where the
management and control of a company lay, the relationship between the directors and
other shareholders and the extent of their controlover a company's voting power, the
adequacy of the grounds for a closely held company's not distributing the prescribed
percentage of its income as dividends, and so on. Many of the old provisions have lost
their relevance now but several stringent provisions are still applicable to private
companies. Section 179 dealing with the liability of the directors of a private
company in liquidation and section 79 denying the benefit of offset of carried forward
losses to subsequent years, where there is any change in the shares holding are
typical instances of the statutory disregard of the separate identity of a company. A
'dividend' is defind in section 2 (22) of the Income-tax Act to include an advance of
loan to a shareholder of a company in which the public are not substantially
interested and also any concern in which the shareholder is a member or a partner
and in which he has a 'substantial interest'. Section43 (2) of the Delhi Shops &
Establishments Act, 1954 treats the corporate facade with equal contempt. In the case
of a private company owning an establishment in Delhi, any of its shareholders may
be prosecuted and punished under the Act for any offence for which the employer in
the establishment is punishable.
Government companies have not been unaffected by this new trend in which the
distinction between a company and its shareholders is getting blurred. Mr. Justice
Krishna Iyer puts the new concept in his inimitable style in Som Parkash Rekha v.
Union of India [1981] 51 Comp. cas. 71 (SC):
"The government company is a mini - incarnation of government itself, made up of its
blood and bones and given corporate shape and status for defined objectives, not
beyond".
It is interesting to note that a government company's claim for exemption for sales-tax
was turned down in National Insurance Co. Ltd. v. Union of India [1982] 49 STC ISO
(Delhi) and the same view is taken even now whenever the Government, State or
Central, dons the gown of a company for undertaking any commercial activity. But
the court's attitude to employees' rights and treatment in government undertakings is
different. The following observations in Central Inland Water Transport Corporation
v. Brojo Nath Ganguly [1986] 60 Comp. Cas. 797 (SC) sums up the current thinking
of the court :
"If there is an instrumentality or agency of the State which has assumed the garb of a
government company as defined in section 617 of the Companies Act, it does not
follow that it thereby ceases to be an instrumentality or agency of the State. For the
purpose of article 12 of the Constitution, one must necessarily see through the
corporate veil to ascertain whether behind that veil is the face of an instrumentality
or agency or the State".
This was a case where the hire-and-fire concept which is supposed to keep executives
on their toes, was tested.
The court or the Legislature steps in only when fiscal or legal obligations are sought
to be bypassed by a corporate entity. But the damage to the corporate personality is
sometimes done not by an external agency but by those who control a corporation.
Companies have been seen caught in destructive family feuds; and mutual
mudslinging between industrial giants is also not an unknown phenomenon. The court
does not have to lift the corporate veil in such cases; it is ripped up by the companies
themselves. In these circumstances, if there is cynical indifference among the public to
the decline in the corporate status, who is to blame for it? And what is the remedy?
The economists' anxiety to avoid double taxation of corporate profits, once in their
own assessments and for a second time in the hands of the shareholders when they
receive any dividend, indicates another point of view. The government have so far
been proceeding on the assumption that section 80L of the Income-tax Act, in terms of
which a limited deduction is available for dividend income, provides adequate relief
incentive to shareholders. But the "split system" under which the distributed profits of
a company are exempted from tax and other methods of taxing a company have been
convassed as better alternatives to the "classical system" prevailing in India. It
remains to be seen whether such treatment will further erode the inviolability of the
corporate status.