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LIFTING THE CORPORATE VEIL

[1989] 1 CLA (Mag.)1


VIEWS & REVIEWS
A Juristic View
P.M.BAKSHI
The object of incorporation as a distinct legal entity is to promote the widest possible
public participation in joint undertakings, with liability limited to the investment in
the undertaking. But, like all good things, the corporate personality has also,
unfortunately, lent itself to abuse in some cases, e.g., outwitting the Revenue or
defrauding creditors. There may also be unintended hardship where a fetish is made of
the legal form and an undertaking is denied the relief that is reasonably due to it.
Courts have not hesitated to look at the reality beyond the apparent, wherever
substantial justice has required it. Shri Bakshi very ably presents a broad canvas of the
expanding application of this doctrine of construction which has found acceptance in
India as in other countries. While the Courts have been increasingly liberal, the
treatment of the concept of incorporation by the Legislature has also been getting too
casual for comfort, in recent years. A brief note illustrating this disturbing trend of
devaluation of the concept, which is outside the scope of this article, is appended to it.

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.

4. Lifting the corporate veil - Variety of circumstances


Theoretically, the circumstances in which the veil may be lifted cannot be defined.
Nor can one say that the veil will be lifted only on this or that principle, excepting that
there is the paramount consideration of public interest. The manner in which the veil
has been lifted also cannot be limited. For example, by lifting the veil, courts have
held another company as the real occupier of certain premises which apparently stand
in the name of its subsidiary - Smith Stone & Knight v. Bermingham Corpn. [1939] 4
All ER 116 (KB). Again, where an individual controlled a number of companies as if
they were his personal property, the court treated those companies as his creatures for
which he was responsible - Wallersteiner v. Moir (No. 1) [1974] 3 All ER 217 (CA).
Further, if a company is controlled by enemy subjects, then, even though it may be
incorporated in Great Britain, it may be held to be an 'enemy' within the meaning of
legislation relating to trading with the enemy - Daimler Co. Ltd. v. Continental Tyre &
Rubber Co. (Great Britain) Ltd. [1916] 2 AC 307 (HL); Clark v. Uebersee Finance
Corpn. AG [1947] 332 US 480. Similarly, directors acting as the agents of the
company have been held to be liable on a contract when they intentionally rendered
fulfilment of the contract impossible - Torquay Hotel Co. v. Cousins [1969] 2 Ch. 106.
Further, an opinion has been expressed that though a company does not become an
agent of a shareholder merely by virtue of the shareholders controlling all or most of
the capital, yet, if there is functional control by the shareholder, it may become a
question of fact whether the shareholder really controls the company which is its de
facto agent. According to Sir Otto Kahn-Freund in [1940] 3 Modern Law Review 226,
227, the company can be regarded as the agent of the shareholder, if the shareholder

a.
b.
c.
d.
e.
f.

treats, as his own, the profits of the company;


appoints the persons conducting the business;
is the 'head and brain' of the trading venture;
decides what capital should be embarked on the venture;
makes the profits by his skill and direction ; and
is in effectual and constant control.

5. Need for defining the concept


It is surprising that while so much literature has gathered round the concept of lifting
the corporate veil, the discussion usually does not attempt a definition of the concept.
Enumeration of specific instances may be helpful, and so would be a delineation of

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

personally liable for intentionally rendering the fulfilment of a contract by the


company impossible. The defendants sought to escape liability by pleading that they
acted merely as agents, but the court considered itself free to look behind the
corporate veil and act on the realities of the situation.
6.1 In fact, the doctrine of lifting the veil may be resorted to in a situation where there
is no question of fraud or evasion of law. In State of U.P. v. Renusagar Power Co.
[1988] 1 CLA 1 (SC) (reported in section III of this issue), the doctrine was applied to
support claim of Renusagar for exemption or liberal treatment in respect of electricity
duty, the Court holding that electric power generated by a company and utilised by
another company was to be regarded as power used by the latter company from "its
own source" within the meaning of section 3(1) (a) of the U.P. Electricity Duty Act,
1952. There were several reasons for so lifting the veil between a holding company
and its subsidiary - the two companies involved in the instant case were so connected.
The most important was the consideration that all concerned, including Government,
the concerned local authority, etc., had treated the two as, in reality, one. There was no
question, in the above case, of one company having adopted a subterfuge to form a
subsidiary company or to utilise power generated by it. The arrangement had been
openly entered into and accepted by the public authorities. It was to buttress this past
treatment that the Court resorted to (what it described as) the device of lifting the
corporate veil. The Court held that even though the two companies were two separate
legal entities, the circumstances and the background showed that the 'duality' had been
disregarded and the two had been treated as one, so far as the generation of power by
one company and its consumption by another company was concerned. Strictly
speaking, this was not a case of lifting the corporate veil. The corporate status of each
company, vis-avis its shareholders, agents and directors, remained intact. What the
Court did, in effect, was to disregard the dividing wall between two corporate entities.
The case presents certain peculiar features. In the first place, there was no question of
evasion of tax, and the device of disregarding the wall between two companies was
adopted by the Court for assisting the company as an assessee. Secondly, the ruling of
the Court helped the assessee and not the Government. Thirdly, there was no element
of trick, fraud or subterfuge. Everything was done openly and with the encouragement
and approval of public authorities. No doubt, a legal wall separating two companies
was regarded as irrelevant, because the circumstances showed that the two were
acting in unison. It was a case of unifying two diverse corporations, rather than
merely lifting a corporate veil. Of course, the ruling was similar to the traditional
cases of lifting the corporate veil, inasmuch as (i) the court gave effect to the reality of
unity, rather than to the theoretical diversity, and (if) the decision related to the
corporate sphere, involving, as it did, two entities separately incorporated.

7 . Doctrine in England and the Common wealth


The doctrine of lifting the corporate veil has been applied in almost all countries of
the Commonwealth, as also in the United States and on the Continent. It seems to
have originated in England. Some writers trace its origin to two cases decided in the
17th century - Edmunds v. Brown & Tillard [1668] 83 ER 385 and Hamborough Co.
[1671] 1 Ch. App. 204. In the present century, the doctrine became necessary for
counter-acting the proposition laid down in Salomon v. A. Salomon & Co. Ltd. [1897]
AC 22 that a company even if it be a 'one man company' - is a person different in law
from the controlling shareholder. In exceptional cases, the veil of the corporateness

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.

8. United States and Europe


The most interesting development is the fact that some of the English cases have been
directly followed in the United States. Thus, the decision of the House of Lords in
Daimler Co. Ltd. (supra) regarding enemy character of a corporation was followed in
the United States in Clark (supra). Most cases in America involve situations involving
fraud or illegality. The courts disregard the corporate facade whenever it is being
abused for puposes of fraud or illegality. As Sanborn, J. put it in Milwankee
Refrigerator Transit Co. (supra): "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". However, the corporate veil cannot be
removed merely to give the other litigant an advantage at law - Wooddale Inc. v.
Fidelity, etc. Co., 378 F. 2d 627 [1967]. It appears that the doctrine of lifting the veil
has come to be recognised on the Continent also E.J. Cohn and C. Smitis (supra),
Lifting the Veil in the Company Laws of the European Continent [1963] 12 ICLO
189; Lifting the Veil in the EEC [1974] Vol. 2, Law and Policy in International
Business 375.

9. Branches of law involved

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 :

Acquisition of land or premises - DHN Food Distributors Ltd. v. London


Borough of Tower Hamlets [1976] 3 All ER 462 ; Smith, Stone & Knight Ltd.
v. Birmingham Corpn. (supra)
Alien enemies - Daimler Co. Ltd. (supra)
Contractual stipulation restraining trade - Gilford Motor Co.(supra)
Contract in general and its enforceability Torquay Hotel Co. (supra). In this
case directors were personally held liable for intentionally rendering the
fulfilment of a contract by the company impossible - Jones v. Lipman [1962] 1
WLR 832 is also of interest Mr. Lipman agreed to sell some property to Mr. &
Mrs. Jones. Mr. Lipman did not want to perform the contract and sold and
transferred the property to a private company that was wholly owned and
controlled by him. The purpose of the transaction was to defeat the purchasers'
claim for specific performance. It was held that the private company was a
sham to avoid enforcement of the equitable remedy of specific performance
and an order for specific performance was granted against Mr. Lipman and the
private company.
Criminal law, see, infra D Taxation CIT v. Sri Meenakshi Mills, AIR 1967 SC
819
Trusts - Abbey Malvern Wells Ltd. v. Minister of Local Government &
Planning [1951] Ch. 728.

10. Constitutional law


The doctrine of lifting the corporate veil was unsuccessfully put forth for securing for
companies a fundamental right in Tata Engineering & Locomotive Co. Ltd. v. State of
Bihar [1964] 34 Comp. Cas. 458 (SC). Article 19 of the Indian Constitution
guarantees the six freedoms to "citizens". Since a company cannot be a citizen, the
company in the above case wanted to lift the corporate veil so as to sustain the
maintainability of the petition filed by the company under article 32 of the
Constitution by treating it as one filed by the shareholders of the company. The
request of the company was turned down by the Supreme Court on the ground that it
was not possible to treat the company as a citizen for the purposes of article 19 of the
Constitution. This decision may be correct on the language of the constitutional
provisions. But it raises an important question for the future. If a corporation can
never claim the freedoms guaranteed by the Constitution because it is not a citizen,
then it cannot claim the freedom of speech and expression guaranteed by article 19 (1)
(a) of the Constitution. This would lead to the position that corporations owning
newspapers or periodicals, publishing houses, film producing concerns and the like
have no constitutional protection against interference with their literary, artistic and
other creative activities when they bring out publications or films. Their right to
collect, receive and disseminate information would similarly remain unprotected by
the constitutional guarantee and would have to come down to the lower level of an
ordinary right, not secure against the onslaughts of political interference, social
prejudice or individual animosity. The position is anomalous; and it may be

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.

11. Criminal law


Criminal law presents a peculiar situation. Generally, courts are reluctant to shift
criminal liability for an act done by A to the shoulders of B, unless there is evidence
of some contribution by B towards the act of A. This is because of the doctrine that
criminal liability is always personal and requires a guilty mind. It has an essential link
with the rationale of punishment. To punish B for an act done by A is meaningless
because, if B does not have a guilty mind, then punishing him achieves neither
deterrence, nor reformation ; and, even as retribution, it is irrational. Besides this, it
shocks our sense of justice.
11.1 This conventional theory has come to be modified in modern times; but the
modification has been effected by a specific statutory provision, rather than by
judicial application of the doctrine of lifting the corporate veil or any other juristic
doctrine. The creation of a host of 'statutory' offences, known as public welfare
offences, or regulatory crimes, or by other suitable appellation, facilitated this process.
The orthodox concept of a 'crime' involving moral turpitude gave way to another
concept of criminal liability through special statutes passed to deal with social and
economic matters. A juristion exposition of the status of such offences will be found
in two comprehensive reports of the Law Commission - 29th and 47th. Both deal with
social and economic offences. The point to note is that the creation of regulatory
crimes by statute has been accompanied by a relaxation of the doctrine of mens rea
(the mental element in crime) and this relaxation itself has been accompanied by
provisions showing a readiness to impose vicarious liability, even in criminal law. It
was in some such climate that the practice started of inserting in modern legislation a
provision to the effect that when an offence is committed by a company, then its
directors, managers and other officers are also criminally liable unless they can prove
that they had no complicity in the crime and could not have prevented the commission
of the offence with reasonable diligence. This is the gist of such provisions, though
the actual language employed is much more complex.
11.2 In India, provisions of this nature started in 1948, and are now a common feature
of most Central Acts imposing penal liability for violations of statutes. From the point
of view of criminal law and jurisprudence, the subject deserves separate treatment in
itself. But its importance in corporate law lies in the fact that a statutory provision
imposes criminal liability even if it be by a rebuttable presumption - where none
would have existed by general principles at common law. The company, of course,
continues to remain liable; but, in addition, its directors and managers are made liable.
Such artificial extension of criminal liability may, in a sense, be regarded as lifting the
corporate veil or "shifting" it. But it must be remembered that there are several special
features present here. In the first place, such creation of additional liability is always
by statute, and not by judicial exposition. Secondly, the device has been adopted on
pragmatic considerations as a measure of law enforcement, rather than on a
theoretical consideration of pros and cons. Thirdly, since liability is imposed by a
statutory provision, there is not much scope for a case by case consideration and
weighing of pros and cons in each individual situation, which one comes across in

cases where arguments for lifting the corporate veil are addressed to the court in
matters involving civil consequences.

12. Limitations - A case from banking law


The corporate veil is not to be easily lifted. And in the absence of special
circumstances, courts hesitate to do so, because every attempt to lift the veil is an
inroad on the corporate personality of the company which was brought into existence
by specific statute. The corporation is not, as a rule, to be confused with its director,
its manager, its shareholder, or its holding or subsidiary company, unless such a
course is justified either by statute or by well established principles as to lifting the
corporate veil. Thus, in banking practice, it is very risky to confuse a corporation and
its director, and any transaction by the bank in which the separate legal identity of a
company and its director is overlooked is bound to run into trouble.
Neither the directors nor the secretary should be allowed to put cheques payable to the
company into their private accounts- Sheldon & Fidler, Practice and Law of Banking
1982 ELBS Reprint 1986, p. 117. The danger of allowing a director or other agent to
place cheques payable to the company or to his principal to the credit of his own
account was emphasised in the case of Underwood v. Bank of Liverpool. [1924] All
ER 230. Underwood converted his business into a private limited company in which
he held all the shares except one. By the articles, he was appointed sole director. A
debenture was issued creating a floating charge over all the assets of the company to
secure its banking account. Soon after the formation of the company, Underwood
commenced to pay into his own private account cheques in favour of the company
duly endorsed by himself as sole director. In an action brought by the receiver for the
debenture holders, it was held that Underwood's bankers had been guilty of
negligence, and they had to refund all amounts so received. Although Underwood was
for practical purposes the sole proprietor of the company, his action was undoubtedly
a fraud on the company's creditors, since even in the case of a 'one-man' company, the
company is an entity of itself, quite apart from that of its chief proprietor. The
collecting banker was, therefore, guilty of negligence. A banker should not allow any
director, or other agent, or a partner, to put to his own account cheques drawn payable
to the company, his principal or his firm.

13. Statutory provisions


It is sometimes stated that several provisions in the Income- tax Act, 1961 furnish
illustrations of lifting the corporate veil. The sections of the Income-tax Act usually
mentioned in this behalf are sections 178 (4), 179(1), 278B(1) and 278B(2). But,
strictly speaking, many of these provisions are provisions focusing on adequate law
enforcement, rather than on any point of corporate law. Section 179 (1) of the Incometax Act is the only provision which has something to do with the concept of lifting the
corporate veil. It provides for personal liability of directors of a private company for
the taxes due from a private company and becoming irrecoverable from the company,
in respect of the income of the private company for any period during which it was a
private company, unless the person who was a director during that period proves that
the irrecoverability cannot be attributed to any gross neglect, misfeasance or breach of

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.

14. Some illustrative cases


It may be convenient to refer to a few other decided cases by way of illustration.

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.

He controlled their every movement. Each danced to his bidding. He pulled


the strings. No one else got within reach of them. Transformed into legal
language, they were his agents to do as he commanded. He was the principal
behind them. I am of the opinion that the court should pull aside the corporate
veil and treat these concerns as being his creatures, for whose doings he
should be, and is, responsible. At any rate, it was up to him to show that any
one else had a say in their affairs and he never did so."
C. Evans & Sons Ltd. v. Spritebr and Ltd., [1985] 2 All ER 415 was a case of
copyright. The first defendant was a company of which the second defendant
was a director and managing executive and which, since 1973, had
manufactured on behalf of the plaintiff company, scaffolding components in
accordance with specific drawings the copyright in which belonged to the
plaintiff. The plaintiff brought an action under the Copyright Act, 1956 against
the first and second defendants, alleging an infringement of its copyright in the
designs of the scaffolding components between 1979 and 1981. The plaintiff
further alleged that the second defendant had been at all material times the
director and managing executive of the first defendant and that he had
authorised, directed and procured the first defendant in breaching the
plaintiff's copyright in the designs of the scaffolding components and was
therefore personally liable to the plaintiff. It was held that there was no
principle that a director of a company who had authorised, directed and
procured the commission by a company of a tortious act, such as infringement
of copyright falling within sections 1 (2) and 3(5) (a) of the Copyright Act,
could in no circumstances be personally liable to the injured party unless it
was proved that he had committed the acts in the knowledge that they were
tortious, or had acted recklessly without caring whether they were or not. It
followed that the judge had been right to reject the second defendant's
submission that the plaintiff had to prove further that he had acted with the
knowledge that the first defendant's acts were tortious.
Where the property of a company is held by trustees under an express or
implied trust, the court would disregard the corporate personality and enforce
the trusts, even though, in theory, the company would be entitled to deal with
the property in any way it pleases -Abbey Malvern Wells Ltd. v. Minister of
Local Government & Planning [1951] Ch. 728.
Sir Dinshaw Maneckjee Petit, Bart, In re. AIR 1927 Bom. 371, the assessee
owned all shares (except 3 held by his subordinate). The assessee had full
control over the company. The company did no business, apart from receiving
dividend and debiting it in asssessee's account as loan. Profits were deemed to
have been received by the assessee and he was charged super-tax. It was held
that the court was entitled to go into the question as to whether the so-called
one man company was really a business carried on by the assessee himself for
the purposes of avoiding payment of tax. The company was not a genuine
company at all, but merely the assessee himself disguised under the legal
entity of a limited liability company. The company was formed by the assessee
purely and simply as a means of avoiding super-tax and the company was
nothing more than the assessee himself. It did no business but was created
purely and simply as a legal entity to ostensibly receive the dividends and
interest and hand them over to the assessee as pretended loans.
In CIR v. Shri Meenakshi Mills Ltd. [1967] 63 ITR 609 (SC), moneys were
lent at interest outside British India and brought into British India. Loan was

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.

In Workmen Employed in Associated Rubber Industry Ltd., v. Associated


Rubber Industry, Ltd., AIR 1986 SC 1, it was found that a new company was
created wholly owned by the principal company, with no assets of its own,
except those transferred to it by the principal company and with no business or
income of its own except receiving dividends from shares transferred to it by
the principal company. The Supreme Court held that the new company was
formed as a device to reduce the gross profit of the principal company and
thereby reduce the amount to be paid by way of bonus to workmen. The
amount of dividend received by the new company should therefore be taken
into account in assessing the gross profit of the principal company. It is the
duty of the court, in every case where ingenuity is expended to avoid taxing
and welfare legislations, to get behind the smokescreen and discover the true
state of affairs. The court is not be be satisfied with mere form. One finds,
however, that not in every case will the court adopt this stringent attitude.
In LIC v. Escorts AIR 1986 SC 1370, overseas companies invested in the
shares of Escorts Ltd., under the Non-Resident Portfolio Investment Scheme.
12 out of whose shares were owned 100 per cent and 13 out of whose shares
were owned 98 per cent by Caparo Group Ltd., and 61.61 per cent of the
shares of Caparo Group Ltd. were held by Swaraj Paul family trust, 100 per
cent of whose beneficiaries were Swaraj Paul and members of his family, all
non-resident individuals of Indian origin. It was argued before the Supreme
Court that the 13 companies were 13 companies only in name and that, for all
practical purposes, they were one, and that one was an individual, Mr. Swaraj
Paul. One had only to pierce the corporate veil to discover Mr. Swaraj Paul
lurking behind. It was argued that 13 applications were made on behalf of 13
companies in order to circumvent the investment scheme which prescribed a
ceiling of 1 per cent on behalf of each non-resident of Indian nationality or
origin, or each company 60 per cent of whose shares were owned by nonresidents of Indian nationality/origin. After mentioning that the circumstances
for lifting the corporate veil had been stated in Palmer's Company Law and
Gower's Company Law and also the cases relied on in the context, the
Supreme Court observed that generally the corporate veil might be lifted
where a statute itself contemplated lifting the veil or fraud or improper
conduct was intended to be prevented, or a taxing statute or a beneficent
statute was sought to be evaded or where associated companies were
inextricably connected so as to be, in reality, part of one concern. It was
neither necessary nor desirable to enumerate the classes of cases where lifting
the veil was permissible, since that must necessarily depend on the relevant
statutory or other provisions, the objects sought to be achieved, the impugned
conduct, the involvement of the element of the public interest, the effect on
parties who might be affected, etc. In view of the aforesaid, the Supreme
Court, in Escorts' case (supra), held that lifting the veil was not necessary or
permissible beyond the requirement of the Foreign Exchange Regulation Act
('FERA') and the Portfolio Investment Scheme. It observed : "We have noticed
that the object of the Act is to conserve and regulate the flow of foreign
exchange and the object of the FERA is to conserve and regulate the flow of
foreign exchange and the object of the scheme is to attract non - resident
investors of Indian nationality or origin to invest in shares of Indian
companies. In the case of individuals, there can be no difficulty in identifying
their nationality or origin. In the case of companies and other legal

personalities, there can be no question of nationality or ethnicity of such


company or legal personality. Who of such non-resident companies or legal
personalities may then be permitted to invest in shares of Indian companies?
The answer is furnished by the scheme itself which provides for 'lifting the
corporate veil' to find out if at least 60 per cent of the shares are held by
nonresidents of Indian nationality or origin. Lifting the veil is necessary to
discover the nationality or origin of the shareholders and not to find out the
individual identity of each of the shareholders. The corporate veil may be
lifted to that extent only and no more."

15. Salomon v. Salomon still vital


Notwithstanding the extensive literature connected with 'lifting the corporate veil', one
should not forget that the conventional view that a company is a distinct legal entity
still holds the field and after almost a century the old ruling in Salomon's case (supra)
retains its vitality. The courts insist upon very strong evidence for displacing it Thus, a
Government company is not regarded as an agent or trustee of the state (except for
writ purposes) unless it is performing sovereign (as opposed to commercial) functions
- Praga Tools Corpn. v. Inamuel AIR 1969 SC 1306; Tamlin v. Hannaford [1950] 1
KB 18. The property of a Government company has been held to be not that of the
State - Bharat Aluminium Co. Ltd. v. Special Area Development Authority [1981] 51
Comp. Cas. 184 (MP). A transport company in which all the shares were held by the
Transport Commission was held to be not acting as an agent for the Commission Ebbow Wale UDC v. S. Wales Traffic Area Licensing Authority [1951] 2 KB 366
(CA). A wholly owned subsidiary company is also viewed to be as distinct from its
parent as any other company - Free Wheels (India) Ltd. v. Dr. Veda Mitra AIR 1969
Delhi 258, except when the parent controls its activity in all respects-fle. F.G. Films
Ltd. [1953] 1 WLR 483.
The fact that in certain cases companies have to give a "group accounts" [section 212
- 214 of the Companies Act] does not impair their individuality. Documents in the
custody of a subsidiary company are not necessarily in the custody of the holding
company - Lonrho Ltd. v. Sell Petro-leum Co. Ltd. [1980] 2 WLR 367 (CA). A
holding company is not liable for its insolvent subsidiary company -Re Southard &
Co. Ltd. [1979] 1 WLR 1198. All these rulings show the vitality of Salomon's case
{supra).

16. Benami transactions


At this stage, it is necessary to examine the position resulting from the Benami
Transactions (Prohibition) Act, 1988. Section 3(1) of that Act prohibits any one from
entering into any benami transaction and section 4 (1) provides as under :
"(1) No suit, claim or action to enforce any right in respect of any property held
benami against the person in whose name the property is held or against any other
person, shall lie by or on behalf of a person claiming to be the real owner of such
property."

This is subject to exceptions regarding trusts and Hindu undivided families. If


property is held benami, then section 4(1) prevents recovery by the real owner.
Section 5 of the said Act provides for the acquisition of benami property by the
Government As regards the impact of the legislation on the doctrine of lifting the
corporate veil, only time will tell us how far it has got any important consequences.
This is a matter that calls for a separate analysis.

17. Aspect of statutory construction - Supreme Court


in Renusagar's case
The latest Supreme Court judgment on the subject of lifting the corporate veil is of
interest in the field of exemption from tax. That case was also discussed in passing in
para 6.1 in a limited manner. Before discussing it further, it may be mentioned that
there are so many angles from which the doctrine can be approached. Application of
the doctrine in a particular case can be taken as an example of judicial creativity - an
aspect welcome to writers on jurisprudence and on the judicial method. For students
of corporation law, such concrete cases may, again, supply useful material for bearing
in mind how the conservative doctrine that a company is different from its
components may come to be modified. Again, students of legal history will see a
parallel between the equitable jurisdiction evolved in the Court of Chancery to correct
the hardship of the common law and the corrective jurisdiction assumed by the courts
by lifting the corporate veil, thus modifying the full operation of a statutory fiction. At
the present stage, it may be of some use to develop the theme of statutory
construction. In Renusagar's case (supra), the question was whether a holding
company, using power generated by its subsidiary, can be described as utilising its
'own source of generation' within the meaning of section 3(l)(c) of the U.P. Electricity
Duty Act, 1952, where under a concessional rate of duty is provided for such
consumption. The Supreme Court answered the question in the affirmative, after
reviewing the important decisions on the subject. The crucial reasoning of the
Supreme Court is as follows :
"As the facts make it abundantly clear all the steps for establishing and expanding the
power station were taken by Hindalco. Renusagar is whollyowned subsidiary of
Hindalco and is completely controlled by Hindalco. Even the day-to-day affairs of
Renusagar are controlled by Hindalco. Renusagar has at no point of time indicatedany
independent volition. Whenever felt necessary, the State or the Board have themselves
lifted the corporate veil and have treated Renusagar and Hindalco as one concern and
the generation in Renusagar as the own source of generation of Hindalco. In the
impugned order, the profits of Renusagar have been treated as the profits of
Hindalco."

18. Object of the statute


As a matter of statutory construction, this approach harmonises with the well-known
rule that in construing a statute it is permissible to have regard to the object of the
statute. This is a rule which necessarily had to be evolved by the courts because of the
inherent elasticity of most words. One of the elementary rules of the interpretation of
statutes is that, when there is a doubt about their meaning, the words of the statute are
to be understood in the sense in which they best harmonise with the object of the

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

courts. Finally, in banking transactions, it is advisable to adhere to the orthodox


proposition that a company is distinct from its members and directors. In this sense,
the authority of Salomon (supra) still holds the field.

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.

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