The company is at law a different person altogether from the subscribers to the Memorandum and, although it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or the trustee for them. Nor are subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act.(Lord McNaughten-Soloman v. Soloman and Co.,(1897) A.C 22 (H.L))
The law laid down in Soloman v. Soloman and Co.(supra) is often considered the source on the basis of which the jurisprudence of corporate personality has been written world over. However, the history of corporate-commercial litigation has witnessed situations wherein the Courts have gone beyond the corporate cloak and analyzed the working and the motives of the members or directors of the company: In doing the same, the Courts have evolved the concept of lifting or piercing the corporate veil. This article aims to bring to light the interpretational issues concerning taxation cases vis-à-vis the aforesaid doctrine and to focus on interpretation of the Indian Courts over time.
In recent times the plague of tax evasion has been so severe that the Courts have actively used the doctrine of piercing of corporate veil to probe into transactions and decide the actual entities responsible behind the facade of the company. Lately, the Hon’ble Karnataka High Court in the case of Richter Holding v. The Assistant Director of Income Tax used this doctrine to take the view that it may be necessary for the fact finding authority to lift the corporate veil to look into the real nature of the transaction and ascertain the virtual facts. The Hon’ble High Court further held that the Assessee, as a majority share holder, enjoys the power by way of interest and capital gains in the assets of the company and it is necessary to identify whether the transfer of shares includes indirect transfer of assets and interest in the company.
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(The authors are Associates, Lakshmi Kumaran & Sridharan, New Delhi)