1. This reference under Section 27(1) of the Wealth-tax Act, 1957, refers to the assessment years 1957-58 and 1958-59 and involves the scope of Sub-clause (m) of Section 2 of the Act and its applicability to the facts of this case. The assessee is a public limited company carrying on business of different types including as hotel-keepers and caterers. For each of the two years, it has been assessed to Wealth-tax. The assessee claimed that a debt of Rupees 31,26,000/- should be taken into account in ascertaining its net wealth. The claim was negatived by the Revenue, and the Tribunal concurred with it. The following question has been, therefore, referred to us:
"Whether on the facts and in the circumstances of the case, the Tribunal is right in holding that the claim of the assossee for the deduction of Rupees 31,26,000/- was rightly rejected as coming under Section 2(m)(ii) of the Wealth-tax Act?"
2. The assessee acquired, pursuant to a resolution of its Board of Directors dated October 22, 1929, 1,59,824 Preference Shares out of 1,60,000 Preference Shares and 1,99,948 Equity Shares out of 2,00.000 Ordinary Shares issued by G. F. Kellner and Company, an incorporated and registered company whose main business was Railway catering in North India. The assessee acquired the shares partly for cash and partly in lieu of its own shares issued to the share-holders of Kellners. By another resolution dated February 4, 1930 the Board of Directors of the assessee decided to purchase and did purchase all the current assets "excepting firstly but only for the time being the agreements relating to catering on the East Indian Railway, the Great Indian Peninsular Railway and the Bengal and North Western Railway" and the good-will of Kellners for a consideration of Rupees 31,26,000. Part of this consideration was to be paid in cash on demand by Kellners pursuant to a resolution to be passed at the General Body Meeting of the asses-see. On December 29, 1939, another resolution was passed by the Board of Directors of the assessee to the effect that in the event of the liquidation of Kellners, the liability to Kellners was to be adjusted against the value of shares held by the assessee in Kellners. Clauses 2, 6, and 8 of the resolution of the Board of Directors of the assessee dated February 4, 1930 ran:
" 2. Part of the consideration price shall be Rs. 31,26,000 which subject to the provision on that behalf set out below shall be paid and satisfied in cash by this Company on demand made by G. F. Kellner and Company Limited pursuant to a resolution to that effect at a General Meeting of the share-holders, and it is agreed that the said price of Rupees 31,26,0007- shall include the indebtedness of this company to G. F. Kellner and Company Limited at 30th June, 1929.
6. If and so long as the Rs. 31,26,0007-mentioned in Clause (2) above remains unsatisfied - this Company shall on each first day of January and each first day of July commencing with the first day of January, 1930 pay to G. F. Kellner and Company Limited such a sum as when increased by any receipts of G. F. Kellner and Company Limited from any other source (i.e) other than the aforementioned half-yearly payment, whatsoever during the previous period of six months and reduced by the out-goings of G. F. Kellner and Company Limited for any purpose whatsoever excluding dividends paid, but not excluding taxes during the same period of six months, will amount to Rs. 1,04,375/-.
8. If while the Rs. 31,26,0007- mentioned in clause (2) or any part thereof remains unpaid G. F. Kellner and Company Limited shall propose to go into voluntary liquidation, any special resolution submitted to share-holders for the purpose by the Board of Directors shall provide that this Company instead of paying to the liquidators the said Rupees 31,26,000/- or the unpaid part thereof in cash shall be entitled to surrender to the liquidators any shares in G. F. Kellner and Company Limited, held by them and thereby to set off or reduce the said indebtedness by Rs. 10/- in respect of each preference share so surrendered and by 1526 to 2000 of Rs. 10/- in respect of each ordinary share so surrendered." in the balance sheets of the assessee as on the two valuation dates the assessee showed on the liability side as under:
Consideration for purchase of Sundry assets of Messrs G. F. Kellner and Company Ltd.
Less: Cost of Shares of G. F. Kellner and Company Ltd., which under agreement between the appellant (assessee) and the Company may be considered as payment of Rs. 31,23,844 of above consideration 31,23,006
Before the Wealth Tax Officer, the assessee's point of view was that the cost of the shares should really be taken to be on the asset side which is exempt from computation of net wealth and is not liable to wealth-tax under Section 5(1)(xix) and that the liability of Rupees 31,26,000 is a debt owed within the meaning of the main part of Section 2(m) of the Act. The Wealth Tax Officer did not accept this view but was of the opinion that the liability shown as above in the balance sheet had been incurred in relation to the exempted asset, to wit, the shares referred to in the balance sheet, and should, therefore, be left out of consideration by reason of Section 2(m)(ii). This view prevailed with the Appellate Assistant Commissioner, "Wealth Tax, and so too with the Tribunal. The Tribunal's reasoning was this. In the balance sheet the sum of Rs. 31,23.006/- almost representing the value of the shares held by the assessee in Kellner and Company had been set off against Rs. 31,26,000 and only the balance of Rs. 2,994 had been shown as liability.
Apart from that, the contingency contemplated by Clause (8) of the resolution of the Board of Directors of the assessee dated February, 4, 1930 would never be permitted to arise, for, it was entirely within the power of the assessee to prevent it because of its controlling power due to its share-holding in Kellner and Company and that though the assessee and Kellner and Company are two different entities, nevertheless, in a situation like this, namely, the assessee owning practically all the shares in Kellner and Company and also purchasing almost all the assets of Kellner and Company including its good-will, the rights and obligations of either would certainly get merged. The Tribunal then proceeded to say that otherwise it would lead to a highly artificial state of affairs like the assessee having to find cash to the extent of Rupees 31,26,000 and all the time holding shares of face value worth much more than this, besides assets. It was evident to the Tribunal from all the circumstances that the intention was only to equate the value of the shares held by the assessee in Kellner and Company to the sum of Rupees 31,26,000/- and thus the liability was related to the value of the shares which were exempt from Wealth Tax.
The Tribunal's opinion in effect appears to be that of the liability being related to the value of the shares, it is within the ambit of Section 2(m)(ii), that in the circumstances there was merger of the rights and obligations of the two companies, so that the assessee became the owner of almost all the shares and assets of Kellner and Company and that, therefore, there was no liability at all to regard it as a debt owed for purposes of Section 2(m) of the Act.
3. The argument before us for the assessee is that the liability of the assessee incurred for the purchase of the assets of Kellners was totally unrelated to its purchase of the shares in Kellners, that in fact the purchase of shares was far anterior to the transaction of purchase of the assets of Kellners. The further submission of the assessee is that the two companies each of them being incorporated and registered under the provisions of the Companies Act, are distinct, different and independent entities, so that there could be no merger of rights and liabilities, as erroneously considered by the Tribunal and that in fact and in law the liability incurred for the purchase of the assets of Kellners was liable to be discharged on demand by Kellners and that it is only in the event of Kellners deciding to go into liquidation that liberty was reserved to the assessee to surrender to the liquidators its shares in Kellners so as to reduce Its indebtedness in the manner stated in Clause 8 of the resolution of the Board of Directors of the assessee dated February 4, 1930. On the other hand for the Revenue it is stated that the balance sheet for each of the years as on the two valuation dates has been the basis of the assessments, that the balance sheet itself showed that the liability incurred for the purchase of the assets had been set off by adjustment of the cost of shares and thus either there was no liability or if there was one, it was related to the shares purchased by the assessee in Kellners.
In support of this contention, it is suggested that it is the substance of the matter which should be regarded for purposes of taxation and that means, in a case like this, the Revenue and the Court are entitled to pierce through the veil of the corporate character of Kellners and discover that the controlling company has, by the purchase of almost the entirety of the shares in the controlled company and also of almost the entirety of its assets, become the owner of Kellners and there is thus an unmistakable connection between the liability and the shares. Before we deal with the rival submission at the Bar, we may notice the statutory provisions which bear on them.
4. Section 3 is the charging section. It says that there shall be charged for every assessment year a tax in respect of the net wealth on the corresponding valuation date of every individual, Hindu undivided family and company at the rates specified in the Schedule to the Act. The tax is, therefore, on the net wealth, 'Net wealth' is defined by Clause (m) of Section 2 which, so far as it is material for this case, we shall extract below:
(m) "net wealth" means the amount by which the aggregate value computed in accordance with the provisions of this Act of all the assets, wherever located, belonging to the assessee on the valuation date, including assets required to be included in his net wealth as on that date under this Act, is in excess of the aggregate value of all the debts owed by the assessee on the valuation date other than-
(i) debts which under Section 6 are not to be taken into account;
(ii) debts which are secured on, or which have been incurred in relation to, any asset in respect of which wealth-tax is not payable under this Act. . ." in other words, net wealth is the sura by which it is in excess of the debts owed, but excluding the debts specified in the clause. We shall revert presently to Sub-clause (ii) of Clause (m). There is an inclusive definition of the term "assets", that is to say it includes property of every description, movable or Immovable but does not include certain categories of properties as for instance agricultural land or any building owned or occupied by a cultivator or receiver of rent or revenue out of agricultural land. Section 4 details that net wealth should include certain types of assets while Section 5(1) gives exemption from tax in respect of certain assets. One of such assets entitled to exemption is what is comprehended by Clause (xix), namely, the value of any shares held by the assessee in any other company in any case where the assessee is a company. Section 6 deals with exclusion of certain debts and assets outside India. The procedure as to how the value of the assets is to be determined has been prescribed by Section 7(1). Clause (a) of Sub-section (2) of the section contains the procedure for what is generally known as global valuation on the basis of the balance-sheet drawn up for the affairs of the business carried on by an assessee instead of determining separately the value of each asset held by the assessee in his business.
The effect of these provisions in the present content appears to be that the shares purchased by the assessee in Kellners, though an asset, are nevertheless exempt from payment of wealth tax. The assets purchased by the assessee from Kellners, will have to enter into the computation of its net wealth. If that be so, as it should be and this is not denied as far as we can understand learned Counsel for the Revenue, the question arises whether the liability incurred by the assessee in purchasing those assets of Kellners is not a debt owed by the assessee which should be deducted from the aggregate value of the assessee's assets in computing its net wealth. Everybody has proceeded on the assumption, and quite rightly too, that it is a debt owed by the assessee but the divergence is on the question whether it is a debt within the scope of Sub-clause (ii) of Clause (m) of Section 2. While the assessee would say that the liability is unrelated to the shares, the Revenue would contradict and assert to the contrary, Sub-clause (ii), as it appears to us, presents no difficulty with regard to its scope and intendment.
Having regard to the exclusion of certain kinds of property from the term assets', and the exemption from tax in respect of certain other kinds of assets, Sub-clause (ii) provides that if a debt has been incurred by an assessee in relation to any property which is not chargeable to wealth-tax or the repayment of which has been secured on such property, such a debt, and this is quite natural, will not DC an allowable deduction from the aggregate value of the assets which go Into the computation of net wealth. To illustrate supposing an assessee purchases agricultural land with borrowed money or improves it with such fund, or the assessee being a Company borrows and with the borrowed moneys purchases shares in another company, in neither case will the property so purchased or improved attract tax either because such property is excluded from the terra 'assets' for the purposes of the Act or is exempt from tax. If such liability is allowed to be deducted from the aggregate value of the assets, that would mean reduction of the value of the net assets to the extent of such liability which obviously cannot be permitted. That 13 because the debt is not related to or secured on property which is itself liable to wealth tax. Any (such?) liability therefore, (should be?) disregarded in ascertaining the net wealth. That precisely, in our opinion, is the scope and intention of Sub-clause (ii) of Clause (m) of Section 2.
5. The Revenue Is, therefore, at pains to show the existence of nexus between the liability in purchasing the assets of Kellners and the shares acquired by the assessee in Kellners, The basis for this nexus, according to the Revenue, is Clause 8 in the resolution of the Board of Directors of the assessee dated February 4, 19.30. The argument is that the value of the shares in effect has been set off or is to be set off against the liability incurred in the purchase of Kellners' assets and that this has actually been regarded so as is evident from the terms of the matter in the balance sheet. We do not think that this manner of thinking is at all justified either having regard to the legal position or the facts, The assessee, in our opinion, rightly contends that the liability incurred in, purchasing the assets of Kellners had nothing whatever to do with the liability therein Incurred for purchase of the shares. The consideration for the purchase of the shares was paid, as we mentioned earlier, partly in cash and partly by transferring shares in the assessee company to some of the shareholders in Kellners. Further the purchase of the shares in Kellners was in point of time earlier than the purchase of the assets Of Kellners.
The effect of Clause 8 in the resolution dated February 4, 1930 is not to create any relation between the shares and the liability so as to bring the liability within Sub-clause (ii) of Clause (m). That Clause speaks of a liability incurred in relation to any property not chargeable to wealth fast. Surely it cannot be said that the liability in this case was incurred in relation to the shares which are exempt from tax. The liability as a matter of fact wag Incurred in purchasing the other assets of Kellners. Clause 2 of the aforesaid resolution makes it manifest that this liability was to be repaid on demand and this position remained throughout. It was only in the event of Kellners deciding to go into voluntary liquidation the question of set off would arise. Even here, the purport of Clause 8 of the resolution is not that the assessee would be obliged to allow set off by surrendering the shares to reduce the liability. The resolution is in the nature of a right accrued to the assessee, namely, that in the event of the voluntary liquidation, the assessee will be entitled to surrender the shares and reduce the liability. Clause 8 has no further effect. It merely provides for the manner of payment in a particular contingency. It does not, in any way prevent the assessee from dealing with the shares in any way as it would like and not merely to surrender shares. Even in liquidation the assessee was at liberty to repay the liability by cash.
Even if there was some kind of relation created by Clause 8, that does not provide the nexus visualised by Sub- Clause (ii) for, the liability was not incurred in relation to the shares. We made it clear earlier that they were unrelated to each other and the purchase of shares preceded the purchase of the assets of Kellners in respect of which alone the subsequent liability was incurred by the assessee. Nor can it be said that the liability was secured on the shares. That is not what Clause 8 of the resolution dated February 4, 1930 does. The liability contemplated by Sub-clause (ii) of Clause (m) should be such, in our opinion, as would not merely relate to the debt in respect of property not chargeable to tax but go further and charge and impound such property with repayment of the debt. We cannot possibly say that the liability incurred in purchasing the assets in Kellners was secured on the shares in the sense that the debt could be collected from or enforced on the shares. There was here no charge of the liability on the shares. Not even Clause 8 of the resolution aforesaid mentioned that the debt was repayable out of the value of the shares. All that it stated was that in the event of voluntary liquidation of Kellners the assessee should be entitled to surrender the shares, set off and thus reduce its liability.
That is not securing the debt on the shares. On this view it should follow that the liability is not within the purview of Sub-clause (ii) of Clause (m) of Section 2, and the assessee is entitled to deduction thereof from the aggregate value of its assets.
6. The argument, however, for the Revenue is that the assessee in the balance sheet set off the liability against the value of the shares and showed only Rs. 2994/- as liability and this manner of looking at it is in accord with the substance of the matter, namely, the fact that the assessee has acquired almost all the shares of Kellners as well as its assets so that it is virtually the owner of Kellners. By this process of reasoning, the Tribunal viewed that there was a merger of rights and liabilities of the two companies so that in effect there was no debt owed which called for reduction in the present assessments. This argument overlooks the fact that the two companies are distinct, different and independent of each other. Each is a corporate body with separate rights and liabilities. The Companies Act contains provisions which enable a company to purchase shares in another company and thus become a controlling company. Merely because a company purchases almost the entirety of the shares in another company, it will not serve as a moans of putting an end to the corporate character of the other company or the controlling company acquiring the ownership of the controlled company, so as to treat them as one entity for purposes of right and liabilities. The share capital of such of the companies is governed and controlled by the provisions of the Companies Act and its enhancement or reduction can only be in accordance with such provisions. We are not told on behalf of the Revenue that there has been any reduction or alteration in the capital structure of Kellners.
7. It is well settled that an incorporated company is a legal person and it cannot be equated to its share-holders. The position continues to be the same even if the number of the share-holders is reduced to one by accident or otherwise. The act of the company cannot, therefore, be regarded as that of any of the share-holder and vice versa. It is true that occasionally the corporate veil of a company is pierced through in order to find out the substance but that is only where it is permitted by a statute or in exceptional cases of fraud.
8. The effect of the incorporation has been noticed by Gower on "Modern Company Law" (Second Edition) and he says the fundamental attribute of corporate personality, from which indeed all the other consequences flow, is that the corporation is a legal entity distinct from its members, it is, therefore, capable of enjoying rights and of being subject to duties which are not the same as those enjoyed or borne by its members. The rule against going behind the corporate character by breaking it was first laid down in Salomon v. Salomon & Co. ( 1897) A. C. 22 and it would appear to have been since relaxed to a certain extent in favour of the Revenue. But as has been pointed out by Gower the relaxation has been done by the Legislature and in this connection Gower quotes the following passage from Devlin, J., in Bank Voor Handelen Scheepvaart N.V. v. Slatford, (1953) 1 Q. B. 243) at page 193: (sic).
"No doubt the legislature can forge a sledge-hammer capable of cracking open the corporate shell; and it can, if it chooses, demand that the Courts ignore all the conceptions and principles which are at the root of company law." Tata Engineering and Locomotive Com. Ltd. v. State of Bihar, was not concerned with
taxation but in considering the question whether by piercing through the voil of the corporate character of a company and from the stand-point of its share-holders, the company can be regarded as a citizen, the Supreme Court declined on that basis to regard a company as a citizen. Repelling an argument that in proper cases the Courts were at liberty to pierce through the veil, the Supreme Court observed at page 674 (of SCJ): (at p. 47 of AIR):
"Thus, at present, the judicial approach in cracking open the corporate shell is somewhat cautious and circumspect. It is only where the legislative provision justifies the adoption of such a course that the veil has been lifted. In exceptional cases where Courts have felt, themselves able to ignore the corporate entity and to treat the individual shareholder as liable for its acts', the same course has been adopted. Summarising his conclusion, Gower has classified seven categories of cases where the veil of a Corporate body has been lifted. But it would not be possible to evolve a rational, consistent and inflexible principle which can be invoked in determining the question as to whether the veil of the corporation should be lifted or not. Broadly stated, where fraud is intended to be prevented, or trading with an enemy is sought to be defeated, the veil of corporation is lifted by judicial decisions and the share-holders are held to be the persons who actually work for the corporation."
Beyond this, the few cases cited before us which we do not think it necessary to refer, do not take the matter further and establish that an exception in favour of the Revenue can be made save through specific legislation. We have not been shown any instance where a share-holder who has purchased almost all the assets of a company and also the shares therein, is for that reason equated to a company or is substituted for the company. In Kodak Ltd. v. Clark (1903) 1 KB 505, there was an English Company carrying on business in the United Kingdom which owned 98 per cent of the shares in a foreign company. Naturally that shareholding gave the English company a prepondering influence in the control, election of directors, etc. of the foreign company. The remaining shares in the foreign company were held by independent persons. It was held that the foreign company was not carried on by the English company, nor was it the agent of the English Company and that the English Company was not, therefore, assessable to income tax under the first case of Schedule D of 5 and 6 Vict. Chapter 35 Section 100 upon the full amount of the profits of the foreign company. This case, in our opinion, illustrates the point that whatever be the extent of the shares held by a company or individual in another company and whatever also be the extent of the assets of the latter owned by the former, that by itself does not make any difference to the continued character of the controlled company whose rights and liabilities remain independent and separate.
Mr. Balasubrarnaniam for the Revenue invited our attention to Commissioner of Income Tax, Madras v. Sri Meenakshi Mills Ltd. and particularly the following passage:
"It is true that from the juristic point of view the company is a legal personality entirely distinct from its members and the company is capable of enjoying rights and being subjected to duties which are not the same as those enjoyed or borne by its members. But in certain exceptional cases the Court is entitled to lift the veil of corporate entity and to pay regard to the economic realities behind the legal facade. For example the Court has power to disregard the corporate entity if it is used for tax evasion or to circumvent tax obligation".
That case proceeded on the special facts, namely, Sri Thyagaraya Chettiar who was the moving figure both for the bank and each of the assessees having had knowledge of a pre-arrangement. In the instant case before us, there is no trace of any attempt at evasion of tax liability. It is true that it does not appear that Kellners had been carrying on business after it had sold its assets to the assessee. But it is not denied that it has been submitting its returns and has been assessed to wealth tax including in its net wealth the liability owed by the assessee to it. There is certainly no mixing up of the rights and liabilities of the two companies or any particular individual or individuals being the moving spirit controlling the affairs of both the companies through a common hand or agency. The separate identity of the two companies has always been stressed and the terms of Clause 6 have been given effect to. Merely on the basis of the balance sheet entries, it is impossible to conclude that there has been a liquidation of the liability of the assessee to Kellners. Even today Kellners can make a demand for payment of the debt owed by the assessee. The assesses cannot in that event take shelter under its own balance sheet and say that the debt no longer exists or it has been adjusted in the manner mentioned therein. That kind of adjustment can be permissible under Clause 8 of the resolution of February 4, 1930 only by the choice of assessee and again only in the event of Kellners going into voluntary liquidation.
9. We are, therefore, of opinion that the assessee is entitled to deduction of the liability of Rs. 31,26,000, in computation of its net wealth. We accordingly answer the question referred to us in favour of the assessee with costs. Counsel's fees Ra 250/-.