1. VEERASWAMI, J.-This reference under section 27(1) of the Wealth Tax Act, 1957, refers to the assessm ent years 1957-58 and 1958-59 and involves the scope of sub-clause (ii) of 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 Rs.
2. 31,26,000 should be taken into account in ascertaining its not 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 assessee for the deduction of Rs. 31,26,000 was rightly rejected and coming under section 2(m)(ii) of the Wealth Tax Act?"
3. The assessee acquired, pursuant to a resolution of its board of directors, dated October 22, 1929, 1,59,924 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 & 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 shareholders 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 goodwill of Kellners for a consideration of Rs.
4. 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 assessee. 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 of 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 in that behalf set out below shall be paid and satisfied in cash by this company on demand made by G. F.
5. 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 Rs. 31,26,000 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. 31,26,000 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 & 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 outgoings 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. 31,26,000 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 shareholders for the purpose by the board of directors shall provide that this company instead of paying to the liquidators the said Rs. 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 indebted--ness by Rs. 10 In respect of each preference share so surrendered and by 1,526 of 2,000 of Rs. 10 in respect of each ordinary share so surrendered." <p.m> </p.m> Amount Rs.
6. Consideration for purchase of sundry assets of Messrs G. F. Kellner and Company Ltd 31,26,000 Less: Cost of shares of G. F. Kellner and Company Limited, which under agreement between the appellant (assessee) and the com--pany may be considered as payment of Rs. 31,23,844 of above consideration31,23,006 Balance 2,994 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 assets-side which is exempt from computation of not wealth and is not liable to wealth tax under section 5(1)(xix) and that the liability of Rs. 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 consider--ation 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 goodwill, 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 Rs. 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 Rs. 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 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.
7. 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 transactions 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 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 sub--mission at the bar, we may notice the statutory provisions which bear on them.
8. Section 3 is the charging section. It says that there shall be charged for every assessment year a tax in respect of the not 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 not 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: "(2) (m) `not 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 not 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; . . . . ."
9. 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, 1930. 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 Keliners. 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 tax. 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, was 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.
10. 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.
11. 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 the 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.
12. 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. 2,994 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 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 assessm ents. This argument over--looks 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 is 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 means 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 rights and liabilites. The share capital of each 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 told on behalf of the revenue that there has not been any reduction or alteration in the capital structure of Kellner.
13. It is well settled that an incorporated company is a legal person and it cannot be equated to its shareholders. The position continues to be the same even if the number of the shareholders is reduced to one by accident or otherwise. The act of the company cannot, therefore, be regarded as that of any of the shareholders 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.
14. The effect of the incorporation has been noticed by Gower on Modern Company Law second edition, and he says that 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 member; 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 at page 193 the following passage from Devlin, J., in Bank Poor Handel en Scheepvaart N. V v. Slatford ((1953) 1 Q B 20 "No doubt the Legislature can forge a sledgehammer 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."
15. Tata Engineering and Locomotive Co. Ltd. v. State of Bihar ((1964) 34 Comp. Cas. 458) was not concerned with taxation but in considering the question whether by piercing through the veil of the corporate character of a company and from the standpoint of its shareholders, 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 as page 674: "Thus, at present, the judicial approach in cracking open the corporate shell is somewhat cautious and circumspect. It is only where the legislative provisions 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 conclusions, 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 a corporation is lifted by judicial decisions and the shareholders are held to be the persons who actually work for the corporation."
16. Beyond this, the few cases cited before us to 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 shareholder 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 K B 505), there was an English company carrying on business in the United Kingdom which owned 98 percent. Of the shares in a foreign company. Naturally that shareholding gave the English company a pre-pondering 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 & 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. Balasubrah--manyan for the revenue invited our attention to Commissioner of Income-tax v. Sri Meenakshi Mills Ltd. ((1967) 63 I T R 609 (SC)), 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."
17. That case proceeded on the special facts, namely, Sri Thyagaraja Chettiar, who was the moving figure both in the bank and in each of the assessee-companies 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 not 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 liquidation of the liability of the assessee to Kellners. Even today Kellners can make a demand for repayment of the debt owed by the assessee. The assessee 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 the assessee and again only in the event of Kellners going into voluntary liquidation.
18. We are, therefore, of opinion that the assessee is entitled to deduction of the liability of Rs. 31,26,000 in the computation of its not wealth. We accordingly answer the question referred to us in favour of the assessee with costs. Counsel's fee Rs. 250.