The Delhi High Court has held that shareholders, even if they hold the entirety of the share capital of a foreign company, cannot on that ground alone be treated as owners or beneficial owners of the company’s underlying assets, nor can the company’s rental income, capital gains, bank interest, or other income be taxed in their hands, absent a specific statutory provision permitting such taxation.
The Court further held that the doctrines of “substance over form” and piercing the corporate veil cannot be invoked by the Revenue in tax matters unless abuse, sham, fraud, tax evasion, or a tax-avoidance device is first established on facts, and in the absence of such proof, the separate legal personality of the company must be respected. Accordingly, since there was no provision in the Income-tax Act, under which the transactions in question could be taxed in the hands of the respondents, and since the attempt to pierce the corporate veil was misconceived, the Department’s appeals were dismissed.
The Division Bench comprising Justice Dinesh Mehta and Justice Vinod Kumar noted that the Assessing Officer had proceeded on an assumption that the respondents had adopted a device to avoid tax, but on examining the factual matrix, it found that the respondents had merely invested in shares of a foreign company, which itself obtained bank finance, purchased properties in the United Kingdom, earned rental income, and later sold the properties at a gain. The income was thus earned by the company and not by the shareholders personally.
The Bench approved the ITAT’s reasoning that the Revenue already knew of the overseas investments and related structure prior to the search, and that no incriminating material was found in search to justify additions. It also noticed that no evidence had been brought to show that the investments were made from undisclosed sources or that the daughters’ shareholdings were benami or beneficially held for the assessees.
The Bench reiterated that the burden to establish abuse, sham, or tax avoidance lies on the Revenue before invoking “substance over form” or piercing the corporate veil. It also emphasized that a company is a separate juristic person and a distinct legal entity from its shareholders. Even if the respondents held 100% shareholding collectively, they were owners only of the shares and not of the company’s underlying properties. Therefore, the company’s income could not ipso facto be treated as the income of the assessees; only dividend, if and when received, could be taxed in their hands.
The Bench found that the remittances for share acquisition were made through proper banking channels under the permitted LRS of the RBI, the company had also borrowed from HSBC in the United Kingdom, and applicable tax under UK law had been paid. It held that the Assessing Officer’s reliance on a general doctrine of “substance over form” was not backed by any statutory provision under the Income Tax Act.
Briefly, the core issue was whether the Assessing Officer was justified in taxing, in the hands of the respondents-assessees, the rental income and capital gains arising from properties owned by Carmichael Capital Limited (CCL), a company incorporated in the British Virgin Islands. A search was conducted on March 02, 2017 at the residence of the respondents, husband and wife, during which papers were found containing details of expenditure relating to upkeep, sale, purchase, renovation, maintenance, furnishing and leasing of certain London properties owned by CCL. The shares of CCL were held equally by the respondents and their three daughters, each having 20% shareholding.
The Assessing Officer recorded that the investment in CCL had been made by the respondents from declared sources through the Liberalised Remittance Scheme permitted by the RBI, but still concluded that the respondents were the real beneficial owners of the company’s assets and therefore liable to tax on the company’s rental income and capital gains. The assessees contended that CCL was a separate legal entity, that one daughter was an NRI during the relevant period, and that the company’s income could not be assessed in the shareholders’ hands.
The CIT(A) upheld the taxability issue against the assessees on the ground of their active involvement in acquisition and sale of the properties and the use of nominee directors, though some relief was granted on other grounds. On further appeal, the Tribunal held that the respondents were not the beneficial owners of CCL’s properties or assets, and therefore rent, capital gains, bank interest, or other income of CCL could not be assessed in their hands.
Appearances:
Advocates Puneet Rai, Ashvini Kumar, Rishabh Nangia, and Nikhil Jain, for the Appellant/ Revenue
Senior Advocate Sachit Jolly, along with Advocates Shreya Jain, Gaurav Tanwar, Abhyudaya Shankar Bajpai, and Sohum Dua, for the Respondent/ Taxpayer
