Introduction
This case is related to the Lifting of The Corporate Veil.
Facts
- The Workmen (P) of the respondent company (Associated Rubber Industry Ltd.) claimed for a bonus of 16% for the year 1969 which had been reduced to 4% by transferring the shares of INARCO Ltd. to its subsidiary company (Aril Holdings).
- The shares had been earlier bought by the respondent company. The dividend earned from the shares were mentioned in the account of the respondent company and also were calculated for the bonus given to the workmen of the respondent company.
Workmen contention
- In order to avoid payment of higher bonus, the Rubber Industry had created a subsidiary company and transferred the shares of INARCO Ltd. to it.
- We did not create this subsidiary company to avoid payment of bonus to the workmen.
- The Aril Holdings (subsidiary company) was amalgamated with the Rubber Industry in 1971. This circumstance shows that initial creation was not a device of avoidance.
Issue
- Whether the workmen will be entitled to get higher bonus ?
- Whether the subsidiary company was created for the loss of workmen?.
Case History and Ratio Decidendi
Industrial Tribunal and High Court of Gujrat
- Held. : 'The Rubber Industry' and 'Aril Holding' were independent companies with separate legal existence. Therefore, the profit made by Aril holding could not be treated as profit earned by the Associated Rubber Industry Ltd. for the purpose of computing the gross profits earned by the Rubber Industry.
- No evidence found that the transfer of shares to Aril Holding Ltd. was only a device to avoid payment of bonus to the workmen.
Ratio Decidendi of Supreme Court
- It is duty of the court, in every case where ingenuity is expended to avoid taxing and welfare legislation, to discover the truth and lift the corporate veil.
- CIT v Shri Krishna Mills - The Court is entitled to lift the veil of corporate entity and to pay regard to the economic realities behind the legal facade, in certain exceptional cases
- In the present case , A new company is created wholly
- owned by the principal company,
- with no assets of its own, except those transferred to it by the principal company and
- serving no purpose except to reduce the gross profits of the company.
- The Court found that the obvious purpose of the second company was to reduce the amount to be paid by way of bonus to the workmen.
- The appeal is allowed.
- The workmen of the Associated Rubber Industry Ltd. are entitled to be paid bonus at the rate of 16% for the year 1961.
