Weldcraft Orissa Pvt. Ltd. Vs. Assistant Collector of Central Excise and anr. - Court Judgment

R.N. Misra, J.

1. Petitioner before us is a private limited Company registered under the Indian Companies Act of 1956 and engaged in manufacture of steel furniture which are excisable to duty at the rate of 20 per cent ad valorem. Government of India in the Ministry of Finance (Department of Revenue and Insurance) by notification, dated 1st of April, 1971 (Annexre 3) provided exemption to the effect that the steel furniture up to the value not exceeding rupees one lakh cleared on or before the 1st day of April in any financial year by on bahalf of a manufacturer from one or more factories for some consumption would be exempted from excise duty, provided that the exemption would not be applicable to a manufacturer whose value of steel furniture cleared in the previous financial year had exceeded rupees two lakhs. Petitioner claimed exemption and approached the Assistant Collector of Central Excise at Cuttak for an appropriate order. The said authority heard the petitioner and by order dated 27-8-1974, refused to entertain the claim of exemption holding that the petitioner and a partnership firm by the trade name 'Metalex Industries' were in fact the business of one and the same Hindu Undivided family and, therefore, the benefit of the notification in question is not available to the petitioner. This application for a writ of certiorari is directed against the said order of the Assistant Collector.

2 and 3. * * * *

4. Now we proceed to axamine the merit of the matter. Jagadish Lal, Bahul Lal and Rakesh Lal are admittedly members of a Hindu Undivided Family, These three persons constitute a partnership firm by name Matelax Industries. While this firm was functioning, these three partners with the wife of one of them and three outsiders formed themselves into a company by the name Weldcraft (Orissa) Private Ltd. (petitioner before us). It is not disputed that the petitioner Company would be entitled to the concession by way of exemption if its claim is considered independently and Metalex Industries is not brought into the picture.

5. Before the Assistant Collector, it contended on behalf of the petitioner that the Company after incorporation was a juridical person and had its own existence different from its share-holders. The Company and the firm were absolutely different. The investments made by the wife and the sons of Jagadish Lal did not flow out of the H. U. F. funds and therefore, there was no scope to take the view that the Hindu Undivided Family was the true owner of the business of the partnership firm as also of the Company. The Assistant Collector came to hold --

'From a reading of the Notification it would be apparent that the intention of the Government is to provide to small scale manufacturers some concessions by way of exemption from duty of excise so that they would be in a position to market their products in competition with the large scale manufacturers. It does not appear that this concession should be admitted to manufacturers of large scale establishments having more than one unit with the intention of availing the concession separately for each unit. The language of the notification is also very clear to emphasise the fact that the exemption is applicable to a manufacturer and not to individual factories even if they are functioning in different names. In the present case both Metalex Industries and Weldcraft (Orissa) Private Ltd. are owned by the members of the family of Sri Jagadish Lal and the benefits of both the concerns by and large go to the same family.'

6. Undoubtedly, one of the consequences of incorporation is that the Company acquires its own legal entity independent of the shareholders. As has been pointed out in the case of Mrs. Bacha F. Guzdar, Bombay v. Commissioner of Income Tax, Bombay, A.I.R. 1955 Supreme Court, 74 :--

'...There is nothing in the Indian law to warrant the assumption thot a shareholder who buys any interest in the property of the company which is a juristic person entirely distinct from the shareholders.'

It was further stated :--

'A shareholder has got no interest in the property of the company though he has undoubtedly a right to participate in the profits if and when the company decides to divide them....'

It has again been pointed out :--

'...The interest of a shareholder vis-a-vis the company was explained in the 'Sholapur Mills case--Charanjit Lal v. Union of India, A.I.R. 1951 S.C. 41 at pp. 54-55. That judgment negatives the position taken up on behalf of the appellant that a shareholder had got a right in the property of the company. It is true that the shareholders of the company have the sole determining voice in administering the affairs of the company and are entitled, as provided by the Articles of Association, to declare that dividends should be distributed out of the profits of the company to the shareholders but the interest of the shareholder either individually or collectively does not amount to more than a right to participate in the profits of the company.

The company is a juristic person and is distinct from the shareholders. It is the company which owns the property and not the shareholders....'

7. There are circumstances when the Court is entitled to lift the veil of incorporation and take stock of the actual situation. Palmer in his treatise on Company Law (21st Edn) at page 133 gives a list of instances where the veil of incorporation is lifted. They are :--

(i) Where companies are in the relationship of holding and subsidiary (or sub-subsidiary) companies;

(ii) Where a shareholder has lost the privilage of limited liability and has become directly liable to certain creditors of the company on the ground that, with his knowledge, the company continued to carry on business six months after the number of its members was reduced below the legal minimum;

(iii) In certain matters pertaining to the legal duties, death duties and stamps; (iv) In the law relating to exchange control;

(v) In the law relating to trading with the enemy the test of control is adopted;

(iv) The Court will not allow an abuse of Section 209 by the formation of a new company by members holding nine-tenths of the shares in an existing company, if the new company is formed solely for the purpose of expropriating the shares of the minority shareholders in the existing company;

(vi) The Courts have further shown themselves willing to lift the veil where the device of incorporation is used for some illegal or improper purpose.

8. In the case of Juggilal Kamapat v. Commissioner of Income. Tax, U.P. A.I.R. 1969 Supreme Court, 932, an instance of lifting the veil when the question of avoiding income-tax came up has been dealt with. In the case before us the principle of lifting the veil has been dealt with for the first time in the counter affidavit and the order of the Assistant Collector did not make mention of it We are, however, of the view that the case is not one where on the doctrine of lifting the veil, the exemption can be denied to the petitioner Company. The Company consists of seven shareholders of whom three are outsides. Undoubtedly, the three members of the family constituted a firm and went into production at Cuttack. Subsequently, the three partners together with a member of their family and three outsiders formed and incorporated a company which started production at Bhubaneswar. There is absolutely no basis for the finding that these two manufacturers the firm and the Company are two units of the Hindu Undivided Family. There is no indication that the three strangers who are shareholders in the Company are name lenders or the share money came from the family of the partners and the dividend, if any, goes to them In the circumstances, the finding of the Assistant Collector is clearly erroneous. In fact, there is no material which would justify the conclusion.

9. we accordingly allow the write application, quash the order of the Assistant Collector and hold that the petitioner would be entitled to the exemption in question provided other requisite conditions in the Government notification and appropriate Rules are satisfied. The petitioner shall have its costs. Hearing fee is assessed at rupees one hundred.