Holding

While the corporate veil may be lifted to determine identity of interest, in the present case the Tribunal's order to investigate shareholdings was of no effect, and the appeal was allowed, setting aside the Tribunal's judgment.

Summary

Calcutta Chromotype Ltd., a manufacturer of playing cards, sold its entire output to its sole distributor, M/s Ganga Saran & Sons Pvt. Ltd. Both companies had common directors and their shares were held by members of the Sharma family. The Assistant Collector of Central Excise treated the distributor as a "related person" under Section 4(4)(c) of the Central Excises and Salt Act, 1944 and levied duty on a higher value, a decision affirmed by the Collector (Appeal) and the Appellate Tribunal, which also directed a detailed break‑up of family shareholdings. On appeal, the Supreme Court examined the meaning of "related person", held that the corporate veil may be lifted to ascertain identity of interest, but observed that the Tribunal’s order to investigate shareholdings was futile given the lapse of time and the fact that the department had not treated the distributor as a related person in subsequent years. Consequently, the Court set aside the Tribunal’s judgment and allowed the appeal.

Issues considered

Whether the sole distributor is a "related person" of the manufacturer under Section 4(4)(c) of the Central Excises and Salt Act, 1944.
Whether the corporate veil can be lifted to determine identity of interest for excise valuation purposes.
Whether the Appellate Tribunal's direction to ascertain the break‑up of family shareholdings should be given effect in view of the elapsed time and subsequent departmental practice.

Legislation cited

Central Excises and Salt Act, 1944s. 4(1), s. 4(4)(c)
Indian Evidence Act, 1872s. 114

Subjects

related personcentral excise valuationcorporate veilidentity of interestSection 4 Central Excise Actexcise dutyshareholdingtax avoidance

Judgment

A CALCUTTA CHROMOTYPE LTD.
v.
COLLECTOR OF CENTRAL EXCISE, CALCUTTA ...
MARCH 31, 1998
B
[MRS. SUJATA V. MANOHARAND D.P. WADHWA, JJ.]

Central Excises and Salt Act, 1944-Section 4(1) (a), proviso (iii) and
Section 4(4)(c)-Two different companies held by same family-Proper
C valuation of excisable goods- "Related person "-Meaning of-Held,
Manufacturer and buyer should not be related persons and that price of the
goods should be the sole consideration for sale.

Corporate /aw-Lifting of corporate veil-Held, no bar to as certain
relationship of manufacturer and buyer-Also as certain any direct or indirect
D interest between them-However, no broad principle can be laid down.
Words and Phrases- "Related Person "-Meaning of in the context of
Central Excises and Salt Act, I 944-Section 4.

The Appellant company manufactures playing cards, and sells the
E entire stock to their sole distributors. The Assistant Collector, Central
Excise levied duty at the price at which the playing cards were sold by the
appellant company to its sole distributor, as the sole distributor was "related
person" within the meaning of Section 4(4)(c) of the Central Excises and
Salt Act. Collector of Appeal~ confirmed the order of the Assistant Collector
holding that the sole distributor was a related person of the appellant. The
F
appellant filed a revision application before the Appellant Tribunal which
upheld the order of the Collector of Appeals as there was identity of interest
between the appellant-manufacturer and the sole distributor and held, that
the Assistant Collector had not considered the break-up of the shares of
each member of the family. Therefore, the matter was remanded to the
G Assistant Collector to consider the break-up and if satisfied of the test of
identity then to confirm the order.
In appeal to this Court it was contended on behalf of the appellant that '"'-,
to be a related persons, they must have direct or indirect interest in the
H business of the assessee and in the instant case both the companies are
570 A
CALCUTTA CHROMOTYPE LTD. v. C.C.E. 571

independent and deal with each other at arms length; that the joint holding A
of shares by the same family was a weak test to determine identity of
interest; that there has bee.n no allegation, finding or evidence to show that
the two companies were not independent or one was giving favourable
treatment to the other; and that the department in the subsequent years, did
not consider the sole distributor as a related person. B
Allowing the appeal, the Court
HELD : 1. When the same family is holding the shares of the
manufacturing company and the buyer, then in order to valuate the excise,
identity of interest of each other needs to be as certained, which can be done C
by the lifting of the corporate veil by the Court or the Statutory Authority.
(575-F)
2.1. Under Section 4(1) of the Central Excises and Salt Act, 1944, the
value of excisable goods shall not be the normal price, which is the price at
which goods are ordinarily sold by the assessee to a buyer, if the buyer is D
a "related person" and price is not the sole consideration for sale.
(584-D-EJ
2.2. Section 4 of the Act :novides for valuation of excisable goods for
purposes of charging of duty of excise. ·Negatively put, it will not, therefore,
be the normal price for the purpose of valuation, if the buyer is a related E
person and the price is not the sole consideration for sale. [576-H; 578-F!
3. The principle that a company under the Companies Act, 1956 is a
separate identity and therefore, where the manufacturer and the buyer are
two separate companies, they cannot, than anything more, be 'related persons'
within the meaning of clause (c) of Sub-Section (4) of Section 4 of the Act, F
is not of universal application. There is no bar on the authorities to lift the
veil ofa company, whether a manufacturer or a buyer to see that it was not
wearing that mask of not beir.g treated as related person when, infact both
the manufacturer and the buyer are the same persons. (581-D)
4. It is not only that both the manufacturer and the buyer, are associated G
with each other for which corporate veil may bt lifted to see who is behind
..)-., it but also that they should have interest, directly or indirectly, in the
business of each other. But once it is foum:I that the persons behind the
manufacturer and the buyer are same, it is apparent that the buyer is
associated with the manufacturer, i.e., the assessee and then regard being H
572 SUPREME COURT REPORTS [1998) 2 S.C.R.

A had to the common course of natural events, hmmm conduct and public and
private business, it can be presumed that they have interest, directly or
indirectly, in the business of each other. However, it is difficult to lay down
any broad principle to hold as.to when corporate veil should be lifted or if
in doing that, would it be said that the assessee and the buyer are related
B persons. That will depend on the fact_s and circumstances of each case and
it will have to be seen who is calling the shots in both the assessee and the
buyer. When it is the same person, the third proviso to clause (a) of Section
4(i) of the Act shall apply. The excise authorities are never barred from
probing further to find out who is the person behind the two companies of
C which one is the mamif!)cturer of excisable goods and the other is the buyer
of those goods, and both the companies are incorporated by the same person,
as any other interpretation may be a narrow one which cannot be accepted.
[584-F-HJ
5. In the instant case the authorities and the Appellate Tribunal did
D address themselves to the basic question as to the share holdings of both,
the assessee and the buyer. It was found that the shares of both the companies
were held by the member~ of the 'Sharma Family'. The Appellate Tribunal
was partly right in giving the direction to as certain the break-up of the
shares of each member of the family in the two companies. To lift the veil
E the actual share holding of both the companies and the persons in control
of management of both the companies needed to be ascertained to consider
"Identity of interest". However, the authorities have not treated the appellant .
and its sole distributor, as related persons which fact has not been controverted
by the respondent and the authorities have accepted the price at which the
F goods are sold by the assessee to the sole distributor as the sole consideration
for sale. The matter pertains to the year 1976 and the order of the Assistant
Collector is of the year 1978. At this late stage no purpose would be served
to inquire into the share holdings of the assessee, the appellant and its sole
distributor. No effect can therefore be given to the judgment of the Appellate
G Tribunal. [585-E-H; 586-A]

Union of India & Ors. v. ATIC Industries Ltd., [19841 3 SCC 575;
Collector of Central Excise, Madras v. TI. Millers Ltd., Madras; and T.I. "-.
Diamond Chaia, Madras, [1988) Supp. SCC 361; Show White Industrial
Corporation v. Collector of Central Excise, (1989) 41 ELT 360 SC; Mis
H Mcdowel and Company Ltd. v. Commercial Tax Officer, [1985) 3 SCC 230;
CALCUTTA Cl-IROMOTYPE LTD. v. C.C.E. [D.P. WADl-IWA . .I.] 573

Tata Engineering and Locomotive Company Ltd. v. State of Bihar & Ors., A
11964] 6 SCR 885 and Life Insurance Corporation of India v. Escorts Ltd
& Ors., 119861 1 SCC 264, relied on.

Mahalakshmi Glass Works Ltd. v. Collector of Central Excise, (1991)
53 ELT 120 (T~ibunal) and Weikfield Products Ct. (India) v. Collector of
Central Excise, (1993) 63 ELT 672 (Tribunal), held inapplicable. B
Salmon v. A. Salmon & Co. Ltd., (1897) AC 22 HL and /RC v. Duke of
West Minister, (1936) AC 1, referred to.

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 241-42 C
of 1991.

From the Judgment and Order dated 30.10.89, 30.7.90 of the Customs
Excise ar.cf Gold (Control). Appellate Tribunal, New Delhi in A. No. E/Bomf
No. 483/81A, 13/90-A.

Dushyant Dave, Ms. Manju Mishra and K.J. John for the Appellant.
D

S.D. Sharma and V.K. Vema for the Respondent.

The Judgment of the Court was delivered by

D.P. W ADHW A. J. M/s. Calcutta Chromotype Ltd. has filed this appeal E
against the order dated October 30. 1989 of the Custom, Excise and Gold
(Control) Appellate Tribunal; New Delhi, (for short 'Appellate Tribunal'). By
this judgment the Appellate Tribunal while upholding the order of the Collector
of Appeals observed that though there was an identity of interest between
the appellant, manufacturer and Mis. Ganga Saran & Sons Pvt. Ltd., its sole F
distributor, the Assistant Collector had not considered the break up of the
shares of each member of the family of the manufacturer and distributor. The
Appellate Tribunal held that the fact that there was identity of interest was
the determining fa.::tor in holding whether a person is a related person within
the meaning of Section 4(4) (c) of the Central Excise and Salt Act, 1944 (for G
short 'the Act'). Since the Assistant Collector had not considered the break
up of the shares of each member of the family comprising the two companies
being the manufacturer and the distributor, the Tribunal remanded the matter
to the Assistant Collector to consider the break up of the shares of each
member of the family and if the "test of identity" was satisfied, he should
confirm the order. H
574 SUPREME COURT REPORTS [1998] 2 S.C.R.

A The appellant manufactures playing cards. It sells the entire stock of
playing cards manufactured by it to its sole distributor Mis. Ganga Saran &
Sons Pvt. ltd. The Assistant Collector, Central Excise under the Act levied
duty at the price at which the playing cards were sold by Mis. Ganga Saran
& Sons Pvt. Ltd. as according to the Assistant Collector it was related person
B within the meaning of Section 4(4) (c) of the Act of the appellant. Collector
of Appeal confirmed the order of the Assistant Collector also holding that
Mis. Ganga Saran & Sons Pvt. Ltd. was the related person of the appellant.·
Against the order of the Collector the appellant filed a revision application
under Section 36 of the Act, prior to its amendment, and thereafter the
C revision application was transferred to the Appellate Tribunal and heard as
appeal.

The Assistant Collector, Central Excise found. that both the appellant
and its sole distributor were limited companies registered under the Companies
Act, 1960. He found that the Board of Directors of both these companies were
D constituted:

"Appellant

I. Shri Narendra Sharma, Managing Director

E 2. Smt. Brahma Devi, Director

3. Smt. Indu Sharma, Director

Mis. Ganga Saran & Sons Co.

F I. Shri Narendra Sharma, Managing Director

2. Smt. Brahma Devi, Director

3. Shri Brajendra Sharma, Director

.G 4. Shri Rajendra Sharma, Director"

Assistant Collector also found that shares of the appellant and its sole
distributor were held by the members of the Sharma family, i.e., persons who
were related to each other and that both the companies were having the
common Managing Director and further that the appellant was selling the
H goods with the brand name of its distributor, namely, Mis. Ganga Saran &
CALCUTTA CHROMOTYPE LTD. v. C.C.E. [D.P. WADHWA, J.] 575

Sons Pvt. Ltd. It was contended before the Tribunal that both the companies A
were registered under the Companies Act and were separate legal entitles and
therefore, could not be considered as related persons. It was submitted that
having the common Director was not the determining factor to hold that
Mis. Ganga Saran & Sons Pvt. Ltd. was a related person and further that the
fact that the manufacturer was printing the name of the buyer and was selling B
the entire product to the buyer also did not make the buyer a related person.
It was also submitted that the authorities below had failed to establish that
Mis. Ganga Saran & Sons Pvt. Ltd. had been accorded a favourable treatment
and that, in fact, low price had been charged on that account. The appellant
said that in the absence of any such evidence it was not correct to hold that C
the price at which Mis. Ganga Saran & Sons Pvt. Ltd. sold the product was
the price for the purpose of determining the assessable value.

The Appellate Tribunal was also of the view with reference to Section
4(4) (c) of the Act that if a person is so associated with the assessee that D
they have interest in the business of each other then the person was a related
person of the other within the meaning of the Section. Appellate Tribunal
noted that Collector (Appeal) had held that the appellant as well as M/s.
Ganga Saran & Sons Pvt. Ltd. were started and established by G.S. Sharma
and his family members and further that Assistant Collector had found that E
the shares of the appellant and the shares of the buyer company were held
by the members of the same Sharma family and, thus, by the persons that who
were related to each other. The Appellate Tribunal referred to the decision of
this Court in Mohan/al Magan Lal Bhavsar (Deseaced) through LRs. and
Ors. v. Union ofIndian and Ors., (1986) 23 ELT 3, and also to its own decision F
in Diamond Clock Manufacturing Co. Ltd. v. CCE. Pune, (1988) 34 EL T 662,
where it interpreted the definiti<?n of related person. Relying on these two
decisions as applicable to the facts of this case, the Appellate Tribunal was
of the view that there was identity of interest and M/s. Ganga Saran & Sons
Pvt. Ltd was related person within the meaning of Section 4( 4 )(c) of the Act. G
The Appellate Tribunal disposed of the appeal with the directions aforesaid.

Mr. Dave, learned counsel for the appellant, contended that the Appellate
Tribunal erred in holding that the appellant and M/s. Ganga Saran & Sons
Pvt. Ltd. were related persons or that there was an identity of interest between H
576 SUPREME COURT REPORTS [1998) 2 S.C.R.

A the two. He said the two judgments, one of Supreme Court and other of the
Appellate Tribunal itself on which the Appellate Tribunal relied were not
applicable inasmuch as facts in the said two cases were entirely different and
decisions were clearly distinguishable. He said that in order to be a related
person within the meaning of Section 4(4) (c) of the Act the person all~ged
B to be related must have interest, direct or indirect, in the business of the
assessee and that in the present case both the appellant and its buyer were
private limited companies established much before the imposition of the
excise duty on playing cards and had been dealing with each other .at arm's
length. He said there was no evidence before the Appellate Tribunal as to the
C shareholding in each of the two companies and to say that shareholdings
were held by Sharma family was a misnomer and that such a fragile test could
not be applied to test the identity or mutuality of interest. Mr. Dave said that
the Appellate Tribunal came to a wrong conclusion on prima facie holding
that Sharma family controlled both the companies. Sharma family is a vague
D term and did not reflect as to what was the exact shareholding of the members
in both the companies and how they were related to each other. Lastly, Mr.
,...
Dave submitted that there was no allegation and no finding ever recorded that
the dealings between the appellant and its distributor were not at arin's length
or that prices at which the goods were sold to the distributor were ex.ceptionally
E low, having been influenced by some extra commercial consideration. Mr.
Dave said that the Appellate Tribunal did not examine the whole facts of the
case and law applicable thereto in proper perspective and that led it to give
directions which are incorrect and these were now being impugnei:I.

F Mr. Dave also submitted that for subsequent years the Department took
the view that the buyer was not a related person. He also cited a few "-
judgments of this Court in support of his submissions. Before we refer to
these judgments, we may reproduce the relevant provisions of Section 4 of
the Act:
G
"4. Valuation of excisable goods for purposes of charging of duty of
excise:-

(1) Where under this Act, the duty of excise is chargeable on any
excisable goods with reference to value, such value shall, subject to
H
CALCUTT A CHROMOTYPE LTD. v. C.C.E. [D.P. WADHWA, J.] 577

the other provisions of this section be deemed to be- A
(a) the normal price thereof, that is to say, the price at which such
goods are ordinarily sold by the assessee to a buyer in the
course of wholesale trade for delivery at the time and place .of
removal, where the buyer is not a related person and the price B
is the sole consideration f.or the sale:

Provided that-

(i)

(ii) ... c
(iii) where the assessee so arranges that the goods are generally not
sold by him in the course of wholesale trade except to or through
a related person, the normal price of the goods sold by the
assessee to or. through such related person shall be deemed to
be the price at which they are ordinarily sold by the related D
person in the course of wholesale trade at the time of removal,
to dealers (not being related persons) or where such goods are
not sold to such dealers, to dealers (being related persons) who
sell such goods in retail ;
E
(b) ...

(2) ...

(3) ...

(4) or the purpose of this section:- F
(a) "assessee" means the person who is liable to pay the duty of
exeise under this Act and includes his agent;

(c) "related person" means a person who is so associated with the
assessee that they have interest, directly or indirectly, in the G
business of each other and includes a holding company, a
subsidiary company, a relative and a distributor of the assessee,
and any sub-distributor of such distributor.

Explanation.-In this clause "holding company", "a subsidiary
H
578 SUPREME COURT REPORTS [1998] 2 S.C.R

A company" and "relative" have the same meanings as in the
Companies Act, 1956;

(d) ...

(e) "
B
Negatively put, it will not, therefore, be normal price for the purpose of
valuation, if the buyer is a related person and the price is not the sole
consideration for sale. Both the conditions must co-exist so that the price at
which the manufactured goods are sold by the assessee to the buyer is taken
C as the value for the purpose of assessment of duty of excise. As to who is
a "related person" within the meaning of clause (c) of Section 4(4), this Court
in Union of India & Ors. v. ATIC Industries Ltd., [1984] 3 SCC 575, said:

"What the first part of the definition requires is that the person who
is sought to be branded as a 'related person' must be a person who
D is so associated with the assessee that they h,ave interest, directly or
indirectly, in the business of each other. It is not enough that the
assessee has an interest direct or indirect, in the business of the
person alleged to be a related person nor is it enough that the person
alleged to be a related person has an interest, direct or indirect, in the
E business of the assessee. It is essential to attract the applicability of
the first part of the definition that the assessee and the person alleged
to be a related person must have interest~ direct or indirect, in the
business of each other. Each of them must have a direct or indirect
interest in the business of the other. The equality and degree of
F interest which each has in the business of the other may be different;
the interest of one in the business of the other may be direct, while ~-
the interest of the latter in the business of the former may be indirect.
That would not make any difference, so long as each has got some
interest, direct or indirect, in the business of the other."
G
This was followed in subsequent cases in Collector of Central Excise,
Madras v. T.J. Millers Ltd. Madras and T.I. Diamond Chain, Madras, [1988]
S~pp. SCC 361; Snow White Industrial Corporation v. Collector of Central
Excise, (1989) 41 ELT 360 SC. It was also pointed out that this Court in a
H special appeal ( Civil Appeal No. 9850/95, decided on April 4, 1996) filed
CALCUTTA CHROMOTYPE LTD. v. C.C.E. [D.P. WADHWA, J.] 579
against the order of the Appellate Tribunal had dismissed the same where the A
Appellate Tribunal had held that mere commonness of partners and Directors
between the buyer and seller was not sufficient to treat the buyer as a 'related
person' even if entire production was sold through them. We have examined
the file of C.A. 9850195. What was find is that the appeal was filed by the
Revenue which was barred by limitation and delay was condoned subject to B
.... payment of cost Rs. 500 payable within four weeks to the counsel for
_.. respondents. Since the cost had not been paid the appeal was dismissed by
order dated April 4, 1996. This dismissal of the appeal, therefore, does not
help the appellant. The Appellate Tribunal in the order, which was impugned
in CA 9850195, found that the assessee had sold 95 out of 96 are lamps to c
a company of which one of the partners of the assessee firm was a director.
On this Department took the view that the company was a related person and
sought to assess the goods at a higher price at which the assessee sold the
goods to the buyer company. Appellate Tribunal was of the view that merely
because there was some common directors between the assessee and the D
company that itself would not be sufficient ground for holding that both were
'i' related persons. Appellate Tribunal found that no evidence regarding mutuality
of interest had been brought on record except the sale of goods by the
assessee to the buyer company. It said that while this fact of sale may create
one way interest of the company in the business of the assessee firm it was E
not indicative of the interest of the assessee in the . business of the buyer
company.

Reference was also made to two orders of the Appellate Tribunal in
Mahalakshmi Glass Works Ltd, v. Collector ofCentral Excise, [1991 (53) ELT F
120 (Tribunal)] and Weikfield Products Co. (India) v. Collector or Central
Excise [1993 (63) ELT 672 (Tribunal)]. In the first case, three out of four
Directors of the assessee were also the Directors of its whole sale buyer
Mis. Western India Class Works. The Tribunal noticed that it was not the
case of the department that sales to customers other than to Mis. Western G
India Glass Works were at prices different from prices of sales to Mis Western
India Glass Works. The Appellate Tribunal held that in the absence of any
,,.,;...., other factor like mutuality of interest, commonness of some Directors was not
sufficient to constitute relationship between the two companies which were
common independent corporate legal entitles. In the second case, the assessee H

..
580 SUPREME COURT REPORTS [1998) 2 S.C.R..

A sold its goods through two broad channels, viz., directly to Canteen Stores
Department and to the Weikfield Central Marketing Organisation. While 20%
discount was allowed to Canteen Stores Department, 30% discount was
allowed to Weikfield Central marketing Organisation. Assessee justified the
reason for allowed higher discount in one case because the department was
B of the view that transaction between the assessee and the Weikfield Central
Marketing Organisation could not be treated as at arms length in view of the
fact that most of the partners in the firm were close relatives of the Directors
of the assessee which was a company company under the Companies Act,.
1956. The appellate Tribunal was of the view that the assessee being a
C corporate concern and Weikfield Central Marketing Organisation a partnership
concern, the latter could not be called a relative of the assessee and to
consider Weikfield Central Marketing Organisation as a favoured buyer, there
must be sufficient proof to show that specifically low price was charged.

D Mr. Sharma, counsel for the Revenue, referred to a decision of this
Court in Mohan/al Magan/al Bhavsar (Deceased) through LRs. & Ors., v.
· Union of India & Ors., (1986) 23 EL T 3 SC. In this case one of the pleas raised 'r
by the appellant was that the High Court was not correct in holding that the
wholesale price of the preparations of the appellant could not be taken for
E the purpose of valuation under Section 4 of the Act at the price at which
these were supplied to Mis M.B. Bhavsar & Sons, Chief Distributor of the
appellant. This Court observed as under:

"The next contention of the Appellants, which was also negatived by
the High Court, was that in determining the value of the medicinal
F
preparations for the purpose of levying excise duty thereon the
authorities erred in taking the wholesale price of the said preparations
and not the price at which these preparations were supplied by the
said firm to their Chief Distributor Messrs. M.B. Bhavsar & Sons. In
order to test the correctness of this contention it is necessary to set
G
out a few facts which are material to this aspect of the case. The firm
of Messrs. M.B. Bhavsar & Sons, though a separate partnership firm,
was in fact a firm in which not only the original a First Appellant and -4.
Appellants Nos. 2 and 3 were partners but a son of each of them was "
also a partner. There was thus identity of interest between the firm of
H
CALCUTTA CHROMOTYPE LTD. v. C.C.E. [D.P. WADHWA, J.] 581

Messrs. M.B. Bhavsar & Sons and the finn M/s. Bhavsar Chemical A
Works. Both these firms had their offices in the same premises and
under the partnership agreement the sons of the original First
Appellant and the other two Appellants were to share only in the
profits of Messrs. M.B. Bhavsar & Sons but not to be liablr. for any
losses. These two firms, therefore, cannot be said to be at ann 's B
length or independent parties and the prices at which the medicinal
preparations were supplied by Bhavsar Chemical Works to Messrs.
M.B. Bhavsar & Sons cannot be taken to be the real value of the said
preparations. The High Court was, therefore, right in rejecting this
contention also." c
.!

The principle that a company under the Companies Act, 1956 is a
separate entity and, therefore, where the manufacturer and the buyer are two
separate companies, they cannot, than anything more, be 'related persons'
within the meaning of clause (c) of sub-section (4) of Section 4 of the Act D
is not of universal application. Law has travelled quite a bit after decision of
the House of Lords in the case of Salomon v. Salomon ( 1897) AC 22. This
is how this Court noticed in Tata Engineering and Locomotive Company Ltd.
v. State of Bihar & Ors., [1964] 6 SCR 885.

"The true legal position regar~ to the character of a corporation or a E
company which owes its incorporation to a statutory authority, is not
in doubt or dispute. The corporation in law js equal to a natural
person and has a legal entity of its own. The entity of the corporation
is entirely separate from that of its shareholders; it bears its own name
and has a seal of its own; its assets are separate and distinct from F

..
those of its members; it can sue and be sued exclusively for its own
purpose; its creditors cannot obtain satisfaction from the assets of its
members; the liability of the members or shareholders is limited to the
capital invested by them; similarly, the creditors of the members have
no right to the assets of the corporation. This position has been well- G
established ever since the decision in the of Salomon v. Salomon &
Co., (1897) A.C. 22 H.L., was pronounced in 1987; and indeed, it has
always been the well recognised principle of common law. However,
in the course of time, the doctrine that the corporation or a company
has a legal and separate centity of its own has been subjected to H
582 SUPREME COURT REPORTS [1998) 2 S.C.R.

A certain exceptions by the application of the fiction that the veil of the
corporation can be lifted and its face examined in substance. The
doctrine of the lifting of the veil thus marks a change in the attitude
that law had originally adopted towards the concept of the separate
entity or personality of the corporation. As a result of the impact of
B the complexity of economic factors, judicial decisions have sometimes
recognised exceptions to the rule about the juristic personality of the
corporation. It may be that in course of time these exceptions may J-
grow in number and to meet the requirements of different economic
problems, the theory about the personality of the corporation may be
C confined more and more.

In life /!fSurance Corporation of India v. Escorts Ltd. & Ors., [ 1986) I
SCC 264, this Court again considered this question and said:

"While it is firmly established ever since Salomon v. A, Salomon &
D Co. Ltd. (1897) AC 22 HL, was decided that a ·company has an
independent and legal personality distinct from the individuals who -r-
are its members, it has since been held that the corporate veil may be
lifted, the corporate personality may be ignored and the individual
members recognised for who they are in certain exceptional
E circumstances. Pennington in his Company Law (4th Ed.) states~

"Four inroads have been made by the law on the principle of
separate legal personality of companies. By far the most extensive
of these has been made by legislation imposing taxation. The
F government, naturally enough, does not willingly suffer schemes
for the avoidance of taxation which depend for their success on
the employment of the principle of separate legal personality,
and in fact legislation has gone so far that in certain
circumstances taxation can be heavier if companies are employed
G by the taxpayer in an attempt to minimise his tax liability than
if he uses other means to give effect to his wishes. Taxation of
companies is a complex subject, and is outside the scope of this
book. The reader who wishes to pursue the subject is referred
to the many standard text books on Corporation Tax, Income
H Tax, Capital Gains Tax and Capital Transfer Tax.
CALCUTTA CHROMOTYPE LTD. v. C.C.E. [D.P. WADHWA, J.] 583

The other inroads on the principle of separate corporate A
personality have been made by two sections of the Companies
Act, 1948, by judicial disregard of the principle where the
protection of public interests is of paramount importance, or
where the company has been formed to evade obligations
imposed by the law, and by the courts implying in certain cases B
that a comp!lny is an agent or trustee for its members.
,(__
In Palmer's Company Law (23rd Ed), the present position in England
is stated and the occasions when the corporate veil may be lifted have
been enumerated and classified into fourteen categories. Similarly in
Gower's Company Law (4th Ed.), a chapter is devoted to 'lifting the c
veil' and the various occasions when that may be done are discussed.
In Tata Engineering and locomotive Co. Ltd. [1964] 6 SCR 885, the
company wanted the corporate veil to be lifted so as to sustain the

.. maintainability of the petition, filed by the company under Article 32
of the Constitution, by treating it as one filed by the shareholders of D

' the company. The request of the company was turned down on the
ground that it was not possible to treat the company as a citizen for
the purposes of Article 19. In CIT v. Sri Meenakshi Mills Ltd., AlR
(1967) SC 819, the corporate veil was lifted and evasion of in.come tax
prevented by paying regard to the economic realities behind the legal E
facade. In Workmen v. Associated Rubber Industry Ltd. (1985] 4 SCC
114, resort was had to the principle of lifting the veil to prevent
devices to avoid welfare legislation. It was emphasised that regard
must be had to substance and not the form of a transaction. Generally
and broadly speaking, we may say that the corporate veil may be lifted F
.... where a statute itself contemplates lifting the veil, or fraud or improper
conduct is intended to be prevented, or a taxing statute or a beneficent
statute is sought to be evaded or where associated companies are
inextricably connected as to be, in reality, part of one concern. It is
neither necessary nor desirable to ·enumerate the classes of cases
G
where lifting the veil is permissible, since that must necessarily depend
,,,..;.... on the relevant statutory or other provisions, the object sought to be
achieved, the impugned conduct, the involvement of the element of
the public interest, the effect on parties who may be affected etc."

In Mis Mcdowel and Company Ltd. v. Commercial Tax Officer, [1985] H
584 SUPREME COURT REPORTS [1998] 2 S.C.R.

A 3 SCC 230 = (1985) ! 54 ITR 148, this Court examined the concept of tax
avoidance or rather the legitimacy of the art of dodging tax without breaking
the law. This Court stressed upon the need to make a departure from the
Westminster principle based upon the observation of Lord Tomlin in the case
of !RC v. Duke of Westminster, (1936) AC 1 that every assessee is entitled to
B arrange his affairs as to not attract taxes. The Court said that tax planning may
be legitimate provided it is within the framework of law. Colourable devices,
however, cannot be part of tax planning. Dubious methods resorting to artifice
or subterfuge to avoid payment of taxes on what really is income can today
no longer be applauded and legitimised as a splendid work by a wise man but
C has to be condemned and punished with· severest of penalties. If we examine
the thrust of all the decisions, there is no bar on the authorities to lift-the veil
of a company, whether a manufacturer or a buyer, to" see it was not wearing
that mask of not being treated as related person when, in fact, both, the
· manufacturer and the buyer, are in fact the same persons. Under sub-section
D (I) of Section 4 of the Act, value of the excisable goods shall not be deemed
to be normal price thereof, i.e., the price at which such goods are ordinarily
sold by the assessee to a buyer in the course of wholesale trade for delivery
at the time and place of removal, if the buyer is a related person and price
is not the sole consideration for sale. As to who is a related person, we have
. .E to see its definition .in Section 4(4) (c) of the Act. It is not only that both,
the manufacturer and the buyer, are associated with each other for which
corporate veil may be lifted to see who is behind it but also that they should
have interest, directly or indirectly, in the business of eacli other. But once
it "is found that persons behind the manufacturer and the buyer are same, it
is apparent that buyer is associated with the manufacturer, i.e., the assessee
F and then regard being had to the common course of natural events, human
,.....
conduct and public and private business it can qe presumed that they have
interest, directly or indirectly, in the business of each other (refer Section 114
of the Evidence Act). It is, however, difficult to lay down any broad principle
to hold as to when corporate veil should be lifted or if on doing that, could
G it be said that the assessee and the buyer are related persons. That will
depend upon the facts and circumstances of each case and it will have to be
seen who is calling the shots in both the assessee and the buyer. When it
is the same person the authorities can certainly fall back on the third proviso
to clause (a) of Section 4(1) of the Act, to arrive at the value of the excisable
H goods. It cannot be that when the same person incorporates two companies

,.
CALCUTTA CHROMOTYPE LTD. v. C.C.E. [D.P. WADHWA, J.] 585
of which one is the manufacturer of excisable goods and other is the buyer A
of those goods, the two companies being separate legal entities the excise
authorities are barred from probing anything further to find out who is the
person being these two companies. It is difficult to accept such a narrow
interpretation. True that shareholdings in a company can change by that is
the very purpose to lift the veil to find out if the two companies are associated B
with each olher. Law is specific that when duty of excise is chargeable on the
goods with reference to its value than !he normal price on which the goods
are sold shall be deemed to be !he value provided ( 1) the buyer is not a related
person and (2) the price is the sole consideration. It is a deeming provision
and the two conditions have to be satisfied for the case is to fall under clause C
(a) of Section 4(1) keeping in view as to who is the related person within the
meaning of clause (c) of Section 4(4) of the Act. Again if the price is not the
sole consideration, then again clause (a) of Section 4(1) will not be applicable
to arrive at the value of the exci.sable goods for the purpose of levy of duty
of excise.
D
In the present case, we do find that the aulhorities of and the Appellate
Tribunal did address lhemselves to the basic question as to the shareholdings
of both, the assessee and the buyer, inasmuch as they found that the Managing
Director of both the companies was the same and one more director was
common. It was also found that the shares of bolh !he companies were held E
by the members of the 'Sharma family' but that is quite a vague expression
and, lherefore, in our view, !he Appellate Tribunal was partly right in giving
the direction to ascertain the break-up of !he shares of each member of the
family in the two companies. To lift the veil the actual shareholding of both
!he companies and !he persons in control of the management of both the F
companies needed to be ascertained to consider the identity of interest of
bolh the companies in !he business of each other. No presumption of such
mutuality of interest in. the business of each other could have been drawn
without the factual data.

However, in the present case, we are told that for subsequent years, the
G
aulhorities have not treated Mis, Ganga Saran & Sons Pvt. Ltd., the sole
distributor of the appellant, as a related person which fact has not been
. controverted by !he respondent and have accepted the price at which the
goods are sold by the assessee to !he sole distributor as the sole consideration
for sale. The matter pertains to !he year 1976. Order oflhe Assistant Collector H
586 SUPREME COURT REPORTS [1998] 2 S.C.R.

A is :if the year 1978. We do not think at this late stage any purpose will be
served to inquire into the shareholdings of the assessee, the appellant and
its sole distributor as directed by the Appellate Tribunal. We are, therefore,
inclined to hold that no effect be given to the judgment of the Appellate
Tribunal.
B
Accordingly, the appeals are allowed and the impugned judgment of the
Appellate Tribunal is set aside. There will be no order as to costs.

A.Q. Appeals allowed.