Tax Liability under Assessment of Companies :

A company is a juristic person and becomes a body corporate upon the issue of the certificate of incorporation; it is a legal person, separate and distinct from the share holders. The legal personality of a company created by the statute can also be modified by legal fiction. For the purpose of income-tax, even an unincorporated association may be declared by the Board to be a company and, consequently, what is not a legal entity in the eyes of law may be assessable as a company. Even companies which have no share capital and those which are limited by guarantee are companies for purposes of the Income-tax Act, 1961 even though the general framework of the Act mainly contemplates companies with share capital. A chamber of commerce or any association without a profit motive and registered under section 25 of the Companies Act, 19561 would be a company for income-tax purposes. The tax-liability of such non-profit making associations arises in respect of the profits from specific services to their members under section 28(iii). A company incorporated for a purpose other than that of carrying on a business, a company in liquidation, a statutory corporation, the Government of any State carrying on a trade or business would be deemed to be a company within the meaning of the Income-tax Act, 1961 for the purposes of levy and collection of tax on the business profits assessable to Income-tax. However, an assessment cannot be made on a company after it has ceased to exist and has been struck off the register of companies. Holding companies and their subsidiaries have to be separately assessed in respect of their profits since they are separate and distinct legal entities.

•  Piercing the corporate veil: Since the law does not prescribe any minimum number of shares to be held by a shareholder nor a maximum, even a one-

man company is a distinctly assessable legal entity as much as any other company. However the incometax authorities are entitled to examine the genuineness and the true nature of the connected transactions of such a company. A company being a separate legal entity, the mere fact that only one individual is beneficially interested in all the shares and that the company, in effect, acts as his agent or nominee will not, by itself make its income the income of the shareholder. However, the Assessing Officer can tax the shareholders after examining the genuineness of such one-man companies on the basis of the true nature of the transaction e.g., when dividends are disguised as loans, when the company is doing the business of the individual who controls it.

As the Supreme Court has observed in CIT vs. Shri Meenakshi Mill Ltd. (1967) 63 ITR 609, “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 a nd being subjected to duties which are not the same as those enjoyed or borne by its members. However, 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 a tax obligation”.

A foreign company or association which desires that the status of a ‘company‘ be accorded to it, for purposes of assessment under the Income-tax Act, 1961, must apply to the CBDT for such a status to be vested in it. Generally, the Board agrees to grant such a status to every foreign body corporate or association possessing the usual characteristics of a company limited by shares and having a separate legal personality recognised by the laws of the country in which the body corporate or association has its registered office. However, since the purpose in obtaining the status of company obviously is to obtain a reduction in the rate of tax at which the body corporate or association would be otherwise taxed, before any foreign body corporate or association is invested with the status of a company, the CBDT would examine the loss of revenue that such a concession would involve.

• Liability of shareholders distinct: Since the company itself is chargeable to tax on its income as a distinct taxable entity, it pays the tax in the discharge

of its own liability and not on behalf of or as the agents of the shareholders as was held by the Supreme Court in Howrah Trading Co. Ltd. vs. CIT (1959) 36 ITR 216 and Purshotamdas vs. CIT (1963) 48 ITR 206. Consequently, the shareholders whether corporate or non-corporate, are liable to tax in respect of the gross dividend (other than dividends referred to in section 115-O) without any credit for the tax assessed in the hands of the company unless a specific provision is made in the Act to the contrary. Where the tax payable by the shareholders is deducted at source from the dividends or other items of income under sections 192 to 195, the tax is deemed to have been deducted and paid by the company on behalf of the recipient shareholders of the income and credit for same shall be given to them in their individual assessments.