Delhi High Court Says 100% Shareholding Not Enough To Tax Shareholders For Company's Income

The Delhi High Court has held that shareholders, even if holding all the shares of a company, are only owners of the shares and not of the company's assets, and therefore the company's income cannot be taxed in their hands.

“Legally speaking, the respondents being shareholders of the company, even if holding all the shares (100%), are only owners of the shares of the company and not the owners of the property as such and similarly the income which that company has earned cannot ipso-facto be treated to be an income of the assessees, who are residents of India.”

A Division Bench of Justices Dinesh Mehta and Vinod Kumar dismissed a batch of appeals filed by the Income Tax Department challenging a common order of the Income Tax Appellate Tribunal, which had ruled in favour of taxpayers Pradeep Wig, Neera Wig and their family members for Assessment Years 2011–12 to 2017–18.

The case arose from a search conducted on March 2, 2017 at the residence of the taxpayers, during which documents relating to properties in London were found.

The properties were owned by Carmichael Capital Limited, a company incorporated in the British Virgin Islands, whose shares were held equally by the taxpayers and their family members.

During assessment proceedings, the Assessing Officer held that the entire investment in the company had originated from India through permitted banking channels under the Liberalised Remittance Scheme of the Reserve Bank of India.

Despite acknowledging that the investments were from disclosed sources, the officer concluded that the taxpayers were the real and beneficial owners of the company's assets and sought to tax rental income and capital gains in their hands.

The Revenue argued that the corporate structure was merely a device to avoid tax and invoked the doctrine of “substance over form,” contending that the veil of the company should be lifted to tax the real beneficiaries.

The taxpayers, on the other hand, argued that the company was a separate legal entity, that all investments were made through lawful channels with regulatory approvals, and that the income from the properties had been earned and taxed in the hands of the company abroad.

They also pointed out that they had neither directly received rental income nor any dividend.

The court noted that the company had been incorporated in 2005, had taken loans from banks in the United Kingdom, and had purchased and later sold properties there, earning rental income and capital gains in its own capacity.

Upholding the findings of the Tribunal, the court held that the taxpayers were not the beneficial owners of the company's assets and that no income arising from those assets could be assessed in their hands.

“Hence, it is only the dividend income qua the shares of the company, which can be taxed and not the income of the company itself.”

The court clarified that while dividend income, if received by the shareholders, may be taxable in accordance with law, the company's income cannot be directly attributed to them.

Rejecting the Revenue's reliance on the doctrine of “substance over form,” the Court held that such an approach had no statutory backing in the present case.

“The AO's endeavour to bring in doctrine of 'substance over form' is an attempt in anxiety of enriching the exchequer, which is not backed by the statutory framework - it is apparently unknown to the Act of 1961.”

The court emphasised that tax liability under a fiscal statute must arise strictly from the provisions of law and cannot be imposed by introducing deeming fictions or concepts not supported by the statute.

“It is a settled position of law that fiscal liability and provisions imposing tax are required to be interpreted strictly. As of today, there is no provision of the Act of 1961 under which the set of transactions in hand can be subjected to tax.”

It further held that this was not a case of tax avoidance or evasion and that the attempt to pierce the corporate veil was misplaced.

“The AO's attempt to lift or pierce the corporate veil is simply misplaced if not misconceived, as it is not even a case of tax avoidance much less tax evasion.”

The court added that an assessee cannot be penalised for earning income through legally permissible means or for structuring investments in a manner that yields optimal returns.

Upholding the tribunal's order, the court dismissed the appeals filed by the Revenue.

For Appellant: Senior Standing Counsel Puneet Rai with Junior Standing Counsel Ashvini Kr., Junior Standing Counsel Rishabh Nangia and Advocate Nikhil Jain.

For Respondent: Senior Advocate Sachit Jolly with Advocates Shreya Jain, Gaurav Tanwar, Abhyudaya Shankar Bajpai and Sohum Dua.