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Workmen Employed In Associated Rubber Industries Vs Associated Rubber Industry Ltd(1985) : Court Shall Order Lifting Of Corporate Veil Where It Is Established That The Company Was Formed To Avoid Payment Of Bonus To Workmen

Ashwitaa Shetty ,
  06 November 2021       Share Bookmark

Court :
Supreme Court of India
Brief :

Citation :
AIR 1986 SC 1, 1985 (51) FLR 478, 1986 157 ITR 77 SC, (1986) ILLJ 142 SC, 1985 (2) SCALE 321, (1985) 4 SCC 114, 1986 (1) SLJ 218 SC, 1986 (1) UJ 235 SC

Date of Judgement:
19 August, 1985

Bench:
O C Reddy, V Khalid

Parties:
Appellant - Workmen of The Associated Rubber Industry Ltd
Respondent - Associated Rubber Industry Ltd


Subject

This case dealt with the lifting of the corporate veil. As per the Companies Act2013, a company on incorporationbecomes a separate legal entity distinct from its members and acquires the status of an artificial person clothed with certain rights and obligations. However, in certain exceptional circumstances, lifting of the corporate veil may be ordered by the court.

Legal Provisions

The court shall order lifting of corporate veil where it is established that the company has acted fraudulently to avoid welfare legislation i.e. to avoid payment of benefits to the workmen.

Overview

  • The respondent held shares of INARCO Ltd. through which Associated Rubber Industry received annual dividends and the dividend was taken into consideration while calculating the bonus payable to the workmen.
  • In 1968, the company transferred shares held by it to Aril Holdings Ltd, a subsidiary company wholly owned by the Associated Rubber Industry.
  • The company Aril Holdings Ltd had no capital or source of income except receiving dividend income on the shares of INARCO Ltd.
  • The workmen of Associated Rubber Industries Ltd contended that the new subsidiary company was formed in order to pay lower bonuses to workmenas a result of transferring the dividend amount to the subsidiary company.
  • The workmen contended that they were entitled to bonus at the rate of 16 % instead of 4% paid to them.
  • The Industrial Tribunal and the High Court of Gujarat held that the two companies were separate legal entities and therefore the profit of Aril Holdings Ltd could not be treated as profit.

Issues

  • Whether the contention of the workmen that the shares were transferred to avoid payment of bonus tenable?
  • Can the company Aril Holding Ltd and Associated Rubber Industry Ltd be regarded as separate legal entities ?

Judgement Analysis

  • Citing the case of Commissioner of Income Tax Madras v. Sri Meenakshi Silks Ltd wherein it was held that the though the company is separate legal entity distinct from its members and is entitled to enjoy certain rights, however in certain exceptional cases, the corporate veil may be lifted to identify the person behind a crime.
  • Further citing the case of Mc Dowell and Company Limited v. Commercial Tax Officer wherein it was held that it is up to court to decide various legal devices used to avoid tax, the Supreme Court observed that the principal company createda wholly owned subsidiary with no assets or business income but only to receive dividends which clearly indicated the fact that it was created to reduce gross profits of the company.
  • The Supreme Court observed that the purpose of creation of the company was to reduce the amount of bonus paid to workmen and no direct or circumstantial evidence was required to establish this fact.
  • The Supreme Court after taking in to account the facts and circumstances of the case held that amount of dividend received from INARCO Ltd shall be taken into consideration for calculating the gross profit of Associated Rubber Industry Ltd for calculating the bonus payable. Further, the Supreme Court, allowing the appeal, declared that the workmen areto be paid bonus at the rate of 16% for the year 1969.

Conclusion

The Hon’ble Supreme Court held that the subsidiary company was formed simply to reduce the amount of the bonus payable to workmen. The court upheld the piercing of the veil to look at real transaction of the subsidiary company.

Click here to download the original copy of the judgement

 
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