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Introduction to Case
A Company is formed by a group of people who come together to work towards a specific goal and to earn profit. One of the main features of a company is that it is has separate legal entity. The term separate legal entity means that the body is a legal person recognized by law where it is treated as a separate legal person who has rights and obligations. It is an artificial person which is different from the people who are running or constitute that entity. However, this fundamental element of Company has had a dynamic history, where it was gradually evolved.This principle for the first time, was visited in the case of Salomon v. Salomon[1], where Lord Macnaghten held that the company is a legal person that is created lawfully through observation of all the rules of the company law and is different from its shareholders and is not an agent or trustee of the company. And this concept was for the first time applied in India in the case of In Re Kondoli Tea Co. Ltd.[2].
Facts of the case
The facts of the case are brief and straightforward. They are a group of eight people who had sold their tea estate to Kondoli Tea Company for an amount of 43,320 pounds, which was to be paid in shares and debentures. However, it was later discovered that only shareholders in the Kondoli Tea Company are those eight people only who sold their company on the first place. The objective was to avoid paying the tax that was due on that property. Therefore, the shareholders refused to pay the ad valorem duty.
Issue
- Whether the document carrying out a particular transfer can be considered as a conveyance under Section 3(9)[3] and Article 21 of Schedule 1 of the Stamp Act 1879?
Arguments in Case
It was argued by the Petitioners to claim an exemption from payment of tax. The ground that they provided was that as property was transferred to the Kondoli Tea Company, and they did not have to pay taxes on that particular property as they were not the owners of any taxable property.
Summary of the judgment
The Hon’ble High Court held that Kondoli tea Company was a separate person, a separate body from its shareholders. It was also held that the contract of conveyance of property to the Kondoli Tea Company was to be treated in a way like any other transfer of conveyance of property wherein the shareholders in the company had been different people. Therefore, they ordered that a proper stamp to be put on the given document is the ad valorem stamp, and henceforth, they have to pay the taxes.
Analysis of the judgment
The Hon’ble judges, Chief Justice William Comer Petheram, James Quain Pigot and Trevelyan JJ after full scrutiny of the given facts, evidence and arguments rightly gave the judgment declaring the company as a separate legal entity. This fundamental feature of a company was duly required to be introduced in the Indian Company Law. The court correctly answered the issue presented before it that as we treat the company as a separate legal entity, therefore the document was to be considered as a conveyance under Section 3(9)[4] and Article 21 of Schedule 1 of the Stamp Act 1879.
Article 21 of Schedule 1 of the Indian Stamp Act 19879 talks about a situation, “where the amount of the consideration for such conveyance he set forth therein does not exceed Rs. 50 When it exceeds Rs. 50 but does not exceed Rs100 for every Rs. 100 or part thereof in excess of Rs. 100 up to Rs. 1,000 and for every Rs. 500 or part thereof in excess of 1,000. Therefore, a duty to pay the ad valorem, that is a tax whose amount is based on the value of transaction was conferred upon the Petitioners by the court, as a result declining their request to exempt them from paying this duty and ordering it to be calculated on amount of consideration mentioned in the in-property instrument.
Conclusion
It can be concluded that the decision taken by the Hon’ble judges was appropriate as it introduced a fundamental feature of company in India, therefore this case acts as a precedent for various consequent cases. One of those cases was Commissioner of Income Tax, Calcutta v. Messrs Associated Clotheirs Ltd.[5], which relied on the precedent set by this case regarding the feature of separate legal entity of a company.
Although the idea of legal personality of a company as a separate legal entity has been prevalent from the primitive days, it has also evolved as a feature since the 17th century through various judgments. However, in reality, it is members who are the real beneficiaries. Therefore, this feature may act as a loophole in certain circumstances. Therefore, the veil of a corporation can be used by their underlying recipients to commit fraud or such other illegal acts keeping their self-interest in mind as opposed to the collective and common interest of the company. Therefore, this is something the judiciary should try to address and curb in today’s time.
References:
[1] Salomon v. Salomon, UKHL 1, AC 22.
[2] Kondoli Tea Co. Ltd. Re, (1886) ILR 13 Cal 43.
[3] The Indian Stamp Act (I of 1879), Section 3(9): “Conveyance.”– “Conveyance” means any instrument by which property (whether moveable or immoveable) is transferred on sale”.
[4] Ibid at 4.
[5] Commissioner of Income Tax, Calcutta v. Messrs Associated Clotheirs Ltd 1967 AIR 788, 1967 SCR (1) 512.
