Judgment

CHINNAPPA REDDY, J. : - The wormken of the Associated Rubber Industry Ltd., Bhavnagar are the appellants in this appeal filed pursuant to a certificate under Art. 133(1) of the Constitution granted by the High Court of Gujarat.

2. The Associated Rubber Industry Ltd. had purchased, some years back, shares of INARCO Ltd. by investing a sum of Rs.4,50,000/-. they were getting annual dividends in respect of these shares and the amount so received was shown in the Profit and Loss Account of the company year after year. It was taken into account for the purpose of calculating the bonus payable to the workmen of the company. Sometime in the course of the year 1968, the company transferred the shares of INARCO Ltd. held by it to Aril Bhavnagar Ltd. (subsequentty changed to the Aril Holdings Ltd.), a subsidiary company wholly owned by the Associated Rubber Industry Ltd. Aril Holdings Ltd. had no other capital except the shares of INARCO Ltd. transferred to it by the Associated Rubber Industry Ltd. It had no other business or source of income whatsoever except receiving the dividend on the shares of INARCO Ltd. The dividend income from the shares of INARCO Ltd. was not transferred to The Associated Rubber Industry Ltd. and therefore, it did not find place in the Profit and Loss Account of the company with the result that the available surplus for the purposes of payment of bonus to the workmen of the company became reduced. The net result of the exercise was that bonus at the rate of 4% only was paid to the workers for the year 1969 instead of at the rate of 16% to which they would have otherwise been entitled. We may mention here that Aril Holdings Ltd. was itself wound up in the year 1971 and amalgamated with The Associated Rubber Industry Ltd.

3. The workmen of The Associated Rubber Industry Ltd., Bhavnagar raised an industrial dispute claiming that they were entitled to be paid bonus at the rate of 16% for the year 1969. According to them, the transfer of the shares of MARCO Ltd. to Aril Holdings Ltd. was no more than a divice to avoid payment of higher bonus to the workmen. The Industrial Tribunal and thereafter the High Court of Gujarat under Art. 226 of the Constitution The Associated Rubber Industry Ltd. and Aril Holdings Ltd. were two independent companies with separate legal existence and therefore, the profits made by Aril Holdings Ltd. could, not be treated as profits of The Associated Rubber Industry Ltd. for the purpose of computing the gross profits earned by The Associated Rubber Industry Ltd. It was further held that there was no evidence to show that the transfer of shares to Aril Holdings Ltd. was only a device to avoid payment of bonus to the workmen.

4. It is true that in taw The Associated Rubber Industry Ltd. and Aril Holdings Ltd. were distinct legal entities having separate existence. But, in our view, that was not an end of the matter. It is the duty of the court, in every case where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smoke-screen and discover the true state of affairs. The court is not to be satisfied with form and leave well alone the substance of a transaction. In Commr. of Income-tax, Madras v. Sri Meenakshi Mills Ltd. (1967) I SCR 934 at 941, the judicial approach to such problems was stated as follows :

"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 and being subjected to duties which are not the same as those enjoyed or borne by its members. But 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 tax obligation. For instance, in Apthorpe v. Peter Schoenhofen Brewing Co. (1899) 4 Tax Cas 41 the Income Tax Commissioners had f