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High Court Of Delhi
SCINDIA POTTERIES AND SERVICES LIMITED - Appellant
Versus
DEPUTY LAND AND DEVELOPMENTOFFICER, GOVERNMENT OF INDIA - Respondent
Civil Miscellaneous (Main) 1750 of 1989
Decided On : 03/27/1990
COMPANY LAW - SHAREHOLDERS AND COMPANY - DISTINCTION - SALE OF SHARES - RESTRAINT - DELHI LAND (RESTRICTION ON TRANSFER) ACT, 1972 - NOT APPLICABLE - INCOME-TAX ACT, 1961 - SECTION 269 - NOT ATTRACTED.
Fact of the Case:
The petitioners, Scindia Potteries and Services Ltd., challenged the re-entry order passed by the respondent, the Union of India, which determined the lease in their favor. The petitioners obtained a stay order from the court, and the Union of India filed an application to vacate or modify the stay order.
Finding of the Court:
The court held that the shareholders of a company are distinct from the company itself, and the leasehold rights in the instant case were owned by the company, not the shareholders. The court also held that the principle of lifting the corporate veil could not be invoked in this case, as the perpetual lease had been in the name of the company since its inception. Furthermore, the court held that the Delhi Land (Restriction on Transfer) Act, 1972 did not apply to the sale of shares, as shares are considered moveable property under the Sales of Goods Act. Lastly, the court held that Section 269 of the Income-tax Act, 1961 would only be attracted if the transfer of shares resulted in someone else gaining control over the land, and that it was up to the income-tax authorities to take action in such a case.
Issues: 1. Whether the shareholders of a company are distinct from the company itself? 2. Whether the principle of lifting the corporate veil can be invoked in this case? 3. Whether the Delhi Land (Restriction on Transfer) Act, 1972 applies to the sale of shares? 4. Whether Section 269 of the Income-tax Act, 1961 is attracted in this case?
Ratio Decidendi: 1. The court relied on the principle established in Salomon v. Salomon, 1897 Appeal Cases 22 (HL), which held that a company is a separate and distinct legal entity from its shareholders. 2. The court held that the principle of lifting the corporate veil could not be invoked in this case, as the perpetual lease had been in the name of the company since its inception. 3. The court held that the Delhi Land (Restriction on Transfer) Act, 1972 did not apply to the sale of shares, as shares are considered moveable property under the Sales of Goods Act. 4. The court held that Section 269 of the Income-tax Act, 1961 would only be attracted if the transfer of shares resulted in someone else gaining control over the land, and that it was up to the income-tax authorities to take action in such a case.
Final Decision: The court dismissed the application filed by the Union of India to vacate or modify the stay order.
( 1 ) BY this application, the applicapts in C. M. 1750 of 1989, made in Civil Writ No. 1295 of 1988, die Union of India, pray that the interim order passed by this Court (Chief Justice R. N. Pyne and Justice G. C. Jain) staying the operation of the re-entry order dated 30-6-1988, on 4-7-1988, be vacated, or alternatively another order be substituted to the effect that : the answering respondents shall not take physical possession of the property in dispute during the pendency of the writ petition. However, the petitioner shall not in? any manner whatsoever, sell, transfer, exchange, lease, encumber, mortgage or change in any manner whatsoever the real and effective ownership and control over the property in dispute. It may be clarified that the shares of Scindia Potteries and Services Ltd. (formerly known as Gwalior Pottery (Delhi) Pvt. Ltd.), shall not be transferred in any manner, whatsoever, legally or equitably, to any third party or entity".
( 2 ) THE petitioners, the Scindia Potteries and Services Ltd. , had filed the writ petition challenging the re-entry order which had been passed by respondent No. I, being an order dated 30-6-1988. By that order, the respondent, as lessor, had purported to have determined the lease in favour of the petitioners w. e. f. 30-6-1988. By that order, the petitioners were called upon to hand over possession of the area known as Scindia Potteries to a designated officer of the Land and Development Office of the respondent.
( 3 ) AGGRIEVED by the said order dated 30-6-1988, the petitioners find Civil Writ Petition No. 1295 of 1988 which came up for admission on 4-7-1988, and on that date, the operation of the impugned order dated 30-6-1988 was stayed till further orders by the Division Bench of this Court.
( 4 ) DURING the course of arguments, Mr. Vipin Sanghi who appears for the Union of India, has referred to the alleged misuse of the land in question by the petitioners, which had led to the passing of the impugned order dated 30-6-1988. Whether there is misuse or not, is not a matter with which I should be concerned with, as far as this application is concerned, for the reason that if relevant, that matter will be considered at the time of decision of the writ petition. I say "if relevant" for the reason that the petitioners allege that reply to the show cause notice which was sent by the respondents to the petitioners, being reply dated 20-6-1988, was not considered before passing of the order of re-entry dated 30-6-1988. If the order of re-entry is to be set aside after hearing the parties on the writ petition, then obviously the petitioners will enjoy the benefit if the lease which has been executed in their favour. If after hearing the parties, the action of order of re-entry is upheld, then the respondents would be entitled to take further steps in the matter of re-entry of the plot demised by the perpetual lease in favour of the petitioners.
( 5 ) WHAT the applicants are seeking to do. by this application, is to stop the sale or transfer of shares of the petitioners to any other person by the share-holders of the company.
( 6 ) IT is well settled that the share-holders of the company are distinct from the company of which they hold shares. It is too well settled since Salomon v. Salomon, 1897 Appeal Cases 22 (HL), (1) that company is separate and distinct legal entity, and this principle has been reiterated and adopted by the Supreme Court in a number of cases.
( 7 ) MR. P. N. Lekhi on behalf of the petitioners, has pointed out that the Supreme Court has in Mrs. Bacha F. Guzdar v. Commissioner of Income Tax, AIR 1955 SC 74, at page 77 (2) stated that the share-holders do not own the property of the company; the company is distinct juristic person. Here leasehold rights, are owned by the company and not by the shareholders of the company.
( 8 ) MR. Vipin Sanahi on behalf of the respondents, is wishing to invoke the principle of lifting of corporate veil for the pu
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