The main legal point established in the judgment is the principle of corporate veil, highlighting that a company has a separate legal entity but the court can lift the corporate veil in exceptional cases to look at the economic realities behind the legal facade, especially in matters of tax evasion or circumventing tax obligations.

Heard the learned counsel appearing for the parties.

2. The petitioner is a Private Limited Company incorporated in Bangalore. The petitioner had participated in the auction for sale of sandal wood and sandal sapwood held by the District Forest Officer, Salem Division, the respondent in the present case and was the successful bidder. Subsequently, auction was confirmed and the petitioner had paid a sum of Rs.17,48,182. It is the case of the petitioner that even though substantial amount had been paid and the petitioner was prepared to pay the balance amount to take delivery, the respondent did not accept the same. At this stage, the respondent issued a show cause notice wherein it was pointed out that the firm of M/s. Sri Mahalakshmi Flour Mills, Bangalore had taken sandalwood on earlier occasion and was liable to pay a huge amount towards sales tax and penal interest and demurrge charges, and filed WP. No.2239 of 1994 and had obtained interim order subject to condition to the effect that the bank guarantee towards sales tax amount of Rs.20,07,209 and Rs.80,31,289 towards penal interest and demurrage charge should be furnished. Even though initially such bank guarantee has been furnished, subsequently the firm, Mahalakshmi Flour Mills had failed to renew the bank guarantee and the firm was not taking any steps inspite of notice. It was further indicated in the notice that out of five partners in the firm, three were the directors of the present petitioner-company, and on the aforesaid basis, the petitioner was called upon to show cause as to why the amount of Rs.17,55,314 paid by the petitioner should not be adjusted against the accounts of M/s. Mahalakshmi Flour Mills, Bangalore.

3. Thereafter, the petitioner filed a reply indicating inter alia that the petitioner is incorporated in the Companies Act as a distinct entity and merely because two of the directors of the petitioner are also partners in the firm, both the entities cannot be treated as the same and the amount paid by the petitioner cannot be forfeited. Moreover, non-renewal of the bank guarantee in the special facts and circumstances of the case cannot be construed as if the the petitioner is in arrears of the said amounts warrenting forfeiture.

4. Subsequently, the petitioner filed WP Nos. 11198 and 11199 of 2001 wherein a direction was given to the present respondent to pass final orders pursuant to the show cause notice dated 2.5.2001 within the stipulated period. Thereafter, the impugned order has been passed wherein the respondent has passed the order to the effect that the confirmation issued is withheld until renewal of the bank guarantee or until disposal of the appeal case in the High Court.

5. Such order has been challenged by the petitioner viz., on the ground that the petitioner which has been incorporated under the Companies Act is a distinct entity and merely because two directors are also partners in the firm viz., M/s. Sri Mahalakshmi Flour Mills, both the entities cannot be treated as the same. Learned counsel appearing for the petitioner has placed reliance upon the decision reported in 1897 AC 22 : 66 LJ Ch 35, (Saloman v. Saloman and Co).

6. Learned counsel appearing for the respondent, on the other hand, contended that even though in law, the company is a different entity, under some circumstances, the Court can lift the Corporate veil to find out the real position. For the aforesaid purpose, learned counsel for the respondent placed reliance upon the decision reported in AIR 1967 Supreme Court 819 (V54 C 175): ILR (1964) 1 Mad 393,(IT Commissioner, Madras v. Meenakshi Mills, Madurai) wherein the position of law is enunciated.

7. Law is well settled that a Company incorporated under the Companies Act has a separate legal entity. However, this principle has certain exceptions as enunciated in IT Commissioner, Madras v. Meenakshi Mills, Madurai(supra) wherein the following observations were made.

"It is well established that in a matter o