A Reiteration of Separate Legal Entity

A recent decision of the Punjab and Haryana High Court in CIT v. Panchratan Hotels has re-emphasised the notion of separate legal entity, albeit in the context of the law of taxation.

Here, the assessee was Panchratan Hotels, and had declared losses for the said assessment year. On 31.7.1992, the shareholders of the company had changed, through a transfer of 100% shareholding from the original shareholder to the new shareholders. On this basis, the CIT contended that there had been a succession of business for the purposes of section 170 of the Income Tax Act. Under section 170, in cases of succession, the predecessor is assessed in respect of the income of the previous year in which the succession occurs, up to the date of succession. On this basis, the CIT contended that the assessment for the year 1.4.1992 to 30.7.1992 was required to be made in the hands of the old company and subsequent assessment from the period 31.7.1992 to 31.3.1993 in the hands of the new company.

For deciding this issue, the Court was required to answer two questions-

(a) Whether the transfer of shares amounted to a succession of business under section 170?

(b) Even if it did, whether section 170 applied to the company whose shares had been transferred?

The Court did not answer the first question conclusively, only noting the argument that a transfer of shares may also amount to a succession under section 170. It based its decision more on the second question, since it was of the opinion that section 170 cannot apply to the facts in issue. The Court observed that the transfer of shareholding would only change the identity of the shareholders and not the identity of the company, which is a separate legal entity. Thus, while the concept of succession would apply to the transferor and transferee of the shareholding, it would not apply to the company whose shares are transferred. In the words of the Court-

Even if for the sake of arguments, we accept that the transfer of shares amounts to transfer of capital assets in terms of Section 2(47), then also in our considered view, Section 170 will not apply. A bare reading of Section 170 shows that the transfer of the business should be from one assessee to another. Person under Section 2(31)(iii) of the Income Tax Act includes a company. Under Company Law, a company is a juristic person. The share holders are not the owners of the company. It is the company itself which is its own owner having its own seal and succession. Where shares are transferred, at best this would be a transfer vis-à-vis, the person who was the holder of the shares to the person to whom the shares are transferred. Therefore, individually when Mr. Kapoor has sold his share to M/s.General Sales Limited then it may amount to a transfer when considering the incomes of Mr. Kapoor or M/s.General Sales Limited. Section 170 may be attracted to both the previous and subsequent owner of the shares but cannot apply to the company itself. This is no transfer as far as the assessee, i.e., M/s. Panchratan Hotel is concerned.

The company is a juristic person having its distinct legal entity separate from that of the shareholders. The change in the share-holders of the company does not change the legal identity of the company.

On this basis, the Court reversed the finding of the CIT, and held that the transfer of shares did not result in the change of identity of the company, but only resulted in a change of the owners of the company. While this seems a reiteration of an accepted principle of corporate law, it assumes greater significance in light of the ongoing Hutch-Vodafone tax dispute, where the central question is whether the transfer of the shareholding of a company having assets in India amounts to transfer of those assets situated in India. In that context, this decision affirming the concept of a separate corporate entity, especially in a tax context assumes is of considerable interest. A copy of the judgment is available here.

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  • Let me make my own bit of contribution – more by way of confounding the existing confusion!

    Reproduced below is my feedback to ITATonline sent on 23-10-09:

    COMMENT: I have just browsed through the reported court decision. My view, even without going into details, is that prima facie – the view handed down by the court is, with due respect, too technical to be conceded, or to be readily accepted without any reservation, to be THE CORRECT OR IN ANY CASE, THE BETTER VIEW, in the matter.

    What is all the more intriguing rather disparaging and needs to be pinpointed is that, – the stance taken by the Revenue in the case on hand, is, if critically looked into, patently contrary and diametrically opposite to its own stance taken in the widely publicised case -popularly known as VODAFONE case. Though, of course, the fate of that case, – the final verdict on or against the seemingly unwarranted or mindless controversy brought to the fore by the Revenue, would possibly not come to be known any time in the foreseeable future.


  • Dear vswaminathan, you say that "the view handed down by the court is, with due respect, too technical to be conceded"

    I assume you are suggesting that the COurt decision is incorrect. Can you elaborate as to why respecting separate legal entity is "too technical"?

  • Dear Mr Anonymous
    You need to read my Post fully (not just stop at – "conceded")- for trying and correctly understanding what I have sought to briefly convey.

    I, for one, always believe that, -self-help (study) is always the best course for anyone to follow in such or similar matters. Though, of course, left to myself, it could run into pages if I were to elaborate.

    Anyway, to provide some clues,: -one should consider the relevance or appropriateness, or otherwise, of the emphasis laid on / rather ought to / not to , have been laid on – the concepts of 'ownership", "transfer", etc, as discussed in the judgment,- particularly on a plain reading of section 170 – as to what, in terms, the section simply says.

    Also to bear in mind, the case law on – 'change in constitution of' vs 'Succession' – having particular regard to inter alia , though not necessarily, the fact that the assessee is – a closely held company.


    My feedbacks on this website are purely intended to provoke a useful study / healthy debate among those active in the field (unlike me) really interested in doing so. Not to venture and express any opinion of my own, a categorical one at that.

  • To continue:

    Also to consider:

    1. The implications of the Explanation under section 170; to be precise, in the view the HC has taken, how/in what manner the Explanation could be given effect to!

    2. As may be readily gathered from the articles/write-ups on the related websites, there are two varying schools of thought obtaining in legal circles; one for and the other against the age-old HL's decision in Salamon vs Salamon
    (1897)- the second appears to be increasingly gaining momentum, especially in the changed circumsances of today.

    Of course, for my own individual views, one may refer my published article – 176 taxman 82 (Mag)


  • Should the court decision be assumed to be THE CORRECT or ONLY POSSIBLE OBJECTIVE VIEW in all its ramifications, how then the Exlanation under section 170 could, in its letter and spirit, be at all given effect to?


  • The view taken by the Hon'ble Court is correct in view of the ruling of the Solomon v/s. Solomon and Company Ltd., by the House of Lords and as per section 36 of the Companies Act, 1956. One cannot mix up the affairs of the company with the affairs of the shareholders.

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