Introduction

According to Section 2(20) of the Companies Act, 2013, a company is defined as a company that is incorporated under this Act or any other previous prevailing Companies Act.

A company can be formed in accordance with the provisions of Section 3 which provides for the incorporation of a company.

A company has the following features:

1. Incorporated association,
2. Independent legal entity,
3. Common seal,
4. Perpetual existence,
5. Limited liability, etc.

What is a Corporate Veil?

The separate or independent legal entity of a company is one of the most important and unique features of a company.

A separate legal entity means that the promoters and owners of a company have a separate identity from that of the company. Official documents are signed in the name of the company and not the promoters or owners. It shields the promoters and owners of a company from liability unlike in a sole proprietorship or a partnership wherein the owners have unlimited liability.

If the company incurs any debt or is involved in any contravention of the law, it the company which is liable and not the promoters or owners, hence they have limited liability.

The purpose of the doctrine of corporate veil is to ensure business efficacy and convenience as one of the attractive features of a company is limited liability. Limited liability means that the liability of each shareholder is to the extent of his or her ownership in the company.

So, basically, a corporate veil is something that separates the personality of a company from the personality of its shareholders and protects them from being personally liable for the company’s obligations.

One of the landmark cases in regard to the corporate veil is – Salomon v Salomon & Co. Ltd[i]

Here, Mr. Salomon incorporated the business of manufacturing shoes and boots by the name of “Salomon & Co. Ltd” and the company had seven shareholders, which were his family members.

He, his wife, his daughter, and his four sons were the shareholders of the company.

He sold his sole trader business to the company and retained 6 of the shares and received debentures worth 10 thousand pounds.

The business ran into some difficulties and was unable to pay the interest on debentures. Salomon made a claim on the basis that he was a secured creditor, and the company was defaulting on his payments.

It was held that the debts of the company were not the debts of Mr. Salomon because it was validly incorporated, and both are separate legal entities.

Understanding the Lifting of the Corporate Veil

There might be some instances wherein it is necessary to know who the people behind the corporate veil are and, in these instances, the corporate veil needs to be lifted and the real culprits need to be punished.

The courts usually lift the corporate veil where fraud has been committed, improper conduct wherein the public interest is at large, or where the sole purpose of incorporating the company is the evade taxes, etc.

Grounds for Lifting the Corporate Veil

The circumstances under which the corporate veil can be lifted can be divided into two types:

Statutory Provisions:

• Section 45 – Reduction of membership below the statutory limit: The minimum number of members or shareholders in a public company is seven and in a private company is two and if the membership is reduced below that then lifting of corporate veil is needed.

• Section 147 – Misdescription of name: If an officer of a company who signs any bill of exchange where the name of the company is not mentioned in the prescribed manners, such officer will be held liable and not the company.

• Section 239 – Power of inspector to investigate: This section provides for the power of the inspector to investigate the affairs of a company for allegations of mismanagement, oppression etc.

• Section 307 & 308 – These sections apply to every Director and deemed Director. It states that the nature of their shareholding must be mentioned in the shareholder’s register and non-compliance will result in the lifting of the corporate veil.

Judicial Interpretations:

Following are the instances where the judiciary can lift the corporate veil-

• Tax Evasion: Where it is evident that the company is trying to evade taxation, then the courts can lift the corporate veil and punish the people responsible.

• Fraud: In order to prevent fraudulent activities or improper conduct, the courts can lift the corporate veil. Since the fraudulent or improper conduct cannot be committed by the company, which is an artificial legal person, hence the people who manage it are responsible. In Gilford Motor Company Ltd. v Horne[ii]it was held that companies cannot be used as a cloak by members for their wrongdoings.

• Determination of enemy character: In certain situations, it becomes essential to lift the corporate veil and check the character of the individuals and to determine whether they are enemies of the country. In Daimler Co. Ltd. v Continental Tire and Rubber Co. Ltd[iii]– a company was set up in England for selling tires, the company was a German company and most of the control was held by German individuals. During the first world war, the company situated in England started a recovery process and it was eventually held that the company was an enemy character and hence the court chose to lift the corporate veil.

• Liability for ultra vires act: Every company is bound to perform only the acts which are mentioned in its Memorandum of Association, however if acts which are ultra vires the memorandum of association are done then lifting of corporate veil is required.

Conclusion

The principle is given in Salomon v Salomon Co & Ltd. is the rule and the above statutory and judicial provisions are an exception to the rule of the corporate veil.

The separate identity of a company is of utmost importance but there needs to be a balance and the corporate veil needs to be lifted whenever it is needed.

[i] Salomon v Salomon & Co. Ltd [1897] AC 22 (House of Lords)

[ii] Gilford Motor Company Ltd v. Horne  [1933] Ch. 935 (CA)

[iii] Daimler Co. Ltd. v Continental Tire and Rubber Co. Ltd 53 SLR 845

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Introduction

Agriculture is considered the livelihood of the majority of Indians. Approximately 58% Indians are dependent on agriculture as their primary source of income.

Agricultural Income can be defined in layman terms to be the income derived from agricultural ventures.

Definition of Agricultural Income

According to Section 2(1A) of the Income Tax Act, 1961, agricultural income means:

1. Rent or revenue derived from an agricultural land and is situated in India: Rent is the consideration paid for using the land of another. Such agricultural land must be situated in India.

• Case law on this point is as follows- CIT v Kamakhya Narayan Singh[i], where it was held that arrears of rent from agricultural land cannot be considered as agricultural income.

• Another important case law on this point is – Bacha F. Guzdar v CIT[ii], in this case, the assessee was a shareholder of a tea company and received dividend. He claimed exemption on account of it being an agricultural income. It was held that the assessee did not derive dividends directly from the land and hence, cannot be exempted under agricultural income.

• Any rent or revenue which is received or derived from such land by use of any agricultural operations which render the produce fit for market or sale of such produce: An important case law on this point is that of CIT v Raja Benoy Kumar Sahas Roy[iii] where the Supreme Court defined agriculture as an activity which consists of two types of operations –

1. Basic operations: includes cultivation of the land and the subsequent tiling, sowing of seeds, planting etc, basically all those activities which require human skill and efforts.
2. Subsequent operations: include those operations which are done for the purposes of further growth andpreservation of the plants and includes weeding, digging, removal, etc.

• Any income which is attributable to a farmhouse which is used for agricultural purposes. Such building should be in the immediate vicinity of the land and can be a dwelling house or an outhouse, etc.

Explanation 3 to Section 2(1A) makes it clear that any income which is derived from the sale of seedlings or saplings shall be considered as agricultural income.

Some examples of agricultural income are as follows:

1. Income derived from sale of seeds.
2. Income derived from sale of replanted trees.
3. Rent received for agricultural land, etc.

Some examples of non-agricultural income are as follows:

1. Income from poultry farming.
2. Income from bee hiving.
3. Dividend from an organization the deals in agricultural ventures.
4. Income from dairy farming.
5. Purchase of standing crop, etc.

Is Agricultural Income Taxable in India?

According to Section 10(1) of the Income Tax Act, 1961, agricultural income is exempted from taxation. The central government does not have the authority to levy tax on agricultural income.

However, the Income Tax Act has laid down a method to indirectly levy tax on agricultural income. This method is called the partial integration of agricultural income with non-agricultural income.

Individuals, Hindu Undivided Family, Association of Persons, Body of Individuals and Artificial Judicial Persons have to compulsorily calculate their income using this method. Companies, Limited Liability Partnership, firms, co-operative societies are exempt from this method.

This method is applicable in the case the following conditions are met:

1. The net agricultural income is greater than Rs. 5,000 per year, and
2. Non-agricultural income is –

1. >2,50,000 for applicable persons (if individuals then under 60 years of age),
2. >3,00,000 for individuals between 60-80 years of age,
3. >5,00,000 for individuals above 80 years of age.

• As can be seen from the above discussion, agriculture income is not per se taxable in India. But many economists and eminent jurists are of the view that agricultural income should be taxable. Let us look at the various views as to whether agricultural income should be taxable or not.

Why the Government should tax Agricultural Income?

Taxation of agricultural income has always been a very sensitive issue and none of the governments have shown any interest in taking corrective measures even though the official reports have repeatedly expressed concerns over non-agriculturists abusing the exemption given to agriculturists.

The fact that non-agriculturists abuse the exemption has been officially acknowledged several times in the past, however, little has been done to avoid that.

The exemption of agricultural income has been used as a tool of tax evasion and money laundering. In 2002, the Task Force on Direct Tax (the Kelkar Committee) in 2002 in its report said that exemption to agricultural income distorts both horizontal and vertical  equity and it also encourages the laundering of non-agricultural income as agricultural income.

This issue goes back to the 1970s. Economist Professor Arun Kumar says that two other committees – the Raj Committee and the Wanchoo Committee also mentioned the same in their reports in 1970s.

In 1925, the taxation enquiry committee noted that historically there is no need or no theoretical justification for the continued exemption of agricultural income from income tax.

NITI Aayog’s member in May 2017 suggested that the agricultural income above a certain threshold should be taxed.

However, given the extent of the informality of the agricultural sector, it will be difficult to implement a taxation scheme for the sector. According to the 2004 paper of the World Bank on “Taxing Agriculture in A Developing Country: A Possible Approach”, Indira Rajaraman analysed 70 countries in order to show how the dual problem of payments in cash or kind and a lack of accounting throws up barriers.

Conclusion

As we can see, agricultural income is more of a political issue and where some say that there should be slabs of tax just as in the case of other sources of income, others say that the rich farmer should be taxed. Whereas some say the idea of taxing agricultural income is of great disservice to the agricultural sector which is already in a deep crisis.

[i] CIT v Kamakhya Narayan Singh (1949) 51 BOMLR 182

[ii] Bacha F. Guzdar v CIT 1955 AIR 740

[iii] CIT v Raja Benoy Kumar Sahas Roy 1957 AIR 768

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Introduction

Tax is considered to be the cost of living in a society. The Government levies tax in order to meet the common expenditure of society. Tax can also be termed as the basic source of income of the government.

Taxes can be broadly divided into two types –

1. Direct Taxes: the incidence and impact of a direct tax fall on the same person. For example – income tax.
2. Indirect Tax: the incidence and, the impact falls on different persons. For example – Goods & Services tax.

Section 2(24) of the Income Tax Act, 1961 provides the definition of Income, it is an inclusive and non-exhaustive definition wherein not only the items mentioned in the section are income but also the items which fall under the general meaning of the term “income”.

Tax is levied on persons under Section 2(31) of the Income tax Act, 1961:

• Individuals,
• Hindu Undivided Family,
• Firms,
• Company,
• Association of Persons or Body of Individuals,
• Local Authorities, and
• Artificial Judicial Persons.

Tax is levied on a person who was a resident of India in the previous year. In order to understand the scope of total income, we need to go through Section 5 of the Income Tax Act, 1961.

Scope of Total Income – Section 5

The Income Tax Act levies taxes on the income of foreign companies or non-residents to the extent of their income which accrues or arises in India. Section 5 of the Income Tax Act, 1961 provides that a foreign company or a non-resident is required to pay taxes in India for the income which is received or is deemed to be received in India.

In order to further understand who is liable to pay taxes, it is imperative to understand the following three terms:

1. Resident & Ordinarily Resident – If a citizen of India or person of Indian Origin stays in India for a period of 182 days in the previous year, s/he will be termed as a Resident & Ordinarily Resident.
2. Resident but Not Ordinarily Resident – An individual would qualify as a Not Ordinarily Resident if in the previous 9 out of 10 years, he has been a non-resident or has been in India for less than 729 days in the previous 7 years.
3. Non-Resident – An Individual would qualify as a non-resident if he does not exceed his/her stay in India by 181 days.

Now, income under section 5 is divided into 3 types and accordingly, an individual is taxed:

While Section 5 mentions the total scope of income, Section 9 specifies the various categories of income that are deemed to accrue or arise in India.

Income deemed to accrue or arise in India – Section 9

Section 9 talks about the categories of income deemed to accrue or arise in India. This is important because only those income which accrue or arise or are deemed to accrue or arise in India are liable to tax. This section provides for taxation on both, residents as well as non-residents.

Section 9 essentially brings a “source income” rule of taxation, ranging from income from a business connection to royalty paid by the government as accruing or deeming to accrue from India for the purposes of taxation. Due to its nature of taxing non-resident corporations as well, this section has been challenged as ultra vires the Constitution of India on the grounds of it being outside the legislative competence of the legislature as well as violative of fundamental rights.

Originally Section 9 of the Income Tax Act, 1961 dealt with taxation of the following categories only – business connection, transfer of assets, income from property, dividend and salary. Then in the Finance Act of 1976, Section 9 was amended, and the following categories were included – interest, royalty and fees for technical services.

Nani Palkhivala criticized the additions to Section 9 which were made in 1976. He said that the additions proceeded on a grossly inadequate territorial nexus and were ultra vires. In his book – The Law and Practice of Income Tax – he writes: if the Indian Parliament can increase their territorial nexus so wide as to include any transaction of a foreign resident with a resident of India under the purview of our taxation laws, then they should also levy tax on a hotel in a foreign country for transacting with an Indian.

Now, let’s begin to understand the bare text of Section 9 of the Income Tax Act, 1961: 

• Section 9(1)(i) talks about income arising or accruing through or from a business connection in India or source of income or through the transfer of a capital asset which is situated in India.

• For a business which does not have all its operations in India, only that part of the income which accrues or is deemed to accrue in India will be taxable.
• For a non-resident, the following shall not be considered as business connection in India – transactions limited to export of goods, operations confined to the collection of news and views for transmission outside India or operations confined to shooting of cinematographic films.
• Business connection shall mean any business activity carried on by an individual on behalf of the non-resident who habitually exercises the authority to finalize contracts in India on the non-resident’s behalf, who habitually maintains stock and manages the delivery of the goods and someone who is basically not an independent agent.

• C.I.T v R.D. Aggarwal & Co[i] – In this case, the Supreme Court discussed the meaning of the term “business connection” and said that though the Income Tax Act, 1961 defines the term “business” in Section 2(13), it has failed to define the term “business connection.” R.D Aggarwal & Co. was a registered company with its head office in Amritsar and were carrying on the business of importers and as commission agents from non-resident individuals from other parts of the world. 

The question before the Supreme Court was whether the business relationship between the non-resident individuals and the company could be termed as “business connection.”

The Supreme Court went on to provide a list of essential characteristics for the existence of a “business connection.” These are: Element of Continuity, Existence may vary from case to case, A Real and Intimate Connection, Mer Purchase Abroad to Use in India is not a Business Connection, Capital Gains arising out of India are Excluded.

• Later in the Finance Act of 2003, two new explanations were added to make the interpretation of the term “business connection” easier.
• Ishikawajima-Harima Heavy Industries Ltd v Director of Income Tax, Mumbai[ii]: The Supreme Court in this case held that two conditions are required to be met – the services which are the source of income which is to be taxed in rendered in India and also needs to be utilised in India, to be taxable in India.

• Section 9(1)(ii) talks about income under the head “salaries” if it is earned in India or is payable for a service rendered in India.

• Section 9(1)(iii) talks about salary payable by the Government of India to an Indian citizen for a service rendered outside India.

• Section 9(1)(iv) talks about interest paid by an Indian company outside India.

• Section 9(1)(v) talks about income by way of interest payable by – the government of India, or by a resident or a non-resident in certain situations.

• Section 9(1)(vi) talks about income by way of royalty which is payable by – the government, resident or by a non-resident.

Conclusion

Section 9 is a very important section as it increases the territorial nexus of the Income Tax Act, 1961. Till now there have been many confusing judgements and situations where understanding whether a business connection or not has been difficult. Different scholars and jurists have given different interpretations of Section 9 and some are in favour of it while some are against it.

Section 5 also is imperative in understanding the scope of Section 9. Section 5 provides for a source rule and courts heavily depend upon that in order to ascertain questions under Section 9 of the Income Tax Act, 1961.

[i] C.I.T v R.D. Aggarwal & Co, 1965 AIR 1526

[ii] Ishikawajima-Harima Heavy Industries Ltd v Director of Income Tax, Mumbai [2007] 288 ITR 408 (SC)

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Introduction

Arbitration is a dispute resolution mechanism wherein the parties to a dispute agree in a written contract to submit their disputes, if any, to arbitration for settlement. The settlement is known as the arbitral award which is given by the arbitrator(s). The arbitral award is the award granted by the arbitrator and it is final. There is only one recourse available to an aggrieved party that is approaching a court of law.

Section 34 of the Arbitration & Conciliation Act, 1996 is of great significance because it provides for setting aside an arbitral award by the intervention of courts. Now, there has always been an immense hue and cry for keeping the jurisdiction of courts away from alternative dispute resolution mechanisms because that would essentially defeat the purpose of introducing alternative dispute resolution mechanisms if the entire burden of cases still falls on the judiciary.

Section 34 of the Arbitration & Conciliation Act, 1996 has been formulated in accordance with the UNCITRAL Model Law. The courts, however, do not have the authority to alter or modify the award or consider the case on any matter of law or fact other than the award itself.

Under the Arbitration Act of 1940, a major issue was the vagueness of the legislative intent of the expression “public policy of India”, which eventually gave opportunities to the judiciary to interfere and to interpret according to their understanding. Section 34 of the Arbitration and Conciliation Act, 1996 after the Amendment Acts of 2015 and 2019 seems to have resolved certain issues pertaining to the judicial intervention, however, further analysis is required to understand the scope of Section 34.

Highlights of the 2015 and 2019 Amendments to the Arbitration & Conciliation Act

Before the Amendment Act of 2015, the courts would often treat an application under Section 34 of the Arbitration & Conciliation Act as a regular civil suit appeal and would follow the lengthy procedure which would result in pendency of cases, defeating the purpose of alternative dispute resolution mechanisms. Moreover, “public policy of India” was also a vague term and subject to interpretation.

The Apex Court in 2009 in the case of Fiza Developers and Inter-Trade P. Ltd v AMCI(I) Pvt. Ltd. held that – it is difficult and unnecessary to consider an application under Section 34 of the Arbitration and Conciliation Act, 1996 to be an application or suit under the Code of Civil Procedure. Applications under Section 34 of the Act are for the purpose of proving the existence of grounds in order to remove the arbitral award only.

The Law Commission in 2014 and 2019 quoted the Supreme Court’s above intent and recommended to amend Section 34 of the Arbitration and Conciliation Act, 1996. Following are the amendments included by the Amendment Acts of 2015 and 2019:

• Public Policy of India – Since in the 1996 Act, there was no definition of Public Policy of India, courts had the liberty to interpret the term according to their whims and fancies which resulted in a lot of judicial intervention in arbitration. The addition of a specific explanation for the “public policy of India” was the need of the hour.

It is very difficult to define the term “public policy” as the term is vague and leads to ambiguity. Each jurist would interpret the above term in their way according to their understanding.

The first case where a mention of the scope of public policy was seen was – Renusagar Power Co. Ltd. v General Electric Co. The court here restricted the meaning of the term “public policy” in an International Commercial Arbitration case to

1. The fundamental policy of India,
2. The interest of India, and
3. Justice & Morality

In 2003, in the case of ONGC Ltd v Saw Pipes, the Supreme Court gave a broader meaning to the term “public policy” and said that since the public policy has not been defined in any act, it is likely to be interpreted widely or narrowly, depending upon the context in which it is being used.

Under Explanation 1 & 2, public policy was defined to be an arbitral award that was won by fraud or corruption or in violation of the fundamental policy of Indian law or the basic features of Natural Law and Morality.

• Prior Issuance of Notice to Opposite Party and Timely Disposal –  The need to issue a notice to the opposite party was mandated to avoid delay and the time limit for disposal of such applications was limited to one year.

• Section 34 – A Mechanism to Monitor, not a Trial – In order to prevent courts to create a mini-trial out of an application under Section 34, the Legislature curtailed all possibility of submission of evidence and cross-examination under Section 34 and elaborated “furnishes proof” as “what the court can establish based on what evidence the arbitrator had on record.”

• Patent Illegality – The Amendment Act of 2015 also brought forward another ground for setting aside the arbitral award – patent illegality. This ground applies only to domestic arbitrations and not to International Commercial Arbitration Awards. Patent Illegality can be explained as – an error that is apparent on the face of the record.

If an arbitral award is not consistent with the provisions of the Arbitration & Conciliation Act, it would be considered to be a patent error. As said by Lord RadCliff – such an award bears on its forehead, the brand of invalidity.

In the case of Associate Builders v Delhi Development Authority, the Supreme Court elaborated on what constitutes patent illegality –

1. Fraud or corruption,
2. Contravention of Substantive Law,
3. An error of law by the arbitrator,
4. Contravention of the Arbitration & Conciliation Act, 1996,
5. Failure of Arbitrator to provide reasoning for the award, or
6. Failure of Arbitrator to give due consideration to terms of the contract and usages.

Grounds under Section 34

Section 34 of the Arbitration & Conciliation Act, 1996 provides for grounds of setting aside the arbitral award. Section 34 states the following:

• Subsection (1) of Section 34 states that the recourse against the arbitral award is available only by filing an application against such award in accordance with the next two subsections.
• Subsection (2) of Section 34 provides for the grounds on which the arbitral award can be set aside:
• Where the party making the application establishes on basis of the evidence on record of the arbitral tribunal that –
  • The party was under some incapacity, or
  • The arbitration agreement in question is not valid under law in force for the time being, or
  • The party was not given proper notice of appointment of arbitrator (s), or
  • The party was unable to present their case, or
  • The award deals with a dispute which has not been expressly mentioned in the arbitration agreement.
• Where the Court finds or is of the opinion that –
• The subject matter is not arbitrable under Indian law for the time being in force, or
• The award is against the public policy of India, it further goes on to explain what is envisaged by the public policy of India.

• Subsection (2A) of Section 34 empowers the courts to set aside any award other than the ones given in International Commercial Arbitration on the grounds of prima facie patent illegality.

• Subsection (3) of Section 34 provides for a limitation period for filing an application for setting aside of the arbitral award. The time for making an application cannot be more than 3 months from the date on which the party received the arbitral award.

• Subsection (4) of Section 34 under this subsection the court has the authority to adjourn the proceedings and allow the arbitral tribunal to resume the arbitral proceedings in order to remove the defect that prompted a party to file an application under Section 34.

• Subsection (5) of Section 34 mandates prior issuance of notice to the opposite party before making an application under Section 34. (introduced by the Amendment Act, 2015)

• Subsection (6) of Section 34 provides the time limit for the disposal of an application under Section 34 which is as expeditiously as possible within a time period of one year.

Conclusion

As discussed earlier, the main intent of the legislature in framing the Arbitration & Conciliation Act, 1996 was to lessen the burden of the courts and provide for a speedier recourse.

The Amendment Act of 2015 brought about changes to Section 34 which have resolved several issues and have also attempted to minimize judicial intervention.

Alternative Dispute Resolution Mechanisms provide for an alternative to litigation and both systems need to co-exist. Presently many of the arbitrators are retired judges who are conditioned to using the procedural codes, wherein arbitration, principles of natural justice apply rather than procedural codes.

The parties to the dispute have chosen to approach an arbitral tribunal instead of a court of law, hence, there should be limited judicial intervention. Hence, a balance needs to be struck between judicial intervention and arbitration to bring out the true object of the Act.

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