Separate Legal Entities(SLE)BOON or BANE

By

Prof. K. Shanthi Augustin

M.Com., M.Phil.,MBA., B.Ed.

Jyoti Nivas college Bangalore

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I was walking with my kids on a dark night

History behind SLE

• Corporate entities emerged only in the last five hundred years. While individual endeavours and group endeavours are common in social, religious and political spears of life.

• Corporate entities have distinct existence from their shareholders, management and employees.

A man was following us….

History-meaning of company

• Europe was developed between the twelfth and the fifteenth century.

• The word company is derived from Italian word Compagnia Cum means together and panis means bread.

• In germany they are called Magna Societas.

• In France they are known as Societes libers or Nom collectif.

I cautioned my husband. “He seems to be a drunkard…”

History-Liability of sole proprietor and partners of partnership firm

• Bad practices:- Creditors and lenders had enormous amount of powers to collect their debt.

• Four thousand years back the code of Hamurabi required to borrower to repay at any cost including selling oneself and wife and children- bonded laborers.

• (4th century BC in Egypt.) the borrower is not permitted to bury his father’s body unless he pays his debt. Pledging father’s body for borrowing.

I was speaking in English so that the man does not understand

Bad practices before SLE

• In India Manu Smriti –rules provided for the recovery of debt by law, by legal action or by force without interference of the King.

• Marco Polo describe the system followed in India where we find that the creditor if he spot the debtor in a public place would draw a circle around him. The debtor cannot come out of the circle unless the loan is settled on the same day or security provided. Failed to settle he can be punished by lord even by death.

After a few minutes I told my husband..

Abolition of enslavement• It is known as Solon’s law.In Sixth century BC

Solon was considered among the seven wise men in Greece. He was a poet and philosopher. He was son of a rich merchant.He enacted a law to prohibit enslavement of the borrower even agreed to it.

• The Bible in the old testament says “every seven years at the festival of shelters, all debts were cancelled”.God expects you to forgive other. In the new testament god himself a forgiving god irrespective of the sin whether it is big or small.

Be careful. Let us walk fast to reach the village to stay during the night

Bad practices-Before SLE

• In India Bonded Labour system Abolition Act 1976

• Abolition of Children(pledge of labour) Act of 1933 pledging of children as security for loans.

• Similar practices are prevailing in other countries such as Nepal and Pakistan.

What happens next?

New development

• In 14th century in order to make business more viable without the borrower being slaved a solution was found in the concept of LIMITED PARTNERSHIP firms called Commandite.

• In March 1786 members who contributed capital to the firm can loose maximum their capital.

Turn to next slide…..

Pure Limited liability

• First government organisations in Italy like Compere and Maone.Comperes were the governmental institutions borrowing money for their activities. Maones raised money for specific government projects.

• The first commercial organisation with limited liability came in to force in England in fourteenth century.

The man started talking to us in…..?

The first recorded company

• Muscovy company is acknowledged as the first English joint stock company.(1553-5)

• Other companies: • 1555-Russian Company or Muscovy company.• 1564- Mines Royal company• 1579-Eastland company• 1581-Levant company also called Turkey

company• 1600- East India company.

English saying….?

Limited liability and their importance

• England was a backward country at the end of the fifteenth century.Export of wool was encouraged by the king.

• Due to limited liability the country expanded their base and ruled the world.

• The joint stock company gave birth to two important interrelated features. 1. Separation of ownership and control

• 2. Transferable ownership interest.

Don’t worry. I am a blind man. After finishing my work I take this route.

First Case law in favour of SLE

• Solomon Vs solomon Ltd.(1877)

• Mr solomon formed a company which issued 20000 pounds worth of shares and 10000 pounds worth of debentures(loan) on the security of all assets of the company.All shares were purchased by Mr.Solomon except one each to wife and children to form a public Limited company. The entire debentures were also purchased by Mr.Solomon. The shoe company incurred huge loss but the company assets were sold for 6000 pounds. Mr.Solomon claimed that all assets are secured to Debentures he has the first right over the assets.The court was in favour of Mr. Solomon.It is because of Separate legal entity. Owner is different from company. Other unsecured creditors could not do anything.

To reach my village. He asked us the place where we were heading to

Case-2

• Lee Vs. Lee air forming Ltd.(1960)Mr. Lee was a pilot who formed a company called

Lee Air Forming Ltd. killed in a aircrash.The widow claimed compensation from company. Others claimed that his wife is not entitled for compensation as Lee Air Farming Ltd. is nothing but Mr.Lee himself. Court was in favour of Mrs.Lee as company is a separate legal entity.Therefore Mrs. Lee can claim compensation from the company.

We told him.He replied???

Case-3

• Bacha. F.Guzdar Vs. the commissionar of Income tax(1955)

• Income from agriculture is exempted from tax. The company had estates which earns income from agriculture. The shareholders who received dividend claimed that their dividend had to be exempted. The court said company is different from share holders. For company it was income from agricultural income where as for share holders it is not income from agriculture but income from business.Therefore share holders can not claim any exemptions.

What was his reply??

Case-4

• Premier construction Co.Ltd. Vs.CIT

• Company is earning income from agriculture. The company paid salary to managing agent. He claimed that his salary incomeis from agricultural income, therefore exempted.It was held that his remuneration is not exempted because company is a separate legal entity.

I will take you there. Don’t worry. I Know the way.

Case-5

• Tayoob surty vs. CIT(Rangoon-Myonmar)

• Interest received by money lender in the form of agricultural produce is not income from agriculture as company point of view it is income from agriculture but money lender’s point of view it is income from business. Therefore it is not exempted.

Lesson: We judge people based on dress, colour and the way they speak. Judge Not!!!

Case-6

• Government company employees are not government employees.It is because Government company is a separate legal entity like any other company employees.

Case-7( Indian Income tax point of view)

• Growing and manufacturing tea:60% agriculture and 40 % income from business• Rubber:65% Agriculture and 35% business• Coffee: with out grinding: 75% agri. and 25%

frombusiness• Blended coffee-60% agri. and 40% business.• Note: Income from agriculture is taxed by state

government where as income tax comes under central government.

Case-8

• Company Bus met with an accident after business hours and not for business trip.Third party can not claim compensation from company but third party can claimfrom driver in his private capacity.If bus met with accident during business hour the company is responsible.

Case-9

• Interest charged by the government for delay in payment of tax is in the nature of personal liability which can not be allowed as deduction in the computation of taxable income- Board’s circular.Here penalty is imposed on the person in charge not on the company

Case-10

• Amrita Bazar Patrika(1937)• Expenditure incurred by news paper company in

defending editor and the printer in the proceeding of court are not deductible as business expenditure.The penalty is imposed on the individual who handles and not on the company. Illegality can not be made legal by showing as company expenditure to deduct tax liability.

Case-11

• CIT Vs. Bharat Steel Tubes Ltd.

• Penal payment for non payment of Sales tax with in prescribed time is not deductible as business expenditure because penal is against the law which is imposed on the person who is incharge in the position.

Case-12

• Hindustan Gas and Industries Ltd. vs.CIT

• Any expenditure incurred to issue share capital is treated as capital expenditure as per income tax act.

• Any expenditure incurred to borrow is treated as revenue expenditure.

Case-13

• Company takes Mr. X’s house property who is an employee of the company but the same house given to the Mr.X as rent free accomodation.

• In the above case whether the house property is self occupied or rented house propery?

Answer-13

• Mr. X stays in his house not as a owner but as an employee. Income from house property to be computed as let out. He can claim any amount of interest on housing loan as per section 24(b)of IT Act.

• His income from salary for Rent free accommodation to be computed on the basis of rent paid by company or 10 % of salary which ever is lower less rent collected from Mr. X.

• Here company employee is different from owner of the house property.The house is not self occupied as he stays not as owner but as an employee.

Case-14

• Dhulia and Amalner Motor Transport ltd Vs. RR Dharmsi

• Partnership plying busses formed a company and transferred(sold) all private busses to the company. The partners claimed share of profits on the earnings of the busses.

• It was held that they do not have right to share the profits based on on number of busses transferred but as a share holder they may be entitled to receive dividend.

Lifting of corporate veil

• Meaning :Looking behind the company as a legal person who formed or used company as a means to protect his personal interest or in order to get personal benefit to avoid personal tax liability or to fulfill personal legal obligations.

• Let us see some situations the separate legal entity is lifted by courts

Case-1-enemy company

• Daimler Co.Ltd. Vs. Continental tyres and Rubber co.(1916)

• Company does not have any character.But if the affairs of the company controlled from enemy country then such company can be saidto be an alien company.Therefore, trading with such company may be prohibited onl during war.

Case-2(Evade tax liabilities)

• Berendsen Ltd. Vs. Commissioner of Inland Revenue:

• The assessee formed a company and transferred all his personal income not to pay personal tax. The Supreme Court broke the corporate veil to see the real transaction.

Case-3(Work men compensation)

• The Workmen employed in Associated Rubber Industries Ltd., Bhavnagar Vs. The Associated rubber Industries Ltd. Bhavnagar and another(SC)

• The company was formed not to give workmen compensation by dividing number of employees so that the number goes below the statutory limit.The SC said for such compensation point of view the new company should be combined with old company. Here companies are not considered as separate legal entity.

Case-4(set off and carry forward of losses)

• As per section 2 (1B) and 72 A of the Income tax Act at the time of amalgamations or re-organisations including de-merger the old company losses can be set off by the new or amalgamating company for next 8 years.

• Here the separate legal enteritis are not applicable if those sections are fulfilled.

• Continues….

Amalgamation…….

• The share holders who exchange shares of old company with new company shares do not amount to transfer if Section 2 (1B) of IT Act is fulfilled. Both amalgamated company and amalgamating company are considered as one. Separate legal concept is not applied. If Section 2(1B) is not fulfilled these two entities are considered as separate entities which attract capital gain tax u/s 45.

Case-5(no.of members below statutory limit)

• If number of members of a company goes below the statutory limits (either 2 or 7 depends on public or private ltd.company) and continues more than 6 months every member is personally liable to third parties incurred during such period.

Life education

• Look at ants, it goes on working without looking at another ant whether they work or not.They do not give excuses.

• Threat is your opportunity.• If you are board or threatened create an

educational programs so that others are benefited out of it instead of wasting your time and others.

• If you have good and useful material which is educative to develop India send to me we will educate India.

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