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The concept of taxation is not new in modern India. “Tax” was basically defined as the burden or charge imposed by the legislative power on persons or property, to raise money for public purposes, whereas “taxation” is an act or methodology of laying these charges on persons or property. It is a compulsory contribution to the support for the government. Even Kalidas stated that this contribution was only for the good of his subjects i.e., commoners, that he collected taxes from them, just as the Sun draws moisture from the Earth to give it back by a thousand folds.

These contributions were deduced in the terms of revenue. The major source of revenues to the state came from within the three tier economic cycle comprising of a) corporate sector including companies and firms, b) public sector like banking institutions and c) service sector. Although the service sector and public sector contribute to the government in the form of indirect taxes like service tax, excise and customs, but the major source of revenue since then was dependent on tax levied on income which can only be abstracted from the private sectors and corporations. These corporations include Indian Companies as well as Body Corporate. These companies provide thirty percent of their turnover net profit as tax to the government. But in the present scenario, this collection is started diluting. Going through the characteristics of companies, the concept of separate legal entity is creating a paradigm of “corporate veil” meaning creating barrier between the personalities of shareholders and their obligation to pay the company’s debts. This veil is being used by the companies as a weapon to evade a large amount of tax out of their huge profit which comes in the name of goodwill of the company but instead of treated as a deferred revenue expenditure which can neither be classified as a capital expenditure, nor revenue expenditure so as to characterize it within the deductions for claiming exemptions. Furthermore, an act of creating a subsidiary for them so that they can avail the every option needed for the exploitation of the concerned resources be it a labour intensive or capital intensive in the name of those subsidiaries for getting the maximum outcome without dropping the coin which led to massive loss to the revenues of the state. Moreover, a hell lot of domestic and international transactions of the companies listed in the stock exchange are going on in the securities market which has led to the flood in the flow of speculative money in the market. To curb this The Ministry of Finance amended the old law of Income Tax Act, 1961 and passed a new legislation in the parliament named as DTC ( Direct Tax Code) with a broadened view towards preventing disequilibrium in the economy and providing clarity and transparency in every act of legislation. Thus the paper describes on whether a new improved DTC will harmonize the wounded financial structure or it will instead rupture the existing financial background of our economy. The paper further throw light on the competency of transactions to classify it as tax evasion as Indian tax laws specifically do not contain any generic provisions relating to anti avoidance.

Accordingly, in order to determine the position with regard to anti avoidance, it is necessary to rely on various judicial decisions issued in this regard. The judicial view in India used to be that it is open to a person to avoid payment of duty by disposing off his property in any way not forbidden by law and the questions of his motives is wholly irrelevant. It has been a well accepted principle of law that an assessee can so arrange his affairs as to minimize his tax burden. Over and over again, it was held that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. The principles stated above were considered to be too wide and the Supreme Court in the case of McDowell & Co Ltd v. Commercial Tax Officer  highlighted that courts are now concerning themselves not merely with the genuineness of transaction but with the intended effect of it on fiscal purposes. It held that no one can get away with a tax avoidance project with the mere statement that there is nothing illegal about it.

This paper ends with the manifold evil consequences of evasion. First, there is substantial loss of much needed public revenue, particularly on a welfare state like ours. Second, there is serious disturbance caused to the economy of the country by pilling up of mountains of black money causing inflation. Third, the large hidden loss to the community by some of the best brains in the country being involved in the perpetual war waged between the tax avoider and his expert team of advisers on the one side and the tax gathers and his not so skillful advisers on the other. Fourth, there will be a sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or are unable to profit by it.     

Piercing the Corporate Veil: A General Trend

In Salomon v Salomon[2] House of Lords affirmed the legal principle that, upon incorporation, a company is considered to be a new legal entity separate from its shareholders. Company has a distinct identity from its members but it is simply a legal fiction. In reality individuals/persons are the ones who run the company in hopes of acquiring profit. Windeyer J, in the High Court in Peate v Federal Commissioner of Taxation,[3]  has stated that

“[A] new legal entity, a person in the eye of the law. Perhaps it was better in some cases to say a legal persona, for the Latin words in one of its senses means a mask: Eriptur persona, manet res.”[4]

It is true that the legal principle is that a company is a separate legal entity distinct from its director and shareholders. However, the principle of piercing the veil of corporate personality has also been evolved. Courts have acknowledged piercing the veil of corporate personality to deny shareholders the protection that limited liability provides. 

By: Pankaj Bajpai


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