Introduction
The concept of corporate veil and its lifting thereof is judicially well recognized however when it comes to applying the doctrine to Trusts , the concept of "corporate veil " has not been sufficiently judicially explored or expounded .
The recent decision by the Hon'ble Madras High Court CIT v. MAC Public Charitable Trust [2022] 144 taxmann.com 54deals with the lifting of "corporate veil in case of a trust " . Though the judgement covers many issues but this article analyses it only from the point of view of lifting of corporate veil in case of Trusts .
Corporate Veil and Lifting thereof - General principles
The purpose of corporate veil is to protect the members of the company from any kind of liability by keeping their identity separate from the action of the company so that shareholders can enjoy protection from all the actions. In the oft repeated and celebrated case of Salomon v. Salomon & Co. Ltd. [1897]AC 22, the House of Lords had observed, "the company is at law a different person altogether from the subscriber…; and though it may be that after incorporation the business is precisely the same as it was before and the same persons are managers and the same hands received the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by that Act".
Since then, however, the Courts have come to recognise several exceptions to the said rule.
According to the Black Law's Dictionary, the Doctrine of piercing of corporate veil has been defined as, "the judicial act of imposing personal liability on otherwise immune corporate officers, directors, or shareholders for the corporation's wrongful act".
In State of Rajasthan v. Gotan Lime Stone Khanji Udyog (P.) Ltd. [(2016) 4 SCC 469], it was held by the Hon'ble Supreme Court that:
The principle of lifting the corporate veil as an exception to the distinct corporate personality of a company or its members is well recognized not only to unravel tax evasion but also where protection of public interest is of paramount importance and the corporate entity is an attempt to evade legal obligations and lifting of veil is necessary to prevent a device to avoid
welfare legislation. It is neither necessary nor desirable to enumerate the classes of cases where lifting the veil is permissible, since that must necessarily depend on the relevant statutory or other provisions, the object sought to be achieved, the impugned conduct, the involvement of the element of the public interest, the effect on parties who may be affected etc.
In Delhi Development Authority v. Skiper Construction Co. (P) Ltd [1996] 4 SCC 622, it was observed:
"when the corporate personality is being blatantly used as a cloak for fraud or improper conduct". (Gower: Modern Company Law-4th Edn. (1979) at P. 137). Pennington (Company
Law-5th Edn. 1985 at P. 53) also states that "where the protection of public interests is of paramount importance or where the company has been formed to evade obligations imposed by the law", the court will disregard the corporate veil."
American Professor L. Maurice Wormser examined the American decisions on the subject in a brilliantly written article "Piercing the veil of corporate entity" (published in (1912) 12 CLR 496) and summarised their central holding in the following words :
The various classes of cases where the concept of corporate entity should be ignored and veil drawn aside have now been briefly reviewed. What general rule, if any, can be laid down ? The nearest approximation to generalization which the present state of the authorities would warrant is this: When the conception of corporate entity is employed to defraud creditors, to evade an existing obligation, to circumvent a statute, to achieve or perpetuate monopoly, or to protect knavery or crime, the courts will draw aside the web of entity, will regard the corporate company as an association of live, up and doing, men and women shareholders, and will do justice between real persons.
Trusts and Doctrine of Corporate veil .
The trust is transfer of property by the owner to another for the benefit of third person along with or without himself as a beneficiary1. The trustees are duty bound to act in the interest of the beneficiaries and in accordance with the Trust Deed . Public Charitable Trusts are for the benefit of public at large . Public charitable Trusts do enjoy exemptions of various kinds under the Income-tax Act,1961 . Before the decision of the Madras High Court (supra) the law as was understood was that lifting of corporate veil in case of a trust was not required since the trustees are under legal obligation to carry out the objects of the trust and to act in accordance with the trust deed. If they fail in their duty or if they do carry on certain activity as trustees, they are accountable in their capacity as trustees. Such was the decision of the Hon'ble Gujarat High Court in K.T. Doctor v. CIT [1980] 4 Taxman 208/124 ITR 501.
The concept of lifting the veil was permissible only in the case of a company with a view to find out the real persons behind the corporate body, but, in the case of trustees, they are under legal obligation to carry out the objects of the trust and to act in accordance with the trust deed subject to overall provisions of the Indian Trust Act. If they fail in their duty or if they do carry on certain activity as trustees, they are accountable in their capacity as trustees. Thus, lifting or piercing of veil was an exercise which was not permissible in the field of law of trusts.
This was affirmed by Supreme Court in CIT v. K.T Doctor [1998] 230 ITR 744 (SC).
CIT v. MAC Public Charitable Trust [2022] 144 taxmann.com 54 (Mad.)
Brief Facts
The assessee/s were Charitable Trusts registered under section 12A. They filed return of income declaring nil income. During scrutiny by the Assessing Officer (AO) it was found that the assessee received corpus donations from a few charitable trusts, which were its "sister "trusts having common trustees . On further inquiry, it was revealed that charitable trusts, from which the assessee received donations, got the said amount in place of procuring seats in a college that was a
unit of the assessee. AO reported that the assessee used these sister trusts as a tool for the transfer of capitation fees received from students. The AO reported that the assessee had purposely and intentionally channeled the capitation fee back to themselves in the form of donations, thereby exempting the money from receipt at both ends. As a result, he held that capitation fees was treated as income not eligible for exemption u/s 11 and also held that the Assessee Trusts were not eligible for exemption u/s 11 Of The Income-tax , Act 1961. Both the CIT(A) and Tribunal ruled in favour of the Assessee Trusts .The revenue appealed to the High Court .
Contentions of Revenue
The Assessee are part of a group Trust engaged in Educational activities . Their modus operandi is that students of the educational institution of Trust - A are asked to give donations to Trust - C. Thereafter, Trust - C transfers the donation amount received to Trust - B and from Trust - B to Trust - A. Such is the arrangement within the group trusts and they have common trustees.
In order to prove this modus operandi resorted to by the Assessee-Trust, the Assessing Officer recorded statements from 1500 persons out of which around 50 percent of those who have given statement, conceded that the donation was a quid pro quo transaction for admission.
Contentions of respondents/Assessee
That respondents/Assessee would submit that the object of the trust is to run educational institutions and other activities; and is to support other institutions by donating the donated money. There was no quid pro quo as contended by the learned counsel for the department. The trustees in the trusts do not get benefitted in any way at all. Thus, section 13 is not attracted in this case.
Findings of the court ( in relation to lifting of corporate veil )
♦ There is no bar to apply the doctrine of lifting of corporate veil in the case of trusts. (emphasis supplied ) ♦ What is to be seen, is the existence of the systemised mechanism to collect the capitation fee as donation through other entities.
♦ The principles laid down in various decided cases while expounding the concept of lifting the corporate veil, especially in cases relating to tax evasion, and in cases where public interest and policy are sought to be defeated by fraud, are squarely applicable to the present appeals where while the Assessee Trusts are controlled by common trustees and are in indeed sister Trusts, this Court may be constrained to lift the veil to see the real beneficiaries and the object of the donations by relatives/friends of parents as quid pro quo for admissions into the Assessee educational institutions as well as the other Assessees who are not educational institutions. (emphasis supplied )
♦ On lifting the veil, it is clear as daylight that the modus operandi adopted by the Assessee Institutions and Trusts are with the twin objectives of circumventing/violating the provisions of the Capitation Fee Act of Tamil Nadu as well as evading tax while seeking tax exemption under the corporate veil of being different and distinct entities receiving funds from each other for purely charitable purposes.
♦ Suffice it to say, nothing can be farther from the naked truth that cannot hide itself sufficiently behind the fig leaf of the legal cover sought to be taken by the Assessee under the guise of being charitable trusts and seeking exemption thereof.
Analysis and Conclusion
The decision of court was very clear that there is no bar on lifting the corporate veil in case of Trusts .The court clearly held that the case is nothing more than a fig leaf to conceal the violation of the Tamil Nadu Educational Institutions (Prohibition of Collection of Capitation Fee) Act, 1992 . It upheld the doctrine of lifting the corporate veil in case of tax evasion, and in cases where public interest and policy are sought to be defeated by fraud. The court considered the decision
of the Gujarat High Court & Supreme Court in KT Doctor (supra) . The Madras High court held that the question of using the Trusts as a device was not before the courts therefore this question was not argued or dealt with before the Gujarat High Court or Supreme Court .The Madras High court while accepting the revenue's contention also suggested setting up of web portal under the aegis of the Supreme Court, wherein any information about the private colleges charging capitation fees can be furnished by the students or their parents or anyone having first-hand information in this regard.
The decision of the Madras High court lays down the principles wherein the corporate veil can be lifted even in case of Trusts though in normal circumstances it may not be required since the trusts may be carrying out activities mandated by the Trust Deed and the trustees are bound by provisions of trust deed . However the exception being : That The courts will not hesitate to step in where public interest and policy are sought to be defeated, the principle of the lifting of the veil can be invoked when the corporate personality is found to be opposed to justice. Merely because the charitable institution is a Trust , it will not allow to escape the doctrine of lifting of corporate veil .
Also this decision should not be seen in isolation . The recent decisions of the Supreme Court in in New Noble Educational Society v. Chief CIT [2022] 143 taxmann.com 276, Asstt. CIT (Exemptions) v. Ahmedabad Urban Development Authority [2022] 143 taxmann.com 278 (SC) point to a convergence of a strict interpretation wherever exemption/public welfare is involved . The courts are also conscious of the Fact that education is a fundamental right under Article 21A of the constitution which cannot be allowed to be misused by Private Educational institutions.
Assisted by Ms. Mahima Katra
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1. Indian Trust Act -1882 - Definition as per Section 3 "An obligation annexed to the ownership of property and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another or of another and the owner."
