SHAM AS A GROUND FOR PIERCING THE CORPORATE VEIL

The concept of a company, being a corporate entity is based on various concepts including the existence of a 'separate legal entity' being the most relevant one. In the eyes of law, the company is considered as a juristic person. This feature differentiates between the company and its member. Therefore, acts done by the company would hold the company accountable and not its members. The company acquires various powers such as to sue and be sued. Therefore, this creates a veil that protects the management of the company. In rare cases, when it is clear that there has been mismanagement on purpose for personal benefit, the veil may be lifted and the members would be held accountable for the actions.

In the landmark case of Balwant Rai Saluja v. Air India[1], the Court recognized the piercing of corporate veil after relying on the case of Prest v. Petrodel[2] which recognized the ambit of the doctrine. The issue here lies as to the concept of sham and what it constitutes. It is argued that there can be two meanings of a sham. It can either mean the ‘economic reality’ or the ‘impropriety’. Sham transactions are considered separate from fraud and evasion transactions. In the case of Snook v. London & West Riding Investments[3], the Court held that sham were actions that gave third parties rights on the face of it. Therefore, it is a false notion of rights given to third parties; non-existent rights.

Therefore, the Indian Court must identify the ambit of a sham transaction. In the case of Vodafone International Holdings v. Union of India[4], sham was discussed concerning tax evasion. Therefore, through the judgment, it could be inferred that when a transaction is made to avoid tax at the cost of the interests of third parties such as the shareholders then such a transaction would be known as a sham transaction. Although, the Court further referred to sham as an entity other than a transaction, while explaining the actions of a wholly-owned subsidiary on its holding company. Therefore, this judgment cannot be relied upon as it constitutes two meanings of a sham.

In the case of Juggilala Kamlapat vs Commissioner of Income Tax[5], the Supreme Court held that the Court could pierce the corporate veil if and when the company is being used to commit fraud, tax evasion, or any other form of fraud. 

Understanding the landmark cases, it can be believed that Supreme Court has often not considered the Balwant Rai case and thus, despite the limited grounds mentioned in the judgment, Indian Courts have failed to follow the same. Seeing the wave of ignorance regarding the Balwant Rai case, it could be safe to assume that the concept of sham has been lost, and therefore, cannot be considered as 

aground for lifting the corporate veil.

Unfortunately, there has been no clarity on the topic and therefore, confusion seems to prevail. 

[1] 2014 LLR 1009

[2] Supra Note 

[3] [1967] 2 Q.B. 786 

[4] (2010) 235 CTR (BOM) 15

[5] 1970 AIR 529

This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being.