CIT Vs Pradeep Wig (Delhi High Court)
Delhi HC to Tax Department: 100% Shareholding Doesn’t Make You Owner of Company’s Property
In a significant ruling on offshore structures, beneficial ownership and corporate veil, the Delhi High Court held that merely because Indian residents held 100% shares in a foreign company, the rental income and capital gains earned by that company abroad cannot be taxed in the hands of the shareholders. The Court dismissed the Department’s attempt to invoke the doctrine of “substance over form” and clarified that a company remains a separate legal entity from its shareholders unless there is clear evidence of sham, fraud or tax evasion.
The case involved a British Virgin Islands company owning properties in London, whose shares were held by Pradeep Wig, Neera Wig and their daughters. The Assessing Officer treated the assessees as the “real beneficial owners” and sought to tax rental income and capital gains from the UK properties in India. Rejecting this approach, the Court held that the investments were made through valid banking channels under the RBI’s Liberalised Remittance Scheme (LRS), taxes had already been paid in the UK, and there was no evidence of undisclosed investment, tax evasion or misuse of the corporate structure. The Court reiterated that shareholders own shares – not the company’s assets, and unless specifically provided by statute, the income of a foreign company cannot be directly assessed in the hands of its shareholders. It also emphasized that tax authorities cannot create new deeming fictions outside the framework of the Income-tax Act merely to “enrich the exchequer.”
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
