1985 (8) TMI 272 - SC - Companies Law

Whether the workmen of the Associated Rubber Industry Ltd., Bhavnagar entitled to be paid bonus at the rate of 16% for the year 1969 as the transfer of the shares of INARCO Ltd. to Aril Holdings Ltd. was no more than a device to avoid payment of higher bonus to the workmen? Held that - The amount. of dividend from INARCO Ltd. received by the Aril Holdings Ltd. should be taken into account in assessing the gross profit of the Associated Rubber Industry Ltd. for the purpose of calculating the rate of bonus payable to the workmen of the Associated Rubber Industry Ltd. The appeal is allowed with costs and it is declared that the workmen of the Associated Rubber Industry Ltd., Bhavnagar, are entitled to be paid bonus at the rate of 16% for the year 1969. Appeal allowed.

Summary

Issues:
Industrial dispute over bonus payment; Transfer of shares between companies to reduce bonus payment; Legal entity distinction between companies; Application of legal principles to lift corporate veil for tax and welfare legislation avoidance.

Analysis:
The case involved an industrial dispute regarding bonus payment to the workmen of a company. The company had transferred shares to a subsidiary to reduce the bonus payable to the workers. The key issue was whether the transfer of shares between the companies was a genuine transaction or a device to avoid payment of higher bonus to the workers.

The Industrial Tribunal and the High Court held that the two companies were separate legal entities, and there was no evidence to show that the transfer of shares was a device to avoid bonus payment. However, the Supreme Court emphasized that in cases where legal entities are used to avoid tax or welfare legislations, the court has the authority to lift the corporate veil and look at the economic realities behind the transaction.

Referring to previous legal precedents, the Supreme Court highlighted the need to consider the substance of a transaction over its form. The court emphasized that avoidance of welfare legislation is as common as tax avoidance and should be dealt with similarly. In this case, the creation of a subsidiary company solely to reduce the gross profits of the principal company and avoid higher bonus payment to workers was deemed an obvious device.

The Supreme Court found that the subsidiary company had no independent business or income apart from receiving dividends from shares transferred by the principal company. The court concluded that the creation of the subsidiary was a clear attempt to reduce the bonus payable to the workers. Despite the winding up and amalgamation of the subsidiary with the principal company later on, the court held that the initial creation of the subsidiary was indeed a device to avoid bonus payment.

Ultimately, the Supreme Court allowed the appeal, declaring that the workmen were entitled to be paid bonus at the rate of 16% for the year 1969. The court's decision highlighted the importance of looking beyond the legal formalities to prevent the misuse of corporate structures for avoiding statutory obligations.