Foreign Company Income Not Taxable in Shareholders’ Hands, HC Clarifies

The case arose from a search conducted on Pradeep and Neera Wig, during which documents were found relating to luxury flats in London owned by Carmichael Capital Limited (CCL), a company incorporated in the British Virgin Islands. The entire shareholding of CCL was held by the Wigs and their daughters. The investments in the company were made through India’s Liberalised Remittance Scheme (LRS), and the company also availed loans from UK banks to acquire the properties. The Assessing Officer treated the company as a mere façade and sought to tax the rental income (over Rs 1 crore) and capital gains (Rs 3.7 crore) earned by CCL directly in the hands of the individual shareholders in India. The Revenue argued that since the shareholders effectively controlled the company, its income should be attributed to them.

Issue Raised: Whether income earned by a foreign company is taxed directly in the hands of its Indian shareholders on the ground of complete ownership and control?

HC Held: The High Court dismissed the revenue’s appeals and held that the income of a foreign company cannot be taxed in the hands of its shareholders merely because they hold 100% shares. The Court reaffirmed the fundamental principle that a company is a separate legal entity distinct from its shareholders. Ownership of shares does not translate into ownership of the company’s assets or income.

It further held that the attempt to invoke “substance over form” without any statutory backing is impermissible in tax law. The Court also noted that the investments were made through legally permitted channels under the LRS and that the income in question had arisen from assets situated in the UK, where applicable taxes had already been discharged. In the absence of any specific provision deeming such foreign income taxable in the hands of shareholders, the Revenue could not artificially attribute such income to them.

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